Great Expectations and the Law of Unintended Consequences

Great expectations! well we all have them, life is after all nothing but that. However,
unintended consequences, more often than not, follows close upon the heels of the
strategies we employ to manifest such great expectations. Simply put purposive actions
taken by people while possibly resulting with the intended outcomes, also cause
unintentional impacts: some good, some bad. Economics is very much concerned with both
visible and the intended impacts as well as the unseen (or invisible) impacts stemming from
an action, event or policy. The term introduced first by the great philosopher John Locke
himself, took the form of a defined concept later and gained popularity after the release of a
paper by Robert Merton -the 20th century sociologist, titled “Unanticipated Consequences
of Purposive Social Action” in 1936.

The “Law of Unintended Consequences” describes unplanned yet consequential impacts of

an intended planned action. Three types of such unintentional consequences have been
identified:

 Unexpected benefit
 Unexpected drawback – a new problem that may arise
 Perverse result - a result that defeats and has the opposite effect of what was
intended

This needs no further explanation to us Sri Lankan’s whose whole sociopolitical economy
and history seems nothing but a series of Unintended Consequences caused by actions of
our great leaders, pre and post Independence, from Kings to Prime Ministers to Presidents
past and present who put self interest ahead of the country and its people. And always
embarking on the wrong strategy and the fast lane to ensure power to oneself and
miscalculating long term “unintended consequences”. Our leaders have erred so much in
their judgement so much so that we even have an idiom that loosely describes this
mannerism “Inguru deela miris gattha vage” (like trading ginger for chilli) which describes
the unintended consequence that followed after the King of Lanka invited the Dutch to get
rid of the Portuguese. We all know our history so no need to get into what followed next.

Merton also describes a “Imperious immediacy of interest” where identified, yet

unintentional consequences are wilfully ignored in the pursuit of the intended consequence.
Some in the modern world call this “collateral damage”

Which brings us to today, with Sri Lanka having no government in office. Whatever the
intentions and great expectations of the Executive President who embarked upon the then
constitutionally questionable and now post Supreme Court ruling, deemed constitutionally
illegal, path of regime change the collateral damage was “democracy” and the result of the
fall out is clear: some having an unexpected windfall, some facing unexpected drawbacks,
and perhaps overall a perverse result to all concerned, especially we the people and the
nation.

Political fallout’s and windfalls aside, an unexpected benefit has impacted the locals trading
in the capital market of Sri Lanka. The CSE has its idiosyncrasies amongst them is the fact
that foreign inflow and outflow of investment is one of the main drivers of our capital
market. The locals who have caught on to this use this over the years to their advantage.
Firstly, not being an efficient market with real price discovery possible and coupled with low
levels of liquidity, the market seemingly avoids major disasters because the majority of
shares are held by local insiders and institutions and thereby remain stuck in the market and
unable to make quick exists -nor do they wish to as there simply is no place to go. Thus, it’s
the free float that generally create volatility. There’s an insiders price and a market price.
Major lots are traded at premium prices and the smaller ones drives the day trades.
However, whenever major domestic disruptions occur in the market due to events occurring
in Sri Lanka’s sociopolitical economy -and they have been numerous especially during the
time of conflict, the foreign institutions do not have a true grasp of the impact, nor the
gumption nor necessity to stick around. And they practice a when-in-doubt, do-without
methodology and choose flight over fight, and exit the market not necessarily at the right
time nor right price.

The insiders and local institutions cautiously treat such disruptions as a temporary setbacks
and mainly not having the choice, capacity nor instruments to allocate risk elsewhere, hold
back reactions to the last possible minute. Thus its the foreigners who exit the market at the
at the first sign of uncertainty or trouble under. This creates an opportunity for local High
Net Worth individuals and institutions who have better insights into the brewing situation
and some take this opportunity to replenish their positions and buy back from the exiting
foreign funds at prices that are more palatable than before or at a lower premium.

Thus at every turn of foreign outflow ( ie: selling out ) the locals watch it happen and wait to
buy in when the hard to come by large quantities or premier counters are come on offer
and get ready for the next great upswing.

We the people of the Sri Lanka’s capital market are quite resilient and court disaster with a
knowing smile on our faces and wink to our brokers, and happy to buy as and when the
foreigners jump ship in sheer panic. Which is why the market has held steady so far despite
foreign out flow, as the local market has readily absorbed it. The local market players -just
as the foreign fund managers, are admittedly aware of the possible danger lurking in the
form of downgrades, travel advisories, political uncertainties, elections etc, yet inherently
believe that this too shall pass, will blow over, sort itself out. Yes, one day it may not.

But not today.