INSUBCONTINENT EXCLUSIVE:
By Somnath MukherjeeIn the legendary Sherlock Holmes story The Adventure of Silver Blaze, ace race horse Silver Blaze goes missing and its
Finally, that is exactly what was found, an inside-job
a reasonable assumption, rather than trying to piece together a bunch of imaginative threads to find a solution
Even an ultra-rational, intelligent person like Holmes was subject to the reality of Bounded Rationality.
Bounded Rationality (BR), a
or luxury of making the perfect rational choice
Traditionally, policymakers have accepted the axiom that low interest rates trigger inflation (and vice versa)
However, Japan (for over four decades), Europe and the US (for over a decade now) have adopted unconventional monetary policies to keep
interest rates low (to the extent that nearly a third of all sovereign bonds outstanding today have negative yields), but inflation in all
three major developed economies has remained stubbornly low.
Xavier Gabaix, an economist from New York University, offered an elegant
Herbert Simon postulated as BR
Ergo, when Central Banks (CBs) reduce interest rates, the Average Javed does not discern an immediate change in his circumstances
And what do rate cuts do in the near term? It pays less on his deposit; it indicates to him that he needs to save more today for his nest
Therefore, he reduces consumption today, resulting in lower inflation today
to increase consumption today
Makes intuitive sense?
Most ordinary people would identify with it, and now the instances of Japan, Europe and the US put a remarkable
empirical imprimatur to the intuitive logic
temper expectations and perhaps look elsewhere
A big tax cut or cash transfer gives an immediate windfall to taxpayers, and short-sighted and bounded by bounded rationality that they are,
Rationality, lesser mortals (like money managers) have little chance
First, a look at the data
alpha (or outperformance against its benchmark)
From an estimated 60-70 per cent of all equity MFs outperforming their relative benchmarks about decade back, research shows that the
While there are some linear reasons to explain this phenomenon (size of MF, for example, is sometimes a binding structural constraint), a
substantial part is attributable to BR
putting together multiple interlinked non-linear variables (that affect a company, and therefore, its stock price) over a long period
They too, like the average Javed, take recourse to simplified, easily discernible filters in order to arrive at their views on how a company
by equity analysts at the beginning of the year and the actual earnings print at the end of the year
In the last seven years, estimates of even the well-tracked Nifty index constituent stocks have not only been at significant variance to
actual earnings, but they have also been off by a factor of 2-3x on occasions
average of the estimates of all analysts covering a stock) are taken
than trying to get to a perfect solution.
(The author is managing partner at ASK Wealth Advisors
The views and opinions expressed in this article are personal.)