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It's Only Words

As the RBI and the Government's statements on the rupee show, fuzzy language contributes to fuzzy thinking and policies...

Linguists and psychologists say that language influences thought and perception. This is supposed to be so at the level of the language itself (say a Japanese speaker thinks differently from a Spanish one) but also within a language, dependant on the kinds of words and phrases that one chooses. The idea is that the words you choose don't just reflect what you're thinking; they also influence what you are thinking. While this is probably true of all kinds of conversations and writing, I notice it a lot in the way people talk about investments.

One of the strangest things that I've noticed is that over the last two decades, the common meaning of the word 'volatility' has changed, probably driven by the business media and financial salesmen. Technically, volatility is a measure of how much a value varies over a period of time. As commonly understood by investors, it used to mean fluctuation. If a stock price rose and fell a lot, it was commonly said to be volatile, even if stayed at roughly the same level. However, somewhere along the line, the common meaning has been changed to simply falling. If a price or an NAV falls, people wring their hands and blame 'volatility'.

In recent weeks the Reserve Bank of India has also displayed the same problem while talking about the rupee. Not just volatility, the central bank has shown an equally worrisome tendency to play fast and loose with some other words, notably, 'stability' and 'temporary'. Over the same period, the Prime Minister and the Finance Minister of country also committed the same violence with the same words while talking about the same topic, namely the decline of the rupee and interest rates.

The result has been a fog of confusion about how the bank perceived the problem and exactly what was being done to solve it, and indeed, what was viewed as a solution by the bank. It was all a huge contrast with another recent statement by another central bank, which was Ben Bernanke's 'tapering' statement last month. Even though the global markets just grabbed the word tapering and ran with it, what Bernanke said was a precise definition of economic conditions, which, if they occurred, would lead to tapering, over a timeframe which he defined.

The RBI's and our government's fog of words makes a sad contrast. The RBI said that it was taking certain measures which were intended to curb the rupee's volatility. These measures were temporary and would seize when stability returned to the rupee. Everyone took this to be the new distorted meaning of volatility, meaning that when the rupee stopped falling they would cease. A couple of weeks later, while the RBI announcing the monetary policy, a mediaperson pointed out to the governor that the rupee was still falling. He asked a colleague to answer, who pointed out that the actions had succeeded because the daily range of the rupee has come down from 80 paise to 15 or 20 paise. This was bizarre because contrary to everything else, this defined volatility as just the daily range!

To my mind the problem is that having only a fuzzy definition of words actually leads to fuzzy thinking and fuzzy actions. In the case of investment advisors and analysts, who originally redefined volatility, it was used as a euphemism for an investment doing badly. Did you recommend a bunch of dud stocks that are now falling, probably never to rise again? Tell the client/reader, "It's just volatility." Pretty soon, you forget that there are investments that actually are lemons--it's all volatility. It's exactly the same with the Indian establishment. The rupee is sinking and it'll keep sinking for a while because it's a symptom of the economy's fundamentals. Fine, so let's just keep calling it volatility and act like that's what it is and eventually we might start believing that.