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It's not just Financial Markets that forget history!

I have written elsewhere about recurrent bubbles in financial markets.

There is a pattern to them, where people forget what has happened in the past...once again get caught in the rosy projections of what are ultimately the same old things. Or in some cases, at times knowing the excesses but still believing that they can get out ahead of the mob, till one fine day everything blows up.

You can learn more about this phenomena in several books on bubbles including John Kenneth Galbraith's concise and brilliant, "A Short History of Financial Euphoria".

But the thing is this:
Forgetting history & excesses are not just a feature of financial or capital markets.

You see this play out in multiple industries!

Sometimes it is the entrepreneurs and business people who are misled repeatedly about the prospects of an industry...they forget the many past busts.

Let us look at the airlines in industry for instance.

Damania, Modiluft, East West, NEPC Airlines etc were among the first lot of private airlines in India in the 1990s and early 2000s. All of them eventually all shut down...but this fact was merrily forgotten when Kingfisher, Deccan, Jet Air started off a few years later.

When their story was about over, came Spice Jet, Go Air etc in next lot...that's how it goes on.

Bank licenses are considered a gold mine, citing examples like HDFC Bank and Kotak Mahindra.

Centurion, Times Bank, Global Trust, Yes Bank & many many more started by experienced professionals (besides the many PSU and cooperative banks) that had to be shutdown or restructured are forgotten!

These examples were about business people forgetting the track record of the industry and setting up a similar company thinking that they will succeed where others have failed in the past.

We see the same thing in investors whether they are retail investors or sophisticated institutional ones.

After a spectacular bust in an industry it takes only a few years for all the lessons to be forgotten...there is no institutional memory of the same.

For example, in financial services the same thing of giving people loans to buy things is packaged differently and there is excitement among investors to get in every time.

Off late it has been something called BNPL, or 'Buy now pay later'... Supposed to be an exciting new innovation. The reality? It nothing but the literally centuries old buying on installment scheme...but BNPL sounds fancier, and most importantly, 'new' and 'innovative'.

People laud growth in landing businesses but how difficult is it to give out money faster and faster...this simple fact is forgotten when people chase lending businesses without a thought in the world. The real difficulty is in getting the money back, but that shows up only years later.

How many remember the first round of EdTech scam companies topped by Educomp, headed by the IIM pedigreed? There were many others too at the time like Treehouse, Everonn, Zee Learn, Jetking etc.

We, at First Global, did a report on why none of financials made sense in 2007, when Educomp was a much owned stock.

These were the red flags for Educomp:

  • Revenues sitting in sky-high receivables
  • No cash flows
  • No cogent explanation from management

So eventually most of these education Tech companies went bust. But the interesting part is what happened thereafter.

After decorous mourning period of a few years once again EdTech or education technology companies became the darling of the investors, this time more in the unlisted space where the likes of Byju's raised over 5 billion dollars in spite of very well-documented holes in the business model as well as corporate governance.

Yet the funding rounds continued probably fueled by the greater fool’s theory that the investors would get an exit by palming it off to someone...maybe in an IPO.

Except that now the story has began to unravel and the sequel to the earlier EdTech story is in the theaters now.

As the cliché goes: those who forget history are condemned to repeat it.

Why does this sort of behaviour happen?
Besides greed, there is also anothe reason: We always think we will beat the odds in any game or don't think about the odds at all!

None of us are inclined to think about data when we start a new business or for that matter any new activity.

That is how so many get taken in by these fancy courses promising that you can make a living by trading specially trading exotica like options and other derivatives.

A visit to the SEBI website shows that not even 10% of the traders in options make money and even of those most of them make only a paltry amount, but human beings don't like data.

As Rolf Dobbeli writes in 'The Art of Thinking clearly', "We respond to the expected magnitude of events (the size of the jackpot) but not to its likelihood. In other words we lack an intuitive grass of probability."

In simple terms when we think of a big pay off later se bhi set our sites on someone who has made of fortune in trading, we cannot process the fact that only one percent or 0.1% of the traders have made that kind of money. We just see the amount of money and chase it...only to come to grief.

Daniel Kahnemman has written extensively about this phenomenon, calling it 'base rate blindness'...and given examples from his own life where he either did not think of what the data  was at all or was comfortable in the belief that he was way better than the average and hence would beat the odds.

For example, he talks his confidence that he would finish his book in 6 months without asking the question of his publisher, "How long does it typically take for 2 authors to write a non-fiction book together?" Later on he found out it was a couple of years.

Similarly when he was part of a team redesigning part of the curriculum in Israeli schools and they did find out how long typically such an exercise took to be implemented which was a few years, they were convinced that this particular team was smarter and better than the previous committees and they would get it done in a matter of months. The reality? In their case the change dragged on for years and was never implemented.

Turns out that even the great Daniel Kahnemman who knows all about such pitfalls still did not beat the odds in either of the cases!

Therefore force yourself to look at the data. Of people/companies doing a particular activities how many have succeeded in the past? What has been the history of this particular industry? Ask these questions whether you are starting a business or investing in one. And no, all of us are not and cannot be hugely above average. Not a glamorous thought or maybe not even happy one but your bank balance will thank you for having thought this through.

From the desk of 

Devina Mehra

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