On cost of terrorism

Ever since the terrorist attack in Paris, there have been a spate of articles discussing the cost of terrorism. Major costs of terrorism are victim costs, tourism decline, higher insurance premiums, increased security costs etc.


Before we start on the costs or terrorism, here is a monetary riddle to consider.

“It’s a slow day in some little town……..
The sun is hot….the streets are deserted.
Times are tough, everybody is in debt, and everybody lives on credit.

On this particular day a rich tourist from back west is driving thru town.
He stops at the motel and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs in order to pick one to spend the night.
As soon as the man walks upstairs, the owner grabs the bill and runs next door to pay his debt to the butcher.
The butcher takes the $100 and runs down the street to retire his debt to the pig farmer.
The pig farmer takes the $100 and heads off to pay his bill at the feed store.

The guy at the Farmer’s Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her services on credit.
She, in a flash rushes to the motel and pays off her room bill with the motel owner.
The motel proprietor now places the $100 back on the counter so the rich traveler will not suspect anything.

At that moment the traveler comes down the stairs, picks up the $100 bill, states that the rooms are not satisfactory, pockets the money & leaves.

NOW,… no one produced anything…and no one earned anything…however the whole town is out of debt and is looking to the future with much optimism.”

Source : http://econlog.econlib.org/archives/2012/01/an_answer_to_a.html

In the above riddle, there were no real goods produced, but the flow of currency erased all the debts. In an experiment tight scenario, where the entire money comes back to the tourist, this might work but in real world such a scenario would be highly unlikely.

Let’s think about the increased security costs because of terrorist threats. We can safely assume that people spend more on security post terrorist attacks. Now, in an Indian scenario let us consider two characters – a rich businessman (has a factory, a big bungalow, a big car and so on) and a security guard (from a poor village in India, is semi-literate and is unable to make any extra money for his family if he stays in his village).

Because of terrorism threat, the rich guy employs the poor guy and pays him Rs8,000 per month. The security guard effectively sits on a chair for the whole month but gets his monthly salary at the end of it. He consumes some of it and sends some of it to his family in his village. His family use that money for better food, education of children and so on.

With the guard sitting on his chair for the whole day, no real work is done. But when he gets his salary, the capital flows from the rich guy to the poor guy and the poor guy spends all of it and he and his family are better off compared to the scenario where he would be under disguised employment in his village.

In an alternate scenario where there is no terrorism and no security is required, the rich guy would not have to spend Rs8,000 per month on security. With the amount saved, the rich guy could have,

  1. Invested the money in some asset
  2. or could have created more jobs by investing in his business
  3. or many other mixed uses

Among all the above scenarios, it is difficult to imagine a scenario where the capital (Rs8,000) would flow to the poor guy. Unpleasant and undesirable terrorism has created an opportunity for the poor guy to earn a steady monthly income, which would otherwise not be possible given the limited skills of the poor guy.

Terrorism has huge costs for many, but not necessarily for everyone. Even something as hated can have an unintended positive effect on the life of someone.


On two models of entrepreneurship


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The models of entrepreneurship vary from being venture capital backed to being bootstrapped. There are other models in between but for the sake of simplicity let us consider these two polar opposite models.

The first model is that of venture capital backed big bang startups. These are the current fad. They are all over the media. Most of these companies in India are less than 10 years old. Take the case of Ola – they are all over the news having raised $500m in a Series F funding. Ola was founded just 5 years ago and is currently operating in close to 100 cities in India. They are not profitable and don’t look to make any profits in the near future. The plan probably is to grow and grow and suddenly one day when they have become big enough they decide to turn profitable.

Ola is currently valued in excess of $5bn. Valuation, I believe is more a matter of belief than of science. Valuation of a company is what everyone (the investors) believes its valuation to be. Anyone who has tried his hand at DCF valuation of a company realizes the power of assumptions and the uncertainty of the future. Now, these companies won’t pay dividend as they are growth companies. So, the only way you can make profit from your share is by selling the share. The share price will continue to grow till the time all the investors continue to believe that it should grow.

In future, if there is any disruption, the investors’ belief might just shake and valuations will then plummet. There are a number of things that can happen in future which can start a vicious downward spiral of the share price. A new technology might come up, there might be an incident triggering regulations or even something happening to the founder..

Now, there is another model which is not all that glamorous but is time-tested. The model where you set a viable business model and keep investing the profits back into the business. You bootstrap and raise debts  to add to the capex. Zoho is doing just that. They refused a $200m valuation from a VC way back in 2000. They have a 15 million user base and have been always profitable. The founders have rejected the VC model for their company. It is difficult to put a valuation to Zoho as they don’t disclose their revenues and there is no investor group to form a belief about their value.

It is difficult to say which model is better. Among other things the approach does depend on the founder’s definition of success. So, what thought is pushing you to take the plunge..

On Instant Gratification


In the famous marshmallow experiment, children who were able to wait longer for a preferred reward were found to fare better in life.

I have been wondering for the last few days, if we have taken this “waiting patiently to enjoy the fruits of our labor later” too far.

Right from the time we start schooling, we are taught to work hard towards securing the highest marks. We are persuaded to clear one exam after another in hopes of a better future. This continues in college where we work towards standing out so that we are “set” for life. Now, there are times when I have really enjoyed studying something, but not always and not everything.

Later in life, most of us pick jobs that require us to work 12 hours every day and sometimes on weekends also. We are rewarded with money, but money is just a currency, a means to something and not an end in itself. We go on accumulating money postponing living life we want to live for later. We pass our 30s, 40s, 50s before we are forced to slow down. What happened to the 4 hour work day that Keynes had predicted in 1930?

But, do we get fulfilment even in these later years? Running after things and accumulating becomes a way of life. Is it possible to switch to different mindset after all those years..

On tolerance

More than 100 years ago Swami Vivekananda gave this talk in Madurai.

“There was a time in this very India when, without eating beef, no Brahmin could remain a Brahmin; you read in the Vedas how, when a Sannyasin, a king, or a great man came into a house, the best bullock was killed; how in time it was found that as we were an agricultural race, killing the best bulls meant annihilation of the race. Therefore the practice was stopped, and a voice was raised against the killing of cows. Sometimes we find existing then what we now consider the most horrible customs. In course of time other laws had to be made. These in turn will have to go, and other Smritis will come. This is one fact we have to learn that the Vedas being eternal will be one and the same throughout all ages, but the Smritis will have an end.”

“The essentials are eternal, the non-essentials have value only for a certain time; and if after a time they are not replaced by something essential, they are positively dangerous. I do not mean that you should stand up and revile all your old customs and institutions. Certainly not; you must not revile even the most evil one of them. Revile none. Even those customs that are now appearing to be positive evils, have been positively life-giving in times past; and if we have to remove these, we must not do so with curses, but with blessings and gratitude for the glorious work these customs have done for the preservation of our race.”

Read the full speech