#2ubh: An elegant escape from reality - Atom 2ubh: An elegant escape from reality - RSS IFRAME: http://www.blogger.com/navbar.g?targetBlogID=13868712&blogName=2ubh:+An +elegant+escape+from+reality&publishMode=PUBLISH_MODE_HOSTED&navbarType =BLUE&layoutType=CLASSIC&searchRoot=http://blog.2ubh.com/search&blogLoc ale=en_GB&homepageUrl=http://blog.2ubh.com/&vt=823850916920582135 2ubh: An elegant escape from reality A blog by Yorkshire-based writer and photographer Tim Chapman. The title is borrowed from JK Galbraith, and refers to certain well-established and persuasive economic theories that rely more on hope and imagination than on practical experience or empirical reality. Unless otherwise indicated, all content is copyright Tim Chapman. Tuesday, April 20, 2010 On the independence and attractiveness of cap-and-trade Interesting little review of emissions cap-and-trade schemes by Robert Hahn, the unfortunately titled Tesco Professor of Economics at the University of Manchester, and Robert Stavins of Harvard. The concentrate on the 'independence property' of such schemes, which allows issues of equity and efficiency to be separated for policy-makers - basically, if it holds, it doesn't matter too much how permits are initially allocated. Half of the eight schemes they analyse seem to have that property. They conclude: The fact that the independence property is broadly validated provides support for the efficacy of past political judgments regarding constituency-building through legislatures’ allowance allocations in cap-and-trade systems. Repeatedly, governments have set the overall emissions cap and then left it up to the political process to allocate the available number of allowances among sources to build support for an initiative without reducing the system’s environmental performance or driving up its cost. This success with environmental cap-and-trade systems should be contrasted with many other public policy proposals for which the normal course of events is that the political bargaining that is necessary to develop support reduces the effectiveness of the policy or drives up its overall costs. I'm not clear how much this can be extended to the large international carbon-trading schemes, though. Other studies have shown that cap-and-trade schemes need to be relatively small-scale and limited in scope to be efficient. And the problem with the big schemes hasn't been the allocation of a strictly controlled number of permits, but that the number hasn't been controlled effectively. Labels: economics, environment posted by Tim Chapman at 8:52 AM 0 comments Friday, January 29, 2010 VC and employment New research from Dr Horst Feldmann at the University of Bath on relations between the availability of venture capital in various industrial countries, and employment statistics: The study estimates that if venture capital availability in Italy, where it was most difficult to obtain during the sample period, had matched the United States, where it was in best supply, Italy’s unemployment rate might have been 1.8 percentage points lower; its long-term unemployment share 9.0 percentage points lower; and its employment rate 2.7 percentage points higher. On average over the sample period, venture capital availability was rated 3.1 in Italy and 5.8 in the United States on a scale of 1 to 7. The United Kingdom was rated at 5.3. The exact methodology may be questionable - data on the availability of VC is taken from surveys of business executives (the World Economic Forum’s annual ExecutiveOpinion Surveys), so seems likely to have some subjective element. Feldmann does say, in the full paper (published in Kyklos) that the survey data can 'permit better coverage of the various facets of venture capital financing than hard data'. But, when tested against data on 'venture capital investment as per mil of average GDP', the correlation coefficient is just 0.29. That aside, it's an interesting paper that will doubtless be welcomed by BVCA, EVCA, et al, as they argue against extra regulation. Labels: economics, VC posted by Tim Chapman at 10:47 AM 0 comments Wednesday, January 06, 2010 Prosperity without growth In this iciest of new years, you might as well curl up with a good book and hope for sunnier times. A good candidate, if you're at all interested in some of the economics ideas occasionally aired here, would be Tim Jackson's Prosperity without Growth: Economics for a Finite Planet (thanks to publishers Earthscan for the review copy). Based closely on Jackson's report for the Sustainable Development Commission (published in March last year, and freely available from the SDC site), the book is a painless introduction to the case against that impossible totem of conventional theory, endless economic growth. Jackson begins with a sketch of ecological limits - it is a small world, after all - and overview of the most unsustainable aspects of our current global economy, addressing the usual objections about the necessity of eternally growing GDPs. Bracingly, Jackson debunks the familiar calls for a 'decoupling' of economic growth and ecological cost - the basic numbers just can't add up. A broader reconsideration of some of the fundamentals of society is needed, Jackson reckons, particularly what he calls, pace Weber, 'the iron cage of consumerism'. The book argues the case for the now-familiar if ever elusive Keynesian 'green new deal', as well as a new form of ecological macro-economics which relaxes that old presumption of perpetual consumption growth as a prerequisite for stability. It's all presented as plainly as is possible for such an inevitably complex topic - a little handwavey at times, but there's abundant references for anyone who wants to dig deeper. The arguments are sound but, in the depths of this post-Copenhagen winter, it's too easy to doubt whether they'll ever be usefully heard. Labels: economics, review posted by Tim Chapman at 3:28 PM 0 comments Thursday, October 29, 2009 No nonsense? I recently read The No-Nonsense Guide to Global Finance, courtesy of the publishers at New Internationalist. As you'd expect from the title, it's a very digestible overview of the international finance system, starting from what 'money' actually is, through the increasingly weird and wonderful activities of banks, to the root causes and effects of the recent mess. As such, it's a great introduction, very clearly written, and spiced with some fascinating historical nuggets - it's a rare treat to have such lucid accounts of both the origins of money itself, and the origins of the credit crunch. And as you'd expect from the publishers of New Internationalist (a venerable magazine on international development issues, originally sponsored by Oxfam and Christian Aid), it takes a deeply sceptical line on the pre-crash orthodoxy. Simultaneously explaining and critiquing something as complex as the global financial system is a tricky task, but author Peter Stalker generally pulls it off. Some parts do grate a little - the chapter on the role of the World Bank and IMF is titled 'The ugly sisters', a judgmental epithet that does rather beg the question -and there is a vague sense of preaching to the converted. Anyone committed to the old economic models will find some of the conclusions easy to dismiss - but then, anyone still wedded to the old certainties has enough problems of their own. It's certainly not an entirely objective book, but so ingrained are the ideologies in global finance, and so emotive the effects, that it's questionable whether objectivity would be possible or desirable. It is a lucid and engaging book, and there's few readers - especially among its target audience - who won't come away with something new. Labels: economics, review posted by Tim Chapman at 1:53 PM 0 comments Thursday, August 27, 2009 Tobin redux, and what the L? Interesting to see Adair Turner apparently considering a Tobin tax to curb destablising speculative currency trades, in an interview with Prospect Magazine. As reported in the Guardian: He told Prospect: "If you want to stop excessive pay in a swollen financial sector you have to reduce the size of that sector or apply special taxes to its pre-remuneration profit. Higher capital requirements against trading activities will be our most powerful tool to eliminate excessive activity and profits. "And if increased capital requirements are insufficient I am happy to consider taxes on financial transactions – Tobin taxes." The paper's Larry Elliot embraces the comment: Lord Turner's championing today of a levy on financial dealings to curb the power of the City marks a breakthrough in the long struggle to have the neglected brainchild of American economist James Tobin become a practical policy proposition. But it does seem like fairly weak support, really. It's not a great advance on his views in his Just Capital (Macmillan 2001), in which he notes that there are 'at least theoretical attractions' in the tax - 'The key arguments against it are therefore not theoretical but simply the impracticality of enforcing it and deciding on division of revenues in a world of multiple nations and government.' Those arguments remain. And here's a puzzling little recession-related thing. The Guardian again relays the wise words of an advertising chap on the likely shape of recovery: Martin Sorrell, WPP chief executive, gave the City little to cheer about as he used his trademark skill with metaphors to suggest the recession would be "L-shaped" – an italic capital L, to be exact. He said that while chief executives and marketing managers may have recently begun to feel slightly more positive about the global economy, that was not yet translating into actual spending. Now, here's an italic capital L: L How the hell does that fit onto a graph of any economic indicator against time? Labels: economics posted by Tim Chapman at 10:19 AM 0 comments Wednesday, August 19, 2009 So has Taleb gone nuts? Last evening, I caught a rather bemused-seeming Nassim Nicholas Taleb appearing at the end of Newsnight, apparently following some kind of meeting with David Cameron. When he could get a few words in between Kirsty Wark and some chap from the Times talking about Cameron's intellectual credentials (such as they are), Taleb was making his usual points about risk in the economy and other areas. Here's something he said: "We have to be more conservative with some classes of risk, like the climate - we have to be more worried about the climate than people traditionally have." So it's slightly puzzling to read this morning's papers and see Taleb presented as a climate change denier (see the Scotsman, for instance - although it is strangely satisfying to see even the Sun portraying denialism as the hallmark of a crank). The implication is that Taleb (and by extension, Cameron, who shared a platform with him at the RSA event) has joined that weird lobby of evidence-denying dishonest do-nothings. From what I've read of his work, that seems rather unlikely. For example, there's this from an essay on the Edge: Correspondents keep asking me if the climate worriers are basing their claims on shoddy science and whether, owing to nonlinearities, their forecasts are marred with such a possible error that we should ignore them. Now, even if I agreed that it was shoddy science; even if I agreed with the statement that the climate folks were most probably wrong, I would still opt for the most ecologically conservative stance. Leave Planet Earth the way we found it. Consider the consequences of the very remote possibility that they may be right—or, worse, the even more remote possibility that they may be extremely right. Here's what he reportedly said at the RSA, as per the London Evening Standard: "I'm a hyper-conservative ecologically. I don't want to mess with Mother Nature. I don't believe that carbon thing is necessarily anthropogenic" [EDIT, 20/8: Having now listened to the recording of the meeting, available from the RSA page linked above, it's clear that what Taleb actually says is "Even if I don't believe that carbon thing is necessarily anthropogenic, I just don't want to mess with Mother Nature." Which is obviously quite different. Shame on the Standard.] It's grossly unfair to paint Taleb as part of the denial lobby, when his message is that even if you don't accept the evidence, we should be doing all we can to reduce greenhouse emissions because the potential cost of not doing so will be devastating. That's a long way from the do-nowt bleating of the fossil fuel industry shills and the genuine fruitloop fringe. I strongly suspect Labour party briefings are behind this morning's stories. That not only seems deeply unfair on Taleb (but then, if you lie down with dogs, etc), but also rather unnecessary, as you really don't need this kind of spin to suggest that Cameron's a bit of a twat. Labels: economics, environment, journalism posted by Tim Chapman at 9:44 AM 2 comments Thursday, July 09, 2009 Rushkoff on economic disconnection From Reality Sandwich, an entertaining interview with author Douglas Rushkoff about his new book Life Inc, a historical critique/polemic on the developing role of corporations in Western culture, touching on many topics of interest: An over-arching theme I found in the book is how the common-sense stuff of our reality, the economy and money and shopping and working, is really science fiction; we don't live inside a "natural" economic structure -- we made it up. It gets very much like Baudrillard in a way. We lived in a real world where we created value, and understood the value that we created as individuals and groups for one another. Then we systematically disconnected from the real world: from ourselves, from one another, and from the value we create, and reconnected to an artificial landscape of derivative value of working for corporations and false gods and all that. It is in some sense Baudrillard's three steps of life in the simulacra. So by now, as Borges would say, we've mistaken the map for the territory. We've mistaken our jobs for work. We've mistaken our bank accounts for savings. We've mistaken our 401k investments for our future. We've mistaken our property for assets, and our assets for the world. We have these places where we live, then they become property that we own, then they become mortgages that we owe, then they become mortgage-backed loans that our pensions finance, then they become packages of debt, and so on and so on. We've been living in a world where the further up the chain of abstraction you operate, the wealthier you are. Labels: economics, odds posted by Tim Chapman at 9:51 AM 0 comments Friday, June 12, 2009 Ecocomics Here's the most entertaining economics blog I've seen for a while - Ecocomics, applying economic theory to problems raised in superhero comics. How do super-villains pay for their dastardly schemes (all those minions!), what kind of insurance structure could pay for all that downtown devastation, the challenges of establishing an intergalactic union and monetary fund. That kind of thing. The latest entries focus on game theory as applied to super-villain team-ups - amazingly, the Joker isn't always being rational when he collaborates with the other inmates of Arkham Asylum. Labels: economics posted by Tim Chapman at 9:42 AM 0 comments Wednesday, May 27, 2009 A cognitive theory of the firm I've been reading A cognitive theory of the firm: learning, governance and dynamic capabilities by Bart Nooteboom*, professor of innovation policy at Tilburg University (with thanks to publishers Edward Elgar for the review copy) Nooteboom's core question is: what are the sources of innovation in firms? That's an important issue for a lot of people - managers and entrepreneurs, regulators and policy-makers, as well as economists. To address it, Nooteboom looks to concepts of cognition - a broad category of mental and social processes from rational inference and knowledge, through to value judgments and perception. It's an intriguing subject, though this isn't an easy introduction to it. The main concepts are taken from social cognitive theory, a model of learning in which individuals learn through interactions with and from observation of others. Nooteboom takes a constructivist 'embodied cognition' view, as in the cognitive work of economist Friedrich Hayek, rather than the computational view currently popular in AI-focused cognitive science. From the economic perspective, the theory draws on Joseph Schumpeter's proposal that innovation comes from novel combinations of resources. As per Hayek, the elements for these innovative combinations emerge from markets: the firm acting as an entrepreneurial vehicle for turning this innovation into marketable products or services, as per Edith Penrose. The dilemma for innovative companies is thus between exploration and exploitation - whether to concentrate on developing new innovations, or on selling what you've already got. Exploration must derive from exploitation, Nooteboom argues, and be based on observations of how existing techologies are received by the market. Nooteboom's key idea, also derived from Schumpeter, is that the firm develops a particular cognitive focus which distinguishes it from other firms or agents, and gives it a particular niche in the market. That can apply to one-man firms, but Nooteboom also considers the role of larger organisations in narrowing the cognitive distance between individual managers and employees (the managerial-speak version of this, I guess, would be 'singing from the same hymnsheet'). That's the nub of the theory, which the book sets out in much more detail. Disappointingly, for me at least, the detail is long on the theory but very short on actual practical applications. Over 100 pages pass before there's even a brief real-world example to illustrate what's being talked about. There's a sprinkling of other illustrative examples in later chapters on relationships between firms (including network and cluster effects), and the evolution of firms and industries, which do help illuminate the often abstract-seeming theory. More would have been very welcome. The book is very much a resource for theorists working in the same area (and, to be fair, primarily intended as such). Getting the most from it will probably require more rather more specialised background knowledge than I've got - although some of the ideas here might prove valuable resources for further research, I suspect the book won't offer much directly to those people working at the sharp end of innovation. * - intriguingly, Nooteboom is also working on a philosophical tome Transhumanism: How to affirm life and be a good person without help from God; a reply to Nietzsche. Labels: economics, review posted by Tim Chapman at 3:17 PM 0 comments Thursday, April 16, 2009 On the futility of carbon trading The New Scientist has a provocative comment piece on the shortcomings of carbon trading from Andrew Simms of the New Economics Foundation: Unless the parameters for carbon markets are set tightly in line with what science tells us is necessary to preventing runaway warming, they cannot work. That palpably did not happen with the ETS, which initially issued more permits to pollute than there were emissions and now, in the recession, is trading emissions that don't exist - so-called hot air. Carbon markets cannot save us unless they operate within a global carbon cap sufficient to prevent a rise of more than 2 °C above pre-industrial temperatures. Governments are there to compensate for market failure but seem to have a blind spot about carbon markets. They could counteract the impact of low carbon prices by spending on renewable energy as part of their economic stimulus packages, yet they have not done so. The UK, for example, has spent nearly 20 per cent of its GDP to prop up the financial sector, but just 0.0083 per cent in new money on green economic stimulus. Price mechanisms alone are unable to do the vital job of reducing carbon emissions. They are too vague, imperfect, and frequently socially unjust. It's more than just a criticism of current trading schemes, it's pretty much a broadside against a large portion of environmental economics. I await the response, not least from these guys. Labels: economics, environment posted by Tim Chapman at 11:41 AM 0 comments Wednesday, April 15, 2009 Without the hot air Inspired by the glowing review in the Economist, I've just been reading David MacKay's Sustainable Energy - without the hot air (available as a book through the usual sources, or as a free download under a Creative Commons licence). Like the Economist, I'd strongly recommend the book for anyone interested in sustainable energy. MacKay might seem like an unlikely person to write such a book - a physics professor from Cambridge, he's primarily a specialist in information theory, with a sideline in international development. It's maybe that off-centre viewpoint that allows him to use some simple tools from physics and maths to address the most basic question - can renewable (or, at least, sustainable) sources replace fossil fuels for the UK? Along the way, he demolishes some of the wilder, waftier claims of industry boosters and environmental campaigners, as well as many of the tedious objections of the climate change deniers and do-nothings. It's mostly to do with totting up the energy consumption and potential renewable resources for the UK, based on pretty basic material considerations. There's very little about what would usually be considered as the economics of the problem - the marginal costs, externalities, public preferences, game theories, discounted cost-benefit analyses, etc - but the book is, at heart, pure economics: how we can make best use of limited resources to achieve a social goal. I've written a longer review over at Clean Ventures. Labels: economics, environment, review, science posted by Tim Chapman at 2:22 PM 0 comments Tuesday, March 24, 2009 Child psychology A different take on the roots of the financial crisis from Peter Totterdell, of Sheffield Uni's Institute of Work Psychology, who's profiled in today's Education Guardian: Look at the causes of the credit crunch and you can see clear evidence of what happens when emotion regulation goes wrong, says Totterdell. "In the financial sector, you've got a situation where people were on an upward spiral," he says. "They are being successful in their speculations. This fuels them into feeling good. They want to maintain that feeling, so they do more of it. They start to ignore the risks, or package up the risks, or push the risks on to somebody else, and there is nothing to stop them. In fact, they are encouraged to do it by the others around them." He is struck by the similarities between what has happened recently to the banking system and two areas of the research programme. One is mood disorders, such as bipolar disorder, "when people go on these upward spirals and sometimes they think they're invincible, that nothing they can do is wrong, everyone around them is wrong, and their mood spirals upwards, they start taking much greater risks". The other is children, and the way that when they get overexcited, parents have to step in to calm them down, or remind them that if they persist it will end in tears. Although he's coming at it from a different angle, it's not far from some areas of behavioural economics. Labels: economics posted by Tim Chapman at 12:56 PM 0 comments Wednesday, March 18, 2009 Economics 2.0 I've just been reading (courtesy of a review copy from Palgrave Macmillan) Economics 2.0: what the best minds in economics can teach you about business and life. Written by Norbert Häring and Olaf Storbeck, both economics journalists on the German Handelsblatt newspaper, and elegantly translated by Jutta Scherer, it's a very accessible scamper over some popular areas of economic study - education and employment, stock market success, the roots of the credit crunch, CEO and sports star pay, things like that. It's undoubtedly part of that post-Freakonomics wave of pop economics books, but it's one of the better ones. It's very clearly written and translated, albeit with the occasional literal. The European origin offers up a few less familiar subjects and perspectives, and the authors also seem refreshingly free of the ideological bent apparent in some such similar books. Indeed, the authors spend the final chapter offering warnings about the effects of political prejudice (and other hazards) among professional economists. It does take a rather scattergun approach, but the main theme is research which helps close that often overwhelming gap between economic theory and reality. Much of the work is drawn from experimental and behavioural studies, and much of it is very recent though there are some interesting historical cases. References are given after each chapter, though these are not comprehensive - to take a glaring example, Ferguson and Voth's fascinating Betting on Hitler (Quarterly Journal of Economics 2008 - pre-press pdf here) is discussed over several pages in chapter 13, but doesn't appear in the references. The book gives a very good overview of a lot of interesting work, and should be of interest to economic novices and experts alike. The breadth of the topics means that even the most experienced professionals are likely to find something they didn't know as well as plenty of ammunition for arguments. The less experienced should get a good sense of what economics is really about and why, despite the conspicuous failures of models and ideologies in recent times, the subject is still relevant. Labels: economics, review posted by Tim Chapman at 12:23 PM 0 comments Wednesday, December 17, 2008 Real-world treats As ever, there's plenty to chew on in the latest Real-world Economics Review (formerly the Post-Autistic Economics Review). Unsurprisingly, it's a financial crisis special, with three papers each on responding to the crisis itself, and on what it means for the study and teaching of economics. No less inevitably, there's a certain element of 'We told you so...' The punchiest paper is from JP Bouchaud of Capital Fund Management, who's done some seminal work on the failures of standard market models (eg, "An Introduction to Statistical Finance", Physica A, 313, 1, 238-251). Here, in an expanded version of a short paper first published in Nature in October, Bouchaud outlines the fundamental case for a more scientific approach to financial economics - Of course, modelling the madness of people is more difficult than the motion of planets, as Newton once said. But the goal here is to describe the behaviour of large populations, for which statistical regularities should emerge, just as the law of ideal gases emerge from the incredibly chaotic motion of individual molecules. To me, the crucial difference between physical sciences and economics or financial mathematics is rather the relative role of concepts, equations and empirical data. Classical economics is built on very strong assumptions that quickly become axioms: the rationality of economic agents, the invisible hand and market efficiency, etc. An economist once told me, to my bewilderment: These concepts are so strong that they supersede any empirical observation. As Robert Nelson argued in his book, Economics as Religion, the marketplace has been deified. [JP Bouchaud, “Economics needs a scientific revolution”, real-world economics review, issue no. 48, 6 December 2008, pp. 290 - 291, http://www.paecon.net/PAEReview/issue48/Bouchaud48.pdf] Elsewhere, there's an intriguing paper by David George of LaSalle University, in which he studies the changing meaning of the words 'competition', 'monopoly' and their variants from 1900 to date - Paradoxically enough, the firm that manages to become the only seller (an economist’s “monopolist”) or the firm that manages to be one of just a few sellers (an economist’s “oligopolist”) now qualifies for the title of “very competitive firm” since it’s the only one (or one of a few) that managed to survive the competitive struggle. Amazingly, the firm that is least able to be described as “competitive” by the old definition (a single firm in a sea of many firms) now is most able to be described as “competitive” by the new definition (a “victorious” or “most able” firm). This is a coup d’état writ large. [David George, “On being ‘competitive’: the evolution of a word, ” real-world economics review, issue no. 48, 6 December 2008, pp. 319-334, http://www.paecon.net/PAEReview/issue48/George48.pdf] To download the entire issue (530KB PDF), click here. Labels: economics posted by Tim Chapman at 11:15 AM 0 comments Thursday, December 11, 2008 The Road to Huddersfield Sometimes, a good poke around a secondhand bookshop will turn up something that just leaps off the shelf at you. So it was with 'The Road to Huddersfield: A Journey to Five Continents'. A book commissioned by the World Bank from Guardian journalist James (later Jan) Morris in the early 1960s, with a delightfully Yorkshire-centric title - what's not to like? Huddersfield here is posited as the exemplar of industrialised society, the epitome of 20th century civilisation, the very birthplace of the modern world, whose 'horny, stocky, taciturn people were the first to live by chemical energies, by steam, cogs, iron and engine grease, and the first in modern times to demonstrate the dynamism of the human condition'. Aye, that's right enough. The assigned task of the World Bank was then (and, more or less, is now) to help those less advanced nations advance along the titular road to Huddersfield - to fund those infrastructure projects which, according to theory, will speed those economies towards the wealth and freedom from want of industrial society, that very state of Huddersfieldness. After a visit to the World Bank HQ, under the idiosyncratic rule of Eugene Black, Morris travels through some of the recipients of the Bank's aid - Ethiopia, Siam, southern Italy, Colombia, and the Indian-Pakistani borders - in an elegant and picturesque odyssey. Given that the book was commissioned by the Bank, Morris stays remarkably ambiguous about the effects and efficacy of its work - a lot kinder than many of its latter-day (or even contemporary) critics, but no apologist for its occasional incompetence or amorality. Some 45 years on, some of the descriptions of the countries visited strike a little odd. 'Nobody is starving' in Ethopia, though that country 'is still a long, long way from Huddersfield'. Further East, 'it is no coincidence that Burma, that gilded stronghold of Buddhism, is perhaps the only country on earth that shows no eagerness at all to take the Huddersfield Road." On the other hand, the chapter detailing political and ethnic tensions in the Indus basin seems ever relevant - though some might see a certain irony as Morris notes of Pakistan, 'never did a country seem to need her Huddersfield more.' It all makes for an intriguing slice of political and economic history. Although it seems slightly unfair that the book's thin section of photographic plates does not show the titular Yorkshire town, but rather its neighbour Halifax - a view from Beacon Hill of a near-unrecognisable forest of belching chimneys. Were it not for the dark satanic smog, now long gone, you might just see my house from there. Labels: economics, odds, review, Yorkshire posted by Tim Chapman at 5:16 PM 0 comments Friday, November 28, 2008 Flawed analysis Some new research from Newcastle Business School leads to an obvious objection. Accountancy reader Richard Slack surveyed mainstream financial analysts, and found that they pay no attention to the social and environmental disclosures in the annual reports of UK banks. This, he says, 'will trigger fears over capital market analysts’ understanding of the broader challenges facing business and their attitudes to issues such as climate change'. Mr Slack said the study, conducted jointly with Newcastle University, left question marks over analysts’ attitudes to the environmental challenges facing business. “Social and environmental reporting was universally considered irrelevant and incapable of influencing a financial forecast,” he revealed. “There was total dismissal of the importance of environmental issues in taking decisions such as giving loans to potential polluters, for example, and I would suggest that analysts are not taking potential climate change and environmental impact seriously enough.” Mr Slack continued: “Our findings show that analysts are dismissive of anything other than financial metrics, and they deem large sections of voluntary narrative reporting as useless or worse. Analysts have been shown up to be narrow in their approach, often formulaic and rules-driven, and highly unlikely to be a source of change in respect of social and environmental issues. Their approach should be a major concern to wider market participants given analysts’ crucial role in the information supply chain.” While, there's little doubt that analysts can be too focused on narrow metrics of questionable relevance to anything resembling real market conditions, it might be unfair to blame them for ignoring environmental and CSR reporting. Repeated studies by academics and pressure groups have shown that such reporting efforts are often meaningless, and little more than greenwash. Obviously there's exceptions to that, but ignoring the stuff that runs closer to self-promotion than to disclosure is hardly damnable behaviour. Still, it's never a bad idea to look beyond the analysts for information... Labels: economics, environment posted by Tim Chapman at 11:30 AM 0 comments Friday, September 19, 2008 Bish bash HBOS A worrying time for my home town of Halifax, with a significant number of local jobs sure to disappear in the wake of Lloyds' white knight takeover of HBOS. Exact numbers have yet to be announced, but I'd guess at least a thousand in the town - maybe more. Lloyds has said that preserving jobs in Scotland will be a priority - job losses there were also small when the Halifax acquired the Bank of Scotland back in 2001, with most of the limited cutting then done at lower levels, and Edinburgh also had the honour of hosting the head office at the BoS's historic HQ on the Mound. So saving jobs there seems fair enough - the Guardian reports that the group has 6,459 employees in Edinburgh, a fairly significant chunk of well-paid employment in a city of 450,000. But what's worrying is that nothing's been said about jobs in the Halifax' eponymous home. HBOS also employs around 6,500 in and around Halifax - and this is a town of just 90,000, with far fewer other major industries than the Scottish capital. There are obvious political motives for favouring Scotland, which will put Labour into even more disfavour locally. Fair enough, most will say. But the potential economic impact on the town and the surrounding area is likely to be terrible. The presence of the bank here - its head office until the BoS takeover and, after, the base of the expanded retail operations - has been the main factor in protecting the town from the worst of the industrial decline and saved it from being quite as bad as, say, Burnley. Any major reduction of HBOS employment would, alongside the general downturn, easily make it as bad as, say, Barnsley when the mines were closed. Not a happy prospect. It might not be that bad, of course. There's inevitably going to be swingeing cuts at the common operations of the two merged groups, but it's a question of deciding how that's going to be split between Lloyds and HBOS. I'm less familiar with Lloyds' operations, but I'd guess the bulk of their operations are in London. It might then be an attractive option for them to cut jobs in that more expensive employment market, and keep them in the more cost-effective West Riding. But even if that happens, I'd guess that in Halifax they'll be cutting from the top; and in London, from the bottom. Fewer well-paid, professional jobs here in finance, IT, management and so forth, but we'll likely still get the minimum-wage call centre and data input end. Not a great deal. More generally, it's been fun to see the scrabbling for scapegoats to blame for the deeply shite state of the banking markets, and the faux outrage over the antics of the short-sellers and speculators who we are shocked (shocked!) to find are inclined towards amoral profit-seeking based on some rather unrealistic financial models. At least, I hope it's faux - surely no one who's been keeping the vaguest of eyes on the financial markets and the economic orthodoxy can honestly be remotely surprised? As per the title of this blog (borrowed from Galbraith, of course), it looks like reality has caught up with its would-be escapees. Labels: economics, photos, Yorkshire posted by Tim Chapman at 11:27 AM 1 comments Wednesday, April 30, 2008 Phantastic phinance It's hardly a secret that the rational agent hypothesis of neoclassical economics is, at best, an idealisation; and, at worst, a dangerous myth. It's much the same for the rational investor of finance theory, as backed up by a host of behavioural studies. You don't need to have experienced many investment bubbles, crazes and panics to appreciate that. Some diehards have claimed that bubbles can be understood as rational phenomena, but that always seems like stretching the definition a little too far. It's interesting then to get the psychoanalytic point of view on a question that has been dominated by economists. David Tuckett of UCL and Richard Taffler of Edinburgh Uni have a paper in the new International Journal of Psychoanalysis with the delectable title Phantastic objects and the financial market’s sense of reality: A psychoanalytic contribution to the understanding of stock market instability. Tuckett lays it out in the UCL press briefing: “Feelings and unconscious ‘phantasies’ are important; it is not simply a question of being rational when trading. The market is dominated by rational and intelligent professionals, but the most attractive investments involve guesses about an uncertain future and uncertainty creates feelings. When there are exciting new investments whose outcome is unsure, the most professional investors can get caught up in the ‘everybody else is doing it, so should I’ wave which leads first to underestimating, and then after panic and the burst of a bubble, to overestimating the risks of an investment. “Market investors’ relationships to their assets and shares are akin to love-hate relationships with our partners. Just as in a relationship where the future is unexpected, as the market fluctuates you have to be prepared to suffer uncertainty and anxiety and go through good times and bad times with your shares. You can adopt one of two frames of mind. In one, the depressive, individuals can be aware of their love and hate and gradually learn to trust and bear anxiety. In the other, the paranoid schizoid, the anxiety is not tolerated and has to be detached, so the object of love is idealised while its potential for disappointment is ‘split’ off and made unconscious. “What happens in a bubble is that investors detach themselves from anxiety and lose touch with being cautious. More or less rationalised wishful thinking then allows them to take on much more risk than they actually realise, something about which they feel ashamed and persecuted, but rarely genuinely guilty, when a bubble bursts. Again, like falling in idealised love, at first you notice only the best qualities of your beloved, but when everything becomes real you become deflated and it is the flaws and problems that persecute you and which you blame. “Lack of understanding of the vital role of emotion in decision-making, and the typical practices of financial institutions, make it difficult to contain emotional inflation and excessive risk-taking, particularly if it is innovative. Those who join a new and growing venture are rewarded and those who stay out are punished. Institutions and individuals don’t want to miss out and regulators are wary of stifling innovation. If other investors are doing it, clients might say ‘why aren’t you doing it too, because they’re making more money than we are’.” That last point seems to bring us into the realm of situational psychology. I've recently been reading Phil Zimbardo's The Lucifer Effect on that area - an interesting and disturbing read. Most of the behavioural finance studies I've read (or, at least, read about) concentrate on the personal biases and heuristics that affect individual decisions - the effects of peer pressure and groupthink on economic decision-making seems a fruitful area for further study. Labels: economics, VC posted by Tim Chapman at 6:24 AM 0 comments Tuesday, April 15, 2008 Of balls and busts It's not often that neuroscience/economics research hits the headlines, but a paper in this week's PNAS, concerning hormonal influences on the behaviour of individual stock traders, has sired prominent stories in many of today's organs - see, for instance, the Guardian or BBC. The research is be John Coates and Joe Herbert of Cambridge uni. Their abstract sums it up nicely: Little is known about the role of the endocrine system in financial risk taking. Here, we report the findings of a study in which we sampled, under real working conditions, endogenous steroids from a group of male traders in the City of London. We found that a trader's morning testosterone level predicts his day's profitability. We also found that a trader's cortisol rises with both the variance of his trading results and the volatility of the market. Our results suggest that higher testosterone may contribute to economic return, whereas cortisol is increased by risk. Our results point to a further possibility: testosterone and cortisol are known to have cognitive and behavioral effects, so if the acutely elevated steroids we observed were to persist or increase as volatility rises, they may shift risk preferences and even affect a trader's ability to engage in rational choice. It's not a new concept, of course - I wrote about a related behavioural economics study two years ago (a post that, because of the title, is actually one of my most frequently accessed items by people coming to this blog via search engines - I suspect most of them will be disappointed). And it doesn't take a genius to spot why this is now a lot more newsworthy - boom and bust economics seems to be on people's minds... Labels: economics, science posted by Tim Chapman at 4:55 PM 0 comments Wednesday, February 27, 2008 PE prognosis Many private equity players are (quite rightly) criticised for doing all they can to avoid publicity. That's not a complaint you could make about Alchemy Partners' John Moulton - I fondly remember his Ali G impersonation, back in the Venturedome days ('Ali G' was a popular TV comedy character of the time), while interviewing himself about his much-reviled bid for MG Rover. Anyway, he's back in the news, raising hackles with a gloomy speech at the more usually bullish 'Super Return' conference in Munich. As the FT reports: "The industry needs to prepare for bad news," warned John Moulton, founder of Alchemy Partners, in his opening address as a handful of trade unionists waved "locust" placards and distributed anti-buy-out leaflets outside Munich's MOC centre. "Parts of our industry were behaving just like the US subprime mortgage lenders," said Mr Moulton, a renowned industry doomsday forecaster. "The quality of what we were doing went down, there was no checking and we used false numbers," he said [...] "We really ought to expect returns of the industry to tumble," said Mr Moulton. Gloomy, but hardly unrealistic. It'd be hard to argue that the top end of the private equity market hasn't been building itself a bubble in recent years, fuelled by cheap debt and the weight of new money pouring into the class. The cheap debt's gone now, slamming the brakes on new deals and leaving many over-leveraged existing investments in deep lumber. The weight of money coming in is still there, though, and it's still looking for a home. I've recently been writing a couple of articles on the European mid-market for Private Equity International, and the folk in that market are a lot more optimistic. There's some problems from the credit crunch, but not nearly as bad as at the big LBO end. And everyone's claiming they were aware of the risks of the recent debt bubble, of course - the head of buyouts at 3i described the generous conditions as "beyond the levels of common sense... a dangerous place for a banking market to be". Many partners are seeing potentially rich pickings in the more troubled economic times ahead, and those out raising new funds over the crunch period say there was no loss of appetite from their own investors. At the venture end, things are looking shakier. 3i's announcement that it's pulling out of earlyish deals (reported here at Real Business) is hardly unexpected, but might be symptomatic of a wider shift. The rate of new deals in the very-recently-hot areas of clean technology, which I've been tracking over on my Clean Ventures blog, certainly seem to be slowing. Interesting times ahead... 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