Monthly Archives: February 2014

What do we know about People Risk in Financial Services?

Despite the harsh realities of the 2008 financial crisis, lessons are still being learnt and fines for misbehaviour in the sector continue to abound.

As recently as February 2014 the Financial Conduct Authority issued its ‘largest ever’ fine of £30 million for product mis-selling to the insurance company HomeServe. Tracey McDermott, the FCA’s director of enforcement and financial crime stated ‘the firm’s culture, controls and remuneration structures meant that staff were focussed on quantity not quality.’ In Ireland we have seen the commencement of legal action against senior individuals of banks. In other countries such proceedings have concluded.

Following our successful inaugural seminar in December 2013, this seminar will focus upon behavioural issues and the paradox of employees being both the most important asset to a financial institution but also its major source of risk.

In co-ordination with Trinity College, Dublin the seminar brings together inspiring people from the disciplines of human resource management, law, finance and business to share their perspectives and learn from each other.

Keynote speaker

Dr Pat McConnell, Honorary Fellow at the Macquarie University Applied Finance Centre. Dr McConnell is an expert in People Risk, Systemic Operational Risk and the Strategic Risks faced by Systemically Important Financial Institutions. He will be discussing his paper: ‘Systemic People Risk – the Final Frontier?’

Dr McConnell will be joined by:

Professor Ruth Byrne, Professor of Cognitive Science at Trinity College Dublin who will discuss: ‘Framing Effects in Reasoning about the Moral Acceptability of Risky Choices’

Professor Blanaid Clarke, who holds the McCann FitzGerald Chair in Corporate Law at Trinity College Dublin. Professor Clarke will present her paper: ‘Board Directors: What can we Expect of Them?’

Dr Michael Dowling, Lecturer in ﬁnance in Dublin City University, Ireland will present his work on Irish banks: ‘From Hubris to Nemesis: Irish Banks, Behavioural Biases, and the Crisis’

Dr Mary Keating, Associate Professor at the School of Business at Trinity College Dublin, will present her research regarding ethical leadership: ‘The Meaning of Leader Integrity’

Wednesday 26 March 2014
09:30 to 16:00
Institute of Bankers in Ireland
IFSC
1 North Wall Quay
Dublin 1

Attendance is FREE but the seminar is strictly limited so please book early.

We have a limited number of small travel bursaries available for attendees and a few bursaries to cover travel expenses for PhD students. Please indicate if you want to be considered for a bursary when you register by emailing Dr Cormac Bryce: cormac.bryce@nottingham.ac.uk

Register at

www.nottingham.ac.uk/business/businesscentres/crbfs/esrc/registrationform.aspx

With grateful thanks from the Economic and Social Research Council

Equality is good – but it costs.

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A version of my column in the Irish Examiner.

The last few weeks we have seen yet more charitable and voluntary bodies being raked over the coals of media stoked political charcoal, regarding their salaries and payments. A new line now seems to be emerging in government; that those who are in receipt of public funds should have their salary details made public. That makes eminent sense. Of course, it would be much more credible were it to be actually done. Eamonn Gilmore is not powerless in this regard. He is the deputy prime minister and the leader of a minority party without whos support there is no government. We have seen minister after minister come out and leap on the bandwagon of public concern around salaries. After a few trots round the track they quietly slip off and hop back into the merc for a bit to recuperate. Its also notable that while they have stood back and held the coats while the charity sector gets a licking they seem to be joyfully powerless to compel details of, say, NAMA or NTMA staff, or the staff of the state supported or bailed out banks. Its never clear if the call for transparency is around a significant sum being given from the state or if a single penny is enough to require transparency. As in so much this is reflexive gobwagoning.

Transparency is in general a good thing. If the ministers truly wished to have transparency across the salary pitch they would adopt the Nordic model and make tax returns public. Yes, yours. And mine. That would at a stroke render moot the staged faux outrage by ministers and baa baa baaackbenchers around pay.

While it would satisfy the prurient itch in all of us as to what our fellow workers and neighbors earn it would also act as a powerful signal. That signal would not however be one that any Irish government would wish to send, as it would be a signal of the true state of inequality in Ireland. The reality is that we are seeing in the world the rise and rise of a plutotarchial class that would put Marcus Crassus to shame. At one level this is the reward for disruptive talent. Some inequality is good as it acts as a spur. If people see that talent is rewarded that hard work pays off and that risk is rewarded than they will act accordingly. But the evidence of economics and the feeling in many peoples guts is that this is very nonlinear. At higher levels of inequality the situation flips – why work hard, why invest, when the hyperwealthy have all the power. The oldest golden rule is that he who has the gold, rules.

The wonderful book “The Spirit Level” makes a strong case that it is income inequality within countries (as well as between them but more strongly within) that matters for social outcomes with long economic tails. Child welfare, crime, social deprvation, social inclusion, interpersonal trust and social mobility, all these are strongly associated with inequality. More inequality is associated with poorer outcomes in these metrics. In the domestic context an interesting recent finding suggests strongly that innovation and income inequality are related, strongly and negatively. The less unequal societies are the more innovative it seems they also are. And innovation, we are told, is A Good Thing. A practical and chilling example of how the rich will eventually choke on their own money was shown recently.Research indicates that 90% of the growth in consumption in the USA over recent decades came from the top 20% of income earners. In the end, if there is no mass market for products then companies will cease innovating. We will see stagnation in product innovation and in the end in the very engines of growth that have propelled the 1% to power.

Ireland is not an especially unequal society. Inequality in Ireland tends to be a feature of the bottom not the top – we have quite a gap between the lower earners and the median earners, but not as much between the median and the higher earners. Nonetheless, we are by no means an equal society. Greater equality can arise only by redistribution of wealth. Power and money beget power and money and thus relying blindly on economic growth will not and has not resulted in less inequality. Redistribution implies tax. Nobody likes tax increases, but a higher rate of tax on higher earners would result in at lest in principle an ability to reduce inequality. The difficulty for politicians is that they cannot persuade people of the need for same and will not . Leaving aside the lack of a vertebral column amongst our leaders, the issue is also rooted in behavioral economics. Those who do not have sufficient income to be liable for any increased income taxes are unlikely to vote for them in any case. People like lottery type payoffs with positive skewness – in other words, they like the chance that they may make it big. And if they were to make it big, to become the high earner, they would not wish to pay the higher tax. The difficulty is that the preconditions to achieve high payoffs may require higher taxes to engender them.

Who really knows the rate of inflation (hint – not government) ?

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Much talk around Europe is on the worries of inflation or deflation. Part of the problem in assessing this is that inflation statistics are stale. They are collected on the basis of representative baskets of goods and are published with a delay. For Ireland the basket of goods was updated in 2007 and then again in 2012. Basket composition issues can lead to changes in the apparent inflation rate.

Wouldn’t it be nice if we had realtime inflation? Where we could see, on a day to day basis, inflation and deflation in key sectors? Well, we can, IF we pay. A company collects these data, for a vast number of countries and for a large amount of sectors. Ireland is included. In fact, in 2009 the originator of this gave a talk at a conference in Ireland.

But we don’t know. State Street in the IFSC know. They are partners with the company. But written responses from the government are clear : the Irish state does not collect nor does it purchase these data. Why is that?

Journal of Behavioral and Experimental Finance : First Issue

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The first issue a new journal is always an exciting time, the more so when one is the Editor. Today we see such, with the launch of a new journal, with my good self as the Editor. The aim of the Journal of Behavioral and Experimental Finance is to provide a single place for the intersection of two distinct fields; finance (in the broadest sense) and behavioral/experimental approaches. The first few papers are now online.

Finance is now mature as a discipline, and behavioral / experimental economics has achieved a solid status. Yet, despite growing usage of the experimental toolkit in finance and the growth of learned associations in the area no journal existed as an outlet dedicated to this endeavor. Similarly behavioral approaches have become common as lenses through which to view financial issues, and while there do exist some journals it is clear that this is a field that is underserved. Cynics will no doubt suggest that paper never refused ink, but the reality is that as knowledge expands so too does the need to publicise and critique it. The days when a learned person could encompass the leading edge of scientific thinking by reading the Philosophical Transactions of the Royal Society are long gone.

Academic peer reviewed journals are, for all their problems and issues, at the very core of how researchers communicate in the modern academy. This is likely to remain the case for a considerable period of time. The quality and impact of a journal depends on its authors, its readers and on its editorial processes. I believe that this journal has the potential to very rapidly become a leading outlet. I am fortunate to be supported by an extremely talented team at Elsevier, led by the publisher Jagna Mirska-Ghent. In many respects it was her vision that led to the creation of the journal, shepherded by Marc Chahin. The editorial board contains many persons who have authored key papers in behavioral and experimental finance, as well as industry representatives. It is, I believe, vital that a discipline such as finance, which in my view must be a supportive function of business not just a mere end in itself, we in the academy keep in regular touch with industry and vice versa. The editorial board and I warmly welcome submissions from industry.

This first issue contains papers that I believe give a good indication of the breadth we wish to cover in the journal. We welcome papers that address questions in corporate finance, asset pricing, financial econometrics, international finance, personal financial decision making, macro-finance, banking and financial intermediation, capital markets, risk management and insurance, derivatives, quantitative finance, corporate governance and compensation, investments, market mechanisms, SME, microfinance and entrepreneurial finance, where such research is carried out with a behavioral perspective and/or is carried out via experimental methods. Social and management sciences cannot be effectively investigated with one approach only, and there is no one correct model nor method. In the wake of the Global Financial Crisis modern economics, macro and finance in particular, have come under well justified criticism for too narrow a focus both in terms of approach and model. We trust that over time this journal will assist in creating a more open environment

So what is in the first issue? Over the next few days papers will start to appear on the site. With a plea towards openness. Aggarwal and Goodell, in their paper, note that in finance and to some extent in accounting researchers need to look for inspiration beyond where we have traditionally looked. The role of national culture as a mediating factor in exchanges is well accepted in many social sciences, but is only very recently being introduced in finance. They plea for this gap to be filled showing how cultural perspectives have greatly aided international business and management scholarship.

Two papers review historical aspects of behavioral finance. Branch draws parallels with institutionalism, the failure of which to thrive despite having some decades where it was seen as the wave of the future should suggest to us that nothing is given. Although Thaler (1999) may be right that in the end there will be no behavioral finance as “economists will routinely incorporate as much behavior into their models as they observe in the real world”, the failure of institutionalism should give us pause. Larkin delves much further back into history and philosophy, reminding us that it is in fact only relatively recently that the centrality of the human was sidelined in economics. Finance as an outgrowth of economics suffered due to it coming to growth just at the time that the human was least integrated in economics.

Seiler shows how money illusion, in a real estate setting, impacts on bubble formation. He demonstrates that with careful framing this money illusion can be mitigated. The inflation and collapse of real estate bubbles has been a recurrent feature and one that arguably precipitated many aspects of the crisis, and any paper that sheds light on how to slow the formation of a future bubble should be warmly welcomed.

Fullbrunn and Haruvy , and also Sonsino and Shavit provide us with experimental papers. Fullbrunn and Haruvy shows how dividend signaling emerges in a market subject to takeover bids, a variant of the investment game. Sonsino and Shavit examines the effect of the financial crisis on portfolio formation, finding that the “misperception of risk” issue raised by Shefrin dominates the thinking of investors.

Superstition should, in traditional finance, have little if any role to play in the pricing of stocks. Despite this there have been numerous papers that have demonstrated some influence. Auer and Rottmann investigate two such issues – the Friday the 13^th effect and tetraphobia (fear of the number 4). They find mixed evidence but conclude that in their sample of Asian markets there is little strong support for superstition influencing the markets .

We conclude the first issue with two papers on sentiment. Pownall and Borgers paper is conceptually linked to Sonsino, in that both examine attitudinal impacts on investment. They find, using Dutch data, that investment in socially responsible stocks emerges less as a rational economic decision and more as a way to show an individuals solidarity with the aims of the funds. Brooks et al also examine sentiment, around disposals, finding that investors focus on the announcements rather than on the reportage of the announcements.

Thaler, Richard H. “The end of behavioral finance.” Financial Analysts Journal (1999): 12-17.

Today in the Sunday Independent the occasional commentator, sometime property developer and fulltime corkman Eddie Hobbs has what my old mam used to describe as “an awful screed“. She was from Corlk…

As is often the case with Eddie there are some solid points made but its as usual hard to find these within an overblown emotive and bitter tone.
His central thesis is that the state is oppressing us. Us here seems to be SME owners. Its hard to tell with his wild uncontrolled gunfire…

Clicking on the chart will give you a page from Eurostate which is the latest cross national comparative data on tax structure in the EU. The chart is for ireland.
Its compared with GDP because guess what – thats the international benchmark. WE have decided that we want to shelter a MNC sector and so complain we want to use GDP. On that Eddie and I are at one. IT wont, shouldnt and isnt washing with our partners.
So, lets see. The rankings are 1 = highest.
We are very much towards the bottom with regard to tax paid by employers. We are very low with regard to the % of tax collected by indirect taxation (VAT). We are very low in terms of business capital taxes. Etc etc. A whole herd of sacred cows that gallop through the national debate are turned into hamburger by the facts.

Link

Boards.ie and Me Part 2 – This time its NOT spam…

So having been banned for spamming ( see here) Boards have now decided, whoops, no it WASN’T spam. They even undeleted the not-spam posts.

No contact from them however, to explain/outline/apologise. Which is odd, as y’know, it was clearly not only not-spam but a mistaken deletion. A moderator agrees. But perhaps any further action needs to be approved by the StoneCutters.

Not good enough lads. Not nearly. But your getting there.

Institutional affiliations of INFINITI submissions

The Independent Learning Scam

The Irish Economy – Out of one wood, into another?

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This is a version of my column published in the Irish Examiner 8 Feb 2014. It takes a long time to recover from a banking crisis. If we were unsure of that we need but look around and notice that we still are talking and fretting about ours.

Seven years ago Irish bank shares share prices were at or near all time highs. Lending for house purchases and deposits inflows to Irish banks were also at all time highs. So also were house prices. And then it all began to unravel. The children born at the bursting of the bubble, who will carry the cost most of their working life, are now in senior infants or first class in school. And still it isn’t fixed. Only this week do we see the first criminal trial arising from the banking shenanigans. This week also we saw a report by the EU which sharply criticized our lethargy in dealing with bringing criminal, especially white collar, trials to justice. The Cowen government moved neither swiftly nor decisively when the storm hit.

But things may be changing. At the annual meeting of the Allied Social Sciences, a sort of Woodstock for economists and likeminded folks, a paper was presented on banking crises. The link above is to the paper – there is a longer version but it is firewalled. Reinhart and Rogoff have previously come in for some (more or less justified) stick on account of a missed spreadsheet error in one of their papers. The paper in question was at the heart of the meme propagated that after 90% debt/GDP countries enter a death zone. However, to my mind their more important work by far is in economic history, where in a series of books and papers they have provided comparative data on banking crises and bubbles. Much of the problem with modern macroeconomics is a twin crisis of insufficient data and a lack of a historical perspective. There is no excuse for this in the area of banking crises as we have not only the work of RR but also a comprehensive database from the World Bank.

The RR work provides details of 100 banking crises. Its well worth reading. The main finding is that the effects of the crisis take a long time to peter out. In 50% of the cases real GDP per capita has not recovered to pre crisis levels even after 6 ½ years. On average it takes 7 years. Ireland has had a really severe banking crisis. RR create a measure of the crisis severity – the data are shown below. In terms of the post WW2 period it ranks in the top ten most severe crises as measured by declines in per capital GDP. What is however apparent is that we may, based on the real GDP per capita data available, be right on target to be an average recovery. Our GDP figures of course are somewhat distant from the reality of people on the ground, but the fact remains that GDP is what the rest of the world measures as being available for the state to distribute. That we have chosen to in effect shelter a large chunk (the fdi sector) is our own decision. Mind you, with the international moves to make tax arbitrage by MNCs less attractive, how long the GNP/GDP wedge will persist is debatable.

This does not mean we are out of the woods by any means. Entering the crisis with a healthy debt to GDP ratio of 25% in 2007 we are exiting it with one closer to 125%. Whether high debt causes slow growth, slow growth high debt or more likely both working together, this ratio needs to come down. And herein lies a problem. Europe, and Ireland, are teetering on the brink of deflation. We are used to inflation – rising prices. Deflation however is where prices fall. And while inflation can be bad at high levels deflation at even moderate levels is disastrous. With deflation there is little incentive to spend – prices will fall so why spend now. There is little incentive for firms to invest in new products –demand will be depressed until people consider that prices are likely to stabilize or rise. And for those with debts, that including states with high debt/gdp ratios and households with mortgages and personal debt, it is ruinous as the real level of debt increases over time.

At a wholesale level, the price that companies get, deflation is already a reality. Across a wide swathe of the Irish economy prices have been falling for 6 months or more. This is particularly evident in manufacturing and related areas. Indeed, surprising as it may seem to the consumer, it is also the case in most food areas, save dairy. At the consumer price level of the 12 main categories of goods and services 6 have shown deflation in the last two months. Indeed since 2010 deflation has been the norm in clothing, furniture, communication and recreation. At a European level overall inflation is now close to zero. What is needed is moderate, 3-6% inflation.

The ECB, again, is in the firing line, as it controls the money supply. However facing broken banks and close to the zero interest rate bound there is a limit to what monetary policy can do. Eurozone governments cannot pump inflation by fiscal means as they are constrained by the various macroeconomic treaties. We are heading for a decade or more of stagnation unless the ECB can both clean the banks and prime the pumps. What chance that ? Draghi has dismissed deflation as a risk – in his press conference he noted that while there was some deflation (but he didn’t call it that) in the program countries (Ireland, Greece, Spain and Portugal) this simply didn’t matter for the core. We have left the woods of austerity for the darker woods of deflation. And nobody who matters cares.

Year	Country	Severity
1857	France	10.9
1857	Germany	4.8
1864	Germany	13.8
1866	Italy	22.8
1866	UK	3.8
1873	Canada	18.7
1873	Germany	15.2
1873	US	7.4
1873	Austria	6.3
1890	Brazil	42.7
1890	Uruguay	40
1890	Argentina	23.3
1890	USA	20.2
1890	Portugal	11.3
1890	UK	10.3
1891	ITALY	15.4
1893	Australia	48
1894	NewZealand	9.8
1907	US	21.5
1907	Italy	6.6
1907	Japan	5.9
1907	Sweden	5.7
1907	France	2.8
1908	India	13
1908	Canada	10.8
1908	Mexico	3.2
1920	UK	29.7
1920	US	10.3
1921	Italy	46.5
1921	Norway	15.8
1921	Denmark	6.2
1922	Sweden	12.4
1923	Canada	40.1
1923	Portugal	8.9
1923	Brazil	7.7
1923	Japan	6.7
1926	Chile	62.6
1927	Japan	13.3
1929	Mexico	47.1
1929	India	39.2
1929	USA	38.6
1929	Austria	33.4
1929	Brazil	21.3
1930	France	25.9
1930	Italy	13
1930	Norway	12.4
1931	Spain	60.6
1931	Uruguay	53.1
1931	Argentina	34.4
1931	Poland	33.9
1931	Germany	24.8
1931	Romania	22.1
1931	Belgium	21.4
1931	Switzerland	18.8
1931	Hungary	18.4
1931	China	13.9
1931	Greece	12.9
1931	UK	11.6
1931	Finland	11.1
1931	Sweden	8.8
1931	Denmark	6.5
1939	Netherlands	37
1980	Argentina	39.8
1980	Chile	26.9
1981	Philippines	39.8
1981	Mexico	31.1
1982	Turkey	0
1983	Peru	57
1983	Thailand	0
1985	Malaysia	8.7
1987	Norway	3.6
1990	Brazil	17.2
1991	Finland	19.8
1991	Sweden	11.2
1992	Japan	8.7
1992	Japan	2.1
1994	Venezuela	38.2
1994	Mexico	10.7
1996	Thailand	19.6
1997	Indonesia	23.1
1997	Malaysia	15.8
1997	Korea	8.4
1997	Philippines	5.7
1998	Colombia	12
1998	Russia	7.2
2001	Argentina	28.9
2001	Turkey	12.3
2002	Uruguay	26.9
2007	Ireland	24.9
2007	Iceland	23.2
2007	UK	18.1
2007	USA	10.8
2008	Greece	36
2008	Italy	23.3
2008	Ukraine	22.4
2008	Spain	20.4
2008	Portugal	19.2
2008	Netherlands	15.8
2008	France	9
2008	Germany	3

So this is taken from a CSO datasheet Measuring Ireland’s Progress. Click the photo for the link

The graph shows the real per student spend and the number of third level students, rebased at 2003=100 for both.

Show this to the next gobdaw that jibbers and yaps about the knowledge economy.

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