Marketing evil

76 people were killed in the attacks in Oslo and Utøya in Norway last friday. As atrocious as the act was, the perpetrator, Anders Behring Breivik has described it as a "marketing operation". To him, it in fact was that, which is yet another example of how cold and calculative he was and - still being alive unlike most of other similar killers - still probably is. As a real act of terrorism with dozens of victims it's of course belittling to call this marketing. However, there are many inviduals, groups, companies and other organizations that don't do direct harm to anyone but that in some way do promote things that are at least malevolent, but often also downright illegal and cruel. Even murdering gets promoted.

Before handling the violence, let's first consider something else. Tobacco products are a prime example of something that is bad for you but has been promoted a lot in the past. They however have been put at a real tight spot nowadays. You simply cannot advertise them in many countries. In fact, it has lately become the opposite: instead of showing brand logos, cigarette packages have to underline there unhealthiness through capital-sized letters that tell you eg. that "smoking kills". This is all good, but it's still interesting to note how people have gone through all these measures, even though nowadays smokers are any way pretty aware of the dangers of smoking and that smoking is always a choice.

So do people show the same commitment to prevent violence? When tragedies like the one in Norway have happened, there has often been a tendency to blame the violence in entertainment such as computer games, movies and television series. Due to the perpetrator still being alive and having political motives, there might be less of that this time, but in general these questions do come up. Especially in the internet communities there has usually been a very strong disagreement with this view of entertainment being the cause of the tragedy. Common, rather naive arguments include "no sane person would do this no matter how much he plays a game" or "I've been playing this for hours almost every day, and I never feel like killing anyone".

It's of course very difficult to say how these things affect people, but I think it's clear that everything we see in entertainment affect us in some way. In case of computer games, the player also has an active role in the violence so I don't find it far-fetched that their influence is towards making people more violent. So in case a person is enraged by something to begin with, this violent entertainment might make it worse and push the person to violent actions in real life. Even so, this doesn't mean that fiction involving violence should be banned, even if it glorifies the violence. For some that may even be a good way of channeling negative feelings. Still, one should never deny that violent entertainment may promote real violence.

Then we have the news media. Especially in cases like this, its role becomes quite controversial. How to treat those involved with proper respect is of course a serious question, but it might still be relatively trivial compared to how to handle the perpetrator. On the other hand it's important to recognize the motive and to get an image of the character in order to be gain knowledge on how one could possibly prevent similar events from happening. On the other hand that's exactly what the criminal often (and at least in this case) wants, and thus all the media attention brings the message to all potential killers that by killing many people, one will certainly be heard. In addition, big headlines with the killer's face may also be a tempting fantasy for other potential murderers. So, by trying to get high sales a newspaper may in fact promote violence, and even trying to prevent further violence may also simultaneously promote violence. It's a real dilemma.

Tobacco can be justified with free will and being mostly harmful just to its consumer. Violent entertainment, even with the possible bad consequences it might cause, can also be justified by giving people enjoyment and basically being just a way of sharing information and experience. Still, not only the marketing but also the consumption of both of them are regulated at least in terms of limits concerning age and place.

News media is not only justified but also needed for spreading knowledge and awareness. However, it also has to be bound to certain rules as well. More generally, outside the mass media, freedom of speech is an even more important part of an open society that wants to improve the quality of life of all its members. It isn't limited in the same way as the media is, but still bound to some rules around the world. For example, hate speeches or incitement against ethnic or racial hatred are illegal in most countries.

Spree killing, sponsored by Google?

(the site as seen on 25.7.2011)

Entertainment, media and general freedom of speech are all basically just sharing information with certain rules. But how does eg. the site spreekillers.ch stand in this? It calls itself the "International Committee of Competitive Spree Killing", and lists all the worst killing sprees as a highscore list, as if killing was a game. The absolute majority of people will find this kind of site tasteless to say the least, but should it be allowed to exist in the name of freedom of speech? Doesn't this kind of a list persuade to kill as many as possible to get the "ultimate highscore"? Even though that can never be the only reason for the cruelties, it's a goal that can probably boost the ego of a serial killer and in the worst case be the last straw to push him over the limit. Thus, the site is basically promoting evil.

So if incitement against ethnic groups can be illegal, why not incitement against humanity in general? Doesn't SWITCH have the legal possibility to shut down such questionable content? It's of course hard to permanently close certain content on the net, but at least showcasing it can be made harder. In some cases one possibility for this is cutting the possibility for their funding. As a matter of fact the most startling about this is related to exactly that. If you look at the screenshot above, you'll see that the site has been running Google ads. The terms that Google have for running their ads include the following:

"You shall not, and shall not authorize or encourage any third party to engage in any action or practice that reflects poorly on Google or otherwise disparages or devalues Google’s reputation or goodwill."

I know I'm too writing on a Google platform, but I don't find mentioning this to be in contradiction with the above term. The spree killer site has been around for at least few years, so there has been enough time to notice what it's about. It still probably doesn't mean that Google exactly condones the content, but maybe it should follow its unique slogan "Don't be evil" in a more active fashion in terms of sites like these. As for the other organizations, individuals and media, that same slogan is worth pursuing for them as well. After all, even if questionable content or questionable marketing may sometimes be worthwhile in the short run or from a certain point of view, such a thing as bad publicity still exists.

Click here for the full story >>

The myth of an efficient market, part 3/3: Actual markets

In the previous part I described the preconditions for perfect market efficiency. In principle even with all its shortcomings, a market could get close to perfect efficiency even if none of the preconditions are really met. But has it been like this in the real-life markets? How have the markets acted in every day situations or under special circumstances? How would this manifest itself as a percentage? And will the market of the future be different from the market of today?

Examples from the last decade

Let's have a look at the recent history. Even though it's an extreme example, it's hard not to mention the dot-com bubble. Normally when a company has a 10% possibility of being worth 100 billion in the long run, and 90% possibility of failing miserably and being worth nothing, its value should be about 10 billion. However in the dot-com bubble the value in a case like this was often closer to that best-case scenario. Thus, during the dot-com bubble many companies were overvalued with a percentage of thousands or even tens of thousands. This could be seen not only in the valuations of single stocks but also very strongly on the index level. Less technology-driven indices had much less of a bubble, but for example NASDAQ was overvalued by hundreds of percent.

Then there's the current crisis that started from the U.S. housing market. Before the crisis stock prices rose to ungroundedly high levels, from which they dove to levels so low that they were even less founded on reality. One of the reasons for the gravity of the dip must have partially been in the efficiency factor number 4: external economical factors. Due to these special circumstances also many small investors saw an excellent opportunity buy shares at very low prices.

Moreover, the way this crisis has affected the European economy with all its troubled national economies starting from Greece, is also largely caused by market inefficiency. Had the debt market functioned efficiently, Greece would have had to pay higher interest for its loans many years earlier. But this never happened until it really had to happen. Greece was deceitful when joining the EMU and as a euro country it got cheaper loans than it should have received based on its economy. Since it took much longer to get to the point of rising interest rates, the economical fall is now of course a lot worse.

Everyday situations

In addition to the aforementioned episodic examples there are many more customary situations, where inefficiency is evident. The human restrictions related to time become obvious, when companies announce their quarterly reports. It's not uncommon that the first reaction will be disappointment eg. from too low quarterly earnings, due to which the stock price will plummet, but after the report is analyzed properly, the more essential factors start looking good, and the price will rise. Or the whole thing the other way around. Of course this is extremely short-term deviation, but what makes it interesting is that a quarterly report can set the price course for a significantly longer period of time. The price may slowly change in one direction, even if no new concrete information is brought to attention, and before the next quarterly report is announced, a plummet of 5% may have changed to a rise of 30%. Of course one could argue that the knowledge of absence of news is also knowledge. This is true, but it rarely justifies any significant price changes. All this can be seen as shortcomings in the efficiency preconditions 1-3 and 5.

In addition to these there are other generally recognized phenomena such as the May phenomenon - which can be summarized by the sentence "sell in may and go away", which somewhat applied to this year as well. Stocks with cheap key figures (which are commonly called value stocks) have also usually given better results than "growth stocks". If the markets truly were efficient, this couldn't be true.

Stock prices also more or less constantly vary without any clear reason. Of course given the extremely complex world and web of knowledge around us, this could be justified by new small pieces of knowledge. In practice the situation of the company or the market still shouldn't change significantly by minute.

A special case are stocks that are particularly involatile and may have very large spreads between their sell and buy assignments. Here's a graph of a small cap OMX-H stock that suddenly rocketed 20% on 24.11.2010 from 17 euro to over 21 without any apparent reason. From the perspective of a regular private investor the change was also significant with a worth of over 30 000 euro. After that the spread was also that huge. Next day the price almost plummeted back to its earlier level, which means that the seller did a good deal there. Of course this is just a small stock in a somewhat peripheric market, but still shows an example of how unefficient the market can be.

The percentual efficiency of the market

So what do we get, when we look at all the practical data we have and try to put it into the the formula given in the first part? It's fair to assume that under full efficiency a stock market index should have a quite steady and balanced progress - not a straight line but not that far from it either. Still, also in an efficient market the stocks of individual companies would of course vary more than the entire index. Thinking like this, the efficiency of many stock market indices would have gone down to something like 30-40% during the dot-com bubble. By using some kind of more merciful weighting methods the efficiency could have been a bit more, around 50%, but that's still very inefficient.

The more recent bubble and recession don't seem much more efficient either. Even though the market started to be more aware of all the problems and risks related to the subprime loans, the market still continued its bullish trend for a while. In the end, most major indices, like DAX, NASDAQ and Dow Jones had gone down over 50% percent from their peaks reaching a bottom from which they have afterwards recovered close to 100% in two years reaching almost the level before the crisis! Of course unlike with the dotcom-bubble there are now more real issues instead of just extreme speculation about huge future profits. Still, even as the western economies are still facing severe problems, the course of events is extremely hard to consider as being even close to efficient. From overvaluation the situation progressed to a clear undervaluation, and once again, depending on the weighting method and other factors the efficiency levels might have been just a bit over 50 percent in many markets.

When thinking about efficiency on a more general level, we should of course consider a longer period of time. Between overvaluation and undervaluation there needs to be a moment when the stock market index momentarily "fully reflects all information". When the index is close to this level, the misvaluations of individual stocks take a bigger role in the overall efficiency. The stocks that are most actively bought and sold are usually of course relatively more efficiently priced as well, and when defining overall effectiveness these could actually have a bigger weight in it. Still, even if this would make the stock selection efficiency (in other words the relative price of different stocks, when comparing them with each other) have an efficiency of let's say 90 percent, the overreactions in the turns of economic trends seem so big that this would still make the overall efficiency much lower to about 70 percent.

When you consider Fama's efficiency forms more like layers as I suggested in the definition part, there is the possibility that efficiency on the information layer would in fact be stronger than efficiency on the psychologic-speculative layer. If the market pricing is divided into macro and micro level efficiencies (in other words the efficiency to detect the business cycle correctly and the efficiency to detect the price of a single stock correctly respectively), the psychologic-speculative layer can be considered as taking a bigger role as a cause for inefficiency on the macro level than it does on the micro level. Still, in practice the layers cannot be fully separated: even if the role of psychology and speculation grows, information efficiency always has a significant part in all of it. Nevertheless, if security pricing inefficiency on the macro level is enough to lower the efficiency to a level of 70 percent, one cannot neglect the non-informational causes for inefficiency.

True efficiency or just human efficiency?

It's probably clear by now that I don't find the market particularly efficient. Still, the level of efficiency is largely a matter of how you define "full reflection of all information". For a full reflection just having a large group of people isn't enough: all information will never be fully reflected in all prices. Still, the information could in principle be reflected to the extent that no individual could ever outperform the market. In practice, as long as the investment decisions are done by humans instead of machines, not even this can be possible. The reason for this is that then there would be no motivation to explore investment possibilities, and that in itself would already lower the overall efficiency from this level that would be humanly efficient.

I suppose when people talk about market efficiency, they are in fact talking about this human efficiency, even though in my opinion "the full reflection of all information" would require a lot more. In principle we can distinguish three different levels of efficiency. From the weakest to the strongest they are as follows:

The actual current market efficiency

< Theoretical full human efficiency

< Theoretical real full efficiency

Even the full human efficiency would already require a huge and extremely efficient organization without any personal goals to evaluate the prices of even the smallest of stocks. In addition the efficiency prerequisites 4 and 5 should always apply, since an individual investor can block these factors. If human efficiency would be for example 75% and the actual market efficiency 65% of the theoretical real full efficiency, the actual market efficiency compared to the human efficiency would be 87%. At good times this efficiency could reach even the 95% that was mentioned in the introduction.

Are the markets getting more efficient?

In practice the market is always wrong - it's only a matter of how wrong it is and how easy it is to pinpoint this error. There may be even big efficiency differences between different indices or markets and in somewhat peripheric indices like the Helsinki OMX-H the efficiency is probably lower than in bigger indices. As time passes efficiency might also grow. For example as the awareness of the January and May phenomena has grown, their effect may have become lower - or on the other hand sometimes these can be seen as self-fulfilling prophecies which would actually result in the opposite. What's more important, however, is that internet with all its information, interaction and the ease of trade should create a certain kind of intelligence of the masses. On the other hand as the amount of players on the playground grows, so might the amount of fools and lemming behaviour.

The dynamics of efficiency will probably still experience many changes. Information efficiency will still probably grow at least in terms of information available. However, as the world economy has become more and more connected, there is always a need for even more information and a possibility for more unexpected emotional bursts. Whereas movie critics for example evaluate a static fully finished product, the different parties in the stock market need to evaluate a constantly living, massive and hugely dynamic web of securities. And what's more, these stock market "critics" - investors, analysts and media - all live in interaction with the market, which in turn may cause self-fulfilling speculation and chain reactions.

All "critic parties" influence the market movement not only in the price formation of securities but also in the real economy. Thus, even absurd and originally inefficient psychologic-speculative reactions may through their own influence result in those reactions being partially sound and even expressing efficiency in a way. When you end up in a market that's been hit by a overreaction, even the tiniest straw can then break the back of that psychological camel, and once again the the entire market will turn from bull to bear or vice versa, and all this affects the real economy as well.

In a way, in addition to business cycles, one could define efficiency cycles. When efficiency gets too low, the motivational precondition for efficiency will get higher, and efficiency will grow. And when efficiency gets too high, the motivation gets lost and inefficiency takes over. By evaluating how efficient the market at a given time is, an investor might get clues on how worthwhile it is to investigate various investment possibilities. When efficiency gets low, it's time to strike.

Click here for the full story >>

The myth of an efficient market, part 2/3: Preconditions for efficiency

In the previous part I described how market efficiency has been generally defined, and how it in my opinion should be understood in practice. I also defined an example formula for calculating market efficiency as a percentage. But what would it require in practice to actually achieve perfect efficiency? For each security there should at all times be enough willing buyers and sellers with adequate purchasing power and an exactly correct and adequately strong view about the correct price of the particular security. In principle one party interested in selling and one party interested in buying may suffice. However in order to form that exactly correct view and to actually follow that view to an adequate extent several preconditions should be met.

1. Perfect information

In order for the market to function fully efficiently, there needs to be perfect information. At its narrowest, the public information mentioned in the depiction of Fama's semi-strong efficiency could be understood as including merely the economical figures of the stock. However the future and thus the price of the company can under no circumstances be deducted from just these figures. A company has a specific business branch and a specific position in its field. The clients also have certain economic power and motivation to buy the products or services of the company, and in addition the whole economical atmosphere in general needs to be taken into account. Thus it is clear that proper price formation demands extremely broad information about all these matters.

Since most of this data is actually not strictly numerical, I think there is no point in making any other artificial restrictions to what the needed information actually consists of either. Instead, all information that anyone with an access to the market anywhere around the world possesses, should be included in the price-forming process. Especially in the global market the amount of this kind of information is extremely vast. Part of this information is relatively easily available for anyone. Part of it on the other hand is knowledge that cannot directly be accessed even by company insiders, but which may be accessed by some party interested in investing, who can thus benefit from this information. This kind of information would be the economical or consumer atmosphere in a certain market area, or knowledge about some kind of a potential scientific breakthrough for example.

When information is thought on a large scale like this, also the so-called insider information is just a small summary of sorts or a peek into an ocean of information. In principle it hardly brings any extra information, but in practice it may be a conclusive factor in the humanly restricted decision making.

2. Perfect interpretation

Information in itself does not reflect any price, so also interpretation is needed for price formation. Thus, in order for the market to be fully efficient, the price has to be based on perfect interpretation as well. Just like the perfect information, also the perfect interpretation should be based on the best know-how that can be found in the world. This analysis would of course be an irrationally complicated process, which would include everything from microeconomy to macroeconomy, from predicting changes in the technological as well as the natural environment to predicting changes in the political decision making, population growth and social culture - along with of course assessing alternative investment possibilities and their relative profitability.

3. Sufficient time and motivation for collecting and interpreting the information

According to the efficient-market hypothesis, the efficiency should be there all the time no matter what the circumstances. Thus, when new information comes up, this should be instantly reflected in the price. This would mean that for example changes in currencies or raw materials prices should instantly be reflected to the whole market network through even the most indirect connections. In practice, even the collective intelligence of the world analysing such humongous networks of cause-and-effect might only succeed in a timespan of months or even years - and even then always imperfectly.

In addition to time, those who have the power to affect price formation should have enough motivation to study and analyse all relevant information. There is of course an inherent paradox related to this: there would never be adequate motivation, if the market would already price the security perfectly.

4. No affecting external economical factors

In addition to the abovementioned factors describing informational efficiency, there are also factors which should not disturb efficient price formation. There should under no circumstances be such external economical agents that would influence the core price formation. To elaborate, private investors in the core of the price formation should not have such strong and irrelevant motives that are based on economical pressure (eg. unemployment, disease, divorce) or need (eg. vacation, buying an appartment), or taxational factors, that they would make the price of the security sway from its true value.

The same of course applies to institutional investors, who actually have even stronger potential to shake up the price formation of securities. In a fully efficient market institutional investors would for example never make allocation changes in a way that would include ill-proportioned trades compared to the normal trading volumes of a specific stock. There should also be no asymmetrical bonus systems that give bonuses for extra profit but do not punish for losses to the same extent, since these kinds of moral hazards might cause an emphasis on the more risky securities.

5. No affecting psychological / speculative factors

Since the market basically consists of just people, one significant factor is market psychology, which directly affects the lowest level of efficiency, namely technical analysis or in other words predicting from past prices. This psychology has a few special features. In addition to the fact that people may predict the future of a company emotionally, people also speculate, what the others think about the future of a company. Moreover, people may also speculate, what the others might speculate. In the end some market movements may momentarily be based on mere speculation of speculation: no one believes that the real economy factor behind a movement would be as significant as the market reactions, but enough people believe that others believe in its adequate significance.

Another special feature is that even if a market reaction was not originally based on anything real, the psychology on the market may create a chain reaction that may have consequences in the real economy as well: once trust gets weaker, companies may invest less, which causes the trust to get even lower - and vice versa. As a result there may be strong overreactions in both directions, when fear or greed take over. However, true efficiency should be able to keep these feelings and overreactions at bay.

Click here for the full story >>

The myth of an efficient market, part 1/3 - Definition of efficiency

According to the efficient-market hypothesis the prices of all traded assets always "fully reflect" all information related to them. The most essential direct implication of this is that no one can continuously outperform the market. However, hardly any one suggests that the market would be entirely efficient, although on the other hand utter ineffectiveness would be an even more impossible idea. It is also clear that not all markets or submarkets function with the same degree of effectiveness.

Nevertheless, I'm surprised how strong the belief in market effectiveness appears to be in the economic field. For example according to the view of a Finnish doctor in Science and economics, the market would be 95 per cent efficient (Meklari 1 / 2010 in Finnish). No matter how you define this percentage and regardless of whether you look at the market through the obvious theoretical preconditions of perfect effectiveness or through practical experience in history, I find it very hard to believe in an efficiency of this magnitude.

This is the first part in a three-part series of blog entries. In this part I will have a look at the definition of effectiveness, whereas the latter parts will concentrate on the theoretical preconditions of perfect effectiveness and the level of effectiveness encountered in actual stock markets.

The definition of an efficient market

Eugene Fama is perhaps the most well-known spokesman for market efficiency. In 1970 he defined three forms of efficiency. The weak form only suggests that you cannot predict future prices for a traded asset based on past prices - and thus technical analysis is a futility. According to the semi-strong form all public knowledge is reflected in the price, so there's no point performing fundamental analysis. The strong form asserts that even insider information is fully reflected in the price.

In my opinion it's misleading to even define the weak form as efficiency. In practice, it only tells whether investors groundlessly base their choices on something that others have done earlier. The fact is that the price history of a stock has nothing to do with how sensible or valuable a specific company is right now. Ignoring the historical prices is certainly a part of the efficiency as a whole, but in itself it only measures how common irrational decision making actually is - in other words it's more like a measure of ineffectiveness rather than effectiveness.

The strong form on the other hand is rather absurd to begin with: how could insider information be included in the price if the holders of that information cannot even utilize the information without breaking the law? And if the insider information would be thoroughly reflected in the market, it wouldn't be insider information any more, now would it? Thus it could be stated that the semi-strong form is most open to debate on actual efficiency. However, rather than looking at three different forms of efficiency, I think it is more sensible to think of these three forms as different layers of the overall efficiency - layers which can be evaluated separately from each other. For instance, one practical implication of this is that in principle the efficiency on the "semi-strong / fundamental layer" could actually be higher than the efficiency on the "weak / technical layer". The fundamental and insider layers could also be considered as one single layer of informational efficiency, whereas the weak/technical layer could also be seen as a psychological and speculative layer.

Whether efficiency is viewed as a whole or through its layers, it seems to me that there is a common fallacy in its definition. It is true that as a consequence of perfect efficiency no one could ever outperform the market without good luck. However, since people are deficient, this reasoning doesn't work the other way around. In other words I find it rather peculiar, if someone tries to prove market efficiency by showing how no-one or merely few can actually beat the market. It's peculiar because already those few are a sign of inefficiency. But more than that, it's peculiar, because prices that fully reflect all information can only mean that the price of a traded asset is always truly "right", and that this price would include all possible information about the state of the company and its future prospects in a perfectly interpreted fashion. It's no wonder that not even the most talented investors can fully define this price in order to benefit from it - not even if they would have a limitless amount of time and resources at their disposal.

In the introduction an efficiency percentage was mentioned, so a definition for calculating one is in order. So let's say there is a "correct/true" price for each stock. Let's also think of a stock exchange and assume that we would have the information about the "correct/true price" of all shares. Since we're talking about the efficiency of the market as a whole rather than just the index, every single share needs to be taken into account separately. The preciseness of the price of a stock could be defined directly as a ratio between its "true value" and its market value. In order to get this value between 0 and 100%, this ratio should be calculated comparing the smaller value to the bigger one. The overall efficiency of the market could then be for example a weighted average (eg. based on company market values) of all stocks. As a formula this would look like as follows:

, where E is the Effectiveness as a whole, n is the number of stocks, w the entire market value of a company, and the letters v represent the "true" (t) and market-based (m) values of a single share.

The true value required here is in practice of course not explicitly definable. However, compared to the time when the market value was defined on the stock exchange, it still should be easier years afterwards. In this case there might of course be a tendency to hindsight bias, where this true value was based on something that could never have been predictable earlier. However, there are still many things that can be fairly judged in retrospect as something that could have been predicted, as long as those who were in the market would have just looked close enough and interpreted the information in the right manner.

In my opinion, when one considers a subject as theoretical as market efficiency, it cannot be justified by just assessing the performance of invidual people. Otherwise you could as easily state that no mammal can run 100 km/h, since no man is capable of that; or that a neighbouring galaxy does not exist, since man can't reach that. In other words, even though a person was not able to define the true price of a share let alone do that in adequate time to actually benefit from it, it does not mean that this true price didn't exist. After all, practical markets are only a manifestation of the inefficient decision-making of people who work under economical and even social restrictions, affected by irrational emotions, with limited information, limited time and limited comprehension in terms of actually interpreting the data at hand. Accordingly it is only natural that the stock prices are also defined at least somewhat inefficiently.

Click here for the full story >>

Beach resort rules

In general, I'm not particularly interested in sheer beach resorts, where the most essential activity seems to be lying in the sun and barbecuing oneself - or more nastily put, purposefully making your skin look older and increasing the risk for skin cancer. Nevertheless I'm not entirely against beach life, so in case a specific resort offers something else too, a beach and/or pool are certainly a welcome addition.

However, even with my limited experience on beach resorts, I've still come under the impression that many of them have a rather peculiar practice: since the amount of deckchairs is limited, people wake up early in the morning, pick up towels from the hotel and use them to reserve deckchairs from the beach or the pool, after which they go back to sleep, to have breakfast or to do both. This doesn't make much sense now, does it?

In terms of the enjoyability of a resort in general, this isn't very fruitful: the deckchairs may stand there empty, even though there would be people interested in taking them, and on the other hand the abusers of the system have to wake up earlier than they otherwise would. Wouldn't it be better if the beach would have a guideline like this or something similar:

"Deckchairs cannot be reserved with mere towels or other personal belongings for a time period longer than the duration of a swim."

Based on this, deckchairs having just towels and no-one around could be easily claimed and the actual utilization rate for the decks would be improved.

Despite its simplicity and low meaningfulness, this small problem can actually be seen as analogous with bigger issues in bigger communities, namely societies: some may claim the right for certain commodities or assets, even though it would be more beneficial to others.

In case some one with experience on beach resort deckchair reserving policies ends up reading this blog, I would appreciate any comments on the subject.

Click here for the full story >>

Stability vs. moral hazard - a compromise to deposit insurance

When the Icelandic banks started persuading clients from the UK and the Netherlands with high interest savings accounts, those interested in the offer could be roughly divided into three groups. Some merely saw the interest, and did not think there would be any risk involved. Others predicted that the Icelandic economy would end up in a serious crisis, and thus stayed away. And then there were those, who had a hunch of the emerging problems, but an even stronger confidence that in case of a crisis, deposit insurance would cover the losses - as it did in 2008.

The deposit insurance is not only an important security factor for individuals, it's also an essential element in maintaining the stability of the economic system. Its downside on the other hand is the moral hazard residing in the minds of the aforementioned third group : potential profits are taken to oneself, whereas the risk is socialized to be paid by others. In this sense deposit insurance has a lot in common with the current Greek bailout. Both basically boil down to a conflict between maintaining stability and avoiding moral hazards. The first one (stability) is of course more important, but ignoring the latter entirely may ultimately result in losing the first one too. And it seems to me that moral hazards aren't payed enough attention to.

In case of deposit insurance, perhaps an efficient balance between stability and moral hazards would be to make the deposit insurance reversely progressive. As a simple example, the savings could be fully covered till 20 000 €, 98% covered for the amount of money exceeding 20 000 €, and 95% covered for the amount exceeding 50 000 € up to 100 000 €. Thus, the most basic savings would be fully protected, but with deposits resembling investments, part of the risk would be taken by the depositor. The risk would remain so small that it would not cause a large scale panic on the market.

Another interesting factor is that apparently the promised interests are also a part of the deposit insurance. As a matter of fact, even now and still for about month now, a few thousand clients of the Finnish Sofia Bank are waiting the last 15% of their money - and with interest. By restricting the amount of interest paid in case a bank ends up in receivership and/or by perhaps implementing a reversely progressive deposit insurance, the moral hazard could be avoided. With a model like this there could have been a bit fewer Icesave savings in the Icelandic Landsbanki, which in turn could have made the economic bubble in Iceland at least a tiny bit smaller.

Click here for the full story >>

Greece and bankers should take their responsibility

Greece has agreed to accept the bailout terms. In other words, it accepts taking the helping hand. It is a little bit peculiar to think that the whole process could have been depending on Greece's approval. It is obvious that with or without a bailout, the crisis will have a serious effect on the lives of ordinary Greeks. Yet based on common sense, one would think that the bailout would make the bumpy road of the upcoming years at least a bit more pleasant. So why shouldn't Greece accept the terms? However, the other countries in the eurozone would have at least two reasons not to...

1. Greece has enough assets to pay the debt off?

The first, yet perhaps less significant reason not to support Greece is partially moral. Why should we support a country, who cheated its way in joining the EMU? Or should we support their ridiculously low average 53 year retirement ages? Or the pensions that the civil servants' daughters are allowed to collect - civil servants who themselves practically can never be fired? Other curiosities like the bonus for arriving to work on time, 14 month annual salaries or the computer usage bonus basically remind me of the rather silly looking evzones of the presidential guard (on the right): is this the kind of circus other eurozone countries are financing?

Of course the most obscure practices in the Greek economy will most certainly be dealt through the terms of the bailout. And the crisis could have been mostly avoided, with a tighter control on Greece joining the euro or preventing it from getting into this much debt. But now this is the situation we have to deal with, so the question remains: should Greece have a greater responsibility for the problems that it has caused by itself? Although control will probably be tightened due to these experiences, the bailout gives an unconstructive message: if we end up in serious trouble, the others will help - so why not continue our irresponsible economy?

If a country didn't have any possibility to deal with its debt, then forcing more responsibility isn't really an option. However, is this really the case with Greece? According to Financial Times, Greece has properties of over 300 billion euro. If this is true, from what I've understood, this is relatively unmatched in most western countries. Iceland has endured significant losses when Icelanders have had to sell their possessions at low prices due to their crisis. Why shouldn't Greece also need to sell some of its possessions - especially if it really has the assets to do so? Couldn't this be a part of the bailout terms?

2. The bailout is supporting the banks

Another factor is that the bailout is basically supporting the creditors, who took a risk when loaning money to Greece. Biggest of the creditors are German and French banks. From what I've understood they might be the biggest creditors even in comparison to the size of the German and French economies, which would mean that Germany and France benefit the most from the bailout. Can this be right? There are also other creditors, some of which are even outside the eurozone. Do we also want to support them?

The purpose here is of course maintaining economic stability and credibility. But couldn't it be done without giving out the message that banks are free to take risks for profits, but the bigger losses will be socialized anyway? Couldn't the debts be organized in such a fashion that the eurozone countries would get shares of the banks that they are basically supporting? Thus, the current owners would have to face the realized risks, but the economic system would be left almost unharmed.

=> Co-responsibility?

Grasping the entirety of the situation, and evaluating the possible scenarios caused by various courses of action, is of course very difficult. The motivation for the bailout is not saving Greece per se, but maintaining economic stability. However, for the aforementioned reasons the current bailout seems morally wrong and transmitting all the wrong messages. Why should the eurozone pay for the mistakes of Greece and the banks that gave Greece loans? Shouldn't at least part of the liability be pushed to that direction? If Greece would sell its possessions for the worth of even 50 billion, and euro countries would receive shares from the banks they are basically financing, the whole crisis would be a far better lesson in economic morals.

Click here for the full story >>