00:00Our job, therefore, is not just to be a regulator coming and pulling up people who do things wrong.
00:07It is to ensure sustained capital formation.
00:11And there are two types of errors that we as regulators can commit.
00:16The first type 1 error is when we let bad things happen.
00:21So when a Harshad Mehta happens, when a Ketan Parekh happens,
00:25then we as a regulator take flack for this type 1 error.
00:29What were you doing?
00:30You were all aware that you were sleeping, right?
00:33And we as regulators are terrified of what the next type 1 error could be.
00:40So we are always guarding against that.
00:43However, there is a lesser known and lesser spoken of error, which is a type 2 error.
00:49Where in our zeal to prevent type 1 errors, we come with so much of regulation,
00:55we come with so much of stipulations that even good people stop doing business.
01:03That is a type 2 error, and we have to be equally guarded against type 2 errors as well.
01:10For capital formation, it's important that we minimize both these type 1 and type 2 errors.
01:15The easiest way to stop type 1 errors would be to close all markets.
01:21But that would not do well for capital formation.
01:25There is a third thing that we have to worry about,
01:28which is we are in the cusp of the nature of capital markets changing dramatically going forward.
01:35And I know these words are often spoken loosely,
01:39but the reality is with things like artificial intelligence,
01:43with things like quantum computing,
01:46and with things like what is possible in robotics,
01:49over the next 5, 10, 15, 20 years, I don't know what the time frame is,
01:53over these years, the nature of our economics is going to change.
01:57You know, people often say we overestimate change in the short run,
02:02and we underestimate change in the long run.
02:05I think we are in the midst of a massive change,
02:08a massive change in the nature of our business.
02:12Imagine if things are getting what we consume, goods and services,
02:16if they are being produced practically for free in a new world,
02:21what will be the nature of capital?
02:23What will be the nature of our capital markets ecosystem?
02:26Much of it is unimaginable.
02:28Why I am mentioning this is,
02:31as we try and understand what this new, brave new world is going to look like,
02:37and I think many of the young people here will define that world over the next 5, 10, 15 years,
02:42we have to make sure that we invent the future rather than be reacting to it.
02:49I can assure you, in 10 years' time, the nature of capital markets will be different,
02:54which means we have to take risks today to make sure we are part of the system
03:00that's creating the future rather than reacting to it.
03:05And again, as a capital markets regulator, along with the ecosystem,
03:09we have to ensure we are conducive to that.
03:12Now, let's come back to behavioral errors.
03:13There are plenty of behavioral errors that all of us, as individual investors,
03:20as people who see investors around us, are aware of.
03:24The first quintessential behavioral error is fear and greed and everything in between, right?
03:31That's what drives all markets.
03:34Another error which I've spoken about earlier is the error of overconfidence and overtrading.
03:39There is plenty of research, including one seminal one which I liked by Barber and Odeon,
03:46which shows that the more you trade, the less you make in the normal situation.
03:52I'm talking about normal human beings.
03:54I'm not talking about the Warren Buffetts, which are the exceptions of the world.
03:57And this fundamental premise that overtrading is not good for your investment health
04:04is something we all tend to forget.
04:08Third, we tend to not focus enough on asset allocation.
04:13We worry more about stock picking, timing the markets,
04:17listening to the next tip, and so on and so forth,
04:19where plenty of research shows again and again and again
04:24that these things, stock picking, timing the markets,
04:29account for a minuscule proportion of the difference in returns across portfolios.
04:35Bulk of the return of your investment portfolio is decided by your asset allocation.
04:42And normal investors tend to spend the least amount of time on that
04:46and the most amount of time on timing the market or trying to see
04:49which stock to buy and which stock not to buy.
Comments