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!
Posts
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 decisi...
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.
From January 2015, I will be an Associate Editor of Finance Research Letters . I will be dealing with all financial history papers submitted to the journal. The journal publishes peer-reviewed letters / short papers on any topic in finance and aims to have a quick turnaround.
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.
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 ha...
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.
In a forthcoming paper in the Quarterly Journal of Economics , Meghan Busse and her co-authors ask if weather conditions affect car purchasing decisions. They find that the choice to purchase a 4x4 or convertible is highly dependent on weather conditions at the time of purchase, which is inconsistent with classical utility theory. Psychological biases such as projection bias and salience seem to explain their findings. The paper is available here .
The book which I co-edited with Tom Boylan and Renee Prendergast entitled A History of Irish Economic Thought is now out in paperback, making it affordable for the interested reader (the hardback version retails at a staggering £100). The book looks at the contributions of Irish economists to the development of economics as a discipline. It also looks at how particular political and economic debates centred on Ireland (e.g., land reform and the Bullionist controversy) affected wider economic discourse.
I'm a big fan of The Bankers' New Clothes: What's Wrong With Banking and What To Do About It by Anat Admati and Martin Hellwig. Anyone interested in the future of banking and how banking should be regulated needs to read this highly accessible book. Recently, Admati and Hellwig have written a response to their many critics, which attempts to debunk 28 flawed claims - it is available here . In the video below, Admati gives an interview to INET about The Bankers' New Clothes.
I have recently read Investing: The Last Liberal Art . In it, Robert Hagstrom argues that students, investors and investment professionals need a range or latticework of mental models to help them understand the complex world of investment. The mental models come from a wide range of disciplines - mathematics, psychology, philosophy, sociology, biology, decision making, literature and physics. Hagstrom clearly demonstrates how each of these disciplines can help investors think about investing. I found this book very helpful in thinking about the education of students in my school. The world is a very complex place and we need to have a diversified portfolio of ways of thinking about the world, which only a broad-based education gives us. The university curriculum can become too specialised and narrow, resulting in graduates with an undiversified portfolio of mental models.
I have a chapter in a book which has just been published by Oxford University Press. The book is entitled British Financial Crises Since 1825 . My chapter looks at the role capital and extended shareholder liability played in assuring British banking stability from 1826 until the 1930s, a theme which is developed at length in my new book Banking in Crisis . My colleague Gareth Campbell also has a chapter in the same book. His chapter looks at the Railway Mania and and the 1847 commercial crisis.