Do you have your interview tactics upside down ¿?

I read and talk to people a lot about interviews, mostly job interviews, but also about interviews for scholarships, awards and other recognitions. I have learned that a majority of the people I talk to (and the people who give them advice on interview techniques) in fact have their techniques upside down. Yes! I am taking a shot at the so call professionals in employment consultancy who give advice to potential candidates about interview techniques and preparation.

Before you ask me, I’ll tell you that I don’t have any degree in Human Resources (HR) or anything along the lines of recruitment and hiring, what I do have is great wealth of experience and practical transferrable skills about interviews and if you choose to continue reading you’ll know why you should listen to me. Simply because I have been through so much of them and never for once did I fail to impress myself. After all if you ask me on my cynical day I’ll tell you that you don’t need a HR degree (or anything like it) to make intelligent hiring decisions or give a valuable advice about job interviews and don’t get me wrong that doesn’t in anyway detract from the value of a HR degree.

And that last sentence is the problem with most interview candidates (and their advisors) that I have spoken to or read about, they’ve their tactics, from preparation, appearance and the questions they ask upside down (or so I think). For example how many of us walk into or out of a job interview asking the question will they hire me? I’d say almost everyone I know and that is the upside down thinking I’m talking about. The real question should be; will I hire me? Based on your preparedness for an interview, how you plan to sell your strengths in alignment with the job and how you plan to convince the interviewer/s that you are the best candidate for the job, you should be asking yourself “Will I hire me if I was the hiring manager”, of course all other things being equal. And if your answer to that question is anything less than a definite “yes” then you’re not in fact the rightful candidate for that job.

I know “all things are not equal” and that’s fine, but the point is that you’ve to believe that you’re the right person for a job before anyone else believes you. And sometimes you’re going to go to interviews believing (while been realistic) that you’d definitely hire yourself if you were the hiring manager, but you wouldn’t still get the job and that is because all things are not equal. Sometimes other candidates are just more qualified than you, sometimes you’re overqualified for the job, sometimes your specific skills set is not what the company is looking for at that time and sometimes companies just already have their favorite candidate in mind even before the interview, perhaps because of a referral, internal applications, networking or just something that gave them that edge over you. But at least you didn’t get the job not because you’re good enough or not because even you wouldn’t have hired yourself if you were hiring. Listen all I am saying is that you should be able to tell yourself (without knowing about the other candidates) that you’d hire yourself base on your interview.

I have been to a lot of interviews and the toughest one also happens to be my first real interview. Just about eight years ago, while attending College for my Associate degree, I interviewed for an “Accounting Associate” position within a multi-national holding company and I must add that I didn’t apply for this job, instead a friend of mine (who was the relationship manager of the company at one of the many Financial Institutions they dealt with) referred me. I was still young and it was my first interview, I obviously didn’t prepare well enough, but I was passionate about accounting. Long story cut short, I walked into the interview waiting area and there were five other candidates waiting, all of them way more qualified than me, two of them were graduating from University. I know them because the person who recommended me for the job didn't just recommend me alone. So when one of the interviewers came out to brief us about the process and finally asked who wanted to go first, believing that I had no chance against the “big boys” and “a girl” my hand was in the air even before he could finish the question. I got in there and the first question I got was also my last question. One of the interviewers gave me a scenario about a transaction involving three of their subsidiary companies and asked how I’d enter that transaction into the various accounts. I asked if I could borrow a pen and paper and after giving a demonstrative answer on the paper, the next question was about my salary expectations.

I know by now you’re wondering why I took so much space to talk about this specific interview and the answer is simple: because it just reiterate my earlier point about having your interview tactics upside down, I wouldn’t have hired myself with the attitude I walked into that interview room, I didn’t believe in myself from the moment I saw those university graduates and more importantly I didn’t believe I was the best candidate in the room, but! but they asked me a question and I seized the moment, I gave a magnificent answer and boy I walked out of that interview telling myself “I would hire myself” based on the answer I gave to the interviewers. You know I actually walked home from that interview stress free, I wasn’t worried about not getting the job because I knew I did exactly just what I had to do. If there was anything that I was hoping for that afternoon, it was that their assessment was based on the interview performance and it didn’t take very long for me to find out, I got a call that evening, I was the preferred candidate.

Interviewing great for the first time is fundamental to landing your desired job, but what happens next if you fail your first interview? After giving it all you could, like one of those situations I mentioned earlier e.g. they hired an internal applicant or a candidate whose qualifications are more in line with what the company is looking for. What do you do? Where do you draw the line? This is another area of upside down strategy that I have noticed among interviewees and their advisors alike. A common response is to apply again, but what do you tell them in your next interview that you haven’t in the first one? (That’s if you get the invite). How about just writing right back to the interviewer telling them how you feel, this is not a marketing stunt, this is telling them that you’re disappointed you didn’t get the job if you were indeed disappointed, this is showing them your level of enthusiasm about the job and working for the company (be realistic), this is the time to make this person remember your name for next time and more importantly this is the time to build a relationship (network) with that person. A lot of people believe that hiring managers don’t read those letters, there’s an element of truth to that, I think there is, but not when you make them want to read it, tell them how feel but also acknowledge the positives of the interview process, remember this is not the time to dwell on the negatives. Here’s a good example:

Dear Mr. Doe,                              

“I would be lying if I said I'm anything but keenly disappointed that I wasn't selected for a second interview for the position of JUNIOR ASSOCIATE at XYZ Ltd. But knowing how professionally and thoroughly each candidate was assessed, and having had the opportunity to chat with you at the first interview, I'm also honoured to have been on that short list. I appreciate that your job of selection was very, very difficult.”

I don’t always write this follow up letters, but if I miss out on a job opportunity along my desired career path, a job I am passionate about, then I make sure I write one, because I know I’m going to apply again when the opportunity arises and when I do I make sure I reference back to the first interview. What this does is, it gives you something to tell the hirer in your next application, for example saying something like:

“I have had the opportunity to chat with [Insert Managers name] when I first interviewed for this position in [date 200X] who gave me an insight into this role and I knew it is a position I’d love right away, I have since never stopped looking for this openings within [Company name]”.

With a statement like the above there are two possibilities; the manager either remember your post interview letter (because not everyone writes them), if not from the interview or if it is the type of manager who conducts hundreds of interviews, then he would want to see this guy again. Either way you just make the manager want to see you again, which is the key purpose of a resume.

Job interviews are not a rocket science, in fact it is not very hard to figure out the qualities companies are looking for from their job postings (and sometimes they make these qualities unnecessary complicated), but your job is to make them simple, most often than not all you need is to be able to learn. Listen, all I’m saying is that you have to be the first person to believe that you've those qualities before anyone else could. 

Tricky answer to a tricky question. Cheating CEO Husband (Wife) or faithful jobless Husband (Wife)?

Would you rather have a Husband (Wife) who is jobless but honest or A Husband (Wife) who is a CEO but cheats; given you’re jobless? This was one of the questions when I and a couple of friends were playing a game on a smart phone. The popular answer was the jobless, but faithful husband (wife). In fact all the girls chose the honest jobless husband within the blink of an eye.

I on the hand had one clarification before I could make my decision; what kind of CEO is she? I know by now you’re wondering what kind of person asks a question like that, but if I’m going to have a cheating CEO wife, it better be a CEO who at least makes enough money to make me a millionaire once we divorce, which by the way is a matter of when than if. 

And you know what, for a jobless man with a jobless wife that same cheating CEO you didn’t marry might as well end up sleeping with your wife.  Soooo! You end up with the jobless and the cheating wife. Seriously, I swear that was, and I repeat that was a JOKE! If that makes sense to you. 

What about an NBA with Relegation?

The beauty of European Sports or more specifically the beauty of the beautiful game (Soccer) is that you pay a price for finishing on the bottom of the standings i.e. Relegation. In European Soccer a team gets relegated to the next lower league if it finishes on the bottom of the standing of the current league it is playing in.  Relegation makes the game much more interesting than otherwise because there is something to play for at both ends of the standing. That’s why in European Soccer games you hardly ever hear the term “Spoiler” as in American Sports. Because if you’re on the bottom of the standings with no possibility of winning the Championship, then you’re also fighting for your life to stay in that league. This unquestionably, gives you more desire to win games than any championship game.

Meanwhile in the NBA, once any mathematical probability of a team making the play-offs is crushed, then there’s arguably no motivation for them to play, because there is no punishment for finishing on the bottom of the standings, in fact isn’t there a reward for finishing with a bad record in the NBA? I thought so, because the worst teams get the first draft picks. As one New York Knicks fan told me “The Knicks should just intentionally lose the rest of their games to have great picks in the draft”. I actually liked the NBA’s idea of drafting system to give lower teams chance of recruiting top prospects for the purpose of parity. But when this gives teams an incentive to finish on the bottom once they know they wouldn’t make the play-offs, then the whole purpose becomes questionable. I am not saying NBA teams do this but they could. And personally I have my own reservations about whether the regulation of many, if not all American sports is for the claimed parity or for the money (For the league and the Franchise owners).

Like the title of this post, “How about an NBA relegation”, where the bottom teams in the Eastern and Western Conference gets relegated automatically. The question becomes, I guess, relegated to where? I don’t know, make one up. That’s the problem with the NBA, it’s the only league where you can play professional basketball as in most other North American sports. But where is the room for development? The NBA D league? I don’t think so, how do you develop in an uncompetitive league? As one NBA fan told me “it’s not even a league bro” when I proposed that it could be used for relegation. Take the British Barclays Premier League (BPL) for example, it is an NBA equivalent with 20 teams. Every year the three bottom teams get automatically relegated to the next bottom professional league, The Npower Championship and the top two teams and one player-off winner from the Npower Championship gets promoted to the BPL.  The bottom three teams in the Npower Championship also get relegated to the next lower division called the Npower league one, giving opportunity to the top teams in that league to also get promoted to a higher league. This process continues to the lowest division, essentially offering all teams an opportunity to compete in the top league based on performance.

This system of relegation maintains the importance of the games played by the supposedly lower ranked teams towards the end of the season, which might be at the risk of relegation. “In contrast, a low-ranked US or Canadian team's final games serve little purpose, and in fact losing may be beneficial to such teams, yielding a better position in the next year's draft.” Relegation comes with a huge cost to a team due to the different monetary pay-outs and revenue generating potential from the different divisions e.g. ticket sales, Commercials and T.V Viewing. As a result teams will avoid relegation and give their fans nothing less than their money’s worth when they log horns with the so called top ranked teams. No Championship game comes closer to the intensity of a game involving two potential relegating teams or a potential relegation team and a Potential Championship team. Because when two teams compete for a championship it is for glory, but when two teams compete to avoid relegation, they fight for their lives; They leave every single bit of energy in them on the pitch and I swear I have seen this games, they’re nothing short of a “Soccer War” where winning is the line between life and death.

If you make it to this point you’re probably wondering, why would you implement relegation in the NBA? Because for one it is going to expand basketball into untapped markets while creating opportunities for players who cannot make it to the NBA directly. Second it will be much more fun and interesting to watch the NBA because every team is playing for something, albeit at the two extreme ends of the standings. And finally because teams that are not good enough for the NBA will get relegated to the appropriate level and get replaced with teams that are prepared to compete in the league on yearly basis. Is the NBA ever going to consider the system of relegation? No! or at least not in the near future if you ask me. There is just too much politics buried under the so call “Regulation” of North American sports that doesn’t just support the system of relegation as in most European sports. The NBA specifically is too monetized and they won’t just let the New York Knicks get relegated and the potential loss of revenue that comes along with it, for example.

Love Sports.

Lives Soccer!

Failures of Risk rating Agencies during the Global Financial Crisis

This is a short excerpt from my independent study research paper title; "Failures of Risk management during the financial crisis and the new trends for the post crisis era". I have a full copy of the paper in PDF available for anyone interested in reading it or for reference. Just leave a comment and I will be in touch. Enjoy!

Credit rating agencies (CRA's) long periods after their establishment have done a great job at maintaining their high authority and determined adequate ratings assessing, with relative perfection, the actual probability of debtor’s insolvency. While there was also some other objective reasons for the wrong decisions by CRA’s in the past crises like the Asian financial crisis, the global financial crisis of 2008 showed that most of the inaccuracies in credit rating can be due solely to the mistakes of the rating agencies. Firms like Lehman Brothers went bankrupt while its investment rating was an investment one (A-). Another big corporation AIG insurance had same investment rating (A-) when it was bailed out by the federal financial aid. No evidence of fraud or submission of false information was found in either case. Both companies were public and operated on the most sophisticated financial market with highest standards of transparency. Thus, the deterioration of the financial condition of this firms was a permanent one, not temporary. Hence, the fault of the rating agencies in these cases is beyond doubt.

What was intriguing about the CRA’s was that studies found that despite the individual cases of  inappropriate (inadequate) ratings, the agencies’ overall rating of corporate bonds do reflect the actual associated credit risk.

(Rafailov 2011) claimed that the most significant failure of CRA is the assessment of the risk of mortgage-backed securities and mostly of collateralised debt obligations (CDO). This argument seems to support the evidence that the global financial crisis resulted from the defaults in sub-prime mortgage backed securities.

 Causes of the Failures

•      The entity issuing the securities pays the main portion of the fees determining the ratings and thus the CRA becomes dependent on this fees and the conflict of interest thereto. The agencies have an incentive to overlook problems with a company’s credibility and issue a higher rating than actual (or deserved) in order to attract more clients by doing so and at the same time will not lose current clients who would go to another agency. This was a fundamental problem due to the conflict of interest issue with investors’ interests requiring an unbiased assessment of the issuer. With regards to structured financial instruments (SFI) the problem with the business model was escalated because most part of the issuance of SFI’s is controlled by a few big investment banks and hence forming a major part of the income of CRA’s.

•         Lack of authority to verify the information. It is interesting to understand that credit ratings are based on voluntary information provided by the issuer. The CRA have no authority to verify the authenticity of the information provided and have no power to request further information by compulsion. Therefore, under such circumstances the issuer can conceal unfavourable information which enables overrating.

•      The problem of “The Big Three” i.e. no competition. The CRA market is basically controlled by the three biggest rating agencies (Standard & Poor’s, Moody’s and Fitch), that control 95% of the market (Langohr 2008 pp. 384-386). This creates an environment in which the opinion the investors receive is not diverse with regards to an issue, and it can lead to the formation of a cartel by the big three agencies to maintain monopolistic high prices for their services and can conduct coordinated policies to segment the market. Moreover under such an environment the risk assessment as well as business models applied are restricted to a certain level of diversity as there are only three firms controlling 95% of the market.

•          The Regulatory Body’s over reliance on Credit ratings. The regulators substantially relied on credit ratings and information produced by CRA’s in regulating the financial market. For instance some financial institutions are allowed to invest in debt instruments only if they have an investment rating provided by some defined CRA’s. Also in its determination of capital requirements of banks and other financial institutions, the regulatory authority uses the credit rating to determine the riskiness and value of various instruments. Furthermore the Central Banks had minimum credit rating requirements when granting refinancing to chartered banks. All these implicitly practically handed regulatory power to CRA’s through change of credit rating as their decisions/actions have enormous impact on the decisions of a lots of investors. This status of regulatory nature creates systematic risk, because it motivates the institutions to invest in overrated securities

•   Conflict of Interest. Normally the CRA firms that determines an issuer’s credit rating also gives professional advice to firms about how their different actions will affect their credit rating. This is a clear conflict of interest as same CRA that advice a firm how to maintain a sound credit rating will have no incentive to criticize its own work by giving a bad credit rating. Obviously the CRA’s will not want to upset the issuers and lost business by giving consulting advice on one hand and giving anything less than satisfactory rating on the other hand. In a nutshell credit rating and consultancy services are practically incompatible for any firm to combine without bias, for example how do you criticize your own advice? This was a really huge and arguably one of the most serious problem with the credit rating.

•        The problem with dependence on mathematical models. This is a common problem in structured instruments where ratings are based on the use of mathematical models, by which the probability of insolvency of different pools of debt obligation is modeled. These mathematical models do not have any component of fundamental analysis or expert assessment of the issuer’s financial condition. Rafailov (2011) argued that “the events during the global financial crisis showed that in most cases the models used are incomplete. They do not account for the presence of asymmetry of the information among borrowers, originator banks, financial institutions securitizing them (arrangers), rating agencies and investors”. He used the originator risk as an example, arguing that Originator banks have an incentive to deceive the arrangers and the rating agencies’ regarding the true creditability of borrowers. “For the information is not examined, there is created a moral risk that the originator banks provide false information as well as reduce the criteria upon lending of loans. The problem further deteriorates due to the fact that after securitization the lending banks do not assume the credit risk any more. Thus, there is no incentive for them to maintain high standards upon lending. As a result of that risk the actual probability of insolvency under individual loans is bigger than the one implied in the model and the credit rating is too optimistic” (Rafailov 2011). Another problem with this mathematical models is lack of complete information. For the determination of the credit rating for these structured instruments depends entirely on the mathematical model, the quality of the final results depends on the quality of the input information. As argued earlier, however, the CRA’s have no authority to request verification of information and if the information given is wrong or incomplete, then this mathematical model will give a misleading result.

•     Lack of efficient Regulation in the credit rating industry. CRA’s play a fundamental role in the sound functioning of the financial system, however, their business wasn’t governed by any strict regulation for long times prior to the crisis in 2008, depending entirely on self-regulation.

The above specified problems explain the reasons for inaccurate ratings determined by the CRA’s. Given the fact these problems were especially serious in the case of SFI’s, the failure in that area is not accidental. This failure hugely contributed to the events that lead to the rise and magnitude of the 2008 financial crisis. Without the work of the CRA’s the issue of overrated risky mortgage backed securities would not have been enormous as it was, investors would not have invested in the volume they did in these securities without the overrated risk because their expected return would not have been high compared to the risk assessment. As a matter of fact the banks would not have the propensity to securitize their loans at the lower realistic rating, because at this rating they would have received lower prices for them. Moreover without the overrating the investment banks facilitating the process would have made less profit because the spread between what they receive under securitized loans and what they pay under Tranches would have been lower if the tranches rating were lower. 

Call it Soccer or Football; Which League is the best League? Again!

Probably the third time that this question pop up in my blog. Today’s one isn’t something I even thought about writing, instead today a middle-of-the-road soccer fan asked me this question and I was so much impressed with my response that I couldn’t just help but share it.

This young lad is an Arsenal fan and he asked me which league is the best league to watch and I said to him; “it depends on what you mean by best, if you are looking for parity in a top league, then look no further than the Italian Serie A (pronounced say-re-Aah). If however, you are looking for entertainment and competition then check out the English Premier league, it is the most watched league in the World. The Spanish league is great, except that Barcelona and Madrid set-up teams to crush minnows, the Spanish league is all about Barcelona and Madrid, while in the English Premier League Man Utd, Arsenal, Chelsea, Man City and arguably Tottenham are all possible contenders for the title".

And yea it is not about how many people agree with that response that impressed me, instead it was how representative that answer was of me, the words just slide through my tongue off my mind. Those words are not just your everyday pundit “carefully worded qualifying statements”. In modern day slang, that was the real talk (Josh).

Peace out.

Why most surprising “Not Guilty” jury verdicts happen; understanding the system design

Just two days ago I wrote a three page article about the George Zimmerman trial where I talked so much about the jury and their unpopular verdict, but I didn’t talk about how jury decisions are reached. I feel that I owe it to myself & my audience to talk about how our justice system is designed and how this is the cause of most “Not Guilty” verdicts.

When a person is accused of a crime and faces a trial, the prosecution presents its case and the jury makes a decision based on the evidence presented. The jury have two options to make a decision about the defendant; “Guilty” or “Not Guilty”. There’re only two possible decisions; convicting or acquitting the defendant.

There is a possibility of the jury making an error, because the jury consist of people and people are fallible. In fact the jury can make only two types of errors. Convicting an innocent person wrongly or acquitting a guilty defendant. The question is which type of error is more serious? Because the two errors are negatively related, an attempt to reduce one increases the probability of committing the other.

Convicting an innocent person is considered (and I agree with this) very serious in our justice system, as a result the system is designed to make the chances of this type of error happening small. This is why the system put the burden on the prosecution to proof the guilt, the defense need not to proof anything. The judges instruct the jury to find the defendant guilty only if there is “evidence beyond reasonable doubt”. Without enough evidence, the jury must acquit the defendant even though there might be some evidence of guilt.

Since the two errors are negatively related & our justice system is arranged to minimize the probability of convicting innocent people, then the probability of acquitting guilty people is relatively high. Oliver Wendell Holmes, a US Supreme Court Justice, once said “Better to acquit 100 guilty men than convict one innocent one”.

This explains why most jury trials that the public think otherwise end up in a “Not Guilty” verdict, it’s not because there is no evidence of the defendant committing the crime, but it’s because there is just not enough evidence to find him/her guilty of the crime. That’s why you never hear the phrase “Found Innocent”, because we can never tell if a defendant is actually innocent, all we can say is that the evidence is not enough to suggest that they commit the crime.

So our justice system is designed to rather let more guilty people walk free than wrongly convict one single person. This is a conscious choice & we must live by the consequences of the choice, but I guess the question is what the consequence of our next best alternative is? If you are the type who supports the second alternative, then I suggest you watch the movie hurricane starring Denzel Washington and based on a true story.

This whole “Zimmerman Trayvon Martin” case is a FARCE

The public outrage & dismay over the acquittal of George Zimmermann for the murder of Trayvon Martin, a 17 year old Sanfield, FLORIDA teenager is unprecedented in any case of its kind. While the public attention is fixated on the absurd two word final verdict of the mis-informed jury, I decided to take a step back to assess the Scenarios that lead to this devastating outcome and the aftermath.

I came-up with one and only one conclusion; the title of this article. From the Prosecution, the defense attorney, the testimonies, the media and the Jury, the entire trial was a farce. How does each of these parties play into what leads to a legitimate trial turning into a farce?

The prosecution break rule number one, they did what they tell you not to do “Never bring a witness to stand unless you are sure of what they are going to say”. The prosecution brought in Chris Serino, the lead homicide investigator of the case and his testimony helped the defense than it helped the prosecution, if it did help the prosecution at all. This is a really weird act, since it is my understanding that in Florida they have this depositions where the attorneys have the opportunity to cross examine the witnesses before they go on stand in the courtroom. If the prosecution couldn’t figure out that Mr Serino would say what he said, then shame on them, if they did know he would say what he said and still bring him to stand, shame on them. An entire book can be written about the role of detective Serino in this whole trial, obviously this article is not enough to discuss his role, but I will give a brief overview of him; He is the person who recommended manslaughter charges against George Zimmerman and at one point during his investigation he told Zimmerman, I quote: “Had you told this child that you were neighbourhood watch & you were just wondering what the hell he was doing when he came up to your car, you probably wouldn’t be here right now”. But During his testimony detective Serino told the court that he believe that Zimmerman was been truthful.

The ridiculous irresponsible knock knock joke made by the defense Attorney Don West at the start of his cross examination of Rachel Jeantel explains why I call the defense a joke, not to mention his irrational and dubious remark about the prosecution; Calling the prosecution “A disgrace” for pursuing the case, it’s an insult to the US Justice system to think that trying such a case was disgrace. You got to be really stupid to even think that any system will just believe, without trial in a story told by a man who has a long history of violence & trouble with the law after shooting an innocent unarmed teenager, and yep I just called Don west stupid, as a matter of fact if it only takes what he did to win this case, then just any unversed criminal lawyer could have won the case. I called Mr West a total joke because you could easily tell his expressions were filled with hatred and anger for no good reason.

With regards to the testimonies and specifically with the testimony of detective Chris Serino, something didn’t click to me. Here is the man who recommended a man slaughter charge against Zimmerman after investigating into the case and then he testify to the absolute opposite of that by saying that Zimmerman was telling the truth, why would you recommend a manslaughter charge when he was telling the truth all this time? I mean if he killed Trayvon Martin in act of self defense, then why are we here? The prosecution brought him in and he helped the defense market its case to the jury. Chris Serino concluded that Zimmerman was either telling the truth or he was a pathological liar, to Mr Serino I say “You’re either an absolute joke or you’re a pathologically inconsistent liar”. The fact that the defense counsel proceeded to ask him whether he has any insight from his investigation that Mr Zimmerman is a pathological liar give me the impression that the latter is the truth. The defense must have a pretty damn good idea what his response was going to be before taking the risk of asking him that question, my own question is how on earth didn’t the prosecution figured this out during the deposition? There can be only one possible answer; He must be a pathologically inconsistent liar.

These whole episodes of farce lead us to the most important group in the case, the people who made the call that George Zimmerman is free of the charges of murdering Trayvon Martin. The jury took 16 hours to come up with just two words, “NOT GUILTY” to close the case, 16 hours and they wouldn’t even say what wasn’t he not found guilty of, isn’t that creepy? I mean come on after 16 hours you ought to come up with something better. I know that the final decision comes down to whether he was found guilty or not, but in a case of this magnitude and the time they took to reach their publicly unpopular verdict, the jury have the moral responsibility of explaining to the public and the family of the victim whether the verdict was reached by unanimous or majority decision or perhaps to explain whether they haven’t just found the accused guilty of the “Murder” & “manslaughter" charge or they found him absolutely “NOT GUILTY”.

But if anyone think race haven’t played any role in the final verdict of the jury, then you definitely need to go right back to Kindergarten, yep you definitely have the brain of a two year old. Its obvious Zimmerman racially profiled Trayvon Martin, but there is not just enough evidence to suggest that his murder was racially motivated, it’s a tough call to say Zimmerman just killed Trayvon because of his race, who knows? He might just be another monster who should pay for the price of his actions regardless of the race of Trayvon. My theory though is that the final verdict of the case would’ve been different if the positions were swapped. I must say that I’m person who doesn’t let himself to be limited by this race issue, but we have to tell the truth and the best way to solve a problem is to discuss it, we cannot deceive ourselves that something doesn’t exist, when there is clear evidence that it does, this will just escalate the problem if anything. We cannot just let innocent kids go through what Trayvon Martin went through whether they are Black, White, Hispanic, Latino, Asian or Native American, with the perpetrators walking away free.

And let me make it clear that I’m not suggesting that the jury verdict was racially motivated; I honestly am not. What I think however, is that they let their perceptions, prejudices and stereotypes take the best of their judgement. I’m of the believe that the jury would have reached a different verdict if they just forgot about who gave what testimony or forgot about that character that the defense have made Trayvon Martin I.e. growing /smoking Marijuana, kicked out of school or what not.  I think the jury found it conveniently easy to believe in some witnesses than others, for example Rachel Jeantel, She represented her true self during her testimony, she act the way she would in everyday real life scenario you can tell, what people forget to remember is that cultural and racial barriers/differences exist and you will be surprised to find out how many grown-ups are out there who have no idea that there is a grey part to life where most people live as opposed to their perceived “Black & White” categorization. To the jury the tone of her voice, her language of expression, her body language or her outfit may represent an unreliable/irresponsible witness, but it’s her spoken words that should matter. Stereotypes exist & sometimes we all get caught up by this judgemental act without even realizing it.

I have no doubt or whatsoever that had the jury put themselves in Zimmerman’s position from the moment of the 911 call to the shooting & killing of Trayvon Martin, they wouldn’t have found him NOT GUILTY. If the jury had asked them selves what would they have done if Trayvon Martin had attacked them as Zimmerman claimed and they‘re as big as George Zimmerman, I’m pretty sure their actions wouldn’t include reaching for their gun. Zimmerman could have easily stepped back and avoid any physical contact with Trayvon the moment he realised that he was unarmed and innocent, but he didn’t because perhaps he knew he had a gun hidden that Trayvon didn’t knew about. The reality is that, we all know even if Trayvon had indeed attacked Zimmerman, he wouldn’t have done this had he known Zimmerman was armed. It doesn’t take a genius to tell that Zimmerman would have escaped from the altercation with Trayvon without any life threatening injuries if he wasn’t armed with a gun, he definitely would with his size compared to Trayvon’s. As a matter of fact he could‘ve avoided the whole altercation by telling Trayvon that he was a neighbourhood watch & just thought he looked suspicious. I’m pretty sure anyone of the six Jurors wouldn’t have got into a power struggle with Trayvon if he looked as suspicious as Zimmerman had claimed to the 911 operator, why would Zimmerman do it then? He must’ve known something that we all didn’t know & I guess will never know.

To add salt to injury, the media reaction after the jury verdict was ridiculous, it was a total joke to watch CNN and see the type of ill-informed people who were given TV space. People like Robert Zimmerman become a common face in America for the wrong stupid reasons, a guy who doesn’t know what he is talking about for one reason and secondly was just instigating public feud. Robert Zimmerman if he really cares should’ve been with his brother in the courtroom in Florida when the verdict was given rather than talking gibberish at some TV interviews in NY. He made some really horrendous comments & remarks that were just utter and blatant lies, like saying to Piers Morgan, I quote; “Trayvon had plans for George that night” , I mean isn’t that an insult to the intelligence of the audience? The evidence is out there that the kid was followed while walking home. He Robert Zimmerman told Don Lemon that he will like to understand what make people as angry as Trayvon was, to this I respond; He should first try to understand what makes people as stupid as Zimmerman was. I’m not taking sides here but let’s face it; Robert Zimmerman lacks the moral to give interviews to a global audience.

It irritates me when CNN vaunt about bringing some expert opinion to the audience after the commercial and next thing you know people like Buck Davis are on live TV, the guy who have no clue about the topic in discussion. Buck Davis is another big idiot; the guy thinks George Zimmerman had no idea about the race of Trayvon Martin when the 911 call evidence was all over the news, are you kidding me? Even the anchorman Don Lemon had to remind him that the 911 call was there for everyone to see, after which he had to change his story. When the story was about Trayvon Martin, he brought in how an African American was murdered in Chicago for refusing to join a gang; again the host had to remind him that was a different case and not the focus of the discussion, what a joke! People like Buck Davis should just save themselves the embarrassment and keep their opinions to themselves, but be it Buck Davis or Robert Zimmerman, blame it on the people who give them the opportunity to air their ill-informed opinions to the World.

Call me a sceptic or a cynic if you like, but for me the dots just didn’t connect in the whole Zimmerman trial and unless the missing dots are found, the Trayvon Martin murder will not change a thing, much like how the Connecticut, New Town shooting didn’t change a thing about America’s gun laws. Just two or less weeks of breaking news headline or a top story, whatever you call it.

Fixed Exchange rate systems; An Art of Mastery, Credibility or Positive expectations?

A discussion of fixed exchange rate system may sound outdated in an age when Financial news headlines are regularly dominated by sharp fluctuations in the exchange rate in major developed countries. But fixed exchange rate system is important for it is the first exchange rate system the World has seen, however it is not the importance of fixed exchange rate system that I intend to discuss today, instead it is the nature in which a fixed exchange system is managed that caught my attention.

Why is Hong Kong and more recently China doing great under a fixed exchange rate system, but Argentina, Turkey, Brazil and Mexico were forced to abandon the system after an unsuccessful trial? To keep an exchange rate fixed a central bank must always be willing to trade currencies at the fixed exchange rate. In it’s simplest term a fixed exchange rate means the Central bank must be willing to buy all the amount of its currency the market wants to sell and at the same time be willing to sell all the amount of it’s currency the markets wants to buy. Sounds complicated right? Well that’s what leads me to the topic of this blog, are central banks with more intelligent Economists more likely to be successful with managing a fixed exchange?

Given what it takes to keep an exchange rate constant infinitely, it is tempting to say that it requires a mastery of an Economic understanding where the Central banks policy makers have to be ahead of the market to keep the rate fixed. This was the view I had, but then I still had some questions about this ideology, how about if the market doesn't believe that the Central bank will keep the currency fixed? More specifically how about if Investors believing that the country will depreciate its currency starts dumping the currency for foreign currency in an effort to make profit out of nothing, A phenomenon known as “Arbitrage”, to Understand this suppose you are holding 100 Argentinean Peso currently fixed at $1=100 peso, but you believe that due to Argentina’s Balance of payment problems it will depreciate it’s currency to $1=200 peso. Now if you sell you current 100 peso for dollars you get $1, if the Central bank of Argentina go ahead and depreciate the currency, you can exchange your $1 back to pesos at $1=200 peso’s, a profit of 100 peso out of nothing.

What is interesting about the above scenario? In the above example for simplicity I used 100 pesos but in reality this could be in Billions of pesos. I just jump to how people can profit from the central bank devaluing the currency, but didn't exactly explain why would the central bank devalue the currency, remember from our definition of the fixed exchange rate system, the Central bank of Argentina have to be willing to buy all the Pesos the investors are supplying with Dollars, now if everyone believes that The central bank indeed will devalue the peso and start dumping it for dollars, as this process continues the question is how much dollars can the Bank of Argentina use to buy the pesos? The answer to this questions depend on how much dollars the bank of Argentina have in reserves, at any rate such a process can only continue for so long, because the Bank of Argentina doesn't print Dollar notes and as such can only have so much of it. By the time the central bank runs out of dollar reserves, it either has to devalue the currency or allow the exchange rate to float freely, a devaluation occurs when a central bank still keeps the exchange rate fixed but depreciate the fixed exchange rate (example from 100 peso = $1 to 200 peso = $1).

The above scenario demonstrates what is known as a “Speculative attack” or “Capital flight”, a situation where investors speculate against the devaluation of a currency and start fleeing that currency for foreign currency.

What causes speculative attacks or more generally currency crises? Krugman, Obstfeld and Melitz (2012) noted that often because a Government is following policies that are not consistent with maintaining a fixed exchange rate system over the long term, they gave an example of a central bank buying domestic Government bonds to allow the government to run large fiscal deficits.

After taking a class in International finance and dedicating so much time to understanding fixed exchange rate systems through research, I have come to the conclusion that, a fixed exchange rate system requires well informed Economist to work, however this is not the ultimate. The authority, perhaps the Central bank overseeing the management of the fixed exchange rate system has to be credible, and the public have to have belief in it, expectations have to be positive, but then positive expectations are based on credibility. If a central bank has a history of deviating away from its announced policies (targets), what will make the public believe that it won’t deviate this time?

It is of my belief that successful and unsuccessful Central banks under fixed exchange rate regimes don’t have great differences in the type of Economist tasked with managing the system; instead they do have great differences in their “credibility” and the “expectations” of the public on their future macro-economic policies. 

Journalism in the age of social media

Facebook, twitter! social networking sites that have re-defined news reporting and journalism. Today journalist are more concerned about what they post on their twitter accounts than what they 'read' to their audience in the main stream, my use of the word ‘read’ is not accidental, for today I doubt the existence of too many true ‘news reporters’. There are still a few true journalists out there, but for the majority of them they are just Government press release readers.

The advent of twitter provides an alternative to the traditional mainstream news reporting and Journalism, but the current state of it’s being used irritates me. It’s absolutely stupid, irrational and illogical why an individual’s twitter news feed should be of a great importance to the audience than the mainstream news reporting, or perhaps ‘news reading’; thanks to their stupid selfish campaign to gather followers on their personal twitter pages.

You see I don’t have any problem with twitter or Journalists having twitter accounts, but it becomes unfair when the people who pay their taxes to sustain the operation of Corporations like BBC are coaxed into following their reporters on twitter for the latest news updates. In fact at some point the BBC wanted to force all its employees to have the BBC subscript in their twitter user names. Since when has sitting in front of a camera and reporting news become so much less efficient than typing and posting a sentence on twitter.

Twitter and other social networking sites are great innovations and they provide an avalanche of opportunities for the media to reach the younger audience group, but when what username I use becomes an important issue or when TV news reporting is dominated by advertising campaigns for twitter following, then you begin to wonder if the customer’s satisfaction is at heart.

It is undoubtedly obvious that every journalist would want to be the first to break important news, and of course the best way to do this is through their twitter accounts, no wonder today most news we see in the mainstream media are already trending or perhaps archived in twitter and Facebook. It’s this latter selfish and stupid usage of the social media by journalists that irritates me, not because I cannot have a twitter or a Facebook account, but because for justice to the tax payer who cannot or doesn't wish to have a twitter account, for s/he deserves much better than the current state of selfish social media news ‘reading’. And yes news ‘reading’............again.

Spanish “La Liga: A league of two teams; Evidence from the FIFA/FIFApro World XI

I have said this before and I will repeat it again; The Spanish football (Soccer) league is a depiction of the Scottish premier league where Barcelona and Real Madrid (Like Celtic and Rangers in Scotland) put teams together to humiliate minnows.

Now before you start calling me out, I must reiterate that the Spanish league is a great league and of course I know there are structurally 20 teams in it like in most top leagues in Europe, but instead it’s the disparity in the Spanish league between Barcelona and Real Madrid and the rest that led me to the title of this article.

If you are a follower of the game of football you probably already know that 10 of the players in ‘2012 FIFA/FIFApro World XI’ are from Barcelona and Real Madrid. Technically what this means is that the best player of each position in 2012 is selected to form a team, call it the World’s best team if you like.  

Since all of the 11 players are from Spain, it is tempting to conclude that the Spanish league is the best league in the World, but if you are reader of my blog you are probably aware of my own thoughts on that, as a matter of fact it is not, unless if your own definition of best is to almost always predict the outcome of a game even before the ball is kicked, but if that’s you, you are probably already used to ingenuity.

But my discussion today is not centred around the question of the best league, instead I’m interested in whether 10 players will be from any two teams in any other league if the best eleven are selected from teams in that league. The answer is no, well not in Europe’s top leagues, You see if you are to select a supposedly dream team in Either the English Premier league or the Italian Sere A, you can guarantee that you will have players from at least five different teams.

I guess the question is why do we have pretty much all the players of FIFA World XI from two Spanish teams? The answer is because there is no parity in the Spanish league, Barcelona and Real Madrid put together ridiculously amazing players to demolish the rest. Personally I’m not surprised these players are from these two teams even though I have my own doubts about who is and who is not on that so called FIFA team, because of the disparity between them and the rest and the numbers of quality players they are surrounded by, these players have a better chance of a better performance than their counter-parts in other leagues even if they are levelled in terms of skills. To understand this think of a player like Robin Van Persie, you can be almost certain that he will be in the FIFA World XI if he plays for a team like Real Madrid or Barcelona in the Spanish League.

It is important for people to understand that the quality of players you are surrounded by and the team power of your opponents plays a great role in a players performance, been surrounded by top quality players coupled with a relatively less powerful team makes playing the game itself easy.

Again it is obvious that gap between Barcelona & Real Madrid and the rest of the other Spanish teams is absolutely absurd and exclusive to the Spanish league. In fact no other team has won the La Liga since 2004 and given the current nature of things it doesn’t look like any team is going to break into that top two spot anytime soon.

By the way before you start calling my name, I’m conscious of the inclusion of Radamel Falcoa in the so called dream team, who doesn’t play for either Barcelona or Madrid, Falcoa is an amazing player, and he is a standout, however with no disrespect to him I think his inclusion in the team is highly debatable. Overall though I think he deserves some credit for his exceptional performance in 2012, hence fair play to him.

If you're the one who is obsessed with who is on the FIFA/FIFAPro World XI, it is worth noting that these players are voted by their fellow professional players and as such opinion plays a great role.

Below is that name of the players for the 2012 FIFA World XI.

IKER CASILLAS, DANI ALVES, MARCELO, GERARD PIQUÉ, SERGIO RAMOS, ANDRÉS INIESTA, XABI ALONSO, XAVI HERNANDEZ, CRISTIANO RONALDO, RADAMEL FALCAO, LIONEL MESSI.

MISCONCEPTIONS ABOUT BALANCE OF PAYMENT DEFICITS

Quite often I speak to people and they try to relate a country’s balance of payment to its standard of living, or more generally people try to think that a country with a balance of payment deficit is having economic troubles. Balance of payments is always a hot topic in economic and political discussions and many people seem to have the concept that deficits are unambiguously bad.

Well firstly balance of payments are always balanced because they are calculated based on double entry accounting, it is a specific category of the balance of payment that can either be in a surplus or a deficit e.g. the current account. In general people mean a current account deficit when they talk about balance of payment deficit. The current account is the part of balance of payments that records the value of trade in merchandise, services, income (from investments) and unilateral transfers.

Given what is recorded in the current account i.e. Exports, imports and investment incomes it is not surprising why it is the most important or may be the most talked about account in the balance of payment. Export and Imports are specifically very important because they make up most of the current account value. Exports bring foreign exchange (money) into the country and hence they are credits in the CA, Imports flow foreign exchange out of a country and they are debit transactions in the CA. A current account deficit occurs when debits are more than credits, which means that a country owes the rest of the World than it is owed by the rest of the World, in other words the country is a net debtor to the rest of the World.

Knowing what is recorded in the CA, we can now easily tell what causes a balance of payments deficit. For instance, since Exports bring money into a country and Imports move money out of a country, we often hear argument for policies aimed at increasing Exports and reducing Imports. The last sentence lead me to the title of this blog, we need to know what caused a BOP deficit before we can make any conclusions about whether it is bad or good.

Consider this; How about if a country is running a current account deficit (Imports more than exports) because it is importing capital and technology for developmental purposes? Of course this country might need the capital and technology in order for it to increase its future long-term exports and run BOP surpluses. From this we can see that short term BOP deficits are not always bad & they are sometimes an intermediate step towards future BOP surpluses. Sometimes nations also run short term BOP deficits because of high imports of intermediate goods to be processed into finished final goods for export.

Husted & Melvin give a simple hypothetical example about BOP deficits; Consider country A and B, A is a wealthy creditor that has extended loans to poor country B. For country B to repay these loans, B must run trade surpluses with A to earn the income required for repayment. Would you rather live in rich country A and experience trade deficits or in poor country B and experience trade surpluses? Perhaps this is a simplistic example; there are real World analogues of rich creditor countries with trade deficits and poor debtor nations with trade surpluses. For Example the U.S has had a trade deficit every year since 1971 (except 1973 & 1975). If you follow the last US election you might have realised that the US trade deficit was a hot topic, the US trade deficit is of a great concern because its causes are largely due to high consumption, which is not good because this means people (and firms) are spending more than they are earning. We see that if the cause of a BOP deficit is rooted in consumption it is unambiguously bad.

“Sometimes governments simply spend more than they earn simply due to ill-advised economic planning. Money may be spent on expensive imports while domestic production lags behind or it may be deemed a priority for a government to spend on the military rather than domestic production.”

In a nutshell it is not generally obvious if a country is better off or worse off running payment surpluses rather than deficits.

When discussing the BOP or the current account it is important for people to understand that it is practically impossible for every country to run a surplus, since one country’s imports is another  country’s exports, therefore a deficit in one country’s current account is surplus in another country’s current account.

KEY:

CA: Current Account

BOP: Balance of Payment

The Student.

Obamanation or Obamabarter?

After reading the US president Barack Obama’s public announcement of his support for Gay (same sex) marriage last month, I said to myself; is he giving away his personal conscience for the votes (Obamanation) or is he selling votes for votes (Obamabarter), hence the title of the blog.

Now if the president just made such public announcements for purely political reasons, then that will just substantiate my personal (sometimes) cynical believe that most politicians are selfish, which will be what I would like to call in this case “Obamanation”.

On the other hand if the president did made such statement’s out of true conscience and as he claimed with influence from his family, friends and neighbours, then it will be what I would like to call "Obamabarter".

Trade by Barter means exchanging goods for goods in the ancient days before money as the means of exchange was introduced. As predicted by the political pundits Obama is going to loose votes on the religious and anti-gay marriage category whilst he is going to gain votes on the gay marriage activists and among gay people category. In fact some statistics goes to show how on average he will either loose or gain votes (in general) for his statement.

My problem is that are there just so many people out there like me who don’t give a damn about who marries who? So long you don’t bother us with your marketing campaign about your sexuality! Will the American people just beat the odds and cast their votes based on who's political manifestos matches their beliefs and hope, rather than based on their personal views on who marries who?

After all President Obama has beaten the odds before and if he’s taught us something in the past it is that he is indeed genuine and a true believer and goes for what he believes in.

Remember he Started with “personally I think”, not “personally we think” or “They should”, I hope people are able to make a difference between the two.

Complexity of the law

I read this book called “Judge & Jury” by James Paterson and Andrew Gross. Even though the book was fictional, there was one question that led me to searching for answers since reading (about 10 months ago). Before stating the question I think it will be more helpful if I explain what led to the asking of this question in the book.

Judge & Jury by James Patterson and Andrew Gross is a thriller about a mafia boss on trial. Nick Pellisante was the FBI agent who tacked down Dominic Cavello (Mafia boss) for years.

Dominic Cavello has committed all sorts of gruesome crimes you could imagine; from murder, bribery, distortion, robbery, money laundry, drugs, rape to shooting and killing of two federal officers.

On the trial of Dominic Cavello, Nick pellisante’s biggest obstacle was to convince the Jury that Mr. Cavello was a criminal and the head behind numerous cold case killings. Pellisante in fact witness Cavello shoot and kill two of his federal agents, the problem for Pellisante though was to get witnesses to make sure Cavello gets what he deserved. But even though Cavello was in prison at the time he made sure all Pellisante’s material witnesses are taken down before they could testify against him, thanks to his mafia mob network who will do any thing to make sure the boss is not sent away, well at least not easily.

Pellisante had to later turn to Cavello’s own men who were earlier been sentenced for crimes committed while working for Cavello. Now, Nick Pellisante get this people to testify against the mafia boss by promising reduced sentence terms if they tell the truth about their boss, but the defense counsel will argue that this people are known criminals and liars, who themselves admit in front of the jury that lying was part of their job, even though at least now they are telling all but the truth.

At this point, Nick Pellisante was irritated by Cavello’s attempt’s to interrupt the trial by blowing up the jury bus, sending threat messages to the judge and killing of witnesses and their families through his mob network. Nick went to visit Cavello at prison, out of anger he personally abuse Cavello by physical means with counter threats that his (Cavello’s) threats won’t in anyway stop this trial.

After that Nick was sacked from leading the case, that he was too enthusiastic about the case and that he is taking it personal, he was transferred to a lower FBI department. Out of devastation knowing that he is loosing a case he thought he has already got, knowing that Cavello was guilty of all the charges, knowing that Cavello might get away with shooting and killing two of his closest FBI buddies, Nick decided to take an indefinite career break from the FBI and started teaching a law course at a University where he asked his student’s the following question, I quote;

Can anyone tell me why the law permits law enforcement agents to use deceit (concealing of truth) at the investigative stage, when they are not even sure of a Suspect's guilt, but strictly forbids them from lying during the testimonial stage, When they are absolutely sure that the accused is a Criminal?

One Student responded; “It’s the means to an end” Mapp and United States versus Russell allow the police to use deceptive procedures to obtain evidence, without it they might never make a case. It’s deception for the greater good.”

Nick Pellisante counter questioned; but what if the police have to lie about those procedures during testimony in order to protect their case?

At which point the book didn't go any further about what happens, indeed it’s a fiction or perhaps they leave it to the reader to figure out the rest. I will be very much interested though in finding the answer to this question, for that reason any knowledgeable opinion is very much welcomed!

Peace!

Why I Listen to Reggae Music

I am a great music lover, and I virtually listen to every kind of music depending on the mood. When I do listen to music I want to be entertained, but also to be informed and be able to take some positives out of it, which means I care about the lyrics. For me there is only one kind of music that is best at offering this: Reggae music. When you listen to Reggae music and other major types of music genres, you will agree with me that it doesn't take a genius to tell the difference between Reggae music and any other type of music in lyrical terms. However today I don’t wish to explore into these differences instead I just want to give you a taste of how powerful a Reggae lyrics can be with the lyrics for one of my favorite songs below:

Artist: Warrior King

Song Title: Don’t Give up

Release year: 2006

Lyrics:

When it seems like there is no hope and you can hardly cope

Don’t give up; don’t give up; never give in

When things are not going your way and you feel like running away

Don’t give up; don’t give up; never give in

Don’t give-up; never give in, even when you feel like your “heart is going to spin”*

Put your trust in the King (God) and he will make you win, win, win!

Obstacles in your way jump over them, don’t be afraid of bad minded people them, don’t be a follower always set the trend, any problem Jah (God) will solve it.

When it seems like there is no hope and you can hardly cope

Don’t give up; don’t give up; never give in

When things are not going your way and you feel like running away

Don’t give up; don’t give up; never give in

Don’t be a victim of the system like those others, committing crimes and inciting** all those murders

Taking out the anger on the brothers and the sisters, that could never be rite, that could never make things better

Keep your head above the water’s; keep your head above the seas

Stand firm on your feet and maintain your sanity, put your faith and trust in the Almighty.

When it seems there is no hope and you can hardly cope

Don’t give up; don’t give up; never give in

When things are not going your way and you feel like running away

Don’t give up; don’t give up; never give in

And when you feeling kind of stressed,

And you feeling so depressed,

Look around you, you not the least, not the last, you are blessed, you blessed.

....................continues to repeat previous verses and chorus.

This surely isn’t a lyric that goes like; my gun, my girlfriend, my money, my swag, amma shoot you in the head.

* Am not sure if that’s what he actually said in this part.

** Not sure if inciting was the actual word he used, couldn’t think of any other word other than that after listening to it a 1000 times (josh).

Anyway if you know (or think you do) what he said in this two places, drop it for me in the comments, will appreciate it.

WHY DO FIRMS STAY IN BUSINESS EVEN IF THEY ARE MAKING A LOSS?

If you are a regular news watcher, you will be familiar with the idea of businesses reporting their profits (or loss) for past periods. One intriguing result of such reports is that some firms will report a loss for the past period or sometimes consecutive periods, but will still not shut down rather than incur loss. I think its worth pointing out what we mean by a loss; A loss in business is a negative profit, a situation where a business spends more than it earns (expenses are greater than revenues), which means the extra expenses is financed from some where else, perhaps from savings or a loan.

So why don’t businesses just shut down when they are making a loss and make zero profits rather than operating at a loss? One obvious answer might be prospective profits; that firms operate believing that the loss is for short-term and that the future is bright, however a seconds thought will tell you that if this was the case, then all firms in same industry will pretty much stay operating if they are making a loss, but this is not the case, In fact even firms in same industry quit at different time periods if they continue incurring losses.

It turns out that Variable costs are the determinants of exit decisions for firms. Costs in business are divided into two; fixed and variable costs. Fixed costs are costs that are fixed, regardless of the level of production, e.g. rent, which you pay whether you produce a single unit or nothing, Variable costs are costs that directly vary with output, e.g. wages and raw materials cost, this costs changes as the level of output changes.

When firms make decisions about whether to stay in business or shut-down, they only consider their variable cost’s and ignore the fixed costs. Here is why you see some firms making a loss but still stay in business in the short-run; If a firm is making a loss, but it’s profits are more than it’s variable cost’s, then the firm is better off operating at that loss level than shutting down, on the other hand if a firm is making a loss that it’s profits are less than it’s variable cost, then the firm is better-off by totally shutting down. The technique behind the analysis here is the fact that firms have to pay the fixed cost in the short run regardless of either they produce or shut down, so if they shutdown their business in the short-run they make a loss equal to their fixed cost, now if they are making a profit that is more than their variable cost, then they can pay the difference towards reducing their fixed cost (which they would have to pay for in full otherwise). Here is the trick, firms pay their fixed cost regardless of whether they produce or not, so it makes business sense when ever a business is making a profit more than its variable cost to stay operating in order to minimise lost.

The idea of firm decision making is better explained with an example; consider a Sole trader who operates’s a convenient store in downtown New York with the following costs;

One year property lease @ $2000/month

Wages of two employees @ $1500/month each

If the traders monthly revenues are $4000

Then the Traders monthly profit/loss statement will be as follows:

Total Revenue	4000
Minus Expenses:
Variable Costs:
Wages employee A	1500
Wages employee B	1500
Profit Before Fixed Cost	1000
Less Fixed Cost:
Rent	2000
Net Profit:	-1000

Now this trader is definitely making a monthly loss of $1000, the interesting question is should s/he shut down? And the answer is no! The trader should operate at a loss of $1000 in the short run. If he chose to shut down, here is what is going to happen, he will be  paying the rent of $2000 because this is fixed regardless of whether he sell or not, remember he signed a one year lease contract, normally businesses pay their rent in advance. However the firm should just shut down anytime the revenue goes below $3000, because his profit won’t even cover his variable cost, it’s left to the reader to change the total revenue to any amount less than $3000 and observe what happen to the profit/loss at that level. At any level of total revenue less than $3000 the trader will be making a loss more than his rent of $2000/ month, hence it’s better for him to stop trading and only pay the rent in the short run than incur a cost more than $2000 when he could do better.

It’s due to this reason that you see that some firms leave the industry so quick once loss hits whiles others in same industry continue operating while still making a loss. The nature of a firms cost determines when to exit the business and this is at any point where profit is less than variable cost.

I have be talking about short-term all along this article, but what do I actually mean by short-term? In economics short term is referred to as the time period within which at least one input of production is fixed and cannot be changed (In order words no specific time period attached to it). These is a very important definition with regards to firms exit decisions, because once all inputs are variable and can be changed, then it doesn’t make any sense for a firm to  operate a business at a continuous loss. Let’s revisit our previous sole trader example, if this guy can re-transfer his Lease (re-rent) to a third party, then it is no more a fixed cost and then he will be better off by just shutting down and make zero profits, however in general we don’t expect such processes to be very immediate, hence the name short-term.

If firms are making a loss, but their revenue is greater than their Variable cost, they will continue to operate until they can get rid of their fixed cost, this take different times for different firms, since every firm have different cost structures, that’s why we witness the shut down of Blockbuster  happened so quick when sales dwindle. 

“An Economist is a man who states the obvious in terms of the incomprehensible”

Alfred A Knopf.

Dangers of the single story

I found this speech by Chimamanda Adichie on Ted quite inspiring and fascinating and thought it's worth sharing.

Enjoy!

Credits:

Chimamanda Adichie

Ted Talks.