tag:blogger.com,1999:blog-24666969930164172302024-03-05T13:14:16.302+02:00In A Complete WorldWe are living in a world of change. But this change is not without a direction. Change in general has mostly been for the better, and it can be kept that way.Johannes Hidénhttp://www.blogger.com/profile/06968608189131118506noreply@blogger.comBlogger14125tag:blogger.com,1999:blog-2466696993016417230.post-77985279738051373862011-10-26T20:04:00.004+03:002011-10-26T20:17:56.697+03:00Reaching the peak of the world population<div style="text-align: justify;"><table style="float:right; margin: 0px 0px 0px 10px;cursor:pointer; cursor:hand;width: 320px; height: 240px;"><tbody><tr><td><a href="https://picasaweb.google.com/116898824932551510235/PhotosUsedInTheBlogs#5667833148840870114" onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}"><img style="float:right; margin: 0px 0px 0px 0px;cursor:pointer; cursor:hand;width: 320px; height: 240px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjE3qkQpDeh-Q4MVaH7OhKj2oZYiQJKLu-tkFrSvY1ccOuZDL4UIzQpwr4DPpIqTUjP89Fy1dn_NhgQ9Y347kdPAgLqyBG0n1lNcEaKkT2-fiMdqb5luDqCRr63zaDC5kNxgr-VNJ4f71g/s320/IMG_5601.JPG" border="0" alt="An intersection in Tokyo (7.3.2009)" title="An intersection in Tokyo (7.3.2009)" id="BLOGGER_PHOTO_ID_5666777630195695346" /></a></td></tr><tr><td align="center"><i>An intersection in Tokyo, the biggest metropole in the world (7.3.2009).</i></td></tr></tbody></table>The world population is about to reach the 7 billion milestone very soon - actually in just a few days at the end of this month according to many sources. The figures are of course somewhat inexact, but there's no denying that the world population has been growing at an incredible rate - it has after all more than doubled in the last 50 years. How about the future - what will happen in the next 50 years and in the time after that?</div><span class="fullpost"><div style="text-align: justify;"><br />Only one thing is for sure: population growth cannot continue forever. At some point the population has to reach its peak. It may be interesting to evaluate or prophesy what the maximum figure will be, but I think there is one question that is more interesting or at least more important: how will this peak be reached? Will it be a bubble that bursts violently through a crisis initiated by a combination of ecological disasters, shortage of sustainable energy, ravaging famine and social problems or perhaps even something totally unprecedented, resulting in a dramatic decline in population? Or will the growth rate just steadily slow down to a point of stabilization? Of course there is also a third question that perhaps isn't really asked that often: will the anticipated peak be the permanent population maximum, or will it be superseded by a new peak after a temporary slump?</div><div style="text-align: justify;"><br />In any case, many people seem to think that the point of the (next) population peak will inevitably be a dramatic event. As of now, no-one really knows what it will be like, but the fact is that the relative population growth rate has already been declining for many years. As the standard of living and life expectancy increase, family sizes decline, which can be easily seen for example from the incredibly illustrative statistics service called <a href="http://www.gapminder.org/world/#$majorMode=chart$is;shi=t;ly=2003;lb=f;il=t;fs=11;al=30;stl=t;st=t;nsl=t;se=t$wst;tts=C$ts;sp=5.59290322580644;ti=2010$zpv;v=0$inc_x;mmid=XCOORDS;iid=phAwcNAVuyj1jiMAkmq1iMg;by=ind$inc_y;mmid=YCOORDS;iid=phAwcNAVuyj0TAlJeCEzcGQ;by=ind$inc_s;uniValue=8.21;iid=phAwcNAVuyj0XOoBL_n5tAQ;by=ind$inc_c;uniValue=255;gid=CATID0;by=grp$map_x;scale=log;dataMin=295;dataMax=79210$map_y;scale=lin;dataMin=0.85;dataMax=9.2$map_s;sma=49;smi=2.65$cd;bd=0$inds=">Gapminder</a>. The service shows each country plotted on a graph in a fashion that's essentially 4-dimensional, and you get to determine the variables for the axes yourself. For the same message you can alternatively check Hans Rosling, the man behind gapminder speak about population growth in the video below (If you don't want to check the entire video, you may want to skip straight to watch the minute from 7:00 to 8:00).<br /><br /><iframe title="YouTube video player" class="youtube-player" type="text/html" width="640" height="390" src="http://www.youtube.com/embed/fTznEIZRkLg" frameborder="0"></iframe><br /><br />Contrary to Rosling's words, some might see him as an optimist. If he is, then I'm probably one too. Whatever challenges population growth may present, mankind has the ability to adapt. I believe the population peak won't be reached before the round figure of 10 billion people, but when it will, it may very well be an undramatic event.</div></span>Johannes Hidénhttp://www.blogger.com/profile/06968608189131118506noreply@blogger.com3tag:blogger.com,1999:blog-2466696993016417230.post-14607507566119755732011-10-09T19:49:00.008+03:002011-10-09T20:13:56.031+03:00Perils of biased attention<div style="text-align: justify;">Man has always shown a certain level of attentional bias. Some parts of this bias are inherent to the way a human thinks, whereas other parts are affected by the surrounding sociocultural environment. The latter type is more susceptible to change of course, since societies and cultures change but the human mind essentially doesn't.<br /><br />Information is nowadays ubiquitous, which means that we have much more options when sharing our attention. In addition there are a lot more ways to direct and control that attention. When attention is directed in a certain way, it also affects the way others try to draw that attention. I see modern technology currently shaping the way we direct our attention on three different layers. <br /><span class="fullpost"><br /><br /><h4>1. Personal</h4><br />People naturally pay the most attention to things that they are personally interested in. This may sometimes lead one to overlook something that would actually have significant value or broaden one's perspective. Nevertheless, this is of course very normal: people have different interests and that's it. However, technology is nowadays boosting this bias, which is well described by Eli Pariser in this speech:<br /><br /><table align="center"><tr><td align="center"><iframe width="560" height="315" alignment="center" src="http://www.youtube.com/embed/WLXa1kEMooU" frameborder="0" allowfullscreen=""></iframe></td></tr></table><br />The speech points out that what you see on Facebook and even on Google is individualized to meet your interests. This means that views you don't that easily look into don't even get the same possibility of being represented to you. In other words, when for example googling for something, you end up in an informational bubble: you see what you want to see, which probably makes the experience more pleasant and entertaining, but on the other hand may prevent you from seeing something that would be more beneficial. As a result personal viewpoints don't get challenged as easily, but rather become more narrow. Individualization of course often helps in finding results quickly, so it does have its meaningful purpose, but this should happen in a more transparent way and the user should have more control over the process.<br /><br /><br /><h4>2. Groups</h4><br />Another source of attentional bias are social groups. People tend to spend time and socialize with like-minded people. As a result their current views may easily get stronger where as different ones may get ignored. This is once again of course quite natural, since people do have different interests.<br /><br />The internet, however, has made the process of creating and finding these interest groups much easier. There are countless internet communities that deal with all sorts of things that may be socially questionable, just plain weird or politically radical. Once someone gets tilted in a certain direction, joining a related internet community is quick and easy. As a member of a community, those already existing views easily get stronger and stronger. What boosts this potential development further is the anonymous nature of the internet. People may write things they would never say out loud, but when the words are read, they might be interpreted as strongly as if they were in fact spoken words. Sometimes an <a href="http://en.wikipedia.org/wiki/Troll_(Internet)">internet troll</a> might even throw in some seemingly absurd opinions that some take seriously and actually agree with.<br /><br />So getting involved with like-minded people is easier than ever. On the other hand due to the freedom and ease of speech around the web, it has also become easier to disrupt the discussion and activity in such groups. Anyone from outside a community may easily go in and write some alternative views. Similarly, anyone from the community is also easily capable of searching for alternative views, which is why the internet probably hinders the most radical thoughts in general. Still, it may take a lot of effort and will to actually take an opposing stand in a different-minded group, and doing so will probably still feel unrewarding. The members of a community may likewise often feel that it's enough if they participate within their favourite community. Considering this, a certain way of radical thinking may easily grow if someone is unwilling to look at things from an objective perspective.<br /><br /><br /><h4>3. Content creators</h4><br />There is the old phrase that states <i>"there is no such thing as bad publicity"</i>. This is not entirely true, but does hold a valid thought: by default, all publicity is good for business. As such, even bad publicity is often for the good, as long as it's nothing really catastrophic. It doesn't matter that much if much of the attention is negative as long as there is a positive or even just neutral interest to go along with it.<br /><br />In a certain sense, social media is currently making this more true than it has ever been. The reason for this is the user ability to "vote" for all kinds of content. In some cases voting basically means just rating the content, which is the practice for example in the internet movie database <a href="http://www.imdb.com/">IMDb</a> and used to be the practice on <a href="http://www.youtube.com/">YouTube</a> as well. This doesn't really cause any bias, since both good and bad votes are quite equally taken into account. However, it's a-whole-nother deal when the voting capability is restricted. One might argue that even the thumb up vs. thumb down practice is already a bit more prone to a certain level of bias, but taking the negative side away entirely is almost bound to give a delusion of excellence under certain conditions.</span><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgIKYiMritwZWbEqZwme4MlZNU8wezfDcPd0PUP5Vrq24eLz6D6KqMFmhcl2uwBZbev60V01JGb7mQoJ8q_IogWdQwBlqh6SKHVvOQrraw_sAone4NyNvdPZ0Z6x69ZMpAVYcQ9kDKmK9ux/s1600/biased_attention.png" onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 373px; height: 195px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgIKYiMritwZWbEqZwme4MlZNU8wezfDcPd0PUP5Vrq24eLz6D6KqMFmhcl2uwBZbev60V01JGb7mQoJ8q_IogWdQwBlqh6SKHVvOQrraw_sAone4NyNvdPZ0Z6x69ZMpAVYcQ9kDKmK9ux/s400/biased_attention.png" border="0" alt="" id="BLOGGER_PHOTO_ID_5659975921248137362" /></a><div style="text-align: center;"><i>Social media is affecting the way we look at the world.</i></div><span class="fullpost"><br />Probably the most significant "voting" method around the internet is currently the "like" button offered by Facebook. Just like its more recent Google equivalent the "+1" they both only express positive experience. Granted, the real purpose of them isn't really evaluating the content. The real reasons are gathering information about the users, giving the content providers a way to promote and distribute their content in order to make them want to integrate and spread the system, and to keep the whole system ticking by motivating the users with a neat experience. From the user point of view it isn't really about rating either, but rather sharing, so should there be a problem?<br /><br />The symbiosis works brilliantly, but something may be sacrificed in the process. Even though this probably isn't a realistic example of Facebook users, let's consider a group of introverted fanatics as an illustration. When someone part of the group writes something that fits the group's agenda, it's probably going to be "liked" by most from the group. However, even though the majority of the people outside the group would consider it absolute nonsense, this wouldn't show anywhere. Now, when the same people see how many people have "liked" the writing, they may think the writing really tells the truth and really is outstanding in all aspects - which is what I refer to as a delusion of excellence.<br /><br />So people don't see the net popularity of a specific content just by watching the "like" or "+1" figures, since the negatives aren't measured. This does affect the view people take on a specific content, but the main issue here might still be that of sharing the content. Accordingly, what's perhaps even more interesting is that writers and other content creators may try to adapt to this social peer-based distribution. For example, let's consider two writing styles from which to choose:<br /><ol><li>Strong and simple statements, that are in principle justified but are essentially and maybe even deliberately one-sided.</li><li>Analytical style that tries to consider all points of view, analyzes them and ponders what could possibly be the best possible outcome. </li></ol>Think about these two for a while. Which do you think would be more popular when talking with some friends by dinner? How about which would gain more popularity in the social media terms: which would gain more "likes" or "+1"?<br /><br />I believe this is something where social media differs from a traditional social situation. When you talk with someone and recommend an article to someone, you will probably describe what was good about it and what perhaps wasn't so. Pressing "like" on something is often much more shallow and thus less of a recommendation. In some cases sharing an article might actually be even the opposite with the purpose of just pointing out the absurdness or stupidity of an article. More common is probably the situation where someone faces an article, quickly sees that it basically has the same point of view as the reader has, and thus decides to "like" it. However, if the article would be more analytical, it would require more effort from the reader to actually go through and decide if he agrees on most of it. As a result the first one of the above styles could really appeal to some, but cause negative reactions in others, whereas the latter one would probably cause less reactions on both sides - and thus get less "likes".<br /><br />A writer or content creator usually wants to have his content shared by as many as possible. So, if an analytical, more challenging article would get less distribution around the social network, a writer might be lead into simplification and making an article intentionally biased. A certain level of intentional provocativeness is by no means an entirely new thing in the media, since provocativeness happens to sell. But just like with the layers 1 and 2, the social media in its current form might be boosting this kind of behaviour. All of this might result in what Pariser referred to in his speech: information junk food.</span></div>Johannes Hidénhttp://www.blogger.com/profile/06968608189131118506noreply@blogger.com0tag:blogger.com,1999:blog-2466696993016417230.post-40328196351106795082011-09-13T22:38:00.004+03:002011-09-14T10:25:53.972+03:00Crippled by space money<div style="text-align: justify;">In the South Park episode <a href="http://en.wikipedia.org/wiki/Pinewood_Derby_(South_Park)">Pinewood Derby</a> (originally aired 15.4.2009) the countries around the globe get their hands on a pile of what they think is stolen space cash. When the Intergalactic Police comes to make inquiries about the cash, the countries deny knowledge of such money. Instead they go on a spending spree not realizing that the cash actually holds no value but the value the countries themselves give to it. Amidst the folly, Finland is the only country who would like to come clean. As a result Finland faces the fate of an unwilling martyr, whereas the rest of the countries later end up realizing that through all the lies they were in fact condemning themselves to a life without a possibility for real growth.<br /><br />Somehow, all of this sounds awfully familiar.</div><span class="fullpost"> </span><div style="text-align: center;"><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg3elob0UhS8XGT3NRn5SdBotJ-q4qI-lkEOCH1Z91n7ltVrXSvQFOC-2vKNet4Iqd6XWaqZHGs7l3bAxgDfvG_oAoZlJqWdffgFzZQb7wA8cyommK-apHQ2mcOj500mUuCUJrHa-FsXBxr/s1600/spacecash.png" onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}"><img style="text-align: left;display: block; margin-top: 0px; margin-right: auto; margin-bottom: 10px; margin-left: auto; cursor: pointer; width: 400px; height: 250px; " src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg3elob0UhS8XGT3NRn5SdBotJ-q4qI-lkEOCH1Z91n7ltVrXSvQFOC-2vKNet4Iqd6XWaqZHGs7l3bAxgDfvG_oAoZlJqWdffgFzZQb7wA8cyommK-apHQ2mcOj500mUuCUJrHa-FsXBxr/s400/spacecash.png" border="0" alt="A pile of space cash" title="A pile of space cash" id="BLOGGER_PHOTO_ID_5651573707423117570" /></a><i>A huge pile of space cash as depicted in the South Park episode</i></div><span class="fullpost"><br /><div style="text-align: justify;">What we're now experiencing in Europe is the result of another type of <i>space money</i>. Greece, most notably, did what the countries in South Park did: it lied. In other words, it misrepresented its fiscal statistics in order to join the party and get its share of the space money. As a result it got money for a cheaper price that would have been fundamentally justified - just because it was part of the monetary union. As years passed, the illusion of a steady source of money led to deeper debt, which would eventually explode into a myriad of problems for the neighbouring countries as well.<br /><br />Just like in the real world, the ultimate breakdown didn't occur all of a sudden in the South Park episode either. In the television series, as countries such as Mexico and Japan were spending huge amounts of money on water parks and giant robots, the Intergalactic Police expressed suspicion. Still, the nations kept lying and were thus sweeping the issue under the carpet. The constant yet obviously inadequate attempts at bailing out the troubled economies could be considered as a real world equivalent to this: lending money to the troubled economy can in fact be just postponing the inevitable.</div><div style="text-align: justify;"><br />Since a financial breakdown is an unpleasant scenario with a highly unpredictable outcome, it's tempting to try to keep it away for as long as possible, even if it would be likely to make it even worse in the end. No one wants to be the one to cause an economic crash or to be a party pooper. Accordingly "not on my watch" may in practice be a major guideline for many politicians: if the problem culminates after their watch they might not be the ones to blame.<br /><br />In South Park, Finland tried to "spoil the party" by bringing the downward spiral of lying to a stop, but the other nations literally shot the messenger before it could act. This was undeniably bad judgment and a disaster not only for Finland but for the rest of mankind as well. In our actual debt crisis, Finland has also taken the role of a troublemaker of sorts by demanding collateral from Greece. Greece and Finland even made a bilateral deal about it four weeks ago. Even if its idea of using cash as collateral for cash seemed absurd to begin with and was abandoned as such by the rest of the union, the underlying message might have been a bit different: the whole bailout is an act of folly, since Greece will default any way.<br /><br />Greece's default is just around the corner. One of the few questions remaining are what would be the best time for the default to happen and when will it actually occur. An essential factor related to the latter question is how the timing will affect the other troubled economies like Portugal, Ireland and Spain. In any case, postponing has already been going on for 1,5 years and banks have had plenty of time to react to this, so couldn't it already be time to let go and just recapitalize the banks where necessary?<br /><br />The people in the world of South Park were put to the test when they got the space money, and they failed miserably. As Greece falls, EMU and the euro will be put to the test as well. We'll probably do better than they did on South Park, but it still might be a bumpy ride.</div></span>Johannes Hidénhttp://www.blogger.com/profile/06968608189131118506noreply@blogger.com0tag:blogger.com,1999:blog-2466696993016417230.post-58229020478231399132011-08-29T23:02:00.002+03:002011-08-29T23:08:35.262+03:00Does short-selling make a difference?<div style="text-align: justify;">Short-selling refers to the practice of selling securities like stocks without owning them in the first place. The seller just borrows the stock eg. from a broker to be able sell it, then tries to buy the stock back cheaper in order to give it back and make money out of the process. In so called "naked shorting" the seller doesn't even make that the security can be borrowed. Needless to say, it is a risky process especially considering the potentially limitless losses a short-seller may have to endure. But it can result in significant profits as well.
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<br />The thing that makes this a timely topic is the fact that Italy, France, Spain and Belgium set a ban on short-selling two weeks ago to calm the plummeting stock markets . A couple of days ago, they decided to extend the ban for probably at least till the end of September (see <a href="http://www.reuters.com/article/2011/08/25/businesspro-us-shortselling-idUSTRE77O5MI20110825">Reuters</a>). Were the bans a good decision? An average person usually finds short selling a crazy, speculative and detrimental practice that should be banned not only for a limited period of time but permanently. Many people working in the field of economics on the other hand think that short-selling makes the market work more efficiently and should never be banned. But does short-selling actually make a difference? And if it does, why, how and when? Let's have a look.</div>
<br /><a href="https://picasaweb.google.com/116898824932551510235/PhotosUsedInTheBlogs#5646370330684884162" onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 151px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjbbL5_hFa4vpKXZSBXiykAoXKylVzKMViDVJyqszusZ934MiuQ5E8YVtXWoZYgGuGl6Q99hV4FltiO9CDAZaR9OGBRMgFqyHlGWDEhak-aNZUpywwH_Pj0I7TR8Y67ZTN7ovnkhMnRubEo/s400/IMG_3882_cr.jpg" border="0" alt="" id="BLOGGER_PHOTO_ID_5645978594638148850" /></a><div style="text-align: center;"><i><span class="Apple-style-span">An equal selling offer and a buying bid - this should result in a transaction, right?</span></i></div>
<br /><span class="fullpost"><div style="text-align: justify;">Starting with the facts, both the people against shorting and supporting shorting can be seen as having legit points. Firstly, like the layman sees it, trying to make money out of falling stocks is not productive for the society in general. On the other hand neither is regular trading. Secondly, like those who support short-selling assert, shorting does support market efficiency. To have a transactions you need someone who is willing to buy and someone who is willing to sell at that price. Anyone can buy shares even if he or she didn't own any, but to be able to sell, you have to own shares of that certain stock. In other words, without short-selling there is much more potential to make a bet that a stock will rise than to bet that a stock will fall.
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<br />This partially unilateral nature of a market without the possibility to sell short has a couple of implications. For one, it means that there will be less people willing to sell. This means that the spread between the buying and selling bids increases, which can be seen as making transactions more expensive - in other words the stocks become less liquid. What's more important is that without short-selling, bubbles could easily become bigger, as many of those who would want to bet on falling prices simply wouldn't be able to do so. On the other hand in the case of falling stocks, selling short can make the prices fall unnecessarily deep. Accordingly selling short can make a difference in terms of how stock prices behave. That on the other hand might affect how tempting it is to start trading on the stock market or how the wealth gets redistributed eg. in times of crises.
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<br />But does that matter much to the layman who doesn't have a dime invested in the stock market? It might. Stock market doesn't exist in a vacuum, but rather reflects the confidence in economy in general. The bigger the bubble the stock market experiences the bigger the general downfall may be, and the more dramatic effects it may have on the real economy - thus also affecting the life of the layman. In that sense, short-selling can be good for everyone. On the other hand, in a bearish market it might make the overreactions at the lower end more deep and thus cause unnecessary damage to the real economy, which would make short-selling bad in that situation - even though studies haven't found many signs of this.
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<br />Short-selling does make a difference for all of us. Especially thinking about overheated markets (like in 2007), I think it's better to always allow short-selling than have it permanently banned. Still, I'm not sure if bans are always a bad idea either. If imposing a ban on short-selling ever makes sense, it should probably be at times when the stock markets are being hit particularly hard - like it now has been.
<br /></div></span>Johannes Hidénhttp://www.blogger.com/profile/06968608189131118506noreply@blogger.com0tag:blogger.com,1999:blog-2466696993016417230.post-15854592447036725662011-08-12T08:10:00.016+03:002011-08-22T21:11:11.347+03:00World in turmoil<div style="text-align: justify;">Just a couple of years ago perhaps the most major subject of global debate at least from a European perspective seemed to be global warming. The reason for this increased interest was probably largely the fact that on the surface economy and life seemed to be developing so smoothly that there was enough mental resources to concentrate on something that's below the surface; something that seemed to call for serious long-term planning. Now, even with some small glimpses on the subject we get especially through the misery and famine caused by the drought in East Africa, several other more acute themes have taken over.
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<br />The world is in turmoil. As the death of one man caused the whole Arab street starting from Tunisia to stand up and demand for proper human rights for the average citizen, Europe is also starting to face more riots that are fundamentally stimulated by immigration-related social segregation, latest of which we've now seen in London - riots that were also initiated by the death of one man. On another front, the supply and demand of oil have reached the point where extracting oil from for example the bituminous sands in Canada has become lucrative despite the expensiveness of the process. Utilization of oil is thus reaching its final frontiers, while another form of energy, namely nuclear power is facing serious opposition and even shutdown plans eg. in Germany due to the terrifying aftermath of the tsunami that hit Japan in March this year.
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<br />Still, the economy is currently taking the biggest headlines in the western world. Whereas many economies in the East, most notably China are still rapidly developing, the economies in Europe and the United States are facing serious issues with debt and insufficient economic growth. A week ago we got a significant indication of this: one of the three major credit rating agencies Standard & Poor's downgraded the rating of United States from AAA to AA+ for the first time ever. This change, even though perhaps not that big per se, is historical and might be a sign of what's to come.</div>
<br /><div style="text-align: justify;"><table style="float:left; margin:0 5px 5px 0;cursor:pointer; cursor:hand;width: 360px; height: 270px;"><tbody><tr><td><a href="https://picasaweb.google.com/116898824932551510235/PhotosUsedInTheBlogs#5643409489993022418" onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}"><img src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj4eMOy_tCmqAVkv3z_NMqzE9q7cL-ZyRAPSUwghInRmIgIvIH1Q0dO0k7oAyCcOUV7pRZKdC6Md5gBvGo5kLSiZCQdWp-DZtHVFNzTqsYRcKveA9j6P6ZfmS1x4kboRhB9hwZr5WLo8njy/s400/IMG_4130.JPG" height="300" width="400" border="0" alt="World sucks, a statement painted on a stone in Athens during the 2008 Greek riots" title="'World sucks', a statement painted on a stone in Athens during the 2008 Greek riots. Picture taken on 29.12.2008." id="BLOGGER_PHOTO_ID_5638720312149847506" /></a></td></tr><tr><td><i>'World sucks', a statement painted on a stone in Athens during the 2008 Greek riots. <font size=-2>(Picture taken on 29.12.2008)</font></p></i></td></tr></tbody></table><span class="fullpost">Environment, democracy, culture, energy, finances - they are all important areas of how the human world functions. The politics, economy and social relations around the world are becoming more global year by year, which causes local troubles to span across the globe more easily. The philosopher Hegel once said <i>"periods of happiness are empty pages in history"</i>. This doesn't mean that mankind would need wars, but sometimes difficult times can result in something better in the end. Accordingly, the interesting question is, how the world will appear once things settle down.
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<br />On a global scale, the economical turmoil might have a favourable outcome in the end: a more equal world, with a wealthier east and hopefully a more balanced financial system everywhere. The disturbance in the Arab world should also finally result in sounder, more democratic societies. The question is just when and how this will exactly happen, but like we've seen, the ease of spreading ideas through modern technology can give a serious boost to potential revolutions.
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<br />What's potentially more unsettling in the longer run are the subjects that are not currently hitting the headlines. Global warming (whether caused by mankind or not) might have much more dramatic and seriously detrimental consequences at least in some parts of the world, even though I don't find widespread or large scale problems very likely. But how about what will happen when the global economy is back on track again? The demand for oil will increase, and if we've reached the peak in oil production, the prices might easily skyrocket to levels that are ultimately unaffordable by both individuals and businesses alike. Is the global infrastructure really prepared for that?</span></div>Johannes Hidénhttp://www.blogger.com/profile/06968608189131118506noreply@blogger.com0tag:blogger.com,1999:blog-2466696993016417230.post-77644538007181269782011-07-25T21:26:00.009+03:002011-07-26T10:42:58.374+03:00Marketing evil<div style="text-align: justify;">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.<br /></div><br /><span class="fullpost"><div style="text-align: justify;">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.<br /><br />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 <i>"no sane person would do this no matter how much he plays a game"</i> or <i>"I've been playing this for hours almost every day, and I never feel like killing anyone"</i>.<br /><br />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.<br /><br />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.<br /><br />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.<br /><br />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.<br /></div><br /></span><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhGULTVk7hMIme2wdJxl18mfqNNZBNFsvIypEgUiN7K-9CkjcV3YNJGsv_aToIxpG57mGDSDGbEeAT14Cn74sULdTfnO6tiXiLnJCnAccpe6N60L8J6C8EOWYN1_lPYv49GkCdp45IqBHmu/s1600/spree_cr.PNG"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 159px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhGULTVk7hMIme2wdJxl18mfqNNZBNFsvIypEgUiN7K-9CkjcV3YNJGsv_aToIxpG57mGDSDGbEeAT14Cn74sULdTfnO6tiXiLnJCnAccpe6N60L8J6C8EOWYN1_lPYv49GkCdp45IqBHmu/s400/spree_cr.PNG" alt="Spree killing, Sponsored by Google?" title="Spree killing, sponsored by Google?" id="BLOGGER_PHOTO_ID_5633180675045654290" border="0" /></a><div style="text-align: center;"><i>Spree killing, sponsored by Google?</i> </div><div style="text-align: center;"><span class="Apple-style-span">(the site as seen on 25.7.2011)</span></div><span class="fullpost"><div style="text-align: justify;"><br /></div><div style="text-align: justify;">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 <i>"International Committee of Competitive Spree Killing"</i>, 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.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">So if incitement against ethnic groups can be illegal, why not incitement against humanity in general? Doesn't <a href="http://www.switch.ch/">SWITCH</a> 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:<br /><blockquote><i>"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></blockquote>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 <i>"Don't be evil"</i> 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. </div></span>Johannes Hidénhttp://www.blogger.com/profile/06968608189131118506noreply@blogger.com2tag:blogger.com,1999:blog-2466696993016417230.post-13746873331546449502011-07-13T16:40:00.004+03:002011-07-13T17:58:18.720+03:00The myth of an efficient market, part 3/3: Actual markets<div style="text-align: justify;">In the <a href="http://inacompleteworld.blogspot.com/2010/12/myth-of-efficient-market-part-23.html">previous part</a> 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?</div><br /><span class="fullpost"><br /><div style="text-align: justify;"><span class="Apple-style-span" style="font-size: large;"><b>Examples from the last decade</b></span></div><div style="text-align: justify;"><br />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 <a href="http://www.nasdaq.com/">NASDAQ</a> was overvalued by hundreds of percent.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">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 <a href="http://inacompleteworld.blogspot.com/2010/12/myth-of-efficient-market-part-23.html#economical">efficiency factor number 4: external economical factors</a>. Due to these special circumstances also many small investors saw an excellent opportunity buy shares at very low prices.<br /><br />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.<br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><span class="Apple-style-span" style="font-size: large; font-weight: bold;">Everyday situations</span></div><div style="text-align: justify;"><span class="Apple-style-span" style="font-size: large; font-weight: bold;"><br /></span></div><div style="text-align: justify;">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 <a href="http://inacompleteworld.blogspot.com/2010/12/myth-of-efficient-market-part-23.html#information">1-3</a> and <a href="http://inacompleteworld.blogspot.com/2010/12/myth-of-efficient-market-part-23.html#psychology">5</a>.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">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.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">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.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjldYA2UKeaptrXHja2aAuKJ9xTEMf8KV32siBTXbRhTr-yWXMPTHB-MMiwVVvOfPyGhD7OqunQX0ZJY2luc6_mvqJp1oLyMxVgE3LzlAjLdhrwIYqYxk8oqhEUHZZ9DpQdYPYiOU-vXoqM/s1600/keskisuomalainen.png"><img src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjldYA2UKeaptrXHja2aAuKJ9xTEMf8KV32siBTXbRhTr-yWXMPTHB-MMiwVVvOfPyGhD7OqunQX0ZJY2luc6_mvqJp1oLyMxVgE3LzlAjLdhrwIYqYxk8oqhEUHZZ9DpQdYPYiOU-vXoqM/s400/keskisuomalainen.png" alt="Keskisuomalaisen kurssikäyrä" title="Keskisuomalaisen kurssikäyrä" id="BLOGGER_PHOTO_ID_5545075572952812290" style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer; width: 400px; height: 224px;" border="0" /></a><div style="text-align: justify;">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.</div><div style="text-align: justify;"></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b><span class="Apple-style-span" style="font-size: large;">The percentual efficiency of the market</span></b></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">So what do we get, when we look at all the practical data we have and try to put it into the <a href="http://valmismaa.blogspot.com/2010/11/myytti-tehokkaista-markkinoista-osa-13.html#kaava">the formula given in the first part</a>? 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.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">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.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">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.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">When you consider Fama's efficiency forms more like layers as I suggested in <a href="http://inacompleteworld.blogspot.com/2010/11/myth-of-efficient-market-part-13.html#layers">the definition part</a>, 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.</div><div style="text-align: justify;"><br /></div><div><br /></div><div><br /></div><div></div><div style="text-align: justify;"><span class="Apple-style-span" style="font-size: large;"><b>True efficiency or just human efficiency?</b></span></div><br /><div></div><div></div><div style="text-align: justify;">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. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">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:</div><div style="text-align: justify;"><blockquote><i>The actual current market efficiency</i></blockquote><blockquote><blockquote></blockquote><span class="Apple-style-span" style="white-space: pre;"><span class="Apple-tab-span" style="white-space: pre;"> <span class="Apple-tab-span" style="white-space: pre;"> <span class="Apple-tab-span" style="white-space: pre;"><i> <span class="Apple-tab-span" style="white-space: pre;"> <span class="Apple-tab-span" style="white-space: pre;"> </span> </span></i></span></span></span><i>< Theoretical full human efficiency </i></span></blockquote><blockquote><span class="Apple-style-span" style="white-space: pre;"><span class="Apple-tab-span" style="white-space: pre;"><i> <span class="Apple-tab-span" style="white-space: pre;"> <span class="Apple-tab-span" style="white-space: pre;"> <span class="Apple-tab-span" style="white-space: pre;"> <span class="Apple-tab-span" style="white-space: pre;"> </span> </span></span></span></i></span><i>< Theoretical real full efficiency</i></span></blockquote></div><div style="text-align: justify;">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 <a href="http://inacompleteworld.blogspot.com/2010/12/myth-of-efficient-market-part-23.html#economical">4 and 5</a> 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. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"></div><br /><div style="text-align: justify;"><span class="Apple-style-span" style="font-size: large; font-weight: bold;">Are the markets getting more efficient?</span></div></span><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjsE6Ng-OZhGDLdyq3qC5lWq64ZXMqoJ02gNnIzjwouNqmCIRsn4B9n1CL0OaILHebRhirHKbQETnEaRMSUc4MBsIA3Dg18b7qDisjmEckOYTUoMRHc0YNqB7OkHHkb_XKRVEph_MXDvdIj/s1600/market_always_wrong.png" onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}"><img style="float:left; margin:0 10px 10px 0;cursor:pointer; cursor:hand;width: 320px; height: 134px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjsE6Ng-OZhGDLdyq3qC5lWq64ZXMqoJ02gNnIzjwouNqmCIRsn4B9n1CL0OaILHebRhirHKbQETnEaRMSUc4MBsIA3Dg18b7qDisjmEckOYTUoMRHc0YNqB7OkHHkb_XKRVEph_MXDvdIj/s320/market_always_wrong.png" border="0" alt="The market is always wrong" title="The market is always wrong." id="BLOGGER_PHOTO_ID_5566227992709361954" /></a><div style="text-align: justify;"><span class="fullpost">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.</span></div><div style="text-align: justify;"><br /></div><span class="fullpost"><div style="text-align: justify;">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.</div></span><span class="fullpost"><div style="text-align: justify;"><br /></div><div style="text-align: justify;">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.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">In a way, in addition to business cycles, one could define efficiency cycles. When efficiency gets too low, <a href="http://inacompleteworld.blogspot.com/2010/12/myth-of-efficient-market-part-23.html#time">the motivational precondition</a> 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.</div></span>Johannes Hidénhttp://www.blogger.com/profile/06968608189131118506noreply@blogger.com0tag:blogger.com,1999:blog-2466696993016417230.post-8360856072978872232010-12-16T23:15:00.004+02:002011-07-13T11:39:06.238+03:00The myth of an efficient market, part 2/3: Preconditions for efficiency<div style="text-align: justify;">In the <a href="http://inacompleteworld.blogspot.com/2010/11/myth-of-efficient-market-part-13.html">previous part</a> 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.<br /></div><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiLwfLGZD9BLbDra5KoqtSE83LHmD__-Zgbsles5WJZHUs2CAWO95_sGq82GTUh78nV1Wage3SMWpvgdyl59wbMzaQo0j1vHijHdszYG7Tot-W7QaP8ULx8J5Y3tqCSRsrb5zI2UVDXtXWE/s1600/IMG_6574-ty%25C3%25B6mehil%25C3%25A4iset.JPG"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer; width: 480px; height: 321px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiLwfLGZD9BLbDra5KoqtSE83LHmD__-Zgbsles5WJZHUs2CAWO95_sGq82GTUh78nV1Wage3SMWpvgdyl59wbMzaQo0j1vHijHdszYG7Tot-W7QaP8ULx8J5Y3tqCSRsrb5zI2UVDXtXWE/s640/IMG_6574-ty%25C3%25B6mehil%25C3%25A4iset.JPG" alt="Worker bees on the good stuff" title="Worker bees on the good stuff" id="BLOGGER_PHOTO_ID_5542471018057000050" border="0" /></a><span class="fullpost"><br /><div style="text-align: justify;"><span class="Apple-style-span"><blockquote><a name="information"><b><i>1. Perfect information</i></b></a></blockquote></span></div><div style="text-align: justify;">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 <a href="http://inacompleteworld.blogspot.com/2010/11/myth-of-efficient-market-part-13.html#semi-strong">semi-strong efficiency</a> 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.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">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. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">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.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><span class="Apple-style-span"><span class="Apple-style-span" style="font-weight: bold;"></span></span></div><blockquote><div style="text-align: justify;"><span class="Apple-style-span"><span class="Apple-style-span" style="font-weight: bold;"><a name="tulkinta"><i>2. Perfect interpretation<br /></i></a></span></span></div></blockquote><div style="text-align: justify;">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.<br /><br /></div><div style="text-align: justify;"><blockquote><div style="text-align: justify;"><span class="Apple-style-span"><span class="Apple-style-span" style="font-weight: bold;"><i><a name="time">3. Sufficient time and motivation for collecting and interpreting the information</a></i><br /></span></span></div></blockquote>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.<br /></div><br /><div style="text-align: justify;">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.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><blockquote><div style="text-align: justify;"><span class="Apple-style-span"><span class="Apple-style-span" style="font-weight: bold;"><a name="economical"><i>4. No affecting external economical factors<br /></i></a></span></span></div></blockquote><div style="text-align: justify;">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. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">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.</div></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><span class="Apple-style-span"><span class="Apple-style-span" style="font-weight: bold;"><blockquote><a name="psychology"><i>5. No affecting psychological / speculative factors<br /></i></a></blockquote></span></span></div><div style="text-align: justify;">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.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">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.</div></span>Johannes Hidénhttp://www.blogger.com/profile/06968608189131118506noreply@blogger.com0tag:blogger.com,1999:blog-2466696993016417230.post-65959005541460479042010-11-28T20:55:00.008+02:002011-07-13T10:15:37.963+03:00The myth of an efficient market, part 1/3 - Definition of efficiency<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiyZEJoMp7kUd-iVhsf72lLYmf0Paz77iTzEiy3PCsx7kugm1cwb-ZUrG63qC98faSMkKaOrAHtSNejKlPGISBRx7HvPqA44_CJFSeqHx0LB3_IJBZunzwVNVwGlRCmkjlXHO0j-EIWO3E7/s1600/deutsche_b%C3%B6rse.jpg" onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}"><img style="margin: 0px 0px 10px 10px; text-align: justify; float: right; cursor: pointer; width: 320px; height: 291px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiyZEJoMp7kUd-iVhsf72lLYmf0Paz77iTzEiy3PCsx7kugm1cwb-ZUrG63qC98faSMkKaOrAHtSNejKlPGISBRx7HvPqA44_CJFSeqHx0LB3_IJBZunzwVNVwGlRCmkjlXHO0j-EIWO3E7/s320/deutsche_b%C3%B6rse.jpg" alt="Deutsche Börse, Frankfurt, 20.6.2007" title="Deutsche Börse, Frankfurt, 20.6.2007" id="BLOGGER_PHOTO_ID_5536845334030435074" border="0" /></a><div style="text-align: justify;">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.</div><br /><div style="text-align: justify;">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 (<a href="http://www.epaper.fi/reader/?issue=10792;875c6313f5ce5f4e705423c255157048;7">Meklari 1 / 2010</a> 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.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">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.</div><div style="text-align: justify;"><br /></div><span class="fullpost"><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><div style="text-align: justify;"><span class="Apple-style-span" style="font-weight: bold;"><span class="Apple-style-span"><span class="Apple-style-span" style="font-size: large;">The definition of an efficient market</span></span></span></div><div><br /></div><div>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 <a name="semi-strong">semi-strong</a> 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.</div><div><br /></div><div>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.</div><div><br /></div></div><div style="text-align: justify;">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. <a name="layers"></a>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.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">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.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">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:<a name="formula"></a></div><div style="text-align: justify;"><div><blockquote><div><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhTPbhQ1jxLegg4cTfnh_qbJDWyk5x8rFR_qflW05CSXJKpcPIA6PvGwqvlLaZUCDqBS84Ct1UMXRE960JDAqt3i7P26VqaJeHtucfjU76bAR1hds8yYNJtgci2y-pnXhdJIACf9ZFVEc2p/s1600/kaava_cr.png" onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}"><img style="float:left; margin:0 10px 10px 0;cursor:pointer; cursor:hand;width: 200px; height: 147px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhTPbhQ1jxLegg4cTfnh_qbJDWyk5x8rFR_qflW05CSXJKpcPIA6PvGwqvlLaZUCDqBS84Ct1UMXRE960JDAqt3i7P26VqaJeHtucfjU76bAR1hds8yYNJtgci2y-pnXhdJIACf9ZFVEc2p/s200/kaava_cr.png" border="0" alt="" id="BLOGGER_PHOTO_ID_5628543906606479010" /></a></div><br /><br /><br /></blockquote><blockquote>, 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.</blockquote></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">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.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">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.</div></div></span>Johannes Hidénhttp://www.blogger.com/profile/06968608189131118506noreply@blogger.com0tag:blogger.com,1999:blog-2466696993016417230.post-33664420938127213542010-08-29T10:33:00.006+03:002010-12-19T10:19:16.807+02:00Beach resort rules<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgu3Kj0qUzSElWX4TSYtu6it8H-pHu4S48eA9g9fmZtlOZe7j5GMXFgpRpQWrC3L4GgVCC2ejqXTlJ4YpjLzvjrKnKWks_DdkbnNw1_Q6hMJM9G6e5d9hxZWigWwOt9-LcFAwOPpi8tpet1/s1600/IMG_8350.JPG"><img style="text-align: justify;float: right; margin-top: 0px; margin-right: 0px; margin-bottom: 10px; margin-left: 10px; cursor: pointer; width: 320px; height: 214px; " src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgu3Kj0qUzSElWX4TSYtu6it8H-pHu4S48eA9g9fmZtlOZe7j5GMXFgpRpQWrC3L4GgVCC2ejqXTlJ4YpjLzvjrKnKWks_DdkbnNw1_Q6hMJM9G6e5d9hxZWigWwOt9-LcFAwOPpi8tpet1/s320/IMG_8350.JPG" border="0" alt="Pulau Tioman, August 2010" title="Pulau Tioman, August 2010" id="BLOGGER_PHOTO_ID_5510407292713545714" /></a><div style="text-align: justify;">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.</div><div style="text-align: justify;"><br /></div><div><div style="text-align: justify;">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?</div><div style="text-align: justify;"><br /></div><span class="fullpost"><div style="text-align: justify;">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: </div><div style="text-align: justify;"><i><blockquote>"Deckchairs cannot be reserved with mere towels or other personal belongings for a time period longer than the duration of a swim."</blockquote></i></div><div style="text-align: justify;"><i></i>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.</div><div style="text-align: justify; "><br /></div><div style="text-align: justify; ">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.</div><div style="text-align: justify; "><br /></div><div style="text-align: justify; ">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.</div></span></div>Johannes Hidénhttp://www.blogger.com/profile/06968608189131118506noreply@blogger.com0tag:blogger.com,1999:blog-2466696993016417230.post-8908115853904561402010-05-18T23:02:00.003+03:002010-10-05T08:19:09.541+03:00Stability vs. moral hazard - a compromise to deposit insurance<div style="text-align: justify;"><p class="MsoNormal" style="text-align:justify"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90ddlxWwCx46Ttz9qBLi-I-cx-sp2Q0MnoLd1Ka29yWpEsX9TiUHsz-KgHnSlPgpRtVRDezyWShVIybOr64p07sWJgJUFNyFVOhiQJKbYaC5y7NY2sLKAnaQp_MNH4nrbr0HqzQ6s78mR/s1600/Icesave-website.png"><img style="float:right; margin:0 0 10px 10px;cursor:pointer; cursor:hand;width: width: 274px; height: 177px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj90ddlxWwCx46Ttz9qBLi-I-cx-sp2Q0MnoLd1Ka29yWpEsX9TiUHsz-KgHnSlPgpRtVRDezyWShVIybOr64p07sWJgJUFNyFVOhiQJKbYaC5y7NY2sLKAnaQp_MNH4nrbr0HqzQ6s78mR/s320/Icesave-website.png" border="0" alt="Icesave website, as it appeared in February 2010" title="Icesave website, as it still appeared in February 2010" id="BLOGGER_PHOTO_ID_5471215278366227474" /></a>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.</p><span class="fullpost"> <p class="MsoNormal" style="text-align:justify">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.</p> <p class="MsoNormal" style="text-align:justify">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.</p><p class="MsoNormal" style="text-align:justify">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 <a href="http://www.risk.net/structured-products/news/1635230/finland-s-sofia-bank-refunds-85-investor-deposits">few thousand clients of the Finnish Sofia Bank are waiting the last 15% of their money</a> - 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.</p><p></p><p></p></div></span>Johannes Hidénhttp://www.blogger.com/profile/06968608189131118506noreply@blogger.com0tag:blogger.com,1999:blog-2466696993016417230.post-35111148644867224512010-05-07T23:05:00.013+03:002010-10-05T08:16:29.755+03:00Greece and bankers should take their responsibility<div><br /></div><div><div style="text-align: justify; ">Greece has agreed to <a href="http://www.cbc.ca/world/story/2010/05/02/greece-debt-bailout-agreement.html">accept the bailout terms</a>. 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...</div><span class="fullpost"><div style="text-align: justify; "><br /></div><div style="text-align: justify; "><br /></div><div style="text-align: justify; "><h4><span class="Apple-style-span" style="font-size:large;">1. Greece has enough assets to pay the debt off?</span></h4></div><div style="text-align: justify; "><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfB68VHKqMZn5Ku815pZNns-gDzZeEw_RHhJ0v20bNansu1OVB-MjkEQtqJKEnzHjlTtox754T8PS75CvSSHn1RjAvjrZHyTVOen9IwpPo0joJE9NEexrZlbe2SNvHBJemxYPsC-UrKPdj/s1600/IMG_4183.jpg"><img src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfB68VHKqMZn5Ku815pZNns-gDzZeEw_RHhJ0v20bNansu1OVB-MjkEQtqJKEnzHjlTtox754T8PS75CvSSHn1RjAvjrZHyTVOen9IwpPo0joJE9NEexrZlbe2SNvHBJemxYPsC-UrKPdj/s320/IMG_4183.jpg" alt="A Greek evzon, December 2008" title="A Greek evzon, December 2008" id="BLOGGER_PHOTO_ID_5468245469403506994" border="0" style="margin-top: 0pt; margin-right: 0pt; margin-bottom: 10px; margin-left: 10px; float: right; cursor: pointer; width: 171px; height: 256px; " /></a>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? <a href="http://www.reuters.com/article/idUSLDE63R0QZ20100428">Other curiosities</a> 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?</div><div style="text-align: justify; "><br /></div><div style="text-align: justify; ">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? </div><div style="text-align: justify; "><br /></div><div style="text-align: justify; ">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 <a href="http://cachef.ft.com/cms/s/0/816b0f86-173a-11df-94f6-00144feab49a,s01=1.html">Financial Times</a>, 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?</div><div style="text-align: justify; "><br /></div><div style="text-align: justify; "><br /></div><div style="text-align: justify; "><h4><span class="Apple-style-span" style="font-size:large;">2. The bailout is supporting the banks</span></h4>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?</div><div style="text-align: justify; "><br /></div><div style="text-align: justify; ">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.</div><div style="text-align: justify; "><br /></div><div style="text-align: justify; "><br /></div></span><div style="text-align: justify; "><div style="text-align: justify; "><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiYIi2Kp7x2vdW0vhyphenhyphenvgAhOorBWIa9lnVA3FTDWidKuZOnoWN0YcSfVeM3Igpvq5GzIp8PAkn3qJ1PEfeHARAuKRiub8x8TWYM3LpYZC5AkVei9Ci2FMtSQvSD1_eYMPZcb8nMxLvtJ20ix/s1600/IMG_4247.JPG"><img src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiYIi2Kp7x2vdW0vhyphenhyphenvgAhOorBWIa9lnVA3FTDWidKuZOnoWN0YcSfVeM3Igpvq5GzIp8PAkn3qJ1PEfeHARAuKRiub8x8TWYM3LpYZC5AkVei9Ci2FMtSQvSD1_eYMPZcb8nMxLvtJ20ix/s320/IMG_4247.JPG" alt="Evzones changing the guard, December 2008" title="Evzones changing the guard, December 2008" id="BLOGGER_PHOTO_ID_5468272950009834850" border="0" style="margin-top: 0px; margin-right: auto; margin-bottom: 10px; margin-left: auto; display: block; text-align: center; cursor: pointer; width: 320px; height: 240px; " /></a></div><span class="fullpost"><div style="text-align: justify; "><div style="text-align: center; "><span class="Apple-style-span" style="color: rgb(0, 0, 238); "><u><br /></u></span></div><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiYIi2Kp7x2vdW0vhyphenhyphenvgAhOorBWIa9lnVA3FTDWidKuZOnoWN0YcSfVeM3Igpvq5GzIp8PAkn3qJ1PEfeHARAuKRiub8x8TWYM3LpYZC5AkVei9Ci2FMtSQvSD1_eYMPZcb8nMxLvtJ20ix/s1600/IMG_4247.JPG"></a><h4><span class="Apple-style-span" style="font-size:large;">=> Co-responsibility?</span></h4></div><div style="text-align: justify; ">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.</div></div></div></span>Johannes Hidénhttp://www.blogger.com/profile/06968608189131118506noreply@blogger.com0tag:blogger.com,1999:blog-2466696993016417230.post-35172683701039758562010-04-18T01:23:00.007+03:002010-10-05T08:22:52.916+03:00Expo 2010 - roadmap to a Chinese future<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgkjWBtlUCsQrn4guTJ491bVfVfj9pu9fyNKTOcybWspQHRXI0FGgKSXTwXrAtG0Zeg08EsO6f_O-OuUcYjQ-P0pBeAJDeRYxNAnUtMupMiIV4w1aPOBrL-WDL8YbN45dGk_g7nnac0ucXa/s1600/Haibao_en_Expo_2008.jpg"><img style="float:right; margin:0 0 10px 10px;cursor:pointer; cursor:hand;width: 320px; height: 240px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgkjWBtlUCsQrn4guTJ491bVfVfj9pu9fyNKTOcybWspQHRXI0FGgKSXTwXrAtG0Zeg08EsO6f_O-OuUcYjQ-P0pBeAJDeRYxNAnUtMupMiIV4w1aPOBrL-WDL8YbN45dGk_g7nnac0ucXa/s320/Haibao_en_Expo_2008.jpg" border="0" alt="Haibao, the Expo 2010 mascot (Wikimedia Commons)" title="Haibao, the Expo 2010 mascot (Wikimedia Commons)" id="BLOGGER_PHOTO_ID_5457484226315932594" /></a><div style="text-align: justify;">The next world's fair, <a href="http://en.expo2010.cn/">Expo 2010</a>, will be held in Shanghai, China. It will begin in less than two weeks, starting on May 1st and continuing till the end of October. The area of the Expo will be the largest in the history of world's fairs and it is also expected to reach the largest visitor count in history - a goal I believe it will easily achieve. I also believe it will do more, by exceeding its goal of getting 70 million visitors. However, it can be seen as more than just a hugely popular event.</div><span class="fullpost"><div style="text-align: justify;"><br /></div><div style="text-align: justify;">So far, due to its huge size, China has been a prime example of a country to which western corporations have moved their manufacturing in order to save money in labour costs. This, sometimes referred to as the "China phenomenon", has been a significant factor in China's economic rise and has pushed China towards a more consumerist lifestyle - especially amidst the younger generations. In addition to being a growing market and a place for manufacturing, an emerging trend in the upcoming years will be the increasing amount of also white-collar work moving to China. One factor supporting this is the increasing amount of Chinese with a sufficient knowledge of English or other foreign languages. This in turn will further strengthen the Chinese influence over the world.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">All of this has made the Chinese economy growing at a very rapid annual rate of about 10% during the past few decades. It is almost inevitable that it will, at some point, surpass the U.S. as the biggest economy on the planet. It may be unlikely that it would happen as soon as during this decade, but even so, it probably will happen during the 2020's. As a consequence not only is the Expo 2010 a huge event, but it can be seen as a sign of what is to come. Just like the expo held in Shanghai will most likely be the biggest of its kind so far, so will China very likely soon be the most powerful country in the world - at least in the economic sense. Therefore, when looked from the late 21st century, this year's Expo might be regarded as a harbinger of a new era.</div><div style="text-align: justify;"><br /></div><div style="text-align: center;"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgdfkNiK9H1Z1aiYQ2iG8VZngHdf4EITj5fFBa9bKxjIY_9KCqbbqqDzs-JeOjHeMfnshJx0WfNEDmk_uzwQh-dmczYBrOO8Fk6Ydot62t60zZUmF7YZfaGCAr0XEh8G3iN7lT1Ld9TI1bo/s1600/800px-Shanghai_at_night.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 214px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgdfkNiK9H1Z1aiYQ2iG8VZngHdf4EITj5fFBa9bKxjIY_9KCqbbqqDzs-JeOjHeMfnshJx0WfNEDmk_uzwQh-dmczYBrOO8Fk6Ydot62t60zZUmF7YZfaGCAr0XEh8G3iN7lT1Ld9TI1bo/s320/800px-Shanghai_at_night.jpg" border="0" alt="Shanghai (Wikimedia Commons)" title="Shanghai (Wikimedia Commons)" id="BLOGGER_PHOTO_ID_5461243406617666738" /></a><br /></div><div style="text-align: justify;">What kind of consequences this power shift to the east will have remains to be seen. It is to be hoped for that issues related to human rights, corruption and freedom of speech will be improved by the time China reaches the status of the biggest economy in the world. At that point the importance of China as a market will be bigger than ever, and this will most certainly affect the way China views the rest of the world. As staying in China will become even more important to most multinational corporations, China has little need to specifically persuade any company or to try to please western organizations. Thus, the drive for change has to come from China itself. </div></span>Johannes Hidénhttp://www.blogger.com/profile/06968608189131118506noreply@blogger.com0tag:blogger.com,1999:blog-2466696993016417230.post-63685529197226547892010-03-20T08:30:00.009+02:002010-10-05T08:29:54.986+03:00Life in a complete world<div style="text-align: justify;"><p class="MsoNormal" style="text-align:justify"><span class="Apple-style-span"><span class="Apple-style-span" style="font-family:georgia;">We are living in a constantly changing world. Technological progress is continuously changing our every day lives, world population is still strongly growing, fossil fuels are being depleted, the power balance between countries is changing, countries split, international collaborative organizations are established and expanded, demographics are changing due to immigration among other things, man is shaping nature and environment, languages die and globalization unifies cultures.<o:p></o:p></span></span></p> <p class="MsoNormal" style="text-align:justify"><span class="Apple-style-span" style="font-family:georgia;"><span class="Apple-style-span"></span></span></p> <p class="MsoNormal" style="text-align:justify"><span><span class="Apple-style-span" style="font-family:georgia;">What if we would live in a world, where all this was no longer true? <span class="fullpost">Technological progress would have practically reached its peak. Population growth would have stopped and would be controlled for example through jurisdiction if needed. The social structure of the population and the possibly still existing countries would have been stabilized. Fossil fuels would have long ago been completely or almost completely replaced by alternative energy sources, and the human relation with nature would also otherwise be in balance. Real economic growth would have stopped and the division of wealth would be stabilized. Everyone on earth would either have the same mother tongue or at least the amount of languages and their power relationship would not change.</span></span></span></p> <span class="fullpost"> <p class="MsoNormal" style="text-align:justify"><span lang="EN-GB" style="color:black;"><o:p><span class="Apple-style-span" style="font-family:georgia;"> </span></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span class="Apple-style-span"><span class="Apple-style-span" style="font-family:georgia;">None of these are close, but the idea is not impossible in the very long run. It may also be that the pace of change is currently at its highest, and in the upcoming decades life will change slower. At least so far the most rapid technological revolution in the entire history might have been the way mobile phones and internet have conquered the world during the last two decades. In practice, we are currently just adapting to the effects of this revolution – both on individual and societal levels.</span></span></p><p></p><p></p></div> <p class="MsoNormal" style="text-align:justify"><span style="color:black;"><o:p><span class="Apple-style-span" style="font-family:georgia;"> </span></o:p></span></p></span> <p class="MsoNormal" style="text-align:justify"><span class="Apple-style-span"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_BFgbBBa_CWWXi6xg5wWUPdtRBF8ThNCtqAS93nKZ-lIznOFD3kKLAtvk_ISdA2KFn8FnFC1sK8FBRTWKjAbVvObiekc5hhUOd4FQjsI4TSZjeQt9Vt3DdPHGHzGWrEKhMlNcDNOMcBt4/s1600-h/800px-Goldenes-Zeitalter-1530-2.jpg"><img style="text-align: justify;display: block; margin-top: 0px; margin-right: auto; margin-bottom: 10px; margin-left: auto; cursor: pointer; width: 320px; height: 222px; " src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_BFgbBBa_CWWXi6xg5wWUPdtRBF8ThNCtqAS93nKZ-lIznOFD3kKLAtvk_ISdA2KFn8FnFC1sK8FBRTWKjAbVvObiekc5hhUOd4FQjsI4TSZjeQt9Vt3DdPHGHzGWrEKhMlNcDNOMcBt4/s320/800px-Goldenes-Zeitalter-1530-2.jpg" border="0" alt="A 16th century view of a Golden Era" title="A 16th century view of a Golden Era (from Wikimedia Commons)" id="BLOGGER_PHOTO_ID_5449330967728451346" /></a><span class="Apple-style-span" style="font-family:georgia;"><o:p></o:p></span></span></p> <span class="fullpost"> <p class="MsoNormal" style="text-align:justify"><span class="Apple-style-span"><span class="Apple-style-span" style="font-family:georgia;">Then what would it be like to live in a truly complete world? The world would probably be, if not entirely equal, a lot more equal than it is today. There would be no war-torn countries nor significant violent conflicts between cultures. In addition to an abolished global inequality, there would also be no inequality between generations: no real economic growth and no new technologies or technological applications would emerge to make life easier. There would also be very little if any reason to fear population growth, global warming, great wars or technological progress potentially going too far.</span></span></p> <p class="MsoNormal" style="text-align:justify"><span class="Apple-style-span"><o:p><span class="Apple-style-span" style="font-family:georgia;"> Apart from the positive factors like equality and safety, also downsides can be seen. From the perspective of the contemporary man a future without linguistic or cultural diversity might seem like a depressing scenario. On the other hand would one be able to miss something that one has never experienced? Some probably would miss, but most perhaps would not – at least not on a substantial or conscious level.</span></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span class="Apple-style-span"><o:p><span class="Apple-style-span" style="font-family:georgia;">How about what life in general would feel like, if the world would have been approximately the same for centuries, and there would be no reason to assume that the following centuries would in any way differ from this? Would it result in a lack of objective and healthy ambition? In science there would be no new discoveries to be found. No industry or profession would be facing any kinds of changes. Of course this would result in a general feeling of safety, but perhaps also a feeling of purposelessness. No new ideas would be brought up in any area of life – not in technology, literature, art, pastime nor in social relations.</span></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span class="Apple-style-span"><span class="Apple-style-span" style="font-family:georgia;">Also in the entertainment culture practically everything would have been experienced. In movies and games or their future equivalents all the stories and phenomena would have been seen. Since similar entertainment - both technologically and in terms of content - would have been produced for centuries and all the old production would be easily available, entertainment consumption would most likely be far more fragmented than it is today. Both in entertainment and in fashion there could of course be short-term variation, but in practice everything would be repetition of something old. Everything would have been already experienced. But although we would have reached our final goal as a race, there still might be space for individual dreams and goals.</span></span></p><p></p> <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjlct982ELqNvFsWjrQmGuDNu0b4aaIm26QEqVX6LTp-FXHMza6UzuKlDFktnQiLqpRt1mu3L4Od9rsmflFTahe3S9W4FbuPEcUUII4e1rCWjn_Xdr0XzG1PAhYWuGRtmZTo1XfEAIapAFh/s1600-h/IMG_6042.JPG"><img style="text-align: justify;display: block; margin-top: 0px; margin-right: auto; margin-bottom: 10px; margin-left: auto; cursor: pointer; width: 320px; height: 240px; " src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjlct982ELqNvFsWjrQmGuDNu0b4aaIm26QEqVX6LTp-FXHMza6UzuKlDFktnQiLqpRt1mu3L4Od9rsmflFTahe3S9W4FbuPEcUUII4e1rCWjn_Xdr0XzG1PAhYWuGRtmZTo1XfEAIapAFh/s320/IMG_6042.JPG" border="0" alt="Tokyo, March 2009" title="Tokyo, March 2009" id="BLOGGER_PHOTO_ID_5449331400399726514" /></a><span class="Apple-style-span" style="font-family:georgia;"> </span><p class="MsoNormal" style="text-align:justify"><span class="Apple-style-span"><span class="Apple-style-span" style="font-family:georgia;">A lot of people may consider a utopia like this rather impossible. Maybe it is, maybe not, which is of course largely dependent on how tightly the term “complete” is defined in this context. In any case, in spite of its perks, the state of goallessness, that is an inherent part of a complete world, might not be entirely worth striving for – although there would perhaps be even less sense in trying to purposefully avoid it. Either way, the current speed of change and progress does not always feel right to the human nature. The older one gets, the more exhausting the surrounding invisible turmoil may feel.<o:p></o:p></span></span></p> <p class="MsoNormal" style="text-align:justify"><span class="Apple-style-span"><o:p><span class="Apple-style-span" style="font-family:georgia;"> For the time being the train of progress is continuing its journey at high speed. Each of us may decide for oneself, how perseveringly one is willing to chase it.</span></o:p></span></p> <p class="MsoNormal"><span lang="EN-GB" style="mso-ansi-language:EN-GB"><o:p> </o:p></span></p><p></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><o:p> </o:p></p></span>Johannes Hidénhttp://www.blogger.com/profile/06968608189131118506noreply@blogger.com0