Linguistics - Finance

We have a new section. We will post articles on Finance, Valuation and Investing written by friends and guests.

To kick off, Prasad contributed this very interesting article about Linguistics and Finance on Lollapalooza. With his permission, it is being reproduced here.

Hi,

Some thoughts to share about, on the application of linguistics in finance. These are in no way any conclusions, but only thoughts to reflect upon. Please share your comments/ideas on the same.

Human "line of thought"(LOT) is divided into natural sciences, applied sciences, arts and humanity etc and many a times one "line of thought" (LOT) is enriched by findings from other "lines of thought". Such a division itself is difficult because of overlapping nature. Sometimes findings in one are found to be erroneous before taking into consideration the findings from other. Example: study of history is enriched by anthropology, evolution, biology etc; Even in the area of finance, we are applying insights from various fields like evolution, biology, chemistry, psychology etc. And there are many other such examples of inter-disciplinary dependancies. I have some thoughts to ponder upon regarding linguists and finance.

1. In Linguistics, one question posed often is "can we think with out language"? Isn't the existing knowledge bounded by the limitations of "language"? We may not always express correctly what we felt/thought. Actions resulted from thinking that we do with out associated words(language), are difficult to analyze further. We try to find situations where various mental models or their combinations have relevance in area of finance and life at large. People's awareness/understanding/susceptibility/application of mental models differ. In such cases, does't it get more dificult to find the right mental model/combination of models, compounded by the problem of actions resulted from thinking with out language, and analysis limited by language?

2. Many disciplines/sciences add new jargons, being limited by existing words. Does the innovation in the discipline (even finance) becomes limited by language constraint? Is it that "I cant express myself in words" a question to be limited to disciplines of arts, metaphysics etc?

3. Is the application of mental models/finding the right model limited by language as in case of study of history, with out inputs from paleontology/archealogy etc.Any such situations one noticed? Are such situations so rare that they don't demand further analysis with regard to applications in behavioural finance? Even if they are not rare, the fact that everyone is bounded by such limitations makes this discussion irrelevant?

I doubt even the above sentences are, limited by langauge as well as my ability to use language effectively. Please share your comments/ideas on the same.

Regards
Prasad.

P.S.: Wiki on Linguistics

Delhi Autorickshaw Drivers - A Fare Deal ... ?

Autorickshaw (aka autos) drivers in Delhi have always been notorious for fleecing customers and demanding exorbitant fares from passengers. Autos are supposed to charge by a fare meter (installed on the auto). A fare meter is an essential part of any public transport system. All the autos had a meter but no driver ever used them. Even people in Delhi got used to haggling with the drivers before they took an auto. I have spent good part of 25 years in Delhi and have never travelled in an auto that runs on fare meter. Even Lonely Planet Guide and other Delhi travel advisories told people to fix rate before they get into the auto.

I moved to Mumbai three months back and on a recent visit to Delhi, I was surprised to see that somehow all autos were going by meter. All means all autos on the road. I took autos at 2 AM, 8 PM, 6 AM and all the time I paid by meter. This was something new to me. How can this radical a change happen in less than 3 months? What changed? This is equal to a social epidemic. The very basic behaviour of people (in this case autodrivers) changed in less than three months. What brought about the change?

It took almost a day to figure out and this is what I could find.

In last three months, few things changed.

1. The per kilometre tariff for auto was hiked (from Rs. 4.5 per KM to Rs. 5.5 per KM).

2. The fine on not going by a fare meter was hiked. From Rs. 100 to Rs. 2000. In case of second default, the autos could be impounded.

3. Policemen were given incentives for catching defaulters. I asked a cop, he did not share the exact numbers but he said that if they catch even 5 defaulters a day, they make same money as they would make in bribes in a week.(This is what a cop told me when I acted as an innocent college kid :))

Now these three changes had following effects

1. Auto Drivers: Most of these auto drivers do not actually own the autos they drive. These are rented (Rs. 250 per day). It was easy for most of the drivers to cough up 100 bucks if at all they were caught. They could either pay Rs. 100 or bribe a cop Rs. 50. To compensate, all they needed to do was over charge 2 other customers. Now with fine at 2000, if they are caught even once, they are in a soup (large fine and possibility of not getting the auto for next day). And with super-incentives to cops, chances of getting caught and fined became higher. It also became difficult to bribe cops as they make more money if they issue challans (traffic violation ticket).

2. Cops: Earlier, cops were happy catching autos for petty things (no driving license, improper uniform etc) and getting Rs. 50 as bribe. With high incentives, they cracked down on autos like anything. They stop autos at random and instead of asking the driver, they ask the passenger about the fare and if the meter is being used or not. Suddenly cops were making quick and easy money and above all, this money came in form of awards. This probably became the tipping point and suddenly every auto driver wanted to go by meter.

So basically it took two simple step to solve an age old problem of over-charging. An awesome application of what Robert Cialdini, Seth Godin, Malcolm Gladwell and a lot of other unknown social scientists have been doing (I am taking the liberty of categorizing all of them as social scientists).

Moral of the story is that next time you take an auto in Delhi, make it a point to go by meter (spread the Ideavirus - become a sneezer).

Post BFBV, everything is reduced to application of Mental Models.There are quite a few evident Mental Models in the entire episode. The ones I could spot immediately are

1. Reciprocation – we have increased the fares, now you start using the meters and stop fleecing the commuters.

2. Incentives – catch defaulters and make fast money.

3. Punishments – large (comparatively) and enforced strictly.

4. Positive Feedback Loop – Initially cops made money, they got stricter, autos started going by meter to avoid getting caught, cops getting even stricter with lesser autos defaulting.

If there is a different opinion, please share. Please point out flaws in arguments.

I have also made following two assumptions

1. No one paid fines earlier and most cops were happy to take bribes than issue challans (aka traffic violation tickets)

2. Assumed that this exercise is success. However the effectiveness is yet to be proved. Until commuters start demanding to travel by meter and use of meters becomes a norm, the effects would start fading in some time.