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Showing posts from December, 2014

The Economics of It's A Wonderful Life

A tradition at Finance: Past, Present and Future is that the final post of the year is both Christmassy and cheesy - for past examples see here and here. This year, we will continue this great tradition with the help of the folks over at EconStories, who have performed an economic analysis of the classic Christmas movie It's A Wonderful Life, starring James Stewart as George Bailey.

I hope that you have a Merry Christmas and a prosperous 2015!

Ethnic Diversity: A Cure for Bubbles?

The Proceedings of the National Academy of Sciences has recently published an interesting article entitled Ethnic Diversity Deflates Price Bubbles. The basic insight of the article is that bubbles can be aided by population homogeneity and thwarted by ethnic diversity. Here is the article's significance statement: Markets are central to modern society, so their failures can have devastating effects. Here, we examine a prominent failure: price bubbles. We propose that bubbles are affected by ethnic homogeneity in the market and can be thwarted by diversity. Using experimental markets in Southeast Asia and North America, we find a marked difference: Market prices fit true values 58% better in diverse markets. In homogenous markets, overpricing is higher and traders’ errors are more correlated than in diverse markets. The findings suggest that price bubbles arise not only from individual errors or financial conditions, but also from the social context of decision making. Informing pu…

Why is the UK Banking Sector So Big?

Why is the UK banking sector so large? Why has it grown so large over the past four decades? And is the size of the banking system a problem? Click here to read a recent Bank of England Quarterly Bulletin article which addresses these questions. One of the article's authors discusses the report in the video below.

Vital Skills for the Modern World

Nobel laureate James Heckman is the world's leading authority on the economics of human development. He is a huge advocate of the need for kids to develop maths and IT skills from an early age. He is also a big advocate of the need to develop 'soft skills' in children. In the short video below, he outlines his views on soft skills and why they are so important. These are skills that we at Queen's University Management School try to develop in our students.

Bubbles and Central Banks

Marcus Brunnermeier and Isabel Schnabel have a new working paper entitled Bubbles and Central Banks: Historical Perspectives. In their paper, they look at the most prominent asset price bubbles from the past 400 years and how central banks (or their precursors) reacted to those bubbles during their formation and bursting. They suggest that a passive stance of merely cleaning up after the bubble is costly. However, although interest-rate leaning policies and macroprudential tools have helped to deflate bubbles, the implementation of these proactive polices is fraught with danger. What then are central banks to do?
What Brunnermeier and Schnabel ignore is the institutional or regulatory environment which commercial banks operate in during bubbles. As I show in my book Banking in Crisis, asset price bubbles in the UK did not always result in banking crises or economic disaster. The reason for this was that bankers were incentivised to not take excessive risk during the boom by having ski…

Central Bank Psychology

Andy Haldane, the Bank of England's Chief Economist, gave a really thoughtful speech a few days ago on central bank psychology. He highlighted four "cognitive ticks" that affect human decision making and public policy making - preference biases, myopia biases, hubris biases and group-think biases. In his speech, he outlined ways in which the Bank has been organised to take account of these cognitive ticks. His speech is well worth reading.