On the Occam’s Razor

It is easier to predict how people will react to a positive event vs. a negative event.

If you find a friend who’s crying, s/he has more likely gone through a negative event than a positive one.

One would often observe complicated interpretations of how others are behaving and feeling based on our own past experiences under similar circumstances.

These are what you would call a lay theory.

There are all kinds of lay theories with respect to race, personality, mind etc.,

Successful people who communicate clearly are for example, often seen as paragon of wisdom.

Similarly social background, color etc., is used to attribute behavior.

These are short-cuts that we apply because they are easier to use and understand.

The beauty of a lay theory is that you can use it in multiple ways-both to ascertain cause from effect and all the way from effect to cause.

Why are we talking about it?

There are conflicting signals all around us.

You see a friend crying and can fairly assume that the friend had a negative event but for all you know it was a pleasant one that overwhelmed the friend into crying.

Using short-cuts can often even send you in the direction of wrong conclusions.

Think about some statistics below

Record Goods & Service Tax collections in IndiaConsumer Inflation at 7.79%
Record overall tax collections in FY-22-25% more than estimates by the Govt. of IndiaWholesale inflation @ 15%-companies not being able to pass on cost to consumers
1st time in history India touched over 400 Bn USD in exportsCurrent Account deficit at multi-year high
Domestic air traffic up 59% YoY as fares rise 40%India unemployment at 7.83%
Home sales up 35% in FY-22Increasing interest rates might dampen home sales in FY-23

These are conflicting signals.

Are we doing better or are getting worse?

The Occam’s razor

The Occam’s razor also known as the law of economy tells one to go for the simpler explanation.

For example-Did I get a tire puncture because of a mail or did someone slash the tire.

The simpler and probably, the right explanation, majority of times is that a nail caused the puncture.

When you go with the slash explanation, you are making too many assumptions.

You can always investigate more, however the simpler explanation is more likely the correct one.

Now when you look at the above table, there is somethings that have happened in the near past and then there are others that will probably impact how things shape up in the upcoming future.

You are more likely leaning towards a tough time ahead if you consider the twin impact of, inflation that is high and as per the Reserve Bank of India will remain above their range for most of part of the financial year, along with the rise in interest rates that’s going to hit the crucial middle class consumption in a high unemployment environment.

That simply speaking is more likely scenario that the positive one.

How to Deal with it?

This is what Jeff Bezos said when Amazon stock price feel to $6 during the dotome bubble burst:

“I had all the internal metrics on how many customers we had and I could see,” he said at the forum. “People thought we were losing money…. I just knew it was a fixed cost business, and as soon as we reached a sufficient scale, we would have a very good business.”

Knowing this concept, according to Bezos, was what kept him calm during the ups and downs.

“That understanding of the fixed nature of our expenses, relative to physical retail, is what led us to have the ‘get big fast’ strategy. We knew that our economics would be improved if we had sufficient scale,” he said.

Whether a recession comes tomorrow or not, you would keep going to work, keep giving your best to what you do.

You would have your family around you.

Good businesses will continue to invest in their businesses and prepare for the future.

However, your patience will be tested, and you will at times need nerves of steel.

But remember when all of this has passed and things are again bright, you will feel good that you didn’t lose the way.

No amount of regret will help if you freeze right now, thinking about the current damage instead of focusing on how to create a better tomorrow.

So, Stay the Course-

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