The Hindu Business Line : <I>Be sensible about Sensex </I>

Few things stood out as much in the minds of people and media last week as the collapse of stock prices, in India and in other countries. Perhaps, the logical reaction to this, following Shakespeare, ought to be, when dream runs come, can nightmare crashes be far behind? Still, we think our own lives will defy logic and hope rises eternal and all that.

The Finance Minister for his part muddied waters already made quite tricky by the earlier departmental pronouncements on taxing the foreign financial institutions as traders, with gratuitous advice on all sorts of issues from his coalition team mate Mr Sitaram Yechury.

Benefits of the boom

Now, it is a question of how everyone concerned can come up, if not actually smelling of roses, at least with explanations that look intelligent, with no blame sticking to them. Alternatively, somebody else or some impersonal economic factors would take the burden: The metal markets melted, oil prices flared up, other stock exchanges collapsed, Americans found some other investment route more attractive and so on. The Left claimed that the benefits of the boom in share prices only made a few rich people richer and lamented for the `poor, small, retail investor' who had to bear the much of the losses.

The impact

If you held Rs 10 lakh worth of the leading scrips last week, and did not sell anything, your wealth might have lost value on paper by something of the order of Rs 100,000. If your total investment, again across the board, was just a lakh rupees, the chances were that (again on paper) you might have suffered a decline in wealth of Rs 10,000. Always assuming that the portfolios were more or less similar and balanced, the impact would only be proportional to the holdings.

The same small investor would, if he had wisely refrained from gambling and merely kept his counsel, have gained anything up to 75 per cent in value in the past 12 months, a huge windfall by any reckoning.

Magic formula

What no one was prepared to say was that they simply didn't know. Markets make fools of us all and no one is any the wiser, and no one has cracked the magic formula for short term economic forecasting, least of all economists.

This reminded me of a book I recently wrote about elsewhere in the paper by Nissim Taleb, a Wall Street trader and professor of probability, who quotes many scientific experiments to show that randomness strikes when we least expect it and human intelligence is unable to cope with it, despite knowing enough about probability to understand it.

Defying reason

Show a person a coin that has turned up heads three consecutive tosses and ask him to bet on the next one and the chances are he would bet higher on tails rather than heads.

Every first year statistics course meanwhile teaches you that this is wrong, and that unless the coin is biased the chances are simply 50-50 for every fresh toss, and tells you why. Yet we go on merrily defying reason. Add greed and gullibility and media hype on top of it and you have a poisonous mixture that is sure to deplete a few bank balances. As the Americans say, if you can't take the heat, keep away from the kitchen.

S. Ramachander

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