Saturday, March 04, 2006

Irrationality is everywhere

A~ in his comments, had posted a link on a most fabulous article on - "The Crazy Math of Airline Ticket Pricing" - an insight on how airline seat prices have nothing to do with the distance of travel. The article reflects on the fact that, there are a number of reasons why airline ticket prices are priced the way it is. Surprising, distance is hardly a factor here.

The reasons have been enumerated here -
a) It's the demand and supply for a seat from point X to point Y which determines the price of the ticket.
b) Attract customers from other airlines or other modes of transportation like the railways
c) Offer discounted airline fares as a loyalty programme

The article says ... "The problem was that all the different pricing rules interact in ways that not even those who designed the pricing systems could begin to fully understand. Mathematically, this made the (idealized) problem of finding an optimal fare between two given locations undecidable, which means that it is impossible to write a computer program to solve the problem."

Linking this irrationality to some news stories from the stock market which have been featured in earlier posts -
1. Infomedia offered a buy-back offer of 245 rupees, on a day when the stock price was only 196 rupees. (The promoters could have just purchased back the shares from the market at 196 rupees)
2. Suzuki sold it's stake in TVS Motors at 16 rupees per share, while the market price at that time was rupees 90.
3. The HLL stock going down by 20% while P&G moved up by 10% - while both firms reduced prices by the same margin. (and HLL was more profitable with greater cash reserves)

Irrationality is everywhere .. in stock markets, airline industry, hotel industry ... even cricket !!! ... imagine Greg Chappell inviting inexperience youngsters to the side while Ganguly, VVS, Sehwag, Kumble might be sidelined - inspite of having better averages, better man-of-match performances per match, better strike rates and better experience. Debatable, but appalling.


Anonymous Anonymous said...

Hey! Shankar,
I guess, just like the airlines & hotels, where the intangible factors or the soft attributes plays an imp is the case with mkts...(not taking away the fact that markets are still inefficient and erratic)
some of the factors that might have played a big role in the stock mkts example could have been;
- mgmt trying to prevent a takeover or a proxy bid
- 16/share, now that really baffels me...
- Could have to do with the product mix and the contribution from those products to the bottom line.

What do u think?


1:30 AM  

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