There’s much discussion about the failure of economic and financial models in predicting real-world outcomes.
The Bank of England’s Andrew Haldane, Executive Director, Financial Stability and Benjamin Nelson, Economist, Financial Stability have written a recent paper, Tails of the unexpected, that suggests that economics and finance is being fooled by randomness.
Let me say here and now, this paper discusses a topic beyond my full comprehension. Although the concept is one that’s understandable. At the beginning of the paper the authors use a brilliant real life example to make their case, and I thought it’s worth sharing with you.
“In 2005, Takashi Hashiyama faced a dilemma. As CEO of Japanese electronics corporation Maspro Denkoh, he was selling the company’s collection of Impressionist paintings, including pieces by Cézanne and van Gogh. But he was undecided between the two leading houses vying to host the auction, Christie’s and Sotheby’s. He left the decision to chance: the two houses would engage in a winner-takes-all game of paper/scissors/stone.
Recognising it as a game of chance, Sotheby’s randomly played “paper”. Christie’s took a different tack. They employed two strategic game-theorists – the 11-year old twin daughters of their international director Nicholas Maclean. The girls played “scissors”. This was no random choice. Knowing “stone” was the most obvious move, the girls expected their opponents to play “paper”. “Scissors” earned Christie’s millions of dollars in commission.
As the girls recognised, paper/scissors/stone is no game of chance. Played repeatedly, its outcomes are far from normal. That is why many hundreds of complex algorithms have been developed by nerds (who like to show off) over the past twenty years. They aim to capture regularities in strategic decision-making, just like the twins. It is why, since 2002, there has been an annual international world championship organised by the World Rock-Paper-Scissors Society.”
It’s up to you if you want to read the paper, but knowledge of statistics would be a big advantage, which sadly is not my strongest subject.
In the late 1800’s and early 1900’s there were many banks. Consolidation and takeover was a common occurrence, such that the London County & Westminster Bank had expanded through takeover to have 200 branches in the home counties.
The London County & Westminster Bank opened their branch in Camberley on the 1st January 1912. Their premises were at 1 London Road, on the corner of the High Street opposite the Cambridge Hotel – now the RSVP.
The building is still there, although now painted in a striking blue and white colour scheme. The attractive architrave, which can be seen in the photo*, remains. The lovely bow-window was lost when the bank expanded the premises in 1935.
In 1970, London County & Westminster, which had by then renamed themselves Westminster Bank, merged with the National Provincial Bank to create NatWest Bank. National Provincial occupied 33 High Street in Camberley, now the home of Blacks Leisure.
In 1973 NatWest moved its Camberley branch from London Road to new premises at 45 Park Street, from where the bank continues to operate.
The branch held a celebratory reception for staff, past managers and staff yesterday evening. Also hosting a photo call this morning with the local press. The branch manager, James Anderson, suitably attired in pin-stripe suit and bowler hat, hosted the evening event, which included the cutting of the obligatory celebratory cake.
A continuous banking presence in Camberley for 100 years is deserving of praise. Congratulations.
I’m not sure of the orgination of this chart, I clipped it from The Big Picture blog.
It neatly capturers investor sentiment in market cycles. Trouble is that I think the markets are going through the whole cycle in one day.
Savings rates are historically low, with little prospect of any increase. Inflation remains stubbornly higher than savings rates. Result savings are eroded.
What to do? I’m not taken by the lure of gold. So, what about investing in BP shares? Anthony Bolton, of Fidelity Special Situations fame, is recommending BP shares as an investment opportunity.
I’m tempted. But as I get older my acceptance of investment risk recedes. However, I’m slightly more tempted to invest in BP, simply to spite the Americans, who seem to be talking down the company’s prospects, as a way to grab it for themselves at a low price.
Stephanie Flanders, the BBC’s economics editor, has that rare skill to convey complex argument in a simple way.
So it is with her blog post – The public-sector pension gap. I’ve only had the chance to skim read the contents of the Public Sector Pension Commission’s report. So it’s thanks to Stephanie’s article that the dilemma of public sector pension funding is presented clearly.
It’s this. While interest rates are low, and asset prices depressed, the amount needed to be put into a pension scheme needs to be increased to meet the expected pension at retirement.
The public sector’s pension pot, which in this case as Stephanie rightly points out doesn’t include local government, is unfunded and is drawn from the taxes collected. The government experiences the same asset prices and interest rates as the private sector. It’s just that the hole in public sector pensions can only be met by taking an increasing amount of the total amount of tax collected.
That’s the crisis. So it’s right to question the affordability of paying, for example, senior police officers, who on retiring at 49, claim an annual pension of variously £80k, or £110k.
The budget, today, has to address our dreadful overspending – otherwise known as the deficit. If you keep on borrowing, the amount you owe keeps on increasing, until such time that the lenders cry out, enough.
This is our problem. My favourite economist, Liam Halligan, wrote in the Sunday Telegraph that ‘Courage and conviction needed to tackle the worst crisis since 1976’. I agree with him in the need to sort out our debt, as I’ve written here often before. This graph gives the pictorial image to the sudden scale of our increase in indebtedness.
It’s surely just as sensible to rein back the debt almost as fast as we accumulated it. This is the nub of the argument. I guess we’ll see later just how courageous is our new Chancellor.
As an interesting aside, I commented in January that the bond markets were giving us a stark warning. Well, here’s a view, from Citywire, that one part of the bond market had it wrong on the frailty of UK bonds. Always interesting to read alternatives views on hot issues.
The Greeks gave us democracy, thanks guys. Now, it appears we may another reason to thank them, as Tim Bond of Barclays Capital notes [courtesy of the FT’s Alphaville blog]. He says that “Greece may very well have done everyone a favour”, as there is “almost no scope for any of the major deficit governments to avoid a fiscal retrenchment over the next several years.”
Tim Bond goes on to say that the markets have the ‘whip hand’ over governments, and have eliminated their ‘wriggle room’ for ‘manoeuvring around fiscal policy for perceived electoral advantage’. Here’s his view on how the Greek experience relates to us:
“Polls suggest that the majority of the Greek electorate is firmly behind the government’s budgetary plans. Similarly, UK polls express a broad acceptance of the need for reduced government spending, even if public opinion has yet to happily embrace the reductions that might affect it personally. Nonetheless, in the wake of the Greek experience, it is less plausible to suggest that a hung UK parliament (the most likely outcome according to current voting intentions) would be unwilling to address the fiscal issue.”
The upcoming budget will tell us more about the government’s plans. I wonder if the other main parties will have shadow budgets?
The unfolding drama about the sovereign debt of Greece offers some small amusement to journalists and sub-editors, as this from the FT Alphaville blog shows:
Surrey Heath Borough Council is not owned as much, by the Icelandic banks, as other councils. There are big sums involved. Keeping the pressure on the Glitnir and Landsbanki Icelandic banks to repay money is vital. Reports indicate that deposits with Landsbanki will eventually be repaid, it’s less certain that all the money on deposit with Glitnir will be fully repaid. Important to keep pressing for our money back.