Answer 1:

In both the cases, there was a boom in investments. Investors were

hugely attracted to run and grab a share of the pie. Thus the assets
became very lucrative for the public (Social Proof)
A consistent rise in the attractiveness led to the feeling of scarcity of
securities in the general public. This further led to an increase in the
demand.
South Sea Bubble refers to the speculation mania that ruined many
British investors. The bubble, or hoax, centered on the fortunes of the
South Sea Company, founded to trade (mainly in slaves), on the
assumption that the War of the Spanish Succession, then drawing to a
close, would end with a treaty permitting such trade. The company’s
stock sold well and there was an incredible boom in South Sea stock,
as a result of the company’s proposal, accepted by Parliament, to take
over the national debt. The company expected to recoup itself from
expanding trade, but chiefly from the foreseen rise in the value of its
shares.
By September the market had collapsed, and by December South Sea
shares were down to 124, dragging other, including government,
stock with them. An inquiry was ordered and the driectors of the
company were disgraced.
Tulipomania
The Tulipomania started in Europe in the 1600s. The tulip was a
favourite among the rich and influential of Holland and Denmark.
They would pay high amounts to secure these flowers and bring them
to Holland and Denmark. The rage for possessing them soon caught
the middle classes of society, and merchants and shopkeepers, even of
moderate means, began to vie with each other in the rarity of these
flowers and the preposterous prices they paid for them.
By 1634 the demand for the flower was so much that traditional
industries were ignored in order to sell this flower. As the demand for
these flowers increased so did the price and ultimately reached
astronomical. The price of a single bulb of tulip were worth small
fortunes and tales of travels show how people were punished for not
being able to pay for the tulip they used. Ultimately the tulip was
being bought for trading and investment purposes and the demand as
a beautiful flower diminished. People trading in the flowers were
becoming very rich and kept re-investing in buying and selling the
flowers. Once people realised the tulip was no longer in demand for a
use but rather as an investment to sell off they realised that the people
would be at a loss. The realisation led to many people backing out of
promised trades and the price of the tulip came tumbling down. The
courts would not intervene saying that they were not responsible for
gambling debt.

Finally, when the market corrected itself, the valuations came

crashing down and investors lost huge sums of money.
Answer 2:
The restaurant business in Manhattan can be described as a high
demand and high supply business, which seems lucrative from the
outside for an investor. But this industry has been characterized with
very low profitability as low as 3% operating income. Following are
some of the reasons associated with the failure of restaurant business
in Manhattan:
1. Highly developed area like Manhattan attracts investors and
entrepreneurs with the high demand side, but often the supply
side is overlooked. In Manhattan also, a lot of competition is
prevailing in restaurant business pushing the profitability of
such businesses.
2. Most people often overlooked the real returns of restaurant
business and do not have the actual figures about the returns and
prosperity. Thus, an average person tends to me more
opportunistic rather than being realistic.
3. The tendency to throw in extra money in a poorly performing
business like Manhattan restaurant thinking that the extra
investment will turnaround the business pushes them more
deeper.
The mental models which can be referred here are as:
1. Availability Bias: Just acting on the information provided easily,
that is, a lot of demand in Restaurant Business
2. Herd Mentality: This bias forces an average person to go with
the herd, that is, investing in a restaurant.
3. First conclusions: Concluding that restaurant is a profitable
business to invest just from the experiences of one or two
restaurant led him to invest in the business.

Answer 3:
The Peltzman Effect theory suggest that a person is more likely to
engage in risky behaviour when security measures have been
mandated. This theory suggested that when security measures are
increased, it pushes a person to take on additional risk which cancels
out the additional security provisions and maintain the overall risk.
Let’s take an example
High-end sports car dealers like to say brakes help the car go faster.
How can this be, when brakes are meant to slow a car down (or bring
it to a complete stop)?
The answer is that a world-class braking system makes it safer to
accelerate and top out at higher speeds. If you know that you can slow
down quickly and reliably, thanks to state-of-the-art braking
technology, you will feel more comfortable stomping on the gas
pedal.
In a strange way, then, a world-class braking system can make a
sports car less safe — because the driver is willing to take bigger
risks.
This effect can be incorporated in stock market as ‘longer the market
feels stable and prosperous, the more comfortable investors become
with taking on larger risks — and the level of riskiness keeps rising
until things become unstable’.
The Peltzman Effect can also be applied to institutions. For example,
there is a popular institutional strategy known as “target volatility
funds,” where a mix of assets is rebalanced toward a standard rate of
volatility. The reason target volatility funds can be dangerous is
because, when overall stock volatility has been low for a very long
time, this strategy will load up extra-heavy on stocks, even for
institutions that are highly sensitive to losses with a maandate that is
very conservative. This increases the risk of getting blindsided when
market volatility rises.
Answer 4:

YKK, the Japanese Zippers company can be characterized with high

quality and low-cost company, which resulted in it having more than
50% share of zipper market in the world. Firstly the main source of
low cost high quality for YKK is its in-house manufacturing the
manufacturing machines for zippers to producing the zipper boxes.
The vertical integration ensured consistency in quality as well as
supply chain management of YKK. Further some important aspects
affecting the performance of zipper business are:
1. Zippers hardly cost anything i.e. a few cents
2. The whole garment can be very costly and may be priced
thousand or greater time in comparison to zippers.
3. Unlike the price ratio, importance of zipper in a garment is
much high. As clearly stated by someone- ‘A zipper cannot
make a garment, but it can break a garment’
Thus, thinking around these lines, we can argue that zippers
manufacturers often command high pricing power if they can provide
the assured quality which provide them with a source of competitive
advantage in the market.
So, we can easily understand that zipper business is something which
creates very high switching costs for its buyers, that is, fashion
designers and garment businesses in this case.
Thus, we can attribute the high switching costs especially in YKK
case study to the following reasons:
1. Low price in comparison to the overall product price
2. High contrast effect, that is, there is a significance difference in
the quality of YKK and other producers and according to high
contrast principle, this difference gets accentuated, increasing
the switching cost for garment businesses
3. YKK, for decades now, has established itself as old reliable.
Sure, you could take a risk on some upstart competitor and
maybe save a little dough, or even get slightly better
performance. But if anything goes wrong your boss will wonder
why you didn’t opt for old reliable.
Answer 5:
Bayesian thinking is based on the fact that more can be known about a
physical situation than what is contained in the data from a single
observation or experiment. Bayesian methods can be applied to
combine the result of various studies and research to reach a
conclusion with less chances of being wrong. Bayesian thinking helps
us to understand base rates properly. If we don’t understand the base
rates, then we are going to make huge losses.
Let’s take an example:
A student belonging to commerce background or engineering
background is in the ratio of 1:5. Also, the probability of student
opting for finance specialization or not is 1:2.
Thus the overall probability of a student with commerce background
opting for finance specialization is 1/18.
Another example can be: We saw a man aged 80 smoking 2-3 packs
of cigarettes a day. From this, we conclude that smoking is not much
injurious for health,
Whereas, studies shows that the chance of living after completing 60
years for someone smoking is 40:60.
Thus Bayesian thinking helps us to make better judgements and
decisions otherwise we may have thought smoking is fine, but it
comes out as not when we applied the Bayesian thinking.