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This is the official Perth blog site for posts, comments, and other contributions about leadership, behavioral finance and economics, and about management generally, as well as other related topics that take our fancy.

An R-shaped “de-covery”?

So the latest GDP data shows the US economy fell 9.5% in the 2nd quarter of 2020. That’s the worst showing ever since the Great Depression. It doesn’t get worse than that right? Or maybe it does.

Hmmm, what is worse than a Depression? The economists now need to put their thinking caps on.

There was a time in those halcyon days of March this year when the argument amongst the econo-literati was about whether the economy was going to recover with a V-shape or a W-shape. Those discussions sound so quaint these days. We’re well into a second wave of covid-19 that looks very likely to extend into a third wave, and maybe to be transformed into a permanent wave – “WHO says COVID-19 pandemic is 'one big wave', not seasonal”. That doesn’t sound like a recovery to me, V-shaped or any shape. What’s the opposite of a recovery? It’s a de-covery of course, dummy!

Seems to me there’s a lot of things about to hit that will cause the “recovery” to be more like a continuing decline over several years. What else do we call that I wonder? A secular decline? A slow collapse? Wait! How about an R-shaped implosion?

What in the Earth is that? Put the R on its back (or side) and there you have it. First a steep lurch downwards, then a very gentle incline off the depths over a longer time. That’s the future, folks. What happens then?

For those people who caught covid-19 and lived there’s the unwelcome prospect of chronic ill-health. There’s the prospect of millions more business failures and a long-term process of rolling disinvestment globally. Protectionist sentiment rises quickly, a reminder of the protectionism and competitive devaluations in the 30s that exacerbated the global rot. We’re already seeing government instability on the rise in Europe and Asia, not to mention in the US just like we saw in the 1930s.

The last time the world had a depression it ended in a world war. GDP figures are actually going to show an even worse collapse of economic performance globally now versus then. That means a corresponding dramatic increase in poverty and political radicalism in both developed and developing countries. An R-shaped global decline doesn’t even start to capture the reality of it all.

It seems to me that the best case is for a long flat low plateau in global economic performance around 15% below before where the pandemic started. If all goes swimmingly, we come out of it in a decade. That’s unless other, ugly things don’t intervene. In which case we’re in a 20 to 30-year Dark Age.

Maybe a 10-year R-shaped recovery is the best case. Let’s pray for it.

BTW it’s looking like China is already well into it’s V-shaped recovery….

 

 

 

 

 

 

 

 

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What's an MBA Really Worth Post Covid-19?


Is there a problem with MBA degree? And the people who earn them? Our research into behavioral finance (what’s that!!!) shows an inverse correlation between MBAs  (and any higher degree in finance) and business acumen. Just thought I would throw it out there to dispel rumors that the educated hoi polloi are going to be the movers and shakers to get...
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Could fintech replace government - in planetary colonies?


Fintech replace government? This seems fanciful, right? Even delusional? But get this: in China recently, a 5-year-old girl who needed brain surgery and had to pay what for her parents was an impossible sum to get, received the surgery courtesy of millions of people who each paid 0.03 yuan per person. They thus met the medical bills of around 300,0...
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Do most leaders lack business acumen?


Uh oh, GE just warned of another year of falling profits. It recently sold off its BioPharma unit making investors feel a bit better, until they realized things were still getting worse. GE needed to do something after cutting its dividend and reporting a huge loss. Jack Welch would be turning in his grave except for the fact that he’s alive. Do yo...
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Why don't risk managers worldwide use behavior as a component of financial and investment risk?


Perth Leadership Institute and its Founder, Dr. E. Ted Prince do a new take on an old issue. See the article by Katherine Heires in GARP Risk Intelligence, the News service of the Global Association of Risk Professionals.  
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Is free trade obsolete?


So we’ve had a little excitement about the US imposing tariffs on steel and aluminum and now we’re into a global frisson about the possibility of a global trade war. As we know, they lead to depressions, or so it is said. But here’s the question I want to ask: if a world has declining population growth rates, does free trade still promise the same ...
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Exercisers are the new 1%


  So many articles about how good exercise is for you that it’s become positively nauseating. Even a confirmed curmudgeon like me can’t find anything wrong with it.   Yet the CDC says that only 20% of adults actually meet their do-good exercise guidelines (both aerobic and muscle-strengthening activity). That means that 80% of Americans don’t do en...
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Is blockchain a bubble – and compromised too?


  Recently I have attended three conferences on widely divergent topics. Every one of them featured blockchain and what everyone was going to do about it and with it. It seems that the contemporary standard for demonstrating your innovativeness is showing you are into blockchain.   Blockchain is, according to the banks, going to transform the finan...
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Will quantum bitcoins be free?


Now bitcoin and other digital currencies have been cratering. Does that spell their end? Nope, not at all, maybe quite to the contrary. There’s a new game in town for crypto-currencies. It’s called quantum computing. We’re now well into a new arms race for the most powerful quantum computer. IBM has just upped the ante with a 50 qubit quantum compu...
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Shouldn’t behavioral finance be a part of fintech?

Fintech is hot; as I’m sure I don’t need to remind you. I just went online to find the top 10 opportunities. Here they are. I can’t argue with any of the topics on the list.

  1. Mobile Banking and Financial Inclusion for Underserved
  2. Smart Personal Finance Management
  3. Affordable and Easy Accounting for Small Businesses
  4. Innovative Payment and Money Transfer Processing
  5. Peer to Peer Lending and Microfinancing
  6. Accessible Investing and Online Trading
  7. Simplified Crowdfunding
  8. Big Data and Predictive Analytics for Fintech
  9. Digitized Insurance Experience
  10. Blockchain and Digital Currency

But here’s the thing. When you check them all out there’s no mention of behavioral finance. And here’s me thinking this is all about FIN- Tech. Get it? Am I missing something?

Could it be that the fintech crowd doesn’t think behavior matters? That it is not an important variable? Or that psychology is just too soft and squishy a subject to be worthy of serious scientific endeavor, or too new to be taken seriously….? Hmm, that’s worth exploring further.

I wonder what could be going on here? This brings back some sensitive memories, like when it was topical to talk about the hard and the soft sciences, with the soft sciences receiving a small but discernible curl of the lip. Like, they’re not worth exploring if you are into the real hard stuff.

Now of course there would be many who don’t consider economics to be a hard science, its (pseudo?) math focus notwithstanding. But you would think that finance would just about make the cut, Black-Scholes falling from grace notwithstanding. But in this telling, finance is the hard science and behavioral finance the soft-science underbelly.

Here’s what I think is going on. The economics guys have teamed up with the MBAs, both of whom are actually closet positivists who think that psychology, behavioral and neuroscience are too imprecise to be worthy of their attention. What is worthy are Big Data, math with rigor (which excludes pure math of course) and algorithmic ways of doing things, souped up with AI as necessary. But behavior just doesn’t make the cut.

So the cultural divide still persists, almost 60 years after CP Snow coined the term The Two Cultures. Before, the dichotomy du jour was hard vs soft science. Now it’s fintech vs behavioral strategy and neuroscience. Plus ca change etc. etc.

What all of this seems to mean is that the fintech types see behavior as a step too far and they really are not going to go there, no matter what. They were never taught about behavioral finance because the academics largely have ignored it, 3 Nobel Prizes notwithstanding. Until it’s shoved in their face by dark reality, it’s going to remain in the shadows, at least for them.

Why would the fintechnorati feel this way? Could it be because behavioral finance takes formal account of irrationality and they still remember all the lessons which drummed into them that homo economicus always makes rational decisions, reality to the contrary? Or could it be that it just makes the math too hard? Who knows? In 20 years people will be writing books on this, just like the books that hundreds of years later excoriated the inquisition for being so crassly stupid about heliocentrism.

Ironically the popular writers have picked up the cudgels on this one even though the academics and fintech types haven’t. Authors such as Malcom Gladwell and Nouriel Roubini are writing for the people who have to use this stuff and that’s why they’re so popular. But the professionals are missing this boat in a really big and splendiferous way.

My sense is that more aggressive and innovative types of going to run with this ball and outwit the fintech traditionalists. The Chinese maybe? Anthropologists, God forbid?

Science has a nasty way of going in the right direction anyway and making hitherto sceptics look like know-nothings. Watch for it to happen with fintech too.

 

 

 

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Is blockchain primarily a medical breakthrough?


   Now we know that blockchain is revolutionizing not just digital currencies but also accounting and increasingly other areas of finance. So blockchain is fundamentally a financial technology right? I’m not so sure.   Check out my Sanctus Sanctorum, Wikipedia, and it will tell you that blockchain is a distributed ledger. As such it can give you a ...
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Can behavioral economics restore Alpha?


Did you notice that Richard Thaler just received the Nobel for behavioral economics? He’s the third; the first was Daniel Kahneman in 2002, the second Robert Shiller in 2013. Hmm, it took 15 years for the second and third prize to be awarded. Is that why economics globally is in such a mess? Why we still can’t predict recessions, the valuation of c...
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Does streaming music reduce productivity?


Well, whadya know? US worker productivity growth rose sluggishly in the last quarter (at 0.9%). So what? This is kind of boring stuff after my usual posts on quantum brains, love force-fields and the like. What could possibly be of existential interest here? Productivity growth is usually said to be caused by eye-glazingly boring phenomena such as ...
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Bitcoin meets behavioral finance – what happens next?



So now Bitcoin has split between two camps, the miners and the rest. That gives us a bit of insight into the psychodynamics of the Bitcoin community. Can we figure out more of them? How about a behavioral finance analysis? To wit, what are the cognitive biases of the Bitcoin crowd? That is, both the rational and the irrational ones, more of the lat...
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What’s wrong with quant approaches?


You know the old story: when a celebrity gets to be Time Person of the Year, it’s time to short them. Obama received the honor twice, in 2008 and 2012 and look where that got him! Trump was Time Person of the Year 2016 so look out! In the same vein I notice that the Wall Street Journal now has a new and separate section on quants. Does that mean th...
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Are dynasties the future of democracy?


So I know I don’t have to remind you that we have a family running the US of A. Let’s say that it continues, with or without a gap between other family members also getting into the saddle. That’s what a dynasty is, in both cases. And this is hardly new. In modern times we’ve had the Kennedys, the Bushes and the Clintons. The Roosevelts before that...
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Quantum economics – can 2 (or more) minds be entangled?


I just read “The Undoing Project” by Michael Lewis. You remember him? The author of Moneyball, the best-selling book about a new way to win at baseball. “The Undoing Project: is about the emergence of behavioral economics and behavioral finance. It focuses on the two key figures in the drama, Amos Tversky and Daniel Kahneman and the incredibly frui...
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Can refugees be the key to a new and vibrant immigration policy?


I think the debate about immigration is missing something really big. The biggest thing we should be worried about is the vitality and energy of our country. If we get that right everything else falls into place. I was just watching a documentary about Japan and the ongoing depopulation there. With more and more seniors as a proportion of the popul...
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Are celebrities better venture investors than the professionals?


We Americans are obsessed by celebrities. Many of them have lots of moolah. So I’m sure you took notice of the recent announcements that Leonardo DiCaprio has joined a Boston VC firm. Maybe you also happened to notice another recent announcement that Kobe Bryant had launched a $100 MM VC fund, with one Jeff Stibel. This is just the tip of the icebe...
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Can we unify traditional and behavioral economics?


So active investing is dead. Even the investment literati have finally figured that one out even though the writing has been on the wall for quite some time. I’ve been heralding the issue (“An Inconvenient Truth - Alpha Financial Styles Beget Ginormous Returns” and “Less Algebra More Fudge Brownie - What Will Managed Investing 2.0 Look Like?”). So ...
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