Case for Internationalization of the Indian Rupee

Contributed by: Priyanka Chandran, CFA

The threat to the USD as an international currency in the wake of the financial crisis, emergence of currencies such as the EUR and more recently the RMB which has been accepted in the International Monetary Fund (IMF) basket as a reserve currency raise many questions. These pertain to the evolution and development of internationalization of a currency along with the policy interventions necessary to promote this end. In light of these events, the progress made by the Indian Rupee and the merit to make the currency more international is worth contemplation.

The argument for internationalizing Rupee include benefits availed by any currency which is internationalized. These include currency gains for importers and exporters, lower borrowing costs for domestic borrowers and financial institutions and benefit of seigniorage for the government. But the bigger argument for the internationalization of Rupee lies in the progress of the Indian economy. Literature suggests that economic size, the sophistication of the domestic financial market and stable macroeconomic policies (especially low inflation) ought to be important determinants of currency internationalization, and empirical evidence is generally supportive (Chey, 2013). India has made a lot of progress against some of the parameters which was also evident in the evolution of international currencies over the last century, including the rise of the U.S. dollar in the 1920s and 1930s, the Japanese yen, Deutsche mark and the Euro more recently. This further builds a case for internationalization of INR

Some of the preliminary steps which have already been taken by Reserve Bank of India to liberalize the foreign exchange markets and develop the bond markets include allowing cancellation and rebook of foreign contracts, introduction of INR billing, increasing the FII debt limit, allowing issuance of INR bonds etc. However, some of the other steps which RBI could take in this direction could be as follows:

Liberalization of Currency Market: These would include allowing cancellation and rebook of FX contracts for foreign institutional investors (FII), relaxing trading restrictions for domestic and foreign banks by allowing them to trade in exchange traded contracts forwards and options for their own books and developing a deeper options market.

Deregulation and Deeping of Bond Markets: CRISIL estimates that India will need approx USD 650 billion for infrastructure till 20201. Use of Corporate Bonds for the LAF, developing Exchange Driven markets for Interest Rate Swaps etc could help.


Increased trade flows in the currency: While RBI has a guideline in place to support exports in INR, from a more strategic point of view, it makes sense for India to have local currency invoicing arrangements mostly with countries with which it enjoys a surplus in bilateral trade. A local currency swap arrangement with countries from whom India imports will only encourage more imports.

Having said the above, the roadmap to internationalization of Rupee also has many challenges. China, runs large current account surpluses but India has generally been a current account deficit country. In view of the large current account deficit, the exchange rate of the rupee is susceptible to the influence of large capital movements, especially during crisis periods. Strong and deep bond and currency markets along with robust regulatory and settlement systems would need to be in place. Further to denominate the trades in a common currency other than USD with the adjoining countries in Asia a certain degree of financial market integration is essential. Asian countries have not yet shown the degree of integration as displayed by Europe. There is a definitely more scope for greater cooperation.

While India has a long way to go towards that road, Internationalization is not an inevitable consequence of financial liberalization, nor can a government guarantee that the steps it takes to liberalize its country’s capital account will lead inevitably to internationalization. Yet the macroeconomic situations of India do demand efforts in this direction and internationalization may lead to strengthening of the domestic financial system and enrich the menu of financial assets available to domestic and international investors.



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Financial Musings: BMC and the Development of Municipal Bond Market

Contributed by: Gaurang S. Trivedi, CFA

Every day, your morning newspaper highlights stories of inefficiencies in the running of this great city of Mumbai. Yes, the infrastructure is inadequate for the size of Mumbaikars it supports. But more glaringly, it is the institution responsible for administration, i.e. the Brihanmumbai Municipal Corporation (BMC), which has become Mumbai’s biggest cog in the wheel. Episodes of corruption, downright apathy towards the citizenry, rampant flouting of rules and regulations established, religious fundamentalism and the decay of law and order have infringed on Mumbai’s cultural heritage and reduced the financial capital of India to a state of social ambivalence. In short, Mumbaikars have become “Comfortably Numb”.

The simple fact is the city of Mumbai spanning its western and central suburbs has become too big to be managed by a Central Authority. The quicker this is realized by politicians and citizens, the lesser will be the pain in accepting the eventual changes that will manifest. We have witnessed the fate of all central economies of the world. Sooner or later, the shortcomings of centralized management lead to inefficiencies in the allocation of resources, which culminate into resentment, civic/social unrest and call for changes in the system. Perhaps, Mumbai is just about there! Resentment and calls on the need for change are the daily rhetoric of the intelligentsia as well as the gentry. However, no solutions other than workabouts of the existing system seem to be forthcoming. I propose a radical approach – Break up the BMC! Decentralize.

Now, you may have already started to think, what does the prior musing have anything to do in a finance blog? Bear with me, as I think my proposal will bring about financial innovation that may help restore Mumbai’s status as a city able to provide not only a high standard of living but also a good quality of life. The product I recommend is by no means an “innovation” from the global availability of financial instruments. However, it is a novel product for the Indian market. Municipal Bonds may be the panacea for Mumbai! How you ask? Let me take you through my thought process.

It is important to recognize the population most of the suburbs in Mumbai support, could very easily represent a city in most developed nations. The distinguishing characteristic of each such city in the developed nations is that it has its own Municipality with its own mayor, budget and elected corporators. Why not replicate the same for our suburbs? Instead of electing corporators that represent the interest of localities in a centralized system, why can’t the citizens of a suburb elect their own mayor and corporators whose exclusive responsibility should be the growth, development, generating employment, providing law and order and thereby a high standard of living and quality of life to all the “city” residents!

In the current system, we do elect corporators, but they have limited voice in the functioning of the locality they represent. The power of decision-making rests with a central body of elected corporators, who may have no idea about the needs and preferences of the citizens living in distant suburbs. Most decision-makers may have never visited a suburb for which they may have sanctioned budgets. Such a system breeds favouritism, leads to faulty economic resource allocations, and entrenches corruption. Furthermore, the central decision makers are accessible, for all practical purposes, only through local corporators, thereby building a fence around themselves and their decisions. Transparency and accountability get buried in centralized systems.

Now think of the alternative, i.e. break-up of the “BMC. In this system, each suburb duly demarcated by its geographical jurisdiction (no different from the current scenario) will be governed by its own “Municipal Corporation”. The residents of the geographic unit (i.e. suburb) will elect their own mayor and corporators to manage the activities of the geographic unit. To make it effective, the elected representatives must necessarily be residents of the geographic unit. These elected representatives will be entrusted with the economic development and welfare of the geographic unit. As such, the process of budgeting of revenues and expenses will become more objective. Objectivity will lead to greater transparency and accountability in this system. Focus on economic development will lead to “marketing” of the geographic unit to potential businesses for setting up their operations leading to local employment. Furthermore, like any business or governmental entity, the geographic unit may tide over its budgetary imbalances via financing of such deficits.

Enter “Municipal Bonds”. Globally, Municipal Bonds are tax sheltered instruments i.e. the return provided by them is tax-free. Naturally, because of this characteristic, their coupon will also be lower than other taxable fixed income instruments. The coupon and principal of Municipal Bonds are backed by the taxing authority of the Municipality (geographic unit). All the taxes that are included in monthly maintenance charges of your residence are the sources of income for the Municipality. In exchange for this income, the Municipality will incur expenditures on the maintenance of infrastructure, marketing for attracting new businesses to set-up operations in the area, supporting municipal schools, compensation for municipal employees, and other incidental expenses to ensure smooth functioning of the municipality and provide good quality of life. By having a relatively clear knowledge of the sources of income, the budgeting (monthly, quarterly, annually) becomes relatively easy. Any shortfall, i.e. deficit, can be financed by the issue of Municipal Bonds. The cost of such financing will be usually lower than competing alternatives such as bank loans, commercial paper, etc. Moreover, the period of maturity is longer, thereby ensuring the municipality of long-term source of funds.

It is important to note here that the purpose of this treatise is not to provide a primer on Municipal Bonds. For the interested reader, insightful information on Municipal Bonds can be found here:

Now, you may appreciate the interconnection between the break-up of the BMC and the development of the Municipal Bond market. Yes, Municipal Bond market development can also be augured in the current centralized system, but the need for transparency and governance that will be required by the Credit Rating Agencies to grade these bonds will be a herculean task. To become part of investment portfolios, these bonds must pass the minimum investment grade barrier. This may not be attainable if the inefficiencies entrenched in the current system are continued.

The older generations of Mumbai may be tolerant of the system as they not only grew up with it but also fostered it for aspirational needs. However, the majority of the younger generation of Mumbaikars, like their counterparts in the developed world, if given the choice, would prefer a work-life balance; a result of aspirational needs of the middle-class families being met at a rapid pace. Mumbaikars, in general, are fed-up with the deterioration in quality of life wherein the daily commute for earning their keep is a grind and takes a heavy toll on health.

The breaking up of BMC into its various geographic units may perhaps be the best solution for Mumbai. It will be fortuitously associated with the development of a financial product that has the risk characteristics to suit investors and employment generation potential for the financial services industry as well as other industries interested in setting-up or growing businesses in the city. If this model is replicated pan-India level, India can have a robust Municipal bond market and help deepen its capital markets, particularly the fixed income market, a long cherished goal!


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Non Consensus Investing

Speaker: Ms. Rupal Bhansali, CIO, International and Global Equities Portfolio Manager, Ariel Investments

Moderator: Sunil Singhania CFA, Global Head Equities, Reliance Capital Ltd.

Contributed by: Jainendra Shandilya CFA

The 8th India Investment kicked off on January 12, 2018 and  Rupal Bhansali hogged the limelight by slicing and dicing the myths associated with investing. The theme of her presentation was Non-Consensus Investing and she stated that the best things in the world are simple and smart, like the Apple of Steve Jobs. There have been people who dared to pick winner far from the consensus and the classic example was of Billy Beans of Oakland Athletics. The advantage of non-consensus investing is high return at lower risk; however, one must understand that this is possible only when one is correct and proves the consensus wrong. She started her presentations with a classic example of Blackberry, how this tech company, once a darling of growth investors, lost out in the race of investing. Blackberry had the advantage in terms of technology as during the era of 2G mobile telephony, the bandwidth was not sufficient to process too much of data along with voice calls. Blackberry did a fine job of compressing data and that allowed its users to communicate seamlessly without bothering about call drops, etc. The technology, however, moved forward with the migration to 3G and 4G and this advantage did not remain unique to this instrument. The share price of blackberry, which rallied to around 900 percent during its heydays, soon lost momentum and also the charm. The stock price lost so much that it is unlikely that stock will reach its high watermark of yesteryear. Why investors lose out on this kind of stock is they try to see the performance of the stock in its financials which is a lagging indicator of a stock performance. The share price of Blackberry and Nokia performed very well during their heydays, however, they are not in the race now. What about Apple? “Apple is no longer a technology company and maybe it will also have the same fate at some point of time”, feels Bhansali. The reason why Apple does not look promising is there is nothing in it that is unique to its platform. Almost all the top apps used worldwide, viz. Uber, Snapchat, Facebook, Spotify, etc. are also available on other platform. The fast charging technology, wireless charging, etc. is not in the domain of Apple. In other words, it is no longer ahead of the curve -inventing the way it did before.

She picked up another winner from her portfolio and showcased how the myths associated with stocks needs to be debunked to get ahead of the curve. The example of Michelin  Tyres was a case in point. The myths associated with tyre industries are they are a low tech commodity, have high sticker price, have low ROIC and especially so in a declining car sales world. “If this was really true, why did Chinese not flood the market with Chinese tyre”, asked Rupal. The fact is a non-consensus investor would look at tyre stock as high tech and differentiated product and it’s a value for money. Also, tyres can’t be reverse engineered as the process used by each company remains unique to itself. Normally, a tyre is supposed to serve two purposes; one it should grip the road well and at the same  time, it should not be too heavy to be a drag on fuel efficiency. By its very design, therefore, there is trade-off between road grip and fuel efficiency. Michelin, through its design and innovation, was able to provide solution to the car industry and therefore it is the favourite of big auto companies such as BMW, Mercedes, Audi, to name a few. The result of this strategy is evident from the 2X return of Michelin stock compared with the whole tyre industry.

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Microsoft is another stock that proved consensus wrong. Normally, consumer staples are consensus favourite, however, market never looked at Microsoft as consumer staples. What Microsoft does is to provide us software constantly and this is what we consume in our day to day life. “I can live without shampoo for a day but not without software”,  she asserted. The result was, Microsoft outperformed the consumer staples industry(Proctor & Gamble) by 3.7 times over a period of a little over five and a half years. Though many in the audience felt it is not the right comparison as Microsoft has underperformed other “consumer tech” companies of the famous FAANG group. In investing it is very important to understand quality. Upset victory over consensus can only be gained by buying quality, however, investors should avoid misunderstanding quality. Both Blackberry and Nokia could have passed for quality due to their past successes, however, investors should understand that as consumer electronics such products could be either hit or miss. She went on to show how avoiding loss is very important in the initial years of bad results and the example in this case was her own performance viz-a-viz the MSCI EAFE Index for 10 years since 2001. From a casual look at her performance it would  seem a very lacklustre performance compared to the index, however, what transpired at the end of the horizon was her portfolio beat the index by a significant margin of 3.6 percent. All this was possible due to compounding of high initial performance where her portfolio lost less than the index did and thereafter the index could never catch up. In all, a $100 invested in Rupal’s portfolio could have grown to $234 in those ten years, whereas the same money could have grown only to $167, notwithstanding the very depressing results of 2008. Rupal stated that her book chronicling all her investing story will be out by September 2018. As her clients will be expecting another stellar performance from her, her fans will wait for her magnum opus.

  • JS
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The Other Half of Macroeconomics and The Fate of Globalisation

Speaker: Richard Koo, Chief Economist,  Nomura Research Institute

Moderated by: Navneet Munot, CFA, Director, IAIP and CIO, SBIMF

Contributed by: Ishwar Chidambaram, CFA, CIPM

Mr. Richard Koo began his enthralling presentation with some insights into Donald Trump’s Presidency. He said that Trump won the White House by focusing on “middle USA”- the geographical area between the USA’s Atlantic and Pacific coasts. This region has for long been neglected by successive administrations. Trump merely filled that vacuum. Richard asserted that Trump is having a profound impact on the forex markets, as he is speaking about US trade imbalance. Despite popular opinion to the contrary, Trump’s macroeconomic policies are actually sound, as he is focused on infrastructure spending. The US is beset with problems, as dollars are not flowing from financial sector to the private sector. Nobody is borrowing, even at zero rates! Everyone is simultaneously engaged in repairing their balance sheets, leading to a phenomenon which Richard termed as “Balance Sheet Recession”.

He lamented the fact that most textbooks and theories focus only on the situations wherein borrowers exist in the market- this is the scenario where the private sector is maximizing profits.  However, the case where borrowers are absent is largely neglected. This is the situation where private sector is minimizing debts. All advanced economies are currently witnessing this situation, wherein private sector borrowers have vanished post the 2008 financial crisis.

Ideally the Monetary Base, Money Supply and Bank Credit should move together. But in the US today, they have decoupled. Despite the relentless injection of liquidity by the US Federal Reserve, Bank Credit has increased only 30% in past 9 years, which is practically nothing! The situation is worse in Europe, where Credit has increased only 1% over the past 9 years, while in UK it has actually fallen. Similarly, in Japan, Governor Kuroda increased liquidity, but it had zero impact on Bank Credit. At the same time the monetary base has grown by 4.6x, 3.52x and 6.84 in the USA, Europe and UK. In Japan the same has increased 3.43 times between 2013 and 2017. These grim statistics lead to only one inescapable conclusion- namely, there is a big disconnect between Monetary Policy and the Real Economy. This can be seen further in the fact that, theoretically, increased printing of currencies by the developed economies should increase the supply of the currencies leading to a fall in their value; but this did not happen as Credit did not increase.

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Alluding to India and China, Richard was relieved that they are not facing Balance Sheet recession. In the case of Japan, however, its nominal and real GDP never fell below the peak of the bubble, as the Japanese Government acted as the borrower and spender of last resort. Hence the Japanese private sector had income to pay off their debts and corporates were able to repair their balance sheets. Hence if the private sector is minimizing debt then the Government has to act as borrower of last resort. But, perhaps ominously for Japan, 27 years after recession the private sector is still not borrowing money. This is because deleveraging is very painful. The USA’s experience is likely to be similar, as nominal GDP fell by 46% in US, whereas Japan’s nominal GDP did not fall post the bubble.

Referring to the absence of borrowers in USA,  Richard posited that Return on Capital is higher abroad than at home for US and Japanese companies. This presents a peculiar problem, as modern credit policy only works if there are borrowers. If there are better opportunities abroad, then monetary policy loses its effectiveness.

Next, he presented the three stages of economic development, namely- Stage 1 wherein most workers are in rural areas and wages are flat; Stage 2 where workers are mainly in cities and wages are upward sloping (Golden Era); and Stage 3 which is the pursued World where ROE abroad is greater than ROE at home. All developed countries are at Stage 3 currently. Policies like printing money, etc. are all based on Golden Era rules, and are not applicable to developed economies. Instead Fiscal Policy assumes greater importance in such cases.

Finally, referring to the Fiscal Cliff, Richard said the reason for USA’s relative outperformance is that the Federal Reserve was the only Central Bank that told its Government not to cut the deficit. Still the Fed appears to be behind the curve on asset prices. Its Financial sector is flooded with money (due to Balance Sheet recession) wherein:

  1. Households stop borrowing
  2. Companies are deleveraging, and
  3. Government is printing money


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Geopolitical Landscape in Asia as China Expands and America Retreats

Speaker: James McGregor, Chairman, Greater China, APCO (Beijing) Consulting Company Ltd.

Moderator: Jayesh Gandhi, CFA, President, IAIP

Contributed by: Chetan Shah, CFA, Secretary, IAIP

There are stark differences in the boards of Chinese and US companies. According to James Mc Gregor, the Chinese boards talk more about opportunities and are ambitious. While those at US talk more about risks and downside. The same things echo at the national level.  China under Xi Jinping wants to overtake other nations at the world stage, take a path of its own, away from those prescribed by the west, and propagate its own development model across the developing world. Through the Belt and Road Initiative, it is offering funds for infrastructure projects at commercial rates. It has taken Hambantota port in Sri Lanka at a strategic southern location on a 99 year lease. In Kazakhstan it has committed to 51 projects around Khorgos International Centre for Boundary Cooperation (a dry port and free trade zone) that opens the door to the West. In Pakistan it has committed large sums to build roads, rails, industries and stabilize the economy. In the last 20 years it has done similar things on the African continent building infrastructure for natural resources. It has convinced leaders there that the Chinese model of development could be easily adopted by them. It has invested into education and offered scholarship to students as a result of which more Africans go to Chinese universities than to the US. While countries joining OBOR will improve their infrastructure, it will help utilize China’s own huge capacities in industries like cement and steel. In Asia China controls around 2/3rd of the South China Sea having built thousands of acres of land and islands. In Malaysia it has 20% ethnic Chinese to cater to. The generals in Thailand prefer closer relationships with China. China is working on a high-speed train from Kunming to Singapore involving 154 bridges, 50,000 workers and around $7bn investment. Chinese leaders have spelled out the “Made in China 2025” vision which includes attaining global leadership in areas like artificial intelligence, cloud computing, bio-pharmaceuticals, new materials etc.

There is a shift of power from the collective opinion system, with 9 member standing committee, in the past to single person in the party. This has been possible due to Xi Jinping’s own background, dissatisfaction over excessive corruption in the past, debt fueled expansion, ageing population and middle-income trap for the nation. Besides there is spin of story with hostile forces surrounding China, greedy MNCs exploiting its people, Japan stealing islands and so on.

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US on the other hand seems to be in undo phase politically. In order to “Make America Great Again” and bring in more jobs, it is pulling out of blocks like TPP (Trans Pacific Partnership). TPP forms nearly 30% of the Global GDP. Little does the US realize that China will gain out of such moves? Of the $3.5T of cumulative trade deficit with China over last few years, nearly 50% of imports come from American companies with 450 factories in China. James added the Chinese proverb “fu bu guo san dai” which means Wealth does not pass three generations. In this case the USA is seeing third generation post World War 2.

At this juncture India has a good opportunity to tap into. Though the international investment in China is huge, investors have currently become exhausted with China and are looking out for similar destinations globally. India emerges as a good continent “rising from the ocean”. There is a huge opportunity for India. It depends how quickly it opens up to foreign investments.

  • CGS


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Tools for Maximising Your Career Success

Speaker: Carla Harris, Vice Chairman, Managing Director, Senior Client Advisor- Morgan Stanley

Moderated by: Madhu Veeraraghavan, Director and T.A. Pai Chair Professor of Finance, T A Pai Management Institute (TAPMI)

Contributed by: Ishwar Chidambaram, CFA, CIPM

Carla Harris enthralled the audience with her outstanding presentation, in which she spoke about the everyday tools and techniques necessary for maximizing one’s career success. She began by asserting that every organization- no matter how meritocratic- will always have the human element. She then proceeded to share her nuggets of wisdom, which she called “Carla’s Pearls”. These Pearls of wisdom formed the bulwark around which her presentation was based. They are as follows:

Carla’s First Pearl: Perception Is the Copilot to Reality

Harris said that how people perceive you will directly impact their interactions with you. The market’s perception about you supersedes your own intelligence and work ethic. For example, if you are looking for a team leadership role, it essential to be perceived as motivational, inspirational and organized, otherwise it will be next to impossible to get the assignment. While other people’s perception may seem to be outside your control, Harris contended that it is possible to train people to think positively about you. You start by selecting 3 adjectives that you would like people to use to describe you when you are not in the room. These 3 adjectives must be consistent with who you really are, and they must be qualities valued by the organization. Once you have identified those 3 adjectives, it is important to behave consistently around those adjectives and even use that language when describing yourself. Harris offered an example from her own career to illustrate: After a manager told her that he thought she wasn’t tough enough for finance, Harris talked tough, walked tough, and described herself as tough from then on. Within a few months, she had established a reputation as one of the toughest employees at Morgan Stanley.

If you offer that which is not valued, you will not be rewarded.  Never assume you know what success looks like. Instead you must ask “What does success look like in this seat?” Success is always shifting.

Corollary for leaders: It is incumbent on leaders to define what success looks like, to get maximum productivity, even in uncertain environments. All human beings are programmed to outperform.

Harris then proceeded to explain the difference between a mentor and a sponsor, stating that both are indispensable to success in scaling the corporate ladder.

Carla’s Second Pearl: Be Comfortable Taking Risks

Having knowledge alone is no longer sufficient to distinguish yourself from your peers. It is important to be comfortable taking risks.

In the current economic environment, many people are afraid to take the risks that can propel their careers. Harris quipped that “Keeping your head down will not keep you from getting shot, so as I like to say, you might as well keep your head up so you can see the bullet coming,”. “Whenever we are in tough economic environments and everybody else is besieged with fear, and everybody else is ducking, you must have clear vision.It’s exactly those kinds of environments where you can markedly accelerate your success.” On the other hand, “Keeping your head down is equivalent to submerging your voice”. This is counterproductive, as “your voice is at the center of your power”. Fear has no place in your success equation, as it stands for “False Evidence Appearing Real”.

If you are afraid of acting on a new opportunity, Harris advises that you ask yourself three questions:

  • Will the new opportunity give you new skills and experiences that you would not get if you stayed in your current seat another 12 months?
  • Will the new opportunity expose you to people, relationships, and networks that you would not get if you stayed in your current seat another 12 months?
  • Will the new opportunity create new branches on your personal decision tree of opportunity if you stay in your current seat another 12 months?

If the answer to all three is yes, you should take the risk.

Carla’s Third Pearl: Nobody Can Be You the Way That You Can Be You

The remarkable fact of life is that most people are not comfortable in their own skin. “Anytime that you are trying to speak or behave in a way that is inauthentic to who you really are, you will create a competitive disadvantage for yourself, because you’re  using valuable intellectual capacity that could be put to better use”, Harris said. “When you bring your authentic self to the table, people will trust you, and trust is at the heart of any successful relationship.”

Although Harris has a successful second career as a singer, she wanted to keep it a secret when she first started in finance — until, that is, she saw the clients’ reactions. Sharing this part of her life created an opportunity to connect with potential clients on a personal level and helped her stand out. She now has 3 CDs and 5 sold out programs at Carnegie Hall.

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Carla’s Fourth Pearl: There Are Two Types of Currency in Any Environment — Performance Currency and Relationship Currency

Performance currency, which is generated by under promising and overdelivering, is valuable because it will:

  • Get you noticed.
  • Get you paid and promoted.
  • May even attract a sponsor/mentor.

But the problem with performance currency is that it is subject to diminishing marginal returns. There is no premium associated with it, and its level declines over time.

Relationship currency, on the other hand, is never associated with diminishing marginal returns. Hence it is critical to cultivate relationships in organizations. Make sure as many people as possible are aware about your performance, as their judgments are directly influenced by relationships. Your ability to ascend will depend on whether someone knows you.

Carla’s Fifth Pearl: Success Does Not Just Happen

“There’s only one person that has responsibility for your career, and that is you,” Harris said. “So, you must ask for the compensation, you must ask for the promotion — and you must be intentional about it. You must be intentional about your performance.” Very few people have original thoughts. Therefore there is a need to both educate and sell. You need to identify who are the winners and losers for each revolutionary change. It’s important to cultivate strategic thinking.

The remarkable session was brought to an end by Carla singing a rousing operatic hymn and the audience joined her in chorus!







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Risk and Uncertainty: Illusion of Control and its Impact on Judgements

Speaker: Anil Gaba, Professor of Decision Sciences and the Orpar Chaired Professor of Risk Management Academic Director, Centre for Decision Making and Risk Analysis, INSEAD

Moderator: Anil Ghelani, CFA, Director, IAIP

Contributed by: Chetan Shah, CFA, Secretary, IAIP

One of the vocal critiques of the practices in investment banking and management industry across the world, Anil Gaba is also one of the most invited ones at such conferences. That’s because he speaks the facts as he sees them, as against the industry practices of showing self-fulfilling and self-serving best data fits and illusion of control. Spyros Makridakis a leading authority in data sciences has been carrying series of competition on prediction. To everyone’s surprise he found that complex models fit the past data very well, but when it came to predicting the future, the simple naïve models do far better than the sophisticated models.

Professor Gaba showed the results of the futility of some of the studies like those in medical sciences where there is a tendency to correlate any disease or weakness to various activities or non-activities. Ezekiel J. Emanuel an oncologist and White House advisor, said that the annual health checkup plans are totally useless as studies have shown that they did not reduce overall mortality or specific causes of death from cancer or heart diseases. The PSA tests for detection of Prostate Cancer were removed because of the futility of those tests. Another case in point is the activity of running. Though as a group runners gained three extra years of life compared to adults who never ran, the benefits were the same no matter how much or little people ran. Yet a trillion dollar industry thrives around treatments and supplements. Likewise the narrative of number of deaths on account of obesity kept reducing from  260,000 to 26,000 to even lower over a period of time.

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There was one person called Klaus who believed in removing all kind of risk from life. He maintained a diary for most of his activities like how much time it take for him to reach his office desk from home taking the subway. Based on the data developed he grew confident of predicting the time it takes for him to reach office. Once he was planning a vacation with his family. So he started studying all the airlines including records like number of accidents, almost 9 months in advance. Finally he booked his flights  and reached his destination. And based on his probability he reached safely. One afternoon after the lunch he lay down on the beach below the tree. Unfortunately  a coconut fell on him and he died! This is what  Prof. Gaba described as “Subway Uncertainty” and “Coconut Uncertainty” with the former representing the known risks and the latter the unknown risks.

All through the examples Prof Gaba  conveyed one common message – Be mindful of Illusion of control as it distorts our ability to see, act or learn.  We therefore become susceptible to cognitive biases and fall prey to Anchoring, Availability, Overconfidence and Loss Aversion. Likewise one should not become religious about traditional or behavioral finance but take the best wisdom from both the streams. One has to attempt to assess uncertainty, be prepared to face the same and build options around them. Doctors attending emergencies or traders in the midst of volatile markets both do not have the luxury to wait and take time to decide or act.

  • CGS
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