Thursday, February 6, 2014

MBA Entrance Coaching on The Cusp of Disruption - Part I

[Inspired by the article “Consulting on the Cusp of Disruption”]

A Note on Disruptive Innovation
“New competitors with new business models arrive; incumbents choose to ignore the new players or to flee to higher-margin activities; a disrupter whose product was once barely good enough achieves a level of quality acceptable to the broad middle of the market, undermining the position of longtime leaders and often causing the “flip” to a new basis of competition.”- HBR article, Oct. 2013

The quote sums up just what disruptive innovation is, how it works, and how it has changed industry after industry as new technologies have brought with them new business models and different ways of competing. This article is my attempt at explaining how disruption has wended its way through a traditional service industry and predict its impact in a business as usual scenario.

I hope to establish that
  • The CAT coaching industry is undergoing a dramatic upheaval with the spread of new distribution channels
  • Traditional coaching will soon be niche/ made obsolete
  • Pure-play e-commerce sites will be the new leaders
  • The business model of those remaining in business is going to be vastly different from the one which opened up this industry
  • The market is going to grow rapidly as these new distribution channels hit the mainstream and increase consumption of CAT coaching

I strongly feel that a business which is unwilling to acknowledge the changing reality is headed on a path of losing market share in a booming market. An organization which does not realize that their competitor is an e-commerce company rather than one just like themselves is in the throes of Marketing Myopia as discussed by Theodore Levitt in his McKinsey award-winning HBR article (1960; reprinted in July 2004).

I shall now proceed to establish the above.

The CAT coaching industry is undergoing a dramatic upheaval with the spread of new distribution channels

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness”. –The United States Declaration of Independence.

In an ideal scenario, this should be self-evident. Ten years ago, did not have 485, 923 registered users (numbers as of 28-01-2014). Six years ago, did not even exist, while CAT coaching did. A website named has tried out online CAT training and supplemented it with a classroom program, rather than the other way around. Analytics did not become a core offering for training until the advent of which sold just that, filling a market niche., a site which was originally meant to be a forum and disseminate news, has started offering CAT material on its website. did not offer comprehensive coaching for CAT with live online classes at cut-throat prices compared to the industry stalwarts.

Yet, these changes have been largely ignored by those who have been in this industry the longest. It is not for lack of awareness that this has been so. The management at the traditional coaching institutes are rational, and are acting according to what they perceive to be strategic. The new distribution channels are currently too small an opportunity/threat. The scenario is a classic case of The Innovator’s Dilemma: When New Technologies Cause Great Firms To Fail.

“The technological changes that damage established companies are usually not radically new or difficult from a technological point of view. They do, however, have two important characteristics: First, they typically present a different package of performance attributes—ones that, at least at the outset, are not valued by existing customers. Second, the performance attributes that existing customers do value improve at such a rapid rate that the new technology can later invade those established markets. Only at this point will mainstream customers want the technology. Unfortunately for the established suppliers, by then it is often too late: the pioneers of the new technology dominate the market.” – Disruptive Technologies: Catching The Wave, HBR, Jan. 1995.

The innovators taking advantage of the new distribution channels are currently not appealing to the mainstream of the established coaching institutes’ customer group; they are merely nipping at their heels. The innovator companies are addressing two market segments: the overserved customers and the non-consumers.

Who are the overserved customers..

“Overserved customers consume a product or service but don't need all its features or functionality. Three specific indicators point to this customer group:
  • People complaining about overly complex, expensive products and services.
  • Features that are not valued and therefore are not used.
  • Decreasing price premiums for innovations that historically created value.”
.. and the non-consumers?

“Nonconsumers generally fall into one of these categories:
  • Consumers who lack specialized skills or training, forcing them to turn to experts to solve important problems.
  • Consumers who lack adequate wealth to participate in a market.              
  • Consumers who can use a product or service only in centralized and/or inconvenient settings.

Because nonconsumers lack the ability, wealth, or access to conveniently and easily accomplish an important job for themselves, they typically have to hire someone else to do the job for them or they have to cobble together a less-than-adequate solution.”

Hence, the industry stalwarts do not take them seriously. Given their current business model, the markets served by these disruptors is unappealing. For a company with $200 million in revenues, a 10% growth requires tapping a $20 million opportunity. A disruptive market opportunity with forecasted size of $2 million is simply not worth exploring, and is indeed worth ceding. For an upstart with $20 million in revenues, that $2 million opportunity is tempting indeed. It is when the disruptors move up-market with sustaining innovations and increasingly grab market share from the established players that the consequences become obvious, by which time it is too late. The books The Innovator’s Dilemma and Seeing What’s Next by Clayton Christensen contain numerous examples of this in industry after industry.

Eventually, as the theory predicts, the disruptors will improve in the performance dimensions valued by the most demanding customers, moving up-market through sustaining innovations and forcing the established players to cede increasingly higher shares of their market, which brings me to my next prediction:

Traditional coaching will soon be niche/ made obsolete

As established players flee the disruptors and move more and more to the higher-end of the market, to meet the needs of the most demanding customers for whom the disruptive innovation is still not good enough, they will increasingly become a niche player than a mass-market player. When the disruptive innovation can fulfil the demands of the highest tier of the market, the niche player too becomes obsolete.
The best example to illustrate this is the story of Nucor and the mini-mills and how they drove the integrated steel mills out of existence. For further reading, refer Disruption at Work: How Minimills Upended Integrated Steel Companies.

A caveat is in order, however. Traditional coaching relies on increasing their numbers in order to stay profitable and grow. Beyond a point, they would rather fight than flee up-market.

Pure-play e-commerce sites will be the new leaders

The new distribution model which is changing the industry is e-commerce based, where the delivery of CAT coaching is via the internet, in asynchronous or synchrous format, with videos, tests, analytics for feedback and virtual classroom sessions. Once this technology is “good enough” to hit the mainstream, it is going to be as disastrous for the business model of the established “physical classroom based” coaching institutes as the mini-mills were to the integrated steel mills once they upped their quality.

Considering the pace of change of technology, and the new wave of SMAC related growth, it is not too much of an exaggeration to say that this might indeed happen within the next five years or so. (As with any quantitative prediction, the numbers have no justification whatsoever). An increase of Private Equity/ Venture Capital activity in this phase, entry of tech-savvy entrepreneurs might accelerate the growth of the disruptors, causing a “strategic inflection point” in the industry even sooner. *

(Refer Only the Paranoid Survive by Andy Grove. A strategic inflection point is something that changes the industry forever. For Intel, one such point was when a flaw in their chip caused a hue and cry in the market and they spent half a billion dollars in replacement chips. Intel had shifted from being a B2B to a B2C company according to market perception, due in large part to their  ”intel inside” marketing campaign). In the context of the CAT coaching industry, a strategic inflection point would be online resources for preparation becoming more valuable than the offline alternatives.

The business model of those remaining in business is going to be vastly different from the one which opened up this industry

Intel has survived two disruptive innovations: the replacement of the memory chip with the microprocessor, and the introduction of the low-priced Celeron chip in price-conscious markets to ward off low-end threats. IBM has transitioned successfully to an IT solutions provider. Buggy whip manufacturers have survived the collapse of the horse-drawn carriage and the rise of the automobile. Clearly, their business model has changed as well. The institutes which emerge from the disruptive wave are going to be very different in terms of how they handle the new technology in their business.

A possible model might be to handle online distribution the same way the successful bands in the music industry did. Prior to file sharing on the internet, bands used to perform live in order to promote record sales. Now, bands give away their music for free and make money in live concerts. Perhaps the coaching institutes who emerge successful would have the role of their online and offline presence switched too- with their offline efforts promoting online sales.  Or, the disruptors could partner with the established players to bolster the latter’s strength online, while cashing in on their brand value to grow.

The market is going to grow rapidly as these new distribution channels hit the mainstream and increase consumption of CAT coaching

Online distribution removes two major barriers to the consumption of CAT coaching: the constraints of time and space. Quality coaching is simply not available to those who choose to live away from the main coaching hubs, or who cannot commute to these hubs at the time live classes are held. With increasing internet penetration and better technology, online CAT training could address these main barriers to non-consumption, thus growing the market. Also, by reducing cost of operations for the companies and increasing economies of scale in distribution, the new distribution channel, and resultant competition, may reduce the price of quality coaching, increasing consumption, and as a result, the market value of the CAT coaching industry, further.

At the low-end of the market, it becomes possible to offer only particular modules, say Geometry Advanced, to those who wish to buy their education piecemeal. Since such individuals are currently non-consumers, this is another opportunity for growth.

Hence, both non-consumers and overserved consumers will participate in the market, increasing the total consumption of CAT coaching.


Clayton Christensen’s theories of disruptive innovation can be applied in the CAT coaching industry to predict the effects of online distribution on institutes with the traditional business model. It remains to be seen how, if and when the mainstream players of today address the disruptive threats to their business.

I will attempt to use theory from Clay Christensen’s book The Innovator’s Solution to explore the available options for the incumbents to adopt the new technology and compete against the disruptors.

A final note. Predictions are always a tricky business. Good theories can only get us so far. Hence, predictions should always be taken with a pinch of salt. Bill Gates famously predicted that the internet is a bubble, but on realizing its importance changed his views and pushed for the development of the Internet Explorer, eventually replacing the incumbent Netscape Navigator as the means to browse the World Wide Web.

Influenced by:
  • The Innovator’s Dilemma
  • The Innovator’s Solution
  • Seeing What’s Next
  • Only The Paranoid Survive
  • Made in America

Wednesday, September 19, 2012


Anthem is another of Ayn Rand’s works. One of her early works, in fact. Read it today in no time, in e-book form. That’s something that would have made her furious, had she been alive. She was unable to get past the notion that words are property.

I don’t believe in IP, as you may have guessed by now. It’s one of the three major flaws in Ayn Rand’s philosophy, the others being her position on anarchy and her abdication of her principle of consistency in answering how governments can exist and be financed in a free society.  

That apart, Anthem was a wonderful read. If Atlas Shrugged is awesome, Anthem is beyond awesome. Nowhere else, in my entire reading, have I come across a greater defense of ego and “I” than in Anthem. It transported me into a different world, as a good work of fiction should. Contemplating the philosophy in that book, I realized that I have a confession to make.

It has been gnawing me for quite a while, ever since I started to think, to reason. Throughout schooling, I have been taught to think in terms of “we” instead of “I”.

“We want to play.”

“We would like it if you could explain this concept again.”

“We wish you all the best.”

It was the same even in college.

Very recently, someone phrased a question to a professor inside the classroom the same way.

“We would like to know if...”

So many times, I’ve been subjected to this “we”.

“We feel that...”

“We would like you to...”

Numerous times I’ve been frustrated with this word, and felt disgusted with myself for thinking, and sometimes, inadvertently, talking in such terms.

Now I know its origins, the evil behind it, and what it seeks to do. Words have meaning; they have the power to help one in reasoning, in conceptualization. Destruction of words can destroy one’s ability to understand the concept represented by that word. I don’t want to engage in concept destruction by having a faulty vocabulary. And that is why it matters whether one has a good command of the language or not. It shows the power of that person’s reasoning mind. The surest way to destroy a mind is through the destruction of concepts, of words that embody that concept. 1984, a novel by George Orwell, is supposedly on that.

The more I read, the more knowledge I gain, the more my eyes open, the better I understand reality. The more I write, the better the sinking in of the concepts I’ve grasped, the better my articulation of what I’ve understood. It is to this end that I write, it is that end which this blog, as an outlet for my writings, serves.

Monday, September 17, 2012

Atlas Shrugged

Man as a trader, exchanging value for value; living for the sake of one’s own happiness; selfishness as the highest moral virtue; never seek or grant the unearned; never live for the sake of another man nor ask another man to live for the sake of yours; judge; discriminate; hold reason above all else; never compromise on principles; hold reality as the ultimate arbiter; if you arrive at a contradiction, check your premises; to earn profits is virtuous – these, and more, philosophical statements are the essence of Atlas Shrugged, a novel expounding the moral code of a man. 

I started reading Atlas Shrugged sometime in mid-July, and completed it about 2 weeks ago. I’m no neophyte to Ayn Rand’s philosophy- I’ve read Introduction to Objectivist Epistemology, Capitalism: The Unknown Ideal and The Virtue of Selfishness- but, this book really opened my eyes, changed my perception of myself and gave me the ammunition to re-form my moral code without the contradictions it was earlier riddled with. I’ll elaborate, but first, something about the book. 

I can very well understand why it has been called Ayn Rand’s masterpiece. It is a great work of art, a brilliant philosophical treatise, and all that, but more than that, for me, the book was a learning experience unsurpassed by any learning I’ve had prior to it in my life, except, perhaps, from Ragnarok Online. Or rather, it integrated all my previous learning, blasted apart the contradictions in my thinking and helped me understand morality, and how to be moral in a way nothing else has. The way Ayn Rand has understood the common contradictions in our thinking, and the masterful way in which she has addressed them in order to make us aware of our faults- that is the significance of this work to me. 

Face reality. Nobody lives in this valley by faking reality, says John Galt to Dagny Taggart. If I face reality, I’ll have to admit to the philosophical contradictions present in my thinking and demonstrated in my actions. 

I’ve faked reality quite often, when reality was hard to accept. I’ve turned a Nelson’s eye where I should have judged, discriminated, and acted according to my moral values. Now I consciously try to avoid faking reality; I face reality especially where it is hardest to face, because I know it to be right

Never grant the unearned. I’ve always balked at asking for the unearned, demanding from others that which I had no claim to, but I’ve never had a problem in granting the unearned, giving others that which they had no claim to, out of a spirit of generosity/altruism. There existed a contradiction in my thinking. How is it right to grant the unearned when it is not right to ask for it? I abdicated my responsibility to answer that question. Now, faced with it, I can answer: it is not right. Never grant, nor ask for, the unearned. 

After answering that question, I found that I was also guilty of asking for the unearned! Facing reality, I am now correcting myself. 

Live life as a trader, exchanging value for value. It’s pretty obvious, at least in matters related to money. It’s not so obvious when it comes to other exchanges between individuals. If an exchange is voluntary, what lies at its root? Reverse valuation. Each individual values that which he receives over that which he gives. Each individual has to offer value to the other in order to gain value from the other. 

There’s a lot of value I’d like to gain from quite a few people, but I have nothing to offer them in return. My need is not a claim on their value. The moral thing to do would be to bring myself up to a position where I can offer them value, thus gaining what I want and making both of us better off. And where I really can’t offer anything of value, I’ll have to sigh and face reality- there’s some value I can’t gain due to the inadequacy of my offering. 

Facing reality on this is probably the hardest thing I’ve ever done. Is there an alternative? Not if I want to live as a man, with a moral code that doesn’t have contradictions. I do.

Sunday, June 3, 2012

Ayn Rand, Morality, and Personal Decisions

I have been heavily influenced by Ayn Rand’s philosophy since about the same time last year. Earlier, my philosophically-oriented friend used to say I spout her philosophy, due to the similarities he found between my way of thinking and what she expounded, but I never really considered myself to be influenced by Rand, for I had read none of her works except Capitalism: The Unknown Ideal.

All that changed after reading Introduction to Objectivist Epistemology. I went around dazed for a long time, trying to understand, trying to fit my world view to the new lens I had acquired. I succeeded at last after months of deep thought, but I still had misgivings on my understanding of ethics, morality, justice and social principles.

As part of a course here at IIT-M, I decided I’d do a book review of her The Virtue of Selfishness, partly because it’s a small book and partly because I really wanted to fill in the gaps in my understanding. I read it at a time when I was already in emotional turmoil, and it made my head spin. Life would never be the same again.

It’s not that I imbibed philosophy from a book; I was already thinking along similar lines, and the book brought it out, made it explicit, and guided me in my thinking. People generally scorn at learning life’s lessons from books; for me, learning is learning regardless of the source. My major learning comes from seeing how two people I know think, and I’m not embarrassed to admit that.

Morality, at its best, is selfishness. Morality is the guiding light behind all our actions, yet we never really think about it and try to formalize it. In fact, conventional wisdom has it that morality is subjective, ought not to be defined, but in a broad sense consists of not hurting others and helping them out. It is such vague ‘definitions’ of morality, which try to obscure the truth from our mind, that Ayn Rand totally trashes.

Morality, as defined by Rand, is a hierarchy of values chosen by man in order to pursue his rational long-term self-interest. The term selfishness means concern with the self. It is this concern with the self that should drive all our actions. Sounds obvious, but the point is often misrepresented and misunderstood. The competing paradigm of morality is one of altruism, which preaches selflessness. It means the giving up of a greater value for a lesser value in order to serve a larger public purpose. Under such a moral code, the moral thing to do would be to give up your sight so that 2 blind men can see, your lungs so that a smoker can continue his disastrous habits, your kidneys to save 2 people the discomfort of dialysis, and your heart so that another person can live on. By sacrificing your life, a greater value to you, you can benefit 6 others, a lesser value to you, and serve the public good. That’s the tenet of altruism, and its proponents, however hardcore, never seem to practice what they preach.

Our minds have, somehow, been conditioned to accept altruism in its milder forms. By sheer instinct, we cannot avoid being selfish, but the propaganda of altruism has the effect of distorting our thoughts and view of reality enough to push through the altruist agenda. Common phrases such as rich people should give back to society, companies should follow corporate social responsibility, we need to save the environment, etc. are all a part of the altruist view of morality.

Coming back to selfishness. If it is the exact opposite of altruist morality, then it should be definable as the choosing of a greater value over a lesser value, to serve our own selfish needs. And yes, it is definable that way.


After spewing out a lot of abstract concepts, let me explain how exactly I can be selfish in my daily life with an example. The example isn’t simple; a simple one wouldn’t suffice to explain the depth of the concept.

Let’s say I have a friend I hold dear but who, I think, doesn’t reciprocate my feelings. English being a sexist language, I’m going to use ‘he’ to denote the friend hereon. I think he doesn’t reciprocate my feelings because he wronged me in some way and refused to acknowledge it, failing which I find it indigestible for me to continue the friendship.

My philosophy is the answer to the question “What should I do?”

The selfish thing to do would be to give up the lesser value for the greater value in order to pursue my rational, long-term self-interest. The question now boils down to: which is the greater value?

What is a value anyway? It is merely something for which you act to gain or keep it.

In this scenario, what are my two values? One is the friendship, which I seek to preserve, and the other is my feeling about what has happened.

Ideally, I should give up on my feelings of the moment and value the friendship more since its loss would hurt me more than swallowing my feelings. The moral thing to do would be to give in, make amends and resume the friendship, which may grow stronger after such rifts.


Not so, and not so obvious.

Morality is a code of values which helps me act according to my rational, long-term, self-interest. Had the long-term part not been there, the above solution would be moral.

The right question to ask is, should I continue to be friends with he who doesn’t value my friendship enough to right the wrongs he committed? For him, his ego in not giving in is a greater value and the friendship at stake is a lesser value. In other words, he values my friendship less than his pride, even when he knows he has done wrong.

By holding such a friend dear, I’d be doing an injustice to my long-term self-interest. It is better for me to acknowledge that the friendship is at an end, suffer in the short-term and be more careful in placing my trust in people in future.

Greater value correctly identified: Giving up on those who don’t reciprocate since they’re not worthy of you.

Lesser value correctly identified: The beautiful friendship you had, and which you can save by swallowing your feelings of the moment and accepting the fact that you need them more than they need you.

The moral thing to do in this hypothetical example is to break that friendship, suffer a short-term setback, while being more careful in future.

This illustrates another point about morality. Being moral does not equate to being happy all the time. Morality is merely the tool you use to strive for happiness. This answers questions such as what’s the point in being moral when it only makes you unhappy. It’s the time horizon which needs to be looked at: ephemeral happiness now at a huge cost or incur a greater cost for a more lasting happiness in the future. Such decisions add up, their effects amplifying over time.

Some things are worth giving up on, even though they are dear. That’s an amazing lesson I learned.

In the other side of the example, it is easy to determine the moral thing to do. If that friendship matters, accept your mistake. If not, save your ego.

This illustrates another point about morality. Moral values are not absolutes. There is no decree that you choose friendship over ego or vice-versa. It is your choice entirely, based on your values, your subjective appraisement of what you desire.

I hope this example has sufficiently conveyed how morality is the right lens to use for personal decision-making. It feels good to blog again after well over a year. Thank you, readers, and comments are most welcome.

Friday, March 25, 2011

B-School Admission Criteria: A Critique, Part Two

Continuing from where I left off yesterday.


Now, the profile weightage, which is the winner of the most flawed of all criteria. This includes weightage for the following parameters:
(a) 10th standard marks
(b) 12th standard marks
(c) Graduation marks
(d) Post-graduation marks, if applicable
(e) Work experience
(f) Extra-curricular activities
(g) Achievements

What is the rationale behind this?
To quote IIMB, “IIMB has found over the years that students who perform well in the academic program are typically those who have a consistently good academic record during their school, high school and graduation level, besides exhibiting sufficiently high aptitude as measured by the CAT. Therefore IIMB uses multiple parameters, namely academic performance in school, high school and graduation programs as well as candidates’ scores in CAT to judge the suitability of candidates for the PGP program.”

And, “Evaluation by multiple criteria is also consistent with empirical research on recruitment and selection that shows greater efficacy of recruitment processes that use multiple criteria. Multiple criteria are used to arrive at a composite score for every candidate, which is used to select candidates for the subsequent stage.”

That’s the rationale in a nutshell. There are quite a few holes in it. I’ll start with the basics.

1. What do marks have to do with an MBA program?
An MBA program is not one in which you write exams, get marks and graduate. It is supposed to prepare you for the business world. Businesses don’t use marks as a test; they judge performance. They don’t want you to write solutions to hypothetical problems with inadequate data for making the right decisions; they expect you to actually solve real ones.

Marks are awarded by an examiner based on his judgment of your answer (i.e. subjective evaluation). In business, the mark equivalents, bonuses and incentives, are awarded based on the tangible value added to the company through your work (i.e. objective evaluation). I add that these are general statements. There are exceptions, but they don’t significantly affect the purpose of my observations.

In sum, if we accept that an MBA program is supposed to prepare a student for a corporate career (an implicit assumption) then marks have no relevance whatsoever.

2. The problem with empirical research
Empirical research is research based on observations or experiments. The problem with empirical research is the problem of induction. I’ll introduce it in an easy to understand manner by using The Black Swan Theory.

The Black Swan Theory
Let’s say you have observed 4000 swans and found all of them to be white in color. You publish the result of your empirical study as: All swans are white.

All it takes to refute your conclusion is for me to show you a black coloured swan. If I can successfully do that, then I can confidently say “Not all swans are white.” This finding of mine would totally invalidate the conclusions you formed from your empirical research. Incidentally, black swans do exist.

Basing anything on empirical research alone without logic is like building a house without a foundation. It looks fine, till it collapses.

If the empirical research on which IIMB bases its selection criteria is someday invalidated by a new study, they would have been ‘unfair’ in their selection process. But that’s not the worst of it. The worst problem is that they would have created a self-fulfilling prophecy, which we shall see in a while.

Also, even if using multiple criteria makes the process more efficacious, the question of what criteria to use still remains. And here, we get into the criteria of marks, and why it is flawed selection criteria.

3. What do marks project?
I studied in a really good CBSE school. My school marks have always been average among my school peers. I never did learn by rote (save for Hindi in 10th standard). I used to understand and analyze concepts and their implications. I have sometimes even gone beyond what is ‘required’ in order to get marks out of my curiosity. I used to love studying some subjects, though I didn’t score greatly in them.

Do my 10th and 12th standard scores reflect my academic development? Not performance in useless tests, but real intellectual development. The answer is an emphatic NO. What do they actually reflect? The mood of the examiner, the presence of certain ‘keywords’ in each answer, my level of boredom at that time and in a small way, my knowledge about the questions asked. As a judge of my caliber, they are merely some meaningless numbers.

College was even worse. I could graduate with a B. Tech. in Biotechnology without knowing anything relevant whatsoever about biotechnology. How? Because I just had to write some answers to some questions on an exam paper and clear the cut-off, and I am now an engineer with a specialization in biotechnology.

I don’t have a ‘consistently good academic record’, so IIMB concludes that I won’t perform well in their academic program. I may have, I may not have. They’ll never know. But I can say this with certainty: if I did do well, it would not be ‘in spite of’ my poor academic record. And if I didn’t do well, it would not be ‘because of’ my poor academic record.

Doesn’t past performance matter?

Monkeys on a typewriter
If you have a billion monkeys typing away on a billion typewriters for a period of a billion years, by sheer chance, one among them may produce the complete works of Shakespeare. Now, let us take this impressively performing monkey and tell it to produce the complete works of Homer next. What are the odds you would give it?

Clearly, past performance does not matter when things happen by sheer chance.

But IIMB claims to have found a correlation between their selection criteria and student performance at IIMB. To again quote their selection document, “IIMB has found over the years that students who perform well in the academic program are typically those who have a consistently good academic record during their school, high school and graduation level, besides exhibiting sufficiently high aptitude as measured by the CAT. Therefore IIMB uses multiple parameters, namely academic performance in school, high school and graduation programs as well as candidates’ scores in CAT to judge the suitability of candidates for the PGP program.” So why not use those criteria for selection?

From these statements, we can see that IIMB has made a basic logic error which any scientist, statistician, academic researcher, or real economist knows he should avoid: correlation does not imply causation.

First, the correlation
If, when A happens, B happens, can we say B and A are correlated? For example: It rains on election days. Are elections and rains correlated? Should rains be regarded more highly when they occur on election days?

Now let us look at this statement:
“IIMB has found over the years that students who perform well in the academic program are typically those who have a consistently good academic record.”

Does this imply that good academic performance at IIMB and past academic record are correlated? Should past academic performance be regarded highly? (There is actually a correlation, but not for the reasons you may think. I’ll address it in a while).

Second, implying causation
A happens. Then, B happens. A caused B. This is called post hoc ergo propter hoc logic. B happened after A, therefore B happened because of A. Example: The performance of bank stocks is correlated with interest rates. RBI hiked repo rates. The BSE Bankex (Banking index) fell 1%. Therefore, the banking index fell 1% because RBI hiked repo rates. If you think that statement looks correct, try the reverse: The BSE Bankex (Banking index) fell 1%. RBI hiked repo rates. Therefore, RBI hiked repo rates because the banking index fell 1%. Now you’ll see the absurdity of this logic much more clearly.

As we see from their selection document:
“IIMB has found over the years that students who perform well in the academic program are typically those who have a consistently good academic record. Therefore IIMB uses multiple parameters, namely academic performance in school, high school and graduation programs as well as candidates’ scores in CAT to judge the suitability of candidates for the PGP program.”

First, they assume they have found a correlation between past academic performance and IIMB performance. Second, they determine there is a causal link between the two i.e. good track records in school and graduation implies good performance at IIMB (if they didn’t think so, they wouldn’t try to get more students with a good track record). And finally, they reward consistently good academic records, thus ensuring they get more students who have it. They have successfully created a self-fulfilling prophecy.

Self-Fulfilling Prophecy
Let’s understand this concept with an example. I use one loosely based on one from the book Outliers by Malcolm Gladwell. An anthropologist found that most Canadian hockey players were born during the first three months of the calendar year. Upon researching, he found that the selection criteria employed an age cut-off date of Jan 1.

What this means is that if you are born on January 2nd 2005, you are eligible for the hockey tryouts in the Under-6 category in 2011. You’ll be the oldest in the group, and much more physically mature than someone born on December 31st 2005 (who is over 5 but under 6 on that arbitrary cut-off date and so competes in the same category).

The extra physical development the January born player has passes off as talent. At that age, size really matters. So even if the January and December born are equally talented, or the December born is slightly more talented, the January born gets selected.

Selected players are given rigorous training, due to which they actually become better. If the coach then measures that January born player against that December born player, he will think his selection is validated because that January born player is much better than that December born. Thus, the slight initial advantage of that January born player due to his being born just after that random cut-off date, turns into an actual advantage because of the training he gets.

The coach then observes over the years that people who perform well in the rink are typically those who were born in the month of January, besides exhibiting sufficiently high aptitude for hockey as measured by the selection tryouts. Therefore, he decides to give people born in January an additional profile weightage in the selection tryouts, which boosts the initial advantage they got by being born in January, after that random cut-off date of Jan 1st. This profile weightage will make even the less talented January born players to appear more talented than they actually are.

With the odds so markedly stacked against the February to December born players, they eventually stop trying, and even when they do try, they lose out unless they have a really massive skill advantage and they get the opportunity to exhibit it during the tryouts.

While the coach thinks that he is picking the best among the players, he is actually only picking the best among the January born players! But, all his observations still validate his selection criteria! Such is the power of the self-fulfilling prophecy.

Won’t some really talented February or March born players surmount their handicap and make it through the tryouts? Yes, that’s a possibility. We’ll see how the coach handles that.

If typically only the January borns play good hockey, but I show the coach a February born player on his team who excels, won’t that make the coach change his mind about his selection criteria? No, it wouldn’t. He would say that player is statistically insignificant. If he employs smoothing techniques, that player would be the noise he would eliminate from his data set.

The mind only sees that which it wishes to see. If you think only January borns make good hockey players, you’ll dismiss all data to the contrary as ‘noise’, ‘outliers’ or ‘statistically insignificant’. This is called the confirmation bias: seeing only the information which supports your preconceived notions, regardless of whether that information is true or not.

I’ll now proceed to relating this analogy to IIMB profile criteria.

Having compared the arbitrary January 1 cut-off date to ‘consistently good academic record in school, high school and graduation’, I have to show why this criteria is also arbitrary i.e. has no basis in logic.

My personal example won’t suffice to prove this. In fact, attempting to use it as a ‘proof’ would be a fallacy. Why? Because I’ll then be guilty of using a local example to dispute a global criteria.

For example, if Chennai has a spell of cold weather for two years (it actually being a hot city) I cannot cite that as a ‘proof’ that global warming is a myth. Nor can I cite it as a proof that there is now global cooling. It is obvious how ridiculous such a statement would be.

(It is ironic that we accept the reverse to be a proof: If Chennai has an unusually warm climate for two years, it is ‘because of’ global warming, and if Chennai has a cold spell, then Oh! It is because global warming caused local cooling due to certain natural phenomena. Warming or cooling, global warming can never be proved false if we accept such proofs. Alas, the mind sees only what it wants to see.

Here, it should be noted that some global warming zealots try to use logic to prove their beliefs. They say: global events have local consequences but local events do not have global consequences so the second example above is true while the first one isn’t. My answer is: you see it that way because you have already accepted the ‘global event’ i.e. global warming and you now see Chennai becoming warmer (or even colder) as the ‘local consequence’. You assume A precedes B, and so when B happens you say it happened because of A, applying the fallacious post hoc ergo propter hoc type of reasoning. Another example of the mind seeing only what it wants to see!)

I had to digress to address the critiques of that example, since failing to do so would have given an entry point for the global warming cult to attack my logic. They never rest in their bid to unleash some eco-fascism couched in the name of science and utilitarianism.

I won’t use my personal example to show why ‘consistently good academic record’ is not an objective criterion. Rather, I’m going to introduce another concept here to create doubt on the efficacy of the criterion.

The Survivorship Bias
I’ll explain the concept with an example related to the criteria we’re analyzing: marks.

First, I’ll assume that people who do well in school (as measured by marks) do so because:
1. Their parents force them to (most likely)
2. They love to score high marks since it gives them an identity or sense of worth or respect (somewhat likely)
3. They love their studies, and also do well in tests (least likely)

All these categories of students move on to college and do well there in terms of marks. After this stage, most of category 1 students move on in life. Some are forced into preparing for CAT. Some among category 2 see it as the ultimate exam, and revel in the challenge so they too prepare for it. Some from category 3 love the learning opportunity and they too prepare for CAT.

In the end, 375 of them make it to IIMB, helped along by lots of luck as we saw earlier. By analyzing these candidates’ profiles, what can we conclude?

IIMB likes to conclude that their consistently good academic performance is linked to their performance at IIMB. But what is IIMB actually doing? It is fooled by the survivorship bias.

It sees only the students who make it in, not the entire sample of students from which these students emerged.

If they cared to see the entire sample, they’d find students with the same ‘consistently good academic performance’ but yet not in IIMB. Since they only look at the qualities of the survivors (i.e. the students actually in IIMB), they miss the point that there are candidates with the same qualities as the survivors outside of IIMB, and that it is not these qualities of the survivors which matter for their academic performance at IIMB.

If the people both inside and outside IIMB have the same qualities, then how do these qualities predict someone’s performance there? It cannot.

I’ll make it simpler. All students have a pen. IIMB selects some students, who then write great essays. Can IIMB then say that it is because their students have a pen that they write great essays? Could it not be the case that they write great essays because IIMB trains them to write great essays? As we saw with the coach example, the initial advantage becomes a real advantage due to training. Looking for explanations elsewhere misses the whole point. When you’re fooled by the survivorship bias, you tend to attribute success to certain qualities of the survivors, missing the point that it is not these qualities which mattered for their success but something else altogether. If only these qualities mattered, then everyone, not just these survivors, would be as successful.

It’s a little tricky to understand, but well worth the effort. When you get stuck in understanding certain logic, draw a parallel. For instance, this statement of mine: If the people both inside and outside IIMB have the same qualities, then how do these qualities predict someone’s performance there? A parallel would be: If everyone in the world had a great pair of lungs, then how does this predict someone’s sprinting ability? Yes, it is a necessary, but not a sufficient condition, and definitely not the predictor of a sprinter’s ability. (I have addressed why consistently good academic performance is not a necessary condition earlier).

This is the survivorship bias. You tend to notice the qualities of the achievers and erroneously conclude that it is these factors which made the achievers what they are. If I find the same qualities among non-achievers, your conclusion goes out the window. This is why statistics without logic is dangerous. You tend to get fooled by what you see. Retro-fitting logic to statistics doesn’t work so well either, but it can be helpful at times.

I have also shown how school and graduation marks have no relevance to an MBA program. Even if marks objectively measured your subject knowledge, my knowledge of physics and engineering has no relevance to my management potential. A good doctor need not be a good actuary. The exception is math, but since CAT tests your current level of math, why go back to scores from your history?

Thus, we have seen that the rationale behind using marks as a criterion is sufficiently flawed.

4. The final nail in the coffin
Even if marks mattered, how will they be judged? Not all universities are the same. Not all boards are the same. Marks over years vary due to the difficulty level of the paper, the type of correction, the test-taking ability of the students (on aggregate) that year etc. Apart from that, a student who did very well in an easy paper may do equally well in a tough paper. We cannot judge his ability based on the difficulty level of the paper.

The solution? More statistics using student data accumulated over the years! Let’s commit more of the same mistakes!

Logic without statistics is fine, but statistics without logic is dangerous. There is no logic behind academic profile weightage. However good the statistical tools employed, the final results are bound to be flawed.

MBA education at top B-schools abroad is prohibitively expensive. Only working executives can afford it. Not wanting dissatisfied freshers (students with no work ex) with huge loans on their backs bringing down the B-school’s image, they started to enroll only working people who could afford the fee or the loan burden.

Indian B-schools only saw that foreign B-schools demanded work ex. Without thinking through the logic behind it, they simply aped the west, and concocted their own logic: that work experience matters for getting the most of an MBA program. Some went a step further and admitted only those with work ex (and ironically, also charged prohibitively high fees), completely fooled by the trend abroad.

And so the myth of work ex was born. Just like the myth that engineering plus MBA is a great combination (which sprouted up because engineers who hated engineering jumped into the non-technical field of management and did well there because a failure to do so would have meant a career as an engineer; and then people applied induction to deduce that engineers make good managers), a new myth was created: work experience is essential for an MBA.

Aside from the myth’s impact on a fresher’s chances of admission to an MBA program, most of the impact is social.

A 22-year old female engineer works for 2 years (2 years is a ‘magic number’ for work ex) in a software company, does her MBA by the age of 26 and spends 1.5 grueling years as a management trainee, only after which she gets married and contemplates starting a family. The full-time residential requirement at MBA programs affects personal life. Late marriage becomes the norm. The same is true for men, but the social impact is most distinctly felt for women.

The other problems with the work ex criterion

1. Work ex is measured in units of time
A year of data entry work is apparently ‘more valuable’ in terms of MBA admission than 10 months of BPO tech support work, which in turn is ‘more valuable’ than 8 months of Project Engineer work at an IT company, which in turn is ‘more valuable’ than 6 months of managerial work ex at a tech startup, and so on. You get the point. It is not the quality of the work ex which gets measured, but the quantity.

IIMC had a unique criterion this year: rewarding work ex in IT and Telecom sector more. Is it because mainly IT and Telecom sector employees populate B-schools? Seems like they want to firmly plonk their self-fulfilling prophecy in place: more IT and Telecom employees do MBA, they do well because they come with IT and Telecom background, so let’s reward IT and Telecom work ex more. This may not be the actual reason (for instance, recruiters may actually prefer candidates with work ex in these sectors) but this whole thing sounds fishy to me.

2. Informal sector work ex is not counted
Let’s say my friend makes around Rs. 1 lakh/- a year doing Internet Marketing part-time, while still pursuing his under-graduation. He finishes his studies and gets into Internet Marketing full-time, increasing his earnings as well as his learning in this new field. He is an entrepreneur, with no company to his name. He has no joining letter, no salary sheet, no visiting card, nothing. All he can show is a screenshot with his earnings and a bank balance. According to the proof of work ex criteria, he is unemployed.

If he does this business for 2-3 years, he can’t show it in his B-school application form and he will get summarily rejected by all B-schools simply because a person who doesn’t seek employment in the formal sector for such a long period of time is not ‘serious enough about his life’ to be considered for an MBA program. The same fate awaits successful day traders, vendors and all the self-employed who don’t have a ‘proof’ of their work ex.

I say the proof of the pudding is in the eating. Joining letters, pay slips etc. are mere bureaucratic red tape. (On that issue, one of the most annoying parts of the admission process is asking for attestation for mark sheets, admit card, score card etc.) Judge the self-employed on their terms.

3. Quality of work ex is not measurable
This is why B-schools measure quantity. No one can objectively measure the quality of an intangible attribute. However, ignoring things just because they are not measurable is a fatal flaw, since these things do have a measurable impact. (Incidentally, this is a flaw of neo-classical economics). The best way to measure quality of work ex, if it must be measured, is during the interview. Subjective evaluations have their place there, since the whole interview is in itself a subjective evaluation of a candidate’s entire life in 5-30 minutes.

4. Incentives to cheat
Now let me make this clear before I start: I am not criticizing the B-schools for this. Incentives to take the easy way out always exist. This criterion of work ex just adds to the already existing incentives. How?

I took a break from formal academics after graduating in May 2010. I didn’t seek employment in the formal sector. This practice is generally frowned upon, since only ‘not-so-serious’ people ‘waste their time’ away from college and workplace. I like the implicit assumption here: that college and workplace don’t ‘waste your time’ but doing something on your own does.

The ultimate purpose of formal education is to make money. If you don’t accept that, I challenge you to opt out of placements in your engineering/MBA (and to prove me wrong, all students have to opt out of placements). We make money so that we can live a life of our choosing. And we may also make money by living the life of our choosing. The point is that a job or education is not an end in itself to be looked upon so highly: the lifestyle you choose is. If I say no to the means (work) because I get the ends directly (leisure or my choice of lifestyle), can I be faulted for it?

But B-schools apparently value conformity (much like socialist bureaucrats) more than individual choice: You study in school and college, you go to work and you come here to do your MBA. We don’t want people who do things differently; because we are so trained in conforming that we cannot look beyond it. It is the same with the classical music snobs. All those who prefer rock and roll are tasteless, because they don’t conform to these snobs’ tastes. Just to be clear, I have nothing against either type of music, just people’s attitudes.

Some of those who took a break from the formal sector take the easy way out: fake some work ex. This is only because there is an incentive to cheat.

But all said and done, this enforcement of conformity, though subtle, plays havoc with the students’ minds: chase your dreams or conform. Most choose the latter.

What’s the link between extra-curricular activities and MBA? Nothing. Some say it is just a way to start the interview, by making the candidates comfortable by asking questions in their areas of interest. I’m all for making candidates feel comfortable. The problem is that it actually doesn’t. People who have no extra-curricular activities feel threatened. People who do have them feel like they have to know all about it since they have mentioned that they like it. It’s akin to the principal of a school saying attendance at his Saturday afternoon speech is optional. He may really mean it, but that’s not the way the teachers and students see it. Can we blame the B-schools for that? I don’t know.

And seriously, what do your achievements in sports or music have to do with your admission into an MBA program? How does an ‘achievement’ give the impression that you’re talented, and that you’ll apply this talent in a different field? It really doesn’t. As I mentioned earlier, a good surgeon need not be a good actuary.

With so many flaws in profile based selection, why do B-schools even choose to adopt it? I can think of two reasons: they’re ignorant and just want to continue business as usual, or they want students who conform to their tastes. Both aren’t objective selection measures.

The entrance test and the profile weightage are the supposedly objective selection criteria, which I have addressed so far. In my next article, I’ll examine the subjective criteria: the interview, group task, group discussion, essay writing, etc. I’m taking it up separately because it is my subjective evaluation of these subjective criteria.

Thursday, March 24, 2011

B-School Admission Criteria: A Critique, Part One

Disclaimer: I have spent well over two years trying to gain admission into a top-notch B-school in India, because I think an MBA education is necessary for my career progression.

A small note
Until a month or so ago, I never paid much attention to the logic behind the admission criteria of top B-schools. All I knew was that such criteria existed, and in order to gain an admission, I needed to satisfy them.

While going through the rigmarole of admission processes in 4 Symbiosis institutes in Pune, I happened to buy a book called Fooled by Randomness by Nassim Nicholas Taleb at a roadside bookstall. Reading that book changed my thinking. It made me realize the uselessness of B-school admission criteria.

That knowledge can now be yours, for free, if you take the time out to read this somewhat lengthy article.

Even non-MBA aspirants can gain from reading this. How? I am outlining a way of thinking here, which can be universally applied, i.e. in practical situations faced in daily life.

I hope you gain as much pleasure and understanding reading this as I did from writing it.

B-schools give weightage to a lot of different criteria. Such division of weightage among ‘relevant’ parameters is considered to be a positive.

While the relative weightage of the criteria differ, all B-schools have the following criteria:
1. Written Assessment Test (WAT) or Computer Based Test (CBT) with Multiple Choice Questions (MCQs)
2. Profile of the candidate (Academics, achievements, work experience etc.)
3. Interview (Group/ Personal)

Other commonly used criteria:
1. Essay writing/ Précis writing
2. Group discussion
3. Case study analysis
4. Extempore
5. Group task/ group exercise

The final selection is based on an overall composite score, with minimum qualifying marks in the interview.

So, what’s wrong with this process?
At first glance, everything seems fine. All the above criteria appear to be objective, and will ensure that the B-school gets a great candidate overall, with competence in a lot of relevant aspects.

Delving into them a bit though, we start treading murky water. All the above criteria fail as a test for measuring a candidate’s potential in handling an MBA program and a career beyond. The rest of this article will be devoted to explaining why.

First, the assumptions
The obvious assumption I have made is that the B-schools employ these criteria in order to get the ‘right’ talent for their institute. They may have other motives, but if so, it remains a secret to the aspirants.

As an MBA aspirant myself, and speaking on behalf of all aspirants, I can safely say that we assume that the selection criteria is intended to get the ‘best’ students.

Debunking the Process
First, the WAT (or CBT) with MCQs in the areas of Language Comprehension, Quantitative Ability, Reasoning and Data Analysis. The mark allotment and weightage given to each area differs, but all entrance exams have these. Some also include a General Awareness (GA) section.

To explain the logic behind these parameters, I have to digress a little. The primary aim of schooling was to educate children in math, logic and language. These 3 are regarded as the fundamental skills every man needs (that school has an etymology that translates into luxury is a different issue).

An MBA program is most probably the last formal education a student will receive in his life. To weed out those who have had at least 17 years (2+10+2+3) of formal education and still have not acquired these skills, B-schools employ such objective tests of math, logic and language (English). I’ll come to the GA part later.

I am in favour of testing for these skills, but not on the method employed in using these test scores.

Note: The relative weightage to be given to each section is subjective, and cannot be argued against provided there is not too huge a bias in favour of or against a section.

Let’s look at two types of entrance tests: a paper pencil (PP) based one (say SNAP, with +1 mark for a right answer and -0.25 for an incorrect answer) and a computer based one with ‘normalized’ scoring (say CAT).
In the case of SNAP, everyone gets the same paper, which translates into an equal opportunity for all to prove their mettle vis-à-vis his competitors in that paper. The only unknowns at play are luck (which cannot be controlled) and preparedness of the candidate. It is a good way of testing.

Note: No man is perfect. No test designed by man can be perfect. A good test is therefore one which is the least imperfect.

The problem with SNAP (leaving GA apart for now) lies not in the test itself, but in the interpretation of the test score. Say SIBM-P has a cut-off score of 118, and calls candidates at and over that threshold score for due process. They think candidates who meet the cut-off are worthy of further consideration.

But how is a candidate with a score of 118 so much better than one with 117.75 that one gets an interview call and the other does not. Clearly, he isn’t.

I don’t deny that for the sake of convenience, the admissions committee has to pick some random cut-off number, which will invariably be a round number. I only say it is not an objective measure of a candidate’s ability.

Yes, the candidate with a 117.75 is out of luck. It can’t be helped. Or can it? I say yes. Let us now look at how the marking system in SNAP is skewed in favour of risk takers.

The problem with negative marking
Why negative marking? Obvious answer: to minimize guessing, so that only real ability is rewarded. By penalizing a candidate for incorrect answers, they hope to ensure that people who make it to the cut-off do so due to their competence, without the help of lucky guesses.

But negative marking actually has the opposite effect: it rewards the guessers and penalizes the talented.


Let us say you’re a salaried employee working as a coder in an IT company. You work hard, spend frugally and save your money in a bank. Would you gamble with it, knowing that you may lose all the fruits of your labour? I assume not.

But say your job is to gamble with other people’s money. You then do it probabilistically, with expected value calculations, hedges and stop losses in place. This is called investing.

Getting back to the SNAP scenario, consider two students A and B, both at a score of 100 due to sheer effort.

A is prudent, B has the investor mindset. A does not guess the answers he doesn’t know. His score stops at 100.

B is a risk-taker. He decides to randomly guess 10 answers. He is risking a maximum loss of 2.5 marks for a maximum gain of 10 marks. And his expected value is positive, at 0.625 marks.
[Expected value: (0.25x1-0.25x0.75)10= 0.625]
A net positive, just from guessing!

But wait. If guessing can be so rewarding, why doesn’t B just guess all the questions he doesn’t know? If he is intelligent, he won’t. An intelligent investor always has a stop loss in place.

Understanding stop loss
Let us say you own a share worth Rs. 100/- at present market conditions. You expect it to rise in value, to a maximum of Rs. 110/-, at which point you will surely sell it, which, incidentally, is called profit booking (realizing the gain). In case the market moves against you, you don’t want to take too much loss on your investment. So, you place a stop loss order at Rs. 97.5/-.

The moment the share price touches Rs. 97.5/- (called stop price), your broker sells your share for you and gets you out with a loss of Rs. 2.5/-. (This is a simplified version; sometimes your broker may be unable to sell at the stop price and you may make a greater loss). Your net risk is 2.5% of your investment. Your net reward can be up to 10% of your investment. Does the risk seem to be worth it? It depends on how much risk you can stomach.

Consider a few more scenarios with the same analogy:
Current Stock Price: Rs. 100/-
Stop Loss: Rs. 95/-
Expected Profit: Up to Rs. 20/-
Expected Value: Rs. 1.25/-
Risking up to a 5% downside for up to a 20% upside.

Current Stock Price: Rs. 100/-
Stop Loss: Rs. 92.5/-
Expected Profit: Up to Rs. 30/-
Expected Value: Rs. 1.875/-
Risking up to a 7.5% downside for up to a 30% upside.

Current Stock Price: Rs. 100/-
Stop Loss: Rs. 90/-
Expected Profit: Up to Rs. 40/-
Expected Value: Rs. 2.5/-
Risking up to a 10% downside for up to a 40% upside.

Current Stock Price: Rs. 100/-
Stop Loss: Rs. 87.5/-
Expected Profit: Up to Rs. 50/-
Expected Value: Rs. 3.125/-
Risking up to a 12.5% downside for up to a 50% upside.

These scenarios I have outlined are basically the same as guessing in SNAP. I stopped at a gain of 50 since SNAP has only 150 questions and B has already answered 100 through his talent.

B has decided to place a stop loss at 97.5 because of his subjective assessment. A has placed his stop loss at 100 by not taking any risk.

If B thinks the cut-off is surely more than 100, he is definitely motivated to guess some answers. He either makes it, luck being in his favour, or does not make it, luck being against him. If the cut-off is above 100, A has no chance of making it, while B does. The risk-taker has been successfully rewarded by SNAP.

More worryingly, if B has access to past data regarding cut-offs in SNAP for various institutes, he can do a time-series analysis and estimate the current cut-off (if he knows what he is doing, he can do it with remarkable accuracy). Armed with this estimate, and depending on his score due to talent, he can determine the optimal level of risk he needs to take. And if he can eliminate one or two choices per question he guesses, with 100% certainty, his expected value will shoot up!

Thus, we see how the intelligent risk-takers are rewarded and the prudent non-guessers are punished.

Lesson: Negative marking makes luck play a more important role and worse still, luck helps only a few (the risk-takers), than all. A better way to eliminate the role of luck would be to give everyone an equal opportunity to use it: stop penalizing incorrect answers.

The problem in no negative marking
If guesses are not penalized, then everybody is incentivized to guess. No candidate’s score will therefore be an accurate measure of his talent! Is not having negative marking worse than the problem it is trying to solve?


Consider the following table:

Type of candidate Scores Reflect
Negative marking No negative marking
A (No Risk) Talent Talent/More than talent
B (Risk-taker) More than /Less than/ Equal to talent Talent/More than talent

When there is no negative marking, both A and B have an equal opportunity to use luck. And their scores will definitely be at least equal to their level of talent. When there is negative marking, A’s score reflects his real talent while B’s score may not. Also, under negative marking, if you don’t know who A is and who B is, how will you judge who is merely talented, and who is talented plus a risk-taker? You can’t. Whereas, under no negative marking, you can more accurately discount the influence of luck of each candidate’s score. (If you do that in a negative marking scenario, you penalize A, and make his score go lower than that which he got by talent).

Sure, discounting the influence of luck (under no negative marking) may still harm those who were favored less by luck than the discounted value and benefit those who were overly favored by luck. But it is less imperfect than the current negative marking system.

(I have to make a confession here. There is a statistical concept called “Regression to the Mean” which can be used to take my explanation of luck further, but I haven’t understood it sufficiently well to attempt to invoke the concept here).

And so I say, since luck influences your chances of an interview call anyway, everyone should be given an equal opportunity to use it, and not just the risk-takers. There may be outliers who make it on sheer luck, but that is true in both negative marking and no negative marking scenarios.

Consider this example: while it is entirely possible that among a large group of music illiterates hitting 60 keys on a piano randomly, one may produce the starting notes of a symphony, the chances of him performing at Carnegie Hall are very, very slim. His lucky performance does not invalidate the ability of the talented performers. That is, a test should not be judged based on outliers. (There is a concept in statistics called smoothing, which tries to capture patterns while eliminating the effects of the outliers. While this has some defects, it holds good for analyzing data sets where the effects of noise (here, luck) on the actual data need to be minimized).

Also, it is more ‘fair’ to those MBA aspirants who just need to be good at their 3 fundamental skills in order to do an MBA, such as those who do not want to specialize in finance. They don’t need to cultivate the investor mindset for their profession; they shouldn’t be forced to do so just to take an entrance exam.

Moving on to CAT
If even a PP based test like SNAP suffers from a lack of objectivity, what of CBTs with normalized (scaled) scores like CAT and NMAT? NMAT has rightly decided to stop penalizing incorrect answers (and has allowed multiple attempts), so I stick to CAT.

Statistics is reliable only at the macro level. It doesn’t truly represent any individual sample. Let’s say you flip a coin twice in succession. According to statistics, you should get 1 Tail (T) and 1 Head (H) in any order (A more technical statement would be that the results converge to that). The possible outcomes are {HH, HT, TH, and TT}. Of these, {HT, TH} individually satisfy the condition. But {HH, TT} do not, although when taken together, they do. After 4 experiments, if all the 4 results (collectively called as the sample space) materialize, we will have 4[1H and 1T] as predicted by statistics. When this experiment is repeated a number of times, the ratio of H to T converge to 1:1, though you will find numerous strings of {HH} and {TT}.

What we understand from this is that while statistics ‘work’, they can still misrepresent an individual sample. A statistical scoring technique which is 99.95% reliable will tend to mess up the scores of 5 out of every 10,000 candidates. At over 2 lakh test takers, around 100 may get short shrift. And you won’t know if you’re one among them.

The more complicated something is, the greater the chances of failure. Do you trust an opaque algorithm to evaluate you accurately?

The problem is exacerbated with the presence of negative marking.

For CAT, where a 0.01 percentile could be the difference between an IIM-A call and no IIM-A call, how many deserving candidates are excluded because they ran out of luck? (I would not say the converse though, that many undeserving candidates got an IIM-A call because Lady Fortuna smiled on them. You need both talent and luck to get an IIM-A call, and frankly, you can’t differentiate between the two. And beyond a threshold level of talent, talent doesn’t really matter for your performance).

A better selection system would be a lottery for all those who passed a threshold percentile. Skip the illusion of objective selection, acknowledge the role of chance. It’s much more ‘fair’ to the candidates than the current system.

How does CAT compare students across time slots?
They use ‘similar’ questions to judge the caliber of the test takers in each slot. Based on this, all scores are brought to the same scale. I have my reservations on the use of these ‘similar’ questions, and how they are scored. I’m not critiquing it; since they keep their methods a secret it is not possible to critique it.

Consider two similar questions to understand my point.

Q1. Suppose I have a pack of cards, each of which has a letter written on one side and a number written on the other side. Suppose, in addition, I claim that the following rule is true: If a card has a vowel on one side, then it has an even number on the other side.

Imagine that I now show you 4 cards from the pack: E 6 K 9
Which card(s) should you turn over in order to decide whether the rule is true or false?

Q2. You are a bartender in a town where the legal age for drinking is 21 and you feel responsible for the violations of the rules. You are confronted with the following situations and would have to ask the patron to show you either his age or what he is drinking. Which of the 4 patrons would you have to question?

1. Drinking beer
2. 2. Over 21
3. Drinking soft drinks
4. Under 21

While both these problems are ‘similar’, the second question is much easier to answer. (The answers are to check 1 and 4 in both cases). Why? Because it is easier for us to associate with people than cards, though the logic is the same. My question now is: how will these types of ‘similar’ questions be evaluated?

How well do entrance tests test your 3 fundamental skills?
It can be argued that any question in math, reasoning and data analysis helps test for your math and logic skills, but what about language? Does the answer to this question really test anything useful?

A baby deer is called a ____.
(a) Foal
(b) Fawn
(c) Calf
(d) Joe

That apart, in many questions, the answers are subjective. The ‘right’ answer is anybody’s guess. This is also true of the decision-making caselets in XAT.

Imagine you are driving a motorbike, wearing a helmet, and at a red signal, you are asked by a traffic cop to produce your license. You don’t have it with you at that moment. Do you…

(a) Plead with the cop saying you have it at home and you would produce it if only he lets you go get it? (And actually do so if he lets you go).
(b) Stall and wait for the signal to turn green and just zoom away on your motorbike.
(c) Pay him a bribe which is less than the fine.
(d) Pay the fine.

Which is the ‘right’ decision to take? Clearly, it depends. If I am sure I could zoom away, I would. If I’m uncertain about that, I would either plead or pay a bribe (depending on whether my time or my money is more important at that moment). I would never pay the fine, if I could avoid it. Now, which choice should I tick? (The worst choice of all, pay the full fine, would probably be the ‘best’ one from an admission point of view though. Does ticking that tell the examiner anything about my actual decision-making ability? What are the odds that a person does in real life what he says he will do in an exam paper?)

A test of decision-making is probably the worst contrivable, save for the test of general awareness.

What’s wrong with testing a candidate’s general awareness? Surely a manager should know what’s going on around him. In fact, everyone should know what’s going on around them. Why not test for it?

I counter-question: How will you test ‘general’ awareness with ‘specific’ questions? Can specific questions test for general answers? A specific question can only test for a specific answer. Only open-ended questions can test your general awareness. Let me explain the difference with an example.

Specific question: What was India’s real GDP growth in the last fiscal year?

Open-ended question: What do you think of India’s real GDP growth in the last fiscal year?

The first type of question tests your memory; the second type tests your awareness as well as gives an insight into your understanding of the data. A rote learner can answer the first question, but not the second. A ‘generally aware’ person can most definitely answer the second question, and he may be able to answer the first one with approximate statistics. Whom does the GA section of the entrance exam benefit? The rote learner! The one who mugs up a CSR yearbook excels, a real thinker who doesn’t care for the exact numbers (which, in any case, are made up and manipulated so much that they may as well as be fictitious) is penalized. The insidious practice of rewarding rote learning over thinking continues well beyond school and under-graduation!

An even more saddening criterion
There are institutes whose placement eligibility criteria include test scores on ‘business awareness.’ That’s taking stupidity to new highs. I wouldn’t be surprised if they churned out rote learners by the dozen. I pity the thinkers who aspire to be real managers but make the mistake of pursuing their MBA in such institutes. I’m glad I’m not among them. (Full disclosure: I got rejected by one such institute).

All in all though, there isn’t much to criticize of the entrance test. It is the most objective among all the selection criteria (though still flawed).

To be continued....

Friday, November 12, 2010

The lure of money

Money makes the world go round, it is said. Money (lack of) also causes a lot of pain and anguish. Money, in places like casinos, also attracts a lot of the affluent, who are drawn by the risk and reward associated with it. It also attracts a lot of young students, mentioning no names (ahem), who want to base their entire lives associating with money.

The flow of money has led to the burgeoning of an entire industry based on it- the so-called financial sector. The finance job today is what the IT job was yesterday and a government job the day before that. We now have some of the best brains in our country vying with each other in order to get into a top-notch B-School and get a finance job after that.

If you step back from all the hype and look at it analytically, it doesn’t make sense. How do you use money to make money? (Can you use washing powder to make more washing powder?) What good does it do for the rest of us? And if we take it that you can’t get something out of nothing (that’s what makes the Big Bang theory so ridiculous) then where does all the money and wealth in the financial sector come from?

If I were tweeting, I’d just end this here by answering the last question in 4 words: It comes from you.

The financial sector works in curious ways. To be a big shot in finance requires as much talent, if not more, as getting into Microsoft Research Labs. The promise of huge salaries, astronomical bonuses, plus the nature of the work involved (what we call as soft power) attracts a lot of talent.

If an oil company attracts a lot of engineers by giving them huge salaries, common sense tells us that the oil company is merely sharing the profits it makes from selling oil with its employees. A finance company, on the other hand ‘sells’ nothing to make profits. To understand how they make profits and pay such salaries, we need to delve into the nature of money itself, because money is the commodity around which this entire industry revolves.

If you are a salaried employee making money working for someone on something, money is the paycheck you receive at the beginning of the month for work done by you in the previous month. This money is given to you by your employer, out of the money you all (your company) made selling your code or bananas to someone else, who in turn sold something else to someone to make the money with which to buy your goods, who in turn did the same. This exchange forms what we call the economy, the buying and selling of goods and services using a medium of exchange called money.

The financial sector doesn’t work this way. It relies on a group of people to make the bits of paper we call money. This group of people produces this paper money the same way newspaper companies produce newspapers- using an apparatus called the printing press.

So, you see, while you have to earn your money by working for someone to sell something of value to someone else, a group of people earn theirs by just pressing a button and making it. They are modern day alchemists- they turn lead (paper and ink) into gold (currency notes).

These pieces of paper are then passed onto banks.

Imagine your favourite movie is going to hit the theatres, and the theatre owner calls you up and gives you first day first show gallery seat tickets for you and your girlfriend at 95% discount, plus free popcorn. Would you pass up the chance?

In much the same way, the group of people who print money pass it on to bankers at a humungous discount (say you pay Rs. 6/- to obtain Rs. 100/-), the catch being that they pay this small amount once a year. They also get free popcorn- the right to give this newly minted paper money to people of their choice at a slightly less humungous discount (say you have to pay Rs. 16/- to obtain Rs. 100/- from the bank), the catch being that you pay that amount every year. The amount given is called a loan, and the extra amount you return is called interest.

The guy who gets the loan uses it to buy something, invest in a trade, start a business etc. with a view to make a profit and repay the loan with interest to the bank. He can do that only by selling something of value to you and taking your paper notes in exchange, which you have earned by producing something of value for someone else.

But in all this, the banker’s job is to collect and give out this paper currency, and collect and give some paper as interest. And the group of people who mint this paper- their job is to keep printing, to keep the party going.

The people who get loans from banks don’t always use the money to produce goods or services to sell. They exchange this paper money for other bits of paper called stocks, bonds, gilts, securities, derivatives, scrips etc. because these bits of paper can later be sold to get more paper money. (To explain how and why of this would be an article in itself).

To sum up, a group of people print money, give it to banks, who lend this money to investors, traders, etc. some of whom immediately use it to buy different bits of papers, and as the paper money changes hands, the new owner keeps using it to buy different varieties of paper bits, and the party continues. Meanwhile, more money keeps getting printed, loans keep getting made and people become rich swapping one type of paper for another.

That’s basically what the financial sector is all about: a party where a group of people turn water into wine, give the wine to their guests, who in turn play games swapping one type of wine for another, and occasionally lending a few bottles to others to drink and enjoy. When they want some solid food, they swap wine for food with the common man, who profits a little.

But, there really is no such magic, though they’d have you believe there is. Water is not actually turned into wine. It’s all deception, a mere illusion kept up by skilled sophists to keep the masses from getting suspicious. But as the saying goes, you can fool some of the people some of the time, some of the people all of the time, but not all of the people all of the time. The truth has a way of leaking out and percolating.


I’ll illustrate with an example based on RO, a game I used to play. I hope my Non-RO friends understand this too, for it is very complicated to explain using real world examples. In RO, you hunt for items, sell and trade to earn zeny, the currency of RO. A group of people are granted the right, by Gravity, to type “/zeny 1, 00,000” to generate as much zeny as they want. While you work hard (or bot hard) to earn your zeny, someone else conjures it up- out of thin air- by typing a command.

At the psychological level, this is de-motivating but there is more. These people, having the potential freedom to create unlimited money, have lesser regard for it. They’ll pay higher rates to buy items which they want from the market. Eventually, merchants will start to set shop at this high rate on the goods where there is high demand. The average Joe now has to work harder and generate more zeny to buy this same item, all because this group of people produced zeny by typing a command and used it to jack up prices. Sounds cool?

What of the merchants now earning more zeny for selling the same goods, don’t they benefit? Well, no, though it seems like it. It takes a little explaining:

For the purpose of clarity, let’s call the group of people who create free zeny for themselves (and their friends) as counterfeiters. Say they have increased the price of elunium. The first few merchants to sell them the elunium at the new, high price profit a lot. On seeing this, more people start botting or hunting for elunium.

Since, if you are hunting for elunium, you are not hunting for oridecons which you used to supply to the market earlier, oridecons now become scarce, and oridecon buyers are forced to offer a higher price for it in the hope that it would induce someone to hunt for it.

The new person to hunt oridecons because it is suddenly more profitable, stops hunting wind of verdures which he used to supply earlier. Now the same scarcity comes into play, and the wind of verdure buyer offers a higher price for them in order to induce someone else to fill this supply gap. So now, a witch starsand hunter switches to wind of verdure, inducing this scarcity in witch starsand, thereby increasing its price. This incentivizes a poison spore hunter to switch to starsands, and this cycle continues, gradually increasing the prices of all the items in the market.

This phenomenon is termed as inflation.

Let’s say our counterfeiters have a month long water-into-wine party, buying not just elunium but also valk flowers, blank cards, diablos set, vesper cores, stone bucklers etc.. You can imagine the scale of inflation which will be caused.

The current world economy is somewhat like this, but there are quite a few gangs of such counterfeiters rather than just one.

Imagine if a counterfeiter keeps creating zeny and buys all the items in the market at whatever rate you charge. Wow, you’ll be rich! Or so you think. Because he’ll pay a billion zeny for a pupa card, if you want one for yourself, you’ll either have to hunt for it or offer 1.1 billion. Another person who demands it will then have to offer 1.2 billion, and so the inflation continues.

In effect, there comes a point when all that zeny in your virtual bank account still can’t get you a pupa card, the card becomes worth much more in terms of zeny than all the other goods you have sold in order to earn zeny and feel rich. At this point, zeny loses value and you realize that if you want a pupa card, you’ll have to swap a roda frog card for it. You’ll have to keep a chat room open for hours until you find someone who wants to swap a roda frog card for a pupa card. The economy now moves into the most primitive state: barter. When there is so much zeny that it loses all value as a currency, we call it as hyperinflation.

This is no ivory tower high theory, by the way. I just explained what happened in an African country called Zimbabwe using the example of RO. Zimbabwean dollar now makes for good toilet paper.

Let’s say everyone has the power to create zeny using the /zeny command. When everyone’s a counterfeiter, you’ve all entered into the overpriced toilet paper business. And since zeny exists only as bits in a virtual world, you’ve only managed to create pixel dust- you get nothing out of nothing, not even e-toilet paper.


Imagine a world where everyone can use the /zeny command. The catch is that if you use it, you’ll be jailed for life and the counterfeit mafia will strip you of all your assets. In this world, although you can potentially counterfeit by yourself and print your way to prosperity, you can’t do it because you’ll lose everything, including your freedom, if you do.

This is how one gang of counterfeiters takes over a country, (and also a group of countries in some places) using the country’s largest and most well-organized weapon of mass destruction: the government.

By now, you’ve cleverly figured out that we could just stop giving away our goods and work in exchange for this future toilet paper made by the money mafia. But alas, you can’t. In a brilliant stratagem, the money mafia devised a means to prevent this. It’s called taxes.

They will force you to accept this paper currency they print, and then give them back a portion of it as taxes. They won’t accept anything but this paper as a tax, so you’re forced to use this counterfeit money in order to pay your taxes. If you don’t comply with the tax regulations, they come knocking at your door, forcibly extort the money they deem as their due, and impose a penalty on you. Using the threat of violence and incarceration, they get their way.

You now live in such a system.


You would think that intellectuals would be against such practices. But no, they’re actually for it. Scientists in general don’t have any skills individual employers want to buy. They live in an ivory tower, surrounding themselves with the leftovers of people long dead, and looking at the rest of the world in a supercilious manner, and always addressing the mass of humanity with arrogance characteristic of them, the people who advance the world through their work, and all us mere mortals are merely pawns to be moved in their game, and in their hubris and megalomania, they try to control and dominate the lives of others, the simple folk, thrusting their ideas down our throats.

They require money and what money can buy to advance their research, so they go to their totalitarian counterparts in the government and demand of them money to fund their research, to be obtained from the traders and the workers. So, they need you in order to rob you of the fruits of your labor, and they also need you to do the menial research work for them, but they show scant respect for you, and live in the ivory tower all their lives, becoming uncaring, unemotional folk divorced from the rest of humanity.

They speak out only to sing praises of the king, for he is their friendly Robbing Hood who robs everyone to fund the nonsense these scientists call research.


The financial sector is the first merchant to receive counterfeit money. They play pass the parcel with it, until the music stops and one person is left holding toilet paper. The loser, in most cases, will not be a finance person, by the way. He is the fall guy, the dumb person who risks his neck due to herd instinct. And sadly, the fall guys are mostly always salaried professionals who get their entire life’s savings wiped out. It is the salaried employee who gets envious of all the money the finance guys are making, and tries to mimic them himself, led by glorious visions of instant riches. It’s a con game, and if you don’t know who the loser is, it’s probably you.


A finance job is nothing to be boastful about. The job is supported by the counterfeit mafia and its violent friend. But, the lure of money is strong; morality be damned.

In all fairness, most of them don’t think of what they’re doing in this manner. But that doesn’t change the facts.

The only saving grace is that, some people who are aware of what is really going on in the world of finance, try their best to warn others and protect them from the consequences of these insidious activities, while at the same time producing real wealth by managing the finances of their clients in order to help them escape the disastrous effects of the system.

What’s happening right now, during the great recession, is a battle between Optimus Prime and Megatron, with Megatron in possession of the All Spark (the printing press) which Optimus Prime is trying to wrest from his hands and destroy. The battle has been actively waged since 1634, and there does not seem to be an end in sight.

So remember, in the world of finance, there are the good guys who want to protect you, and the bad guys who want to rob you. Forgive the bad guys, for, as Jesus said, they know not what they’re doing.

And lastly, don’t get fooled. When you read finance news, take it with a pinch of salt, and see if the reasoning is logical. Devise your own bullshit filter and run all articles and opinions (including this one) through it. Don’t associate glamour with finance. Most of what glitters is fool’s gold.