Author: shyam

Some of our regulatory bodies put out fascinating studies – studies that only tax-payer funded entities dare sponsor. I found this gem in our Competition Commission website: a report on the economics of onion markets. Some of its conclusions reiterate what our inner cynics had already judged:

• Market structure of onion is unilaterally dictated by the traders, not farmers.
• A few big traders having well connected networks with market intermediaries seem to play a major role in hoarding for expected high prices.
• A clear case of oligopolistic entry barriers were found.
• Farmers generally take reference of the local markets’ rates, while traders compare rates of all markets, including major distant and export market and then decide where to send their produce of a particular grade. This brings greater profits to them.
• Export ban and arbitrary practice of fixing Minimum Export Prices (MEP) for onion often cost exporters in in terms of losing their credibility in export markets as irregular suppliers. Fixation of MEP makes small exporters reluctant to export which sometimes leads to excess supplies in domestic markets, leading to fall in prices.

Grab a cup of coffee and read the whole thing.

Source: Competitive Assessment of Onion Markets in India (pdf)

Is more information better information?

Eight experienced bookmakers were shown a list of 88 variables found on a typical past performance chart on a horse, e.g. the weight to be carried, the number of races won, the performance in different conditions, etc. Each bookmaker was then asked to rank the pieces of information by importance.

Having done this, the bookmakers were then given data for 45 past races and asked to rank the top five horses in each race. Each bookmaker was given the past data in increments of the 5,10, 20 and 40 variables he had selected as most important. Hence each bookmaker predicted the outcome of each race four times – once for each of the information sets. For each prediction the bookmakers were asked to give a degree of confidence ranking in their forecast.

The chart below shows how both accuracy and confidence change as the information set grows over time.

Accuracy is pretty much a flat line regardless of the amount of information the bookmakers had at their disposal. However, confidence soared as the information set increased. With five pieces of information, accuracy and confidence were quite closely related. However, by the time 40 pieces of information were being used, accuracy was still exactly the same, but confidence has soared to over 30%.

So more information isn’t better information, it is what you do with it rather than how much you can get that truly matters.

Source: Behavioral problems adhering to a decision policy (pdf)

So, you are an analyst who blew a forecast. You thought you had found a gem and it turned out to be turd. You were so confident in your forecast that you went on CNBC and articulated your beliefs. You know you can be persuasive when you want to be. But now investors who followed your advice are baying for your blood. What do do now? Here’s a ready cheat-sheet for those awkward moments:

1. The ‘if only’ defense: Claim that you would have been correct ‘if only’ your original advice had been followed. For example: if only the RBI had cut rates, or if only FDI in e-commerce was allowed, etc. This makes your forecast an historical counterfactual, which is impossible to prove.
2. The ‘ceteris paribus‘ defense: Your Rs. 40,000 target for gold is right and the analysis is solid. The government manipulated the market.
3. The ‘I was almost right’ defense: The stock would have been a 10-bagger if not for the management blowing it by idiotic acquisitions. Of if you had a ‘sell’ rating:  “They would have gone bankrupt but their competitor bought them out.”
4. The ‘It just hasn’t happened yet’ defense: Just you wait – the Indian government is run by a bunch of fools and soon gold will be at Rs. 40,000.
5. The ‘single-prediction’ defense: The analysis is valid, but the forecasting was flawed. Don’t shoot the messenger.

Source: Tetlock: Are we prisoners of our misconceptions?

Previously:
A dose of realism
The value of publicly available information is zero