Keeping stock of emotions 😶❓

India’s largest broker Zerodha is trying to nudge people into better behaviour

This is edition 313 of Beyond The First Order, a premium daily newsletter that demystifies the hidden models, incentives and consequences of the most significant events across India and Southeast Asia

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Good morning,

It’s no surprise that India needs more vaccine doses, and global pharma giant Pfizer wants to be the white knight. But it is time to look at the intentions of Pfizer. Stockbrokers that ride on emotions are popular, but it can come at a cost. 

Killing emotions

In March 2020, I’d exited all my stock investments as the first signs of the pandemic emerged. When the markets crashed, I was sitting pretty. 

But then I did something that I’ve always advised others against. I began to trade stocks using borrowed money or leverage from my broker. 

The thing with leverage is that it can magnify your gains. Imagine you have only Rs 1 lakh (US$1,347). But you can invest 5x that. You’re basically playing in the markets now with Rs 5 lakh (US$6,736). A 10% gain nets you a profit of Rs 50,000 (US$674). But your initial investment was actually only Rs 1 lakh. Do the maths. 

But it can just as easily go south when your trade goes against you. And when it does, your broker will ask you to put up more money (it’s a margin call). 

And before you know it, your lizard brain takes over. Rationality flies out of the window and emotions get the better of you.  Now you’re trying to make back whatever you’ve lost. And you could lose money that you didn’t even have. 

And, of course, India’s largest brokerage Zerodha knows this. In June 2020, in a blog post, the CEO Nithin Kamath wrote: “Here is the thing though: less than 1% of active traders earn more money than a bank fixed deposit over a 3-year period.” 

So what does Zerodha decide to do in an attempt to change people’s fortunes a bit? Here’s an excerpt from an email I received from them in the evening of 23 June:

We have just added Kill Switch as a new Nudge. If you’re making losses, this new feature helps with your trading discipline and risk management by allowing you to disable trading in one or more segments on Kite instantly. Once a segment is disabled, you can only re-enable it after 12 hours.

This is especially helpful when you're making losses because most traders tend to over-trade when making losses trying to recover the loss and losing more in the process. So, if you think you're over-trading or need a break, you can now just hit the Kill Switch and stop.

If you start to feel your emotions creep up while trading and you don’t have the self-control to step away from a bad run of trades, tell the investment platform to police you instead and lock you out for a while. Till sanity returns. It’s still manual intervention at this stage; so your mind still has to send a message to your trading finger to trigger the kill switch. 

But isn’t getting people to trade a big part of how Zerodha makes money? 

Yes. In an interview with The Ken in December 2020, Nithin Kamath said, “It is still primarily the day traders, who continue to pay Rs 20 per trade, who subsidise buy-and-hold transactions that are free.”

So, it could knock-off their revenues. But Zerodha, which is now a decade old, is facing competition from other players and is thinking beyond just pricing competitiveness. 

The thinking is that its product suite—a cloud-based trading platform, an ecosystem of financial products to aid the trading community—along with features like the kill switch is its competitive advantage or moat. 

This kill switch isn’t the first time Zerodha has nudged trader behaviour. We’ve mentioned earlier how they introduced a nudge to educate investors about ‘Rights Entitlement’ category of shares (BFO#286). It also introduced nudges earlier this month to warn people about the housing finance company DHFL that is going through a bankruptcy resolution process.

The philosophy seems to be that if you do the right thing by customers, they’ll stick with you despite a few hiccups now and then (it has constantly been on the wrong end of technical glitches). 

All this is a far cry from what you typically see other ‘free’ investment platforms do in the rest of the world. Robinhood—the super popular ‘free investment app in the US—is known for gamification of the wrong kind, replete with confetti and visuals that make you believe that you’re making money when you’re probably not, and getting into the crosshairs of regulators (BFO#189). 

For a market that’s still pretty much in its infancy, when a discount brokerage in India decides that things like behavioural nudges and better investment behaviour are what matter over things like confetti, it’s a good thing for traders and investors in the country.

PS: I lost money during my brief tryst with trading.

Does India need the big vaccine bully?

It has been six months since India launched the Covid-19 vaccination drive, but it has not been able to achieve a middle ground with US-based pharmaceutical company Pfizer for getting at least 50 million doses into the country. 

The elephant in the room that both negotiating parties are not addressing openly is the clause for ‘indemnity.’ It is basically a contract by which Pfizer is asking the Indian government to protect the corporate giant from any legal claims that may occur if someone decides to sue the company, for possible vaccine-related side-effects. 

India has not indemnified Serum Institute of India in case of the Covishield vaccine or Bharat Biotech for Covaxin as yet. 

Till 23 June, India has given out 300 million vaccine doses of Covishield and Covaxin combined. That is just 20% of its total target of procuring at least 1.56 billion doses to vaccinate 60% of its population – 780 million Indians with two doses each. Pfizer’s potential contribution of 50 million doses in the game is a drop in the ocean. And it will come with special benefits.

Pfizer’s history of dealing with South American countries who desperately needed the vaccine is proof of its bullying tactics, and time will tell if India will bow or respectfully exit the conversation. 

Only Dominican Republic’s contract with Pfizer to purchase nearly 8 million doses of vaccine for close to US$16 million is public. According to the contract, Dominican Republic was asked to give a full advance payment of the purchase amount. However Pfizer refused to take any liability for any adverse events that may occur due to the vaccine. 

And while that is expected out of an indemnity clause, lawyer Anand Grover observed that Pfizer was also seeking indemnity against failure to deliver doses on time. “It is so gross. If you read the contract they are sitting in a win-win situation, if they get one ounce, they will take a kilo of things,” Grover said at a panel arranged by Doctors Without Borders and Third World Network, to discuss the issue. 

Countries like Brazil and Argentina were left high and dry, because they refused to put their sovereign assets like government buildings as collateral, according to a demand made by Pfizer, for showing funds to cover potential liabilities. 

Experts urge the Indian government to look at issues that go beyond indemnity. 

Patients are the biggest victims of this deadlock. Even after the indemnity is signed for instance, Indian systems are not best designed to hand out compensations to aggrieved patients. “The difficulty is in showing causation of the vaccine to the adverse event. In India, individuals are not equal. It all depends on how well resourced you are to first figure out the causation and then fight the case out for compensation,” said Murali Neelkantan, a senior corporate lawyer. 

Concerns of safety are emerging in the US regarding mRNA vaccines—Pfizer and Moderna. But the US has a neat compensation plan and a history of meting out relatively fair hearings to patients. 

In India, causation is hard to prove when data is unavailable with patients. Currently the government completely controls the opaque system of determining if a reaction following the vaccine is directly related to immunisation. The patient or their representative has no voice in the determination of causation. 

We wrote about the fall-outs of shoddily managing Adverse Events Following Immunisation (AEFI) data here. Vaccination at times can cause side effects, some of which are fatal. Local, state and central governments maintain data of such cases at every level. Even pre-pandemic, India has had a history of not transparently releasing data or details of persons who suffer from fallouts of vaccinations.

While Pfizer irons out the indemnity bottleneck with India, it will also be incumbent upon the government to put its own house in order first and deal with AEFI. 

That’s a wrap for today.

Hope you’re taking care of yourself, staying socially distant, masking up, and washing your hands frequently.

We’ll see you on Monday.

Stay safe,
[email protected]

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