UNCUT GEMS

AN ECONOMIC REVIEW
CREATED BY

S.ADITYA 2K18/CO/305
RITIK AGRAWAL 2K18/CO/294
ROHAN CHANDANI 2K18/CO/297
SAMBHAV JAIN 2K18/CO/313
RAHUL SRIVASTAVA 2K18/CO/277
RAHUL KUMAR JHA 2K18/CO/273
RISHABH CHAURASIA 2K18/CO/291
SANKHAYA SINGH CHANDEL 2K18/CO/321
RAMANSH GROVER 2K18/CO/281
THE TOPICS WE COVER

 Financial Leverages

 Marketing and Push and Pull Strategies

 Classification of Consumer Behaviour

 Shill Bidding

 Debt Traps

 Tipping Points of Consumers

 Income Pyramids
BUT BEFORE THAT, A BRIEF MOVIE SUMMARY

“ A charismatic jeweler makes a high-stakes bet that

could lead to the windfall of a lifetime. In a precarious
high-wire act, he must balance business, family and
adversaries on all sides in pursuit of the ultimate win
while auctioning, and betting. ”
CETERIS PARIBUS, LET US START
FINANCIAL LEVERAGE
A LESSON INTO FINANCE
LET’S PUT FORTH SOME KEY POINTS

 Let us start from the beginning of the movie: What are the source of revenue that Howard expects to
generate:
 Sale of the Opal (i.e. the Uncut Gem) at an auction (expected to sell at $1 Million)
 Profits from gambling on NBA Games (expected to be > $500,000)
 Profits from his jewelry store (constant income)

 For the discussion we shall only consider the second revenue generator ceteris paribus, since that is
the revenue that depends on how much of a bet is placed (i.e. amount of initial investment made)

 An important concept here is of Financial Leverage

DEBT AND EQUITY

 Whenever we establish a business, there is a need for an initial investment. More often than not, this investment is obtained
through the form of DEBT or EQUITY.

 WHO ARE DEBTORS?

Entities who agree to provide you certain sum of money, expecting you to pay back that amount after some time, along with an
interest.

 WHO HOLDS EQUITY?

Entities who agree to invest in your business in return for certain percentage on profits earned

In this movie, Howard’s brother in law is the debtor, while Howard himself holds the majority share of his shop.
WHAT IS LEVERAGE

 In the movie, let us say that his jewelry shop is the asset he has (and assume it is worth $1 Million). Let us
pictorially represent this.

ASSETS AND RETURNS FINANCING

KMH Jewellery Shop Equity

$ 1 Milllion (his own money)

Profits (assuming he earns all the expected Loan

profits) (someone else’s money)
$ 500,000
WHAT IS LEVERAGE

ASSETS AND RETURNS FINANCING

KMH Jewellery Shop Equity

(his own money)
$ 1 Milllion
Let us assume he invests $ 1 Million into his
equity
Profits (assuming he earns all the expected Loan
profits) (someone else’s money)

$ 500,000 Let us assume he doesn’t loan any money

RETURN ON ASSET = 50% (Profits/Asset Worth)

RETURN ON EQUITY = 50% (Profits/Equity)
NOW, ASSUME THAT HE FINANCES PART OF HIS INVESTMENT FROM
A LOAN
ASSETS AND RETURNS FINANCING

KMH Jewellery Shop Equity

(his own money)
$ 1 Milllion
Let us assume he invests $ 800,000 using
equity
Profits Loan
(someone else’s money)
$ 500,000 - $ 40,000 (assuming 20%
interest) … and takes $ 200,000 as loan

Net Profit = $ 460,000

RETURN ON ASSET = 46%
RETURN ON EQUITY = 57.5%
 OBSERVING TRENDS

 Let us try to plot the Return on Equity along the dependent axis (Y) and Loan Amount on the independent axis (X)

 We see the following trend (assuming a 20% interest on loan)

Return on Equity trend with Loan Amount

700

600 We see that, as Howard

500
increases the amount of loan he
Return on Equity (in %)

borrows, the return on his share

400 of equity increases significantly.
300
Perhaps, this explains why
200 Howard was so keen to simply
100
borrow more money.

0
0 200000 400000 600000 800000 1000000
Amount of Loan Borrowed ($)
THE CATCH

 We make a very speculative assumption. The question remains whether Howard will win the bet at all.

 What happens when instead of posting a profit, he posts a loss (of even $1) on the bet?
 Howard’s equity crashes (he either has to put in more money or simply go bankrupt)
 The loan shark (his brother and others) take control of all assets
 More often than not, the loss for each party is too much to recover
OUR TAKE ON LEVERAGE

❑ It is a good financial strategy if you can minimize any risk of posting a loss, i.e.

• “Leverage can multiply your gains…….and wipe out equity in case of an unexpected loss”

❑ Always quantitatively foresee the situations (of both profits and losses) while taking on more amount of
debt

❑ As a personal finance tip, never exceed 40% on the debt-income ratio.

MARKETING AND PUSH/PULL STRATEGIES
CONCEPT FROM SUPPLY CHAIN AND MANAGEMENT
DEMAND DOESN’T EXIST? LET’S CREATE IT

 While running any business, one requires marketing. Marketing in its most simple term means the promotion of any
business activity (buying/selling).
 To market, people either “pull” people to their business, or “push” them towards their business. To give an essence
of what is a pulling and what is a pushing strategy, let us look at the classification below.

PUSH TACTICS PULL TACTICS

Any tactic that causes a third party to Any tactic that results in consumers
stock up on your products demanding your product from retailers
Video on your product Advertising

Demonstrating product Viral Marketing

Asking retailers to buy a surplus Word of Mouth/Social Media

DEMAND DOESN’T EXIST? LET’S CREATE IT

 In the movie, we observe that initially there was no interest for ‘Black Opal’ that Howard Ratner imported from the a
mine in Africa.
 However, when Howard's business associate Demany brings basketball star Kevin Garnett to Howard’s store,
Howard starts hyping the gem up and starts explaining about the luck it brings to the one who owns this precious
gem.

 In this way, Howard is actually executing in anticipation of an order from Kevin Garnett => Push Strategy
 Eventually, Garnett becomes obsessed with it, insisting on holding onto it for good luck at his game that night. At the
game he performed well and his team won.

 Then, Garnett offers to buy the gem. Howard acts in response to Garnett’s order and sells it => Pull Strategy
IF I RUN A BUSINESS, SHOULD I USE PUSH OR PULL STRATEGY?

 As a marketer, your first priority is to make your prospects aware of your goods or services.

 If you are a new company with minimal visibility or an established company with a new product offering, a push
marketing strategy might be best. Once users have identified a need, you can implement pull marketing.
 Also as we identify in the movie, push marketing is more suited for immediate interactions rather than building
lasting relationships.
CLASSIFICATION OF CONSUMER BEHAVIOUR
A CHARACTER-BY-CHARACTER CLASSIFICATION
RISKS AND RETURNS

 Now let’s try to analyze each characters’ risk taking capacity and their expectation of rewards.
HOWARD

 He not only gave the black opal to KG for free for the match (just to gain his trust
and believing this would improve his relations with him), but also used the auction
money to bet on KG and multiply his profits, even when there was a threat to his
life.
 He did score big in the bet but at the cost of his life.
 Hence he is a high risk taker with high returns.
ARNO (HOWARD’S BROTHER-IN-LAW)

 He was positive that Howard would pay the money back, even after Howard didn’t
make much money in the auction.
 He could have stopped (forcefully) Howard from betting on KG with the money, but
his mind also changed when KG started scoring, and he was under the impression
that Howard would probably win the bet, and he’ll get a good share of the money.
 This ultimately did cost his life like in case of Howard.
 Hence he was a high risk taker with high returns.
MINE WORKERS

 Although appearing in the movie only for over a minute or two in the movie, they
too took a massive risk to find the black opal which Howard had ordered.
 They could have been caught and maybe imprisoned for stealing government
property.
 But they took the risk, found the stone, and also got a huge sum, which they could
never earn from mining.
 Hence they are high risk takers with high returns.
KEVIN GARNETT (KG) – THE BASKETBALL PLAYER

 He was desperate to get the stone, thinking this would affect his game in a
good way.
 His highest bet on the stone was $185k on the stone in the auction and
after the auction, bought it personally from Howard at $175k.
 He took a risk of $175k (the stone) to level up his game, but it was the luck
factor that worked and not necessarily the stone.
 Hence the total economic return is not much.
 Hence he took high risk with a low return.
PAWN SHOP DEALER

 The case with Pawn shops is peculiar.

 Although they have a regular customer inflow, the risk associated with each
customer is variable.
 Howard took loans from the shop in exchange of expensive watches and KG’s ring,
but there was no guarantee that the money will be paid back, which means the
shop had to auction it or sell it to other jewelers.
 Hence they took a medium risk and had medium returns.
SHILL BIDDING
A DUBIOUS WAY OF MANIPULATING AUCTIONS
AUCTION SALES

 Let’s say that you are a wealthy businessman and on you get to know that a piece of diamond cut out of the
Kohinoor is being auctioned at Sotheby’s. This catches your eye, and you head on to the Sotheby’s auction
house to make your bid and buy that diamond.

 The starting bid for that diamond is let’s say $40,000. You start off the bidding at the base price. After bids
have come in from across the room, only you and another person remain in the process.

 And you’ve the latest bid of $60,000.

Let’s see a little simulation of how the bidding might go in the next slides.
THE BID SIMULATION

 Current Bid: $60,000 made by you. At this price let us say that you will obtain the maximum
value/satisfaction/utility out of the product (Assume a value of 100%)

 The second bidder makes a bid of $70,000. How is your interest affected?

 Economics tells us that by the law of demand, that if we consider this to be a normal good, ceteris paribus,
as the price for the product increases the demand decreases. That is my interest is bound to reduce.

 Let us also assume that we keep on bidding till our interest is around 50% of the original interest. So, you
place a bid for $80,000, and now your interest falls to 80%.
THE BID SIMULATION

 So, you keep on bidding till your determined level of satisfaction is above 50% of initial satisfaction.

 Now, let’s digress a bit and move into the perspective of the buyer. You had bought the diamond from a
collector at $20,000 but now that you’ve knowledge about its origins, you came to Sotheby’s to sell it.

 You were expecting the bid to start at $80,000 and sell at around $120,000. Alas for you, the auction house
determines the starting bid. They appraise the diamond at a low $40,000.

 What do you do?

CAN’T CHANGE THE STARTING PRICE? LET’S INFLUENCE IT

 You can’t go to any other auction house since you’ve already paid a security fee. You can’t change their
starting price. So what do you do?

 You decide to influence the bidders by your knowledge. Knowledge of the Law of Demand taught to you in
your Economics lecture. You ask one of your acquaintance to sit in the auction. You estimate that the buyers
will be willing to purchase the diamond at $110,000 (a significant increase from the starting price)

 The role of your acquaintance: To keep bidding till a bid nearing $100,000 is reached.

 What do we achieve?
CAN’T CHANGE THE STARTING PRICE? LET’S INFLUENCE IT

 People will keep on bidding for the diamond till they’re satisfied with the price and a significant
demand is maintained in the auction room.

 What your stooge does for you is this: They keep on driving the bidding price till a point wherein
you are certain that a higher bid will be present. This is called SHILL BIDDING. The results of this
strategy can be as follows:
 The highest bid is of another person who buys your product at an optimal price

 The highest bid can be of your acquaintance and no other person is willing to go higher, in which case you
are at a loss (you lose the security deposit) and the diamond ends up back in your hand.
HOW UNCUT GEMS SHOWS THIS STRATEGY

1. Howard goes to Adley’s Auction House to sell his Opal for an expected amount of $1 Million. But Adley’s re-appraises his Opal for

$150,000. He has no option but to accept the updated value

2. Then, Howard uses his father-in-law to drive the bet higher to a cost where he supposedly knew Kevin (the basketball player who

wanted the Gem) would buy it.

3. Without his father-in-law the opal would have been sold for $150,000 but the bid runs till $200,000

4. The problem is encountered, when Kevin doesn’t bid the amount Howard expected him to, and the highest bidder for the diamond

becomes his own father-in-law.

5. He ends up in a significant loss along with the unsold opal.

DEBT TRAPS
HOW UNWISE FINANCIAL DECISIONS CAN INFLUENCE YOUR FINAL STATE
PAYING DEBT WITH DEBT

 Consider that you have a loan that needs to be paid, and many loyalty rewards to be gained by paying
using your card. What do you think? A wise decision?

 More often than not, it is an extremely unwise decision. This is showcased in the movie very aptly.

We’ll see how the movie does that in the next slide.
PAYING DEBT WITH DEBT

 Let us see the categorization of the loans first

LOAN SOURCE LOAN AMOUNT INTEREST RATE

Arno (brother-in-law and loan shark) $100,000 40% (Assumed)

Pawn Shop $21,000 Can buy back ring by paying 7% extra, else
(by pawning his customer’s ring) lose the ring

By selling watches of someone else, it $60,000 0% (not a proper loan)

converts to a lone

To his father-in-law who had financed his uncut $190,000 0% (not a proper loan)
gem
SUMMARY OF DEBT

 He has to pay back an amount of $140,000 back to Arno.

 To payback a part of it, he pawns (takes a loan) of $21,000 against a ring, of which he now owes the pawnbroker
$22,470.

 Further, in order to repay a past debt with a customer, he sells $60,000 worth of watches that belong to one of his
client, which now turns into debt.

 So, apart from the $40,000 in interest to be paid to Arno, he has now accumulated an extra interest of $1,470 with
the pawnbroker and approximately $10,000 to the watch owners. Hence his interest increases by 28.675%.

 This puts Howard at a precarious situation of landing in a debt trap.

DEBT TRAP

 When we are unable to pay back the amount loaned to us with the
interest due, it is called a Debt Trap
 A very easy way to fall into a debt trap is by defaulting on your loans,
or accumulating debts of varying interest rates, which can pile up over
a period of time, especially when your revenues don’t match your
owed amount.
TIPPING POINT OF CONSUMERS
TILL WHAT POINT ARE CONSUMERS WILLING TO RISK
TIPPING POINT OF CONSUMERS

 Let us first try to define something along the lines of a satisfaction cutoff.

 But before that, let us also define satisfaction to be measured in percentages. A 100% satisfaction would mean that
the person is completely satisfied with the purchase of the product at that price at that instant. On the other hand, a 0%
satisfaction indicates that the person is entirely dissatisfied with their product.

 Coming back to the satisfaction cutoff – A satisfaction cutoff is that value of satisfaction at which value the
demand/quantity demanded for the product drops down to zero. That is to say that if a person is having 𝑥% as satisfaction
cutoff, this means that this person, will not buy a product if their satisfaction drops to a value less than 𝑥%.

 Now let us move into the auction hall and continue our analysis there.
THE AUCTION HALL

 Let us imagine an auction hall, where there are identical people (having identical buying capacities) but having different
satisfaction cutoff percentages ceteris paribus.

 So now, let’s think about a histogram plot that plots the number of bidders in a particular saturation cutoff percentage range .

 On the independent axis (X), we are mention the satisfaction cutoff percentage, and on dependent axis (Y) we are plotting number
of bidders.

 The X-axis is divided into intervals, for eg. An interval of 100% to 90% will consist of people who will not buy a product even if their
satisfaction level falls to 89%.

 Can you guess how the histogram will look?

THINKING ABOUT THE GRAPH

 Let’s try to figure this out using a practical scenario. You are bidding for a historical artifact that belonged to
Alexander. Let us assume that the bidding starts at $0.

 How many people would like to buy the artefact? All the people, right? So, at the current price, each and everyone
will like to own the product since they will ideally achieve a near 100% satisfaction.

 Let’s say now the bid increases to $1000. Now, how many people will be interested? Certainly quite a few people
(after all it belonged to Alexander ☺), but the number would now decrease compared to when its price was $0,
because they would not feel 100% satisfied buying the product at a higher price (as seen in the Law of Demand)

 Now, how do you think the graph will look?

THINKING ABOUT THE GRAPH

 Thinking along that past logical deduction, the histogram bars will be having a decreasing trend as
we move from satisfaction cutoff from 100 to 0, i.e., the height of each bar decreases as people’s
satisfaction decreases and demand for people whose satisfaction cutoff was higher ceases to
exist.

 Now as the bid is increased by another $2000, let us say there is not a single person in the room
with a satisfaction cutoff percentage over 90, so the bidders in the room decrease by the y
coordinate in the histogram for 100 to 90 range.

 So now people in the range of 90 to 0 in the graph are still competing for the product. Gradually
the bid increases and now only 80 to 0 people are competing, and so on.
TRYING TO VISUALISE

 Let’s assume the following data and try to plot a

corresponding histogram for the same

Number of People having

Satisfaction satisfaction cutoff less than
current satisfaction
100% 200

90% 150

80% 90

70% 40

60% 30

50% 20

40% 1

30% 0

20% 0
WHAT IS THE TIPPING POINT THEN?

 In this room, there is not a single person in the range from 60 to 0.

 So can we predict, till which point this bid can be increased in order to have at least one buyer?
 The answer is to take the bid in the range of 70 to 60, and if the bid increases beyond this point, there will not be a
single buyer for this product and the product will remain unsold. This point is called the TIPPING POINT.

ALSO NOTE:
If are having this histogram we can also predict the no of bidders, as the price is increased for the product.
Initially, all the people from 100 to 60(considering there are no people beyond 60) will participate, now as the price is increased,
people from 90 to 60 will participate and so on.
So if this trend is plotted, it will be a cumulative effect of the previous histogram.
HOW THE MOVIE SHOWCASES THIS?

 Just before the auction starts, Howard discovers the opal has been appraised for significantly less
than his initial estimate of $1 million.

 He convinces his father-in-law Gooey to bid on the gem to drive up the price, but the plan backfires
when Garnett fails to top Gooey's final bid.

 This incident can be seen as crossing the tipping point (satisfaction cutoff) for the basketball
player Kevin Garnett and Howard was not able to sell the stone to him.
INCOME PYRAMIDS
HOW THE INCOME IS HIGHLY CONCENTRATED IN THE HANDS OF A FEW
INCOME INEQUALITIES AND DISPROPORTION

• The movie begins with the injured mine worker who has severe injury while working in the mine in
process of extraction of opal.
• Howard imports the black opal from the mine workers for relatively low price and sells it at the
auction at ten times the price he imported it for.

• And if we see it in terms of mine workers who actually risks their life and some even lose their life
in the process of extracting those opals.

• This is similar to how farmers in our country risk and works hard for a daily sustenance and get a
lot less percentage of the profits for which their products are sold in the urban markets.
 Uncut Gems is a story about living in a
state of perpetual unfulfillment. While
that can lead to making some
questionable decisions, it's more
WHAT DO
complicated than the concept of being
WE LEARN? either good or bad. The story perfectly
encapsulates Uncut Gems' themes
about the complex nature of humanity.
THE END