I was extremely lucky to spend more than one month in Mumbai seeking wisdom from a lot of smart value investors. Everyday I used taxi to navigate the city. Everything was going as planned until the taxi drivers went on a two day strike protesting against app-based taxi operators like Ola and Uber. No taxis were running on day one and I commuted the city by foot. Around 10-20% of the taxis were running on day two. And I was lucky to get a taxi. In order to understand the situation better, I started a conversation with the driver.
Me - What is the reason for the taxi strike? Driver - Before Ola and Uber I used to make around 1500 rupees everyday. Driver - After they came I am only making only 1000 rupees everyday. Me - Why is that? Driver - For every kilometer we charge around 15 rupees and they only charge 11 rupees. Driver - Customers can easily book cabs from Ola and Uber using their mobile phones. Driver - They're taking away our customers. So we're protesting against them.
Based on the information provided by the driver, I came up with the price comparison chart shown below. The chart accounts for the difference in minimum charges between Ola cabs and Taxis. Ola cabs charges 100 rupees for the first 4 kilometers and Taxis charge 22 rupees for the first 1.5 kilometers.
I didn’t jump to any conclusions based on the information provided by the driver. In other words I avoided first-conclusion-bias. To analyze the situation better, I stopped conversing with the driver and started an imaginary conversation, inside my head, with some of my role models. The first one who came to my active mind was Bruce Greenwald. I asked him, “Why are the taxi drivers losing market share to Ola and Uber?”.
To that he answered – “For a business to maintain its market share it needs to have a durable competitive advantage. And it stems from three sources (1) supply side advantages; these cost based advantages could come from a proprietary technology, access to specialized niche resources or an accumulated body of experience. (2) demand side advantages; these advantages occurs due to customer captivity which comes from the combination of habit formation + brand loyalty or due to high switching costs. (3) economies of scale; these advantages comes in businesses with high fixed costs and with high volume of sales the average cost per unit sold goes down.”
In the video given below watch from 7:00 to 8:50 minutes to see Greenwald talk about durable competitive advantages.
From his answer it’s very clear that taxi drivers have none of the competitive advantages. Also the new entrants are providing convenient booking for the customers and they’re offering the service at lower cost for distance more than 10 kilometers. This resulted in taxi drivers losing market share to Ola and Uber. But the total number of taxi drivers on the road are still the same. And each one will receive less than what they were making before.
After Greenwald, the next person that came to my active mind was Sam Walton. I asked him, “Why not prevent Ola and Uber from operating so that taxi drivers can operate by charging higher fares to their customers?” To which he answered
I think, of a group of people believing for some reason that they’re just entitled to take a piece of the action, no matter how little they contribute to the transaction or what it means to the customer. The argument is as simple as the small-town merchant controversy. If American business is going to prevail, and be competitive, we’re going to have to get accustomed to the idea that business conditions change, and that survivors have to adapt to those changing conditions. Business is a competitive endeavor, and job security lasts only as long as the customer is satisfied. Nobody owes anybody else a living. – Sam-Walton-Made-America
After Walton, the next person that came to my active mind was Charlie Munger. I asked him, “Should I tell the taxi driver about what Greenwald and Walton told me. And why protesting against Ola and Uber might not change the fundamental reality?”. To which he answered – “It’s very hard to get a man to believe non-X when his way of making a living requires him to believe X. And they’re losing marketshare which made them to operate in deprival super reaction syndrome. Any suggestions from you will make you a persian messenger and he’ll reciprocate his animosity towards you.”
Even though I was enjoying my conversation with my role models, I was restless deep inside. My amygdala was constantly scanning the road to see if someone is throwing a stone at the taxi. Before getting into the taxi, I read this news and the vivid images of broken glasses and a stone made me to behave that way.
Few days back I was reflecting on my fear and at that moment Daniel Kahneman came to my active mind. I asked him, “Of few thousand taxis that ran on that day one of them was hit by a stone. The base rate of getting hit by a stone is less than 0.1%. But on that day, I didn’t think using base rates. Instead I fell for a single story. Why did I fail to apply what I already knew?” To which he replied.
I visited Israel several times during a period in which suicide bombings in buses were relatively common— though of course quite rare in absolute terms. There were altogether 23 bombings between December 2001 and September 2004, which had caused a total of 236 fatalities. The number of daily bus riders in Israel was approximately 1.3 million at that time. For any traveler, the risks were tiny, but that was not how the public felt about it. People avoided buses as much as they could, and many travelers spent their time on the bus anxiously scanning their neighbors for packages or bulky clothes that might hide a bomb.
I did not have much occasion to travel on buses, as I was driving a rented car, but I was chagrined to discover that my behavior was also affected. I found that I did not like to stop next to a bus at a red light, and I drove away more quickly than usual when the light changed. I was ashamed of myself, because of course I knew better. I knew that the risk was truly negligible, and that any effect at all on my actions would assign an inordinately high “decision weight” to a minuscule probability. In fact, I was more likely to be injured in a driving accident than by stopping near a bus. But my avoidance of buses was not motivated by a rational concern for survival. What drove me was the experience of the moment: being next to a bus made me think of bombs, and these thoughts were unpleasant. I was avoiding buses because I wanted to think of something else. – Thinking, Fast and Slow
If Kahneman couldn’t think in probabilities then an average person like me has no chance. So I shouldn’t feel guilty about my behavior that day. In this post I took a real life experience and analyzed it using various mental models that is stored in my head. By doing that I was able to see the reality as it is. This is what Munger meant when he said, “You’ve got to array your experience—both vicarious and direct—on this latticework of models”.