Seat Belts, Condoms and the Indian Equity Investor

The Seat Belt mystery

Image result for seat belts

In early 1970s, when the use of seat belts were made mandatory in the US to improve driver safety, something strange happened.

Instead of road accident deaths coming down they actually went up!

While the regulators were perplexed by this phenomenon, an economist by the name Sam Peltzman came up with a controversial answer.

Image result for seat belts + peltzman

He argued that though the drivers had lower risks due the additional safety that a seat belt provides,  many drivers actually compensated for the additional safety by driving more recklessly (driving faster, not paying as much attention, etc.) under the comfort of the added safety.

“The safer they make the cars, the more risks the driver is willing to take”

This meant that bystanders – pedestrians, bicyclists etc – would receive no safety benefit from the seat belts but would rather suffer as a result of increased recklessness.

He termed this effect “risk-compensation” but it is popularly known as the Peltzman effect.

Although the study has had its fair share of criticism, the Peltzman effect has been observed in a number of different settings.

Condoms and HIV prevention

Image result for condoms and hiv

In the late 1980s, Thailand and the Philippines had roughly the same number of HIV/ AIDS cases at 112 and 135 cases, respectively.

In the early 1990s, the Government of Thailand enforced the “100% Condom Use” program in its booming commercial sex industry while the Philippines was characterized by its very low rate of condom use and the firm opposition of church and government to condoms.

In 2003, almost fifteen years later, the number of HIV/ AIDS cases in Thailand had risen to 750,000 while the number in the Philippines remained low at 1,935 cases despite Philippines population growing to more than 30 per cent that of Thailand. Thailand ranks as the country with the highest HIV prevalence in Asia.

Source: Link

Mike Roland, editor of Rubber Chemistry and Technology states that wearing a condom reduces the risk of AIDS by a factor of 3 but simply choosing your partners wisely reduces the risk factor by 5,000.

While it is obvious that wearing condoms during promiscuous sexual activity reduces the risk of HIV, counter intuitively the lower risk of HIV can actually have the effect of tricking people into blindly engaging in more risky promiscuous sexual activity.

Its our peltzman effect at play 🙂

Titanic – The ship even god cannot sink

All of us know what happened to the Titanic. I would rather let the below picture do the talking.

Related image

Image result for titanic captain couldnt sink

Yep, its peltzman effect, yet again!

Olympic Boxing – Good bye Head Guards

boxing helmets banned

Did you know this – the Olympics ditched boxing headgear in 2016 for the first time since 1984!

The decision, according to the International Boxing Association, or AIBA came down to safety. 

Several studies, including one commissioned by the association, found that the number of acute brain injuries declined when head guards were not used.

The studies pointed out that

Headgear creates a false sense of safety and boxers take more risks.

By now, you know what is happening 🙂

Our behavior adapts to perception of risk

Now while all this goes against our intuition – the underlying point is that

When our perception of risk reduces, we usually adapt our behavior by taking higher risks

Indian Investor and the Peltzman effect

What does this have to do with the Indian investor?

Based on the Peltzman effect, if investor perception of risks in the equity market reduces, then it means that investors will respond by taking additional risks.

Let us evaluate the current investor perception of risk.

From a purist point of view – risk is the probability of permanent loss of capital.

However, when there is a market decline, most of us at that juncture do not know if it is permanent or temporary. (and unfortunately a lot of us give up and jump out at the bottom).

So for the purpose of this post, I will assume that investor perception of risk will depend on the intermittent declines in equity market that he/she has witnessed in recent times.


Here is an interesting chart which shows the intra-year declines which an investor in Indian equity markets would have witnessed in the last 27 years.

Nifty Intra Year Returns

An interesting thing to notice is that, the 20 year period from 1991 to 2011 has witnessed significant declines each year and 20% declines or more (indicated by the red bars) were a common occurrence.

So any investor who invested in equities during that period, eventually had to go through these significant but temporary declines year after year.

However, if you notice the recent 5-6 years, the declines have been significantly lower.

In fact the intra-year decline for 2017 is the lowest ever!

The other way to confirm this thesis is to look at the index which indicates volatility – Nifty VIX index (It measures the degree of volatility or fluctuation that active traders expect in the Nifty50 over the next 30 days).

INDIA VIX Stock Price  NSE Market Indices  INDIA VIX Price  Stock Performance   Comparison.png

The Nifty VIX index is also close to its all time lows!

Thus the first takeaway is:

Takeaway 1: Indian Equity Market fluctuation is extremely low in recent times           (leading to a perception of lower risks in equity markets)

Further the markets have also rallied since 2013.


Takeaway 2: Indian Equity Market Returns have been awesome in recent times

Further real estate returns have been poor in recent times and are showing initial signs of a decline (see here)

Gold returns have also been very dismal over the last few years.

Spot Gold

Bank FD rates and debt fund returns have also significantly dropped due to lower interest rates.

Takeaway 3: Real Estate, Gold, Bank FD – all fall down!!

Now if we combine the above three takeaways, it’s a deadly combination where equity returns are high, equity volatility is low (read as – perception that risk is also low) and none of the alternatives are performing.

Now if we apply the Peltzman effect, this means Indian investors will adjust their behavior to take on more risk!

Is this true? Let us see if Indian investors have increased their risk..

Equity Mutual Fund Industry – Unprecedented Flows!

Equity Flows.png

You read that right – In the last 2 years, the money that we Indians invested in Equity Mutual funds is more than the earlier 16 years put together!

If you further drill down, the largest amount of money came in the last year (more than previous 3 years put together)

CY Equity Flows.png

And here is the scary part – the flows for 2017 currently represent 1/4th of the entire equity AUM – and investors who have brought in this money have never witnessed true equity declines (20% and below which was the norm a few years back) as they have come at a point where the volatility is at its historical lows.

CY Equity Flows 2017.png

Balanced Funds are the new FD replacement – WTF?

In every bull market, there is always some product which is mis-sold.

This time it is the balanced funds – a category of funds where equity is around 70% of the portfolio and the remaining in debt instruments.

Unfortunately, this equity heavy product is being mis-sold as a 1% every month dividend product which will give you 12% tax-free returns every year and as a FD replacement.

This is clearly reflected in the staggering growth of inflows witnessed in 2017

Balanced Fund Flows 2017.png

Here is an interesting article which explores this further – Link

Equity Market Valuations have moved up significantly led by flows

Nifty PE chart.pngSource:

Small Cap funds & PMS signalling “Enough! We can’t take more”

Given the whopping out-performance of small and mid cap funds over large caps recent money has been chasing this segment leading to insane valuations for most of the companies in this segment.

Funds Monitor   Value Research Online.png

Source: Value Research

To the extent that certain funds have shut down their funds and returned their money back to investors.

DUZWJohVwAAQD34 (1).jpg

Source: ET, Read the entire article here

Some other funds which have restricted their funds for new money –  DSP BlackRock Micro Cap Fund, Reliance Small Cap, Mirae Asset Emerging Bluechip and SBI Small and Midcap Fund.

Peltzman effect at play – Time to be cautious and focus on risk

At this point, it seems pretty clear that the perception of equity risk is currently very low amongst investors and this has clearly manifested in higher risk taking behavior across Indian investors.

Everything at this juncture is about returns as risk has taken a backseat.

Hence we as investors must remain cognizant of the exuberant expectations being built into the current market. While earnings growth cycle is yet to begin, lofty valuations imply the possibility of sharp intermittent declines if in case something goes wrong. (and usually something always does go wrong in the interim)

So, at the current juncture the key is to focus on risk. Also

  1. Pare down return expectations
  2. Stay away from mid and small caps
  3. Stick to your asset allocation plan

If you don’t have an advisor to help you out with asset allocation, then dynamic equity allocation products can be a good option for incremental money allocation.

In a nutshell

  1. Peltzman effect – Introduction of safety belts in cars increased accidents as drivers compensated for the additional safety by reckless driving
  2.  Observed in several settings such as HIV prevention via condoms, Titanic, Olympic boxing etc
  3. Peltzman effect visible in current equity markets
  4. Deadly Trio: Indian Equity Volatility at all time lows + Great returns in equities + Alternative investments (Real Estate, Gold, FD) not doing well
  5. This lower perception of risk in equities leading to risky behavior in Indian investors
  6. Signs visible in 1) Unprecedented Equity MF inflows 2) Balanced Funds being sold as FD replacement 3) High Valuations 4) Small Cap funds restricting flows
  7. Time to be cautious and shift focus on risk (rather than returns)
  8. Things to do: Pare down return expectations, Avoid mid & small caps and stick to asset allocation

Happy investing 🙂

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Disclaimer: All blog posts are my personal views and do not reflect the views of my organization. I do not provide any investment advisory service via this blog. No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments



This behavioral scientist has the surprising answer to our spending habits

10 minute read

The problem of sudden increase in spending..

Till a few years back, my idea of saving money was simple:
Spend all that you can and miraculously if there is some money still left at the end of the month – hurray I get to save”

“I would rather spend on things I love, today rather than save for an unknown future” went the voice in me.

My method worked perfectly for me and I did save up a reasonable amount as my spending was mostly less than my salary.

But somehow in recent times, I am finding it more and more difficult to save as my spending pattern has suddenly gone haywire.

Despite my salary going up, there is always a set of new expense cropping up each and everyday out of nowhere and eventually the entire salary is consumed.

My existing technique of saving money is up for a toss!

If you are nodding your head, then you have landed at the right place.

While obviously there is something definitely wrong with my spending habits, somehow most of my friends also seem to go through this problem in recent times.

Spending seems to have suddenly increased out of nowhere.

Is it just us or is there something else happening which is playing havoc with our spending habits? 

BJ Fogg has the answer..

To answer this question, let us catch hold of Mr BJ Fogg – a leading Stanford scientist who has done some super awesome research on how to change human habits.

At the end of the day, spending and saving are both habits. Understanding the science behind how habits are formed might give us a possible clue to what is happening.

Image result for bj fogg

According to him, for any behavior to happen, a person must have three things happening at the same instant

  1. Trigger – something that reminds him to do the specific task
  2. Motivationsome reward (either extrinsic or intrinsic) which motivates him to do the action
  3. Ability – Ability is all about whether the task at hand is easy to do

Now before you give me that “WTF” look, trust me it isn’t as complex as it looks.

In fact, who better than BJ Fogg himself to explain this in less than 3 minutes

 So the whole idea is that if the behavior to be done is pretty difficult (think exercising,  investing etc) then we need a high level of motivation and a reminder (trigger).

Vice versa, in cases where the motivation levels are too low, for the behavior to happen, the action needs to be extremely simple enough to do along with a reminder. (think brushing your teeth – no one woke up excited saying – I am going to brush my teeth – hurray!!)

This is also summarized via his model chart  below


For those who are interested in a detailed explanation – refer to this link here

Now you can apply this perspective to all your habits and behaviors and I am sure you will be surprised.

Try thinking about the trigger, motivation, ability combo in play when you do the following

  • Order food in Swiggy
  • Hail a cab via Uber
  • Order your jeans in Amazon
  • Scrolling through feeds in Facebook

Are you able to connect the dots?

Now let us see how the companies, end up either knowingly or unknowingly applying the framework to modify our behavior.

Historically, most of them would work on increasing our motivation like the one below

Related image Image result for india gym new year ad

But there is an issue with motivation – its transitional.

Remember all your new year resolutions of the past years and you know exactly what is the issue with motivation.

So we would do the behavior initially but with time as our motivation wave drops down, our behavior also stops especially if it is tough to do.

That is when these companies hit upon the holy grail of changing our behavior!

Make the behavior outrageously easy..

Instead of the difficult job of motivating the customers to do the behavior, they instead decided to make the desired behavior as easy as possible!

This meant you only needed to induce minimal amount of motivation to make the customer do the desired behavior.

So for the companies it all boiled down to:

How do we make the action outrageously simple to do?

To do this, Fogg suggested tinkering around with what he calls the “Six Elements of Simplicity” (or Ability):

Image result for simplicity + fogg model

  1. Time: You have more ability to perform a behavior that takes very little time versus one that takes a lot of time.
  2. Money: You have more ability to perform a behavior that costs very little money versus one that costs a lot of money.
  3. Physical Effort: You have more ability to perform a behavior that requires little physical effort and strain versus one that requires a lot of physical effort and strain.
  4. Mental Cycles: You have more ability to perform a behavior that is not mentally fatiguing or challenging versus one that is.
  5. Social Deviance: You have more ability to perform a behavior that is socially acceptable versus one that isn’t.
  6. Non-Routine: Your ability to perform a given behavior will change over time, and will have a greater ability to perform behaviors that are routine (versus behaviors that are non-routine).

So the task for the companies is simply to pick each and every item of the 6 simplicity factor and figure out how to simplify them with respect to the behavior that they want to induce.

End of the day, if they design – quick and physically/mentally easy behaviors that don’t cost a lot of money or violate any social norms – they have a winner at hand!

Amazon’s quest for “make it outrageously easy to buy and spend”

Let us take the example of Amazon and see how they went about simplifying their required user behavior – “to make them shop and spend on Amazon”:

1.One Click Patent

One of Amazon’s first patents was the “1 click patent”

Image result for amazon one click patent

The core of the proposition is that when you sign in on Amazon and you go to buy something, you can just press one button and presto – the thing is bought.

This means that there are fewer steps to ordering, which is less time-consuming and what is termed “friction-less”. Amazon patented that process back when it was just a little online bookseller in 1997.

Now for us in India – the 1 click equivalent is the COD – Cash on Delivery!

2.Shift to app version from desktop version

Gradually with higher discounts when you use the app version vs the desktop version, they slowly made us get comfortable with using the amazon app in the phone. This makes perfect sense as accessing amazon over the phone is extremely easy and solves the issue of time (can be accessed anytime) , physical effort (simple thumb action), mental effort (no thinking required), social deviance (desktop is not the in-thing), non routine (anyway all of us are staring at our mobile screens all day long)

3.Credit Cards solve the money issue

With our credit cards linked, the worry or thought of whether we have money in account balance has also been addressed.

4.One day delivery

The one day delivery for Prime members makes it even more simpler than actually going out to a physical store and buying (imagine the time & physical effort involved).


Add to this the constant triggers of

  • Notifications
  • New discount sales announced
  • Ads on other sites which remind us of the products that we are looking
  • Recommendations based on our viewing/buying history and similar people’s buying activities

6.The mind blowing future of convenience

If this was not enough, look at what the future holds

This is exactly what BJ Fogg calls simplifying Ability!

Conclusion: Ease of buying & spending will be taken to its extremes

All biggies have joined the party..

And this is just one company. Imagine what is going on in Apple, Google, Facebook, Uber, Netflix and millions of other companies etc

All companies have hit upon on this idea of making our making our buying and spending outrageously easy.

No wonder in recent times, our spending pattern has gone for a toss!

Do you think we seriously stand a chance in controlling our spending urges against an onslaught such as this.

And the corollary to this is that – Saving money is going to get more and more difficult as spending money gets more and more easy

In a nutshell

  • Spending pattern for most us has gone for a toss in recent times
  • BJ Fogg behavior model indicates that for any behavior to happen we must have 1)Motivation 2) Ability 3)Trigger occurring at the same instant
  • Companies have realized that trying to increase motivation to make us spend is a difficult ask
  • But there is a low hanging fruit – Ability; i.e to make the behavior as simple as possible and hence negate the requirement for a high level of motivation
  • Amazon has been doing it successfully over the years
  • With several companies (Apple, Google, Netflix, Uber, Flipkart, Ola, Swiggy etc) joining the bandwagon, our spending and buying pattern has gone for a toss – with several impulsive purchases
  • Going by the same trend, in future our ability to buy and spend is incrementally going to become more and more easier. This simply means more spending and less saving!

The million dollar question is – Can we really put up a fight and control our spending impulses against these giants who are after our wallets day in and day out?

Hang on till the next week for the answer..

Happy investing 🙂

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Disclaimer: All blog posts are my personal views and do not reflect the views of my organization. I do not provide any investment advisory service via this blog. No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments