George Mller Yes, provided we dont mess up again. What have we - - PowerPoint PPT Presentation

George Möller

 Yes, provided we don’t mess up again. What have

we learned, and what have we let go of?

 The perfect storm was perfect, but not a storm.  The economic assumptions underlying our

models are too simplistic and grossly inadequate.

 People are not rational. Given that, what are they?  Markets are liquid most of the time but not

always, and black swans come along when we don’t want.

 People fail to maximise utilities but do maximise

things such as power.

 All of these topics are the territory of behavioural

finance.

 Economics was once a moral science, then it

became a mechanical science, if not more.

 ‘ The tower and the stone’  Morality became unfashionable (a given).  Unethical behaviour was a major cause of the

crisis.

 Rational people can be immoral.  Immoral people can be extremely rational.  Is immorality wrong?

 Immoral behaviour leads to wealth creation

(Mandeville).

 The invisible hand will correct behaviour, and

make it more moral and less immoral (Smith).

 The lack of moral behaviour needs to be

addressed at an institutional level.

 Moral behaviour is behaviour that ensures the survival

• f an individual or a group. Issues include conflicts

between the short-term good and long-term good, between what is good for the individual and what is good for the group (and which group), and between groups (fairness).

 Which is worse: dumping toxic waste on land or

at sea, or even in the air?

 What is the difference between (1) a fully funded

pension system, (2) a pay-as-you-go pension system and (3) a Ponzi scheme?

 Why is the exhaust pipe always located at the

back of a car, even when the engine is at the front?

 Harvard students and the Harvard trust

discussion

 Thomas Piketty ‘ Capital in the Twenty-First

Century (2013)

 Yes/no or…

don’t know

 It comes down to institutional factors.

 Empathy and relationship between producer

and consumer

 Financial markets are abstract.  Financial markets are leveraged.  If you love bread you become a baker, if you

love money you become....

 Economics is a linear science: we add amounts up

and call the total an aggregate (gross, e.g. GDP)

 Economics involves simplifying: cetrus paribus.  Theory of complexity:

1) aggregation creates new problems (we all sell) 2) aggregation results in behaviour that is emergent

 The behaviour of complex systems cannot be arrived

by adding up, which we should have known.

 Dutch and English football hooligans (≠ ∑individual

football fans)

 What if everybody uses the same risk systems? A

model implosion? Basel, here I come.

 LTCM and the impact on the price of German and UK

debt

 Everybody does the same thing, so behaviour is

not distributed normally.

 Emergent behaviour from system; beyond our

scope.

 Regulation:

1) prudential only 2) behavioural 3) systemic

 Consequently, issues concerning behaviour,

ethics and complexity have been overlooked.

 Sometimes the financial markets are the

source of misery (subprime crisis).

 Sometimes the financial markets are culprits

(money laundering).

 Sometimes the financial markets act as

healers (credit rating agency versus France and the UK).

 Use principles and move away from rules, i.e.

bring ethics back.

 Use empathy as a key tool: confront people

with the consequences of their behaviour (bonuses are only a proxy).

 Combine internal norms with external

standards.

 Apply checks and balances; everybody must

have a boss.

 Reinstate systemic risk management.  Make economics a moral science once more.

 end