Vivek Kaul: Sharma ji ka beta and the economics of imitation

However, there's a catch with this counterfactual. Given how subjects are taught in Indian colleges, studying economics and history might have drained my interest in them, just as it happened with mathematics and information systems, steering me in yet another direction. So, as the saying goes, all’s well that ends well.

In the early to mid-1990s, when I had to choose a subject to specialize in, for a stable career, pursuing an engineering degree was what was expected of me. My maternal grandfather had his heart set upon me becoming an engineer. He is an engineer. So are his two sons-in-law and his two younger brothers. I took the path of least resistance and decided to sit for engineering exams.

Now, do remember that these were the pre information technology boom days, and engineering colleges were yet to sprout up left, right and centre, so, getting into a good engineering college was tough. It needed a lot of hard work and preparation.

But my heart was never in it: I was enjoying college life a little too much; watching movies first-day-first-show was more important for me than preparing for engineering exams. Not surprisingly, I didn’t clear any exam.

Now, that was a time when if you did not make it on the first attempt, you dropped a year, prepared all over again, and wrote engineering exams a second time. I didn’t make the same mistake twice given that I had figured out that it would involve too much hard work, something I wasn’t capable of, in the process disappointing my maternal grandfather, who is 96 now, and probably still hasn’t forgiven me for not becoming an engineer.

As the IT boom took off in the late 1990s, the number of engineering colleges and engineering seats available in the country took off as well.

In a reply to a question raised in the Rajya Sabha in November 2002, the Union government said 295,796 engineering seats were approved by the All India Council for Technical Education (AICTE) were available in the country. In August 2006, again in a reply to a question raised in the Rajya Sabha, the government said the number of AICTE-approved engineering seats in the country were at 539,105.

This number shot through the roof in the next few years. A September 2021 newsreport in The Print pointed out that this number had jumped to 2.69 million in 2012-13 and further to 3.18 million in 2014-15.

A major reason for this jump lay in political entrepreneurs, particularly in the states of Maharashtra, Karnataka, Tamil Nadu and the erstwhile Andhra Pradesh, jumping in to start engineering colleges to be able to cash in on the IT boom. And as happens in any boom, the entrepreneurs ended up overdoing things.

Suddenly, there were more engineering seats than the economy could absorb. Also, not surprisingly, the quality of engineers being produced by these new engineering colleges wasn’t really up to the mark.

There were more than a few reasons for it. Indeed, the quality of students getting admission left much to be desired. By the late noughties (the first decade of 2000s) and the early 2010s, the phenomenon of Sharma ji ka beta or the Aiyar sahab ka ladka—almost always a boy—was at play.

Parents wanted their children to pursue engineering degrees because they had seen someone they knew—who hadn’t even attended a top college—land a job at an IT company and eventually move to the US. Doing what the Sharma ji ka ladka had done, they thought, was the ticket to prosperity: a one-way ticket to the moon.

This was the Indian IT dream that led to the sprouting of engineering colleges left, right and centre, and it was fuelled by imitation or wanting to do what someone else had already done and seemed to have made a success out of it.

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Now, it’s one thing to buy land and build a building, and it’s yet another thing to get the right faculty and infrastructure required to get a good engineering college going. As my father has often pointed out, some of the equipment they had in their engineering college in the late 1960s and early 1970s was not available in many of these newer colleges in the late 1990s and the 2000s. So, the quality of the students coming out of many engineering colleges wasn’t really great, as has been pointed out in umpteen number of surveys over the years.

But it didn’t matter. At least not initially, because IT companies were happy taking them all and training them to be job-ready. There was a time when one large Indian IT company would come on campus and recruit almost everyone who hadn’t found a job up until then. Those were the days.

That’s the thing with any pyramid scheme—like the race of life is: the earlier you enter it, the greater are your chances of earning higher returns and making a success out of your investment, be it in educational terms or financial terms.

This is exactly what happened to many engineers who graduated in the late 1990s and the 2010s, even those from the less prestigious engineering colleges.

Such was the demand for engineers that they found work and ended up being successful and becoming role models, like the stereotype of Sharma ji ka ladka. Of course, I am speaking in very general terms here, but, dear reader, I know you get the drift.

But like all good pyramid schemes, this one also came to an end. When the number of engineering seats increased, and the number of engineering students went through the roof, there weren’t enough economic opportunities to ensure that a good chunk of those students was recruited.

Look at the following chart based on data sourced from a question asked in the Rajya Sabha in July 2018.

We know that the number of engineering seats in 2014-15 stood at 3.18 million. Of these, many seats would have gone vacant with students not enrolling, and even among those who did quite a few would have failed the course. Numbers from the above table suggest that about 760,000 students graduated in 2014-15. Of them, only about 335,000 found a job on campus after graduating.

So, not surprisingly, gradually the realisation set in that getting an engineering degree from a not-so-good engineering college was no longer an assured path to success. Given this, the number of engineering seats in the country has been coming down, with engineering colleges shutting down or simply reducing seats.

The Print report referred to earlier points out that the number of engineering seats in India in 2021-22 had fallen to about 2.36 million, which is still more than what the Indian economy needs. Demand created supply. And then the lack of demand for the new large supply has been destroying supply.

Nonetheless, the point I really want to make here is that how soon you enter any pyramid scheme determines the kind of returns you are likely to make from it.

And that imitation is very strong social force influencing people to make decisions that they do. As Luke Burgis writes in Wanting—The Power of Mimetic Desire in Everyday Life: “Humans learn—through imitation—to want the same things other people want… Our power of imitation dwarfs that of any other animal… At the same time, it has a dark side. Imitation leads people to pursue things that seem desirable at first but ultimately leave them unfulfilled."

Like it happened to so many engineers who became engineers because of the Sharma ji ka ladka phenomenon and who ended up with degrees but next to no job prospects. And this is not only true about engineering degrees.

Over the years many multi-level marketing (MLM) companies have been launched. And many individuals have tried to become rich by investing in them. These companies have a pyramid structure.

As Ben McKenzie and Jacob Silverman write in Easy Money—Cryptocurrency, Casino Capitalism, and the Golden Age of Fraud: “An MLM—also known as networking marketing or relationship marketing—is a business model predicated on existing members recruiting new ones in order to sell them stuff. Someone comes up with a product, then recruits others to sell it to even more people. It’s important to understand that in an MLM, if you join as a member, you are required to purchase the product to demonstrate its usefulness to others."

On the face of it, this sounds quite simple. You become a part of the MLM scheme. Buy their products. And sell them on to newer members who buy products from you and try to sell them on by adding still newer members. This is how it works.

In fact, imitation is an essential part of becoming a part of any MLM scheme. You see someone who has already entered the scheme. And they seem to be making good money from the scheme, or at least they pretend to.

They then take you to a conference organized by the MLM company at a local hotel. On the stage are legends of that particular MLM scheme who have made tonnes of money from it. An emcee is seen talking up these legends. And these legends then talk up the MLM scheme, with the basic message being that if they could do it so can anyone else.

But no one tells you what level of the MLM hierarchy you are on. Like no one told those students getting into mediocre and terrible engineering colleges that they were too late to the game. As McKenzie and Silverman write: “Jon M. Taylor studies MLMs… His 2011 paper ‘The Case (for and) against Multi-level Marketing’ analysed more than 400 such companies. He observed that the vast majority of commissions paid by MLM companies go to a tiny percentage of TOPPs (top-of-the-pyramid promoters) at the expense of a revolving door of recruits, 99 percent of whom lose money."

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The TOPPs are the Sharma ji ka betas of their MLMs, who think that just because things worked out well for them by doing what they did, the same is going to be true for everyone else. That’s one explanation. Or they understand how any pyramid scheme works—where it’s necessary that newer investors keep coming in and keep paying the older ones—so they are simply lying.

Now, dear reader, if this dynamic sounds similar to the crypto mania that hit us a few years ago, I don’t blame you. If you were high in the crypto hierarchy, like only a very few were, you would have made good money from your investment. As McKenzie and Silverman write: “In the case of crypto, the TOPPs are influencers, celebrities, VCs, crypto company executives, and other insiders. They are the industry’s 1 percent, and everyone else is overwhelmingly likely to lose, often through no fault of their own."

The moral of the story being that imitation mixed with a pyramid structure can be really deadly.

Financial influencers are the Sharma ji ka betas and betis of the current era. They have influenced thousands of youth to take on trading in derivatives as a more-or-less full-time activity. The message being sold by these new age Sharma ji ka betas and betis is that it’s very easy to make money from trading stocks and derivatives based on stocks.

This imitation of financial influencers has cost people dearly. As a report recently released by the Securities and the Exchange Board of India points out: “During FY22-FY24 [from April 2021 to March 2024], 1.13 crore unique individual traders incurred a combined net loss (i.e. trading loss inclusive of transaction costs) of ₹1.81 lakh crore in futures and options. In FY24 [from April 2023 to March 2024] alone, Individuals incurred about ₹75,000 crore in net losses."

In that sense, these traders losing money are like the students going to engineering colleges because someone they know did that and made a successful career out of it. But then it’s never as simple as that.

The billionaire hedge fund manager George Soros writes in The New Paradigm of Financial Markets: “Nothing is quite as profitable as investing in an early-stage bubble." Now, bubbles are by far the best example of a pyramid scheme built because of imitation, where newer investors try to invest like older investors have, and in the process drive up prices and help the older investors earn a good return.

The examples shared in this newsletter, everything from the engineering bubble to the MLM bubble to the crypto mania to the successful financial influencers who entered the game early show us that.

The trouble is that Soros doesn’t clearly tell us when a right time is to sell out while riding an investment bubble. As his son Robert once told biographer Michael Kaufman in Soros—The Life and Times of the Messianic Billionaire: “My father will sit down and give you theories to explain why he does this or that. But I remember seeing it as a kid and thinking, Jesus Christ, at least half of this is bullshit. I mean, you know the reason he changes his position on the market or whatever is because his back starts killing him. It has nothing to do with reason. He literally goes into a spasm, and it’s this early warning sign."

Dear reader, the next time you get that back ache…

Finally, it is important to understand why people imitate. At its most basic level, imitating is taking the easy way out, given that thinking through an issue is hard, very hard. John Kay and Mervyn King make this point in the context of organisations in Radical Uncertainty—Decision Making For An Unknowable Future: “Decisions are made on the basis of what is easiest to justify rather than what is the right thing to do. ‘No one ever got fired for buying IBM’ was for long a mantra among mid-ranking executives, and a crucial factor in the success of that company’s technically unremarkable personal computer."

It’s just easier to imitate what others are doing and go with the herd. For a while it makes sense. At a personal level, after I didn’t end up in an engineering college, my BSc took four years to complete instead of the usual three, because universities in Bihar would run late at that point of time. Then it took me another year to get into a business school. Those were difficult years personally, when my friends ended up in engineering colleges but I didn’t.

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So, imitation does make sense, at least for a while, until it doesn’t. Like it did to the engineering students in the 1990s and the 2000s, until it didn’t to those engineering students in the 2010s.

Or like it has to everyone who continues to bet big on many midcap and smallcap stocks whose valuations continue to be very high. Indeed, those who have called out these high valuations have ended up looking stupid, as prices continue to move higher. It would have been easier for them to simply continue to imitate others. As James Surowiecki writes inThe Wisdom of Crowds: “The striking thing about herding is that it takes place even among people who seem to have every incentive to think independently, like professional money managers." 

To conclude, as the British economist John Maynard Keynes wrote in The General Theory of Employment, Interest, and Money: “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally." 

So, going with the flow was and is the order of the day.

I guess that’s the long and the short of it. My grandfather would have loved me becoming a senior executive working for an Indian IT company in New England, making money in US dollars, showing him pictures of snow filling up the front yard of my house in winters, and coming back to India every year during summers bearing gifts bought from Walmart and Costco. This kind of job would have been easier for him to explain to his friends and relatives. And that would have meant success for him, with thephoren tag flying.

But here I am sitting in Mumbai on a balmy afternoon, waiting for the season’s last rains to come, and writing a piece about what has gone wrong with my life, or possibly right. The question is whom am I imitating: Who is my Sharma ji ka beta?

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