information asymmetry

191 results back to index


pages: 209 words: 13,138

Empirical Market Microstructure: The Institutions, Economics and Econometrics of Securities Trading by Joel Hasbrouck

Alvin Roth, barriers to entry, business cycle, conceptual framework, correlation coefficient, discrete time, disintermediation, distributed generation, experimental economics, financial intermediation, index arbitrage, information asymmetry, interest rate swap, inventory management, market clearing, market design, market friction, market microstructure, martingale, price discovery process, price discrimination, quantitative trading / quantitative finance, random walk, Richard Thaler, second-price auction, selection bias, short selling, statistical model, stochastic process, stochastic volatility, transaction costs, two-sided market, ultimatum game, zero-sum game

In the model (and in real markets), a trade can trigger a wave of elections. 5.5 Empirical Implications This book’s presentation of information asymmetry focuses on its role in trading situations. More broadly, though, asymmetric information figures SEQUENTIAL TRADE MODELS prominently in many models of corporate finance and asset pricing. The sequential trade models (and others to follow) establish a connection between information asymmetries and observable market phenomena. The construction of proxies for the former via empirical analysis of the latter ranks as one of the most important goals of empirical microstructure research. In the model of section 5.2, the structural asymmetric information parameter is µ (the proportion of informed traders in the population). µ is positively related to both the bid-ask spread and the revision in beliefs (compare Eqs. (5.7) and (5.1)).

The logic of the sequential and strategic trade models broadly connect the trade-related variance components to asymmetric information. The variance measures, and other microstructure-based information asymmetry proxies, such as price impact coefficients and spreads, may readily be estimated in many important settings. It is then tempting to use relate the cross-sectional and time-series variation in these proxies to changes or differences in regulation, reporting, disclosure, or any events that might plausibly be hypothesized to affect the information environment. Because stakes in these questions are high, we emphasize that there is little corroborating evidence that these microstructure based proxies are meaningfully connected to asymmetric information, at least as it pertains to securities’ cash flows. Neal and Wheatley (1998) examine the spreads of closed-end mutual funds.

The model nevertheless illustrates a nonfundamental informational advantage. This is an important point because although information asymmetries related to value are quite plausible in some markets, they are more dubious in others. In equity markets, for example, advance knowledge of an earnings surprise, takeover announcement, or similar event confers an obvious advantage. Similar events do not, however, characterize the government bond and foreign exchange markets. Models of these markets, therefore, must rely on a broader concept of private information. This important point has been stressed by Lyons (2001). 5.4.2 Fixed Transaction Costs Suppose that in addition to asymmetric information considerations, the dealer must pay a transaction cost c on each trade (as in the Roll model). The modification is straightforward.


pages: 436 words: 76

Culture and Prosperity: The Truth About Markets - Why Some Nations Are Rich but Most Remain Poor by John Kay

"Robert Solow", Albert Einstein, Asian financial crisis, Barry Marshall: ulcers, Berlin Wall, Big bang: deregulation of the City of London, business cycle, California gold rush, complexity theory, computer age, constrained optimization, corporate governance, corporate social responsibility, correlation does not imply causation, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, Donald Trump, double entry bookkeeping, double helix, Edward Lloyd's coffeehouse, equity premium, Ernest Rutherford, European colonialism, experimental economics, Exxon Valdez, failed state, financial innovation, Francis Fukuyama: the end of history, George Akerlof, George Gilder, greed is good, Gunnar Myrdal, haute couture, illegal immigration, income inequality, industrial cluster, information asymmetry, intangible asset, invention of the telephone, invention of the wheel, invisible hand, John Meriwether, John Nash: game theory, John von Neumann, Kenneth Arrow, Kevin Kelly, knowledge economy, light touch regulation, Long Term Capital Management, loss aversion, Mahatma Gandhi, market bubble, market clearing, market fundamentalism, means of production, Menlo Park, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Naomi Klein, Nash equilibrium, new economy, oil shale / tar sands, oil shock, Pareto efficiency, Paul Samuelson, pets.com, popular electronics, price discrimination, price mechanism, prisoner's dilemma, profit maximization, purchasing power parity, QWERTY keyboard, Ralph Nader, RAND corporation, random walk, rent-seeking, Right to Buy, risk tolerance, road to serfdom, Ronald Coase, Ronald Reagan, second-price auction, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, Steve Jobs, telemarketer, The Chicago School, The Market for Lemons, The Nature of the Firm, the new new thing, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, total factor productivity, transaction costs, tulip mania, urban decay, Vilfredo Pareto, Washington Consensus, women in the workforce, yield curve, yield management

The insurance company, which looks only at statistics, takes a different view, and the premium seems high. Soon, however, information asymmetry is reversed. Perhaps the relationship develops well, perhaps it does not. Happily married couples will not be interested in divorce insurance. Those whose marriages are rocky will. Couples visiting their insurance broker will be as representative of the whole population as couples visiting the marriage guidance counselor. This is the problem of adverse selection: the people who want the policy are bad risks. A "fair" premium based on the average incidence of divorce would be unprofitable for the insurance company. Culture and Prosperity { 239} Asymmetric information issues pervade risk markets. The insurer would sensibly raise the premium to match the characteristics of those who want policies.

Odysseus would not have been impressed by the argument that the behavior he fears, being irrational, will not happen. And nor are we. Information (Chapter 19) ••••••••••••••••••••••••••••••••••••• Asymmetric information is endemic in modern market economies. It is easy to conclude that the remedy for asymmetric information is to tell consumers more, either by regulation or by recognizing disclosure of risks as a legal defense. Yet, as these examples illustrate, such measures are almost use- Culture and Prosperity { 349} less. The normal market mechanism for dealing with asymmetric information is reputation. When we place a deposit with a bank or visit a doctor, we rely on the reputation of the bank and the doctor to assure the security of our deposit and the wisdom of the advice. No regulation can ensure that banks will not go broke or that doctors will make correct diagnoses.

Sharpe USA 1990 Finance theory { 360} Appendix Name Country Year Subject Herbert A. Simon USA 1978 Decision making Vernon Smith USA 2003 Behavioral economics Robert M. Solow USA 1987 Theory of economic growth A. Michael Spence USA 2001 Asymmetric information George J. Stigler USA 1982 Industrial structures, functioning of markets, and causes and effects of public regulation Joseph E. Stiglitz USA 2001 Asymmetric information Richard Stone UK 1984 National income accounting Jan Tin bergen Netherlands 1969 Economic dynamics James Tobin USA 1981 Finance theory and macroeconomics William Vickrey USA 1996 Asymmetric information {glossary} ••••••••••••••••••••••• absolute advantage balance of payments bounded rationality See COMPETITIVE ADVANTAGE. The difference between a country's exports and imports (its current account surplus or deficit), which is necessarily matched by a growth or decline in its net asset position in the rest of the world.


pages: 1,164 words: 309,327

Trading and Exchanges: Market Microstructure for Practitioners by Larry Harris

active measures, Andrei Shleifer, asset allocation, automated trading system, barriers to entry, Bernie Madoff, business cycle, buttonwood tree, buy and hold, compound rate of return, computerized trading, corporate governance, correlation coefficient, data acquisition, diversified portfolio, fault tolerance, financial innovation, financial intermediation, fixed income, floating exchange rates, High speed trading, index arbitrage, index fund, information asymmetry, information retrieval, interest rate swap, invention of the telegraph, job automation, law of one price, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, market clearing, market design, market fragmentation, market friction, market microstructure, money market fund, Myron Scholes, Nick Leeson, open economy, passive investing, pattern recognition, Ponzi scheme, post-materialism, price discovery process, price discrimination, principal–agent problem, profit motive, race to the bottom, random walk, rent-seeking, risk tolerance, risk-adjusted returns, selection bias, shareholder value, short selling, Small Order Execution System, speech recognition, statistical arbitrage, statistical model, survivorship bias, the market place, transaction costs, two-sided market, winner-take-all economy, yield curve, zero-coupon bond, zero-sum game

When we compare spreads, we will implicitly refer to relative spreads. 14.6.1 The Three Primary Spread Determinants The three primary spread determinants are asymmetric information, volatility, and utilitarian trading interest. Their effects on spreads are not independent of each other. For example, if information asymmetries are high, spreads will be wide. Wide spreads, however, discourage uninformed investors, decrease trading volumes (a secondary spread determinant), and thereby make spreads even wider. Asymmetric Information The adverse selection spread model suggests that markets with asymmetrically informed traders will have wide spreads. Spreads will be widest when well-informed traders know material information about instrument values that would have an immediate and significant effect on values if it were common knowledge. When traders are asymmetrically informed, liquidity suppliers set their prices far from the market to recover from uninformed traders what they lose to well-informed traders.

For example, we argue below that firms in emerging industries should have wider spreads than firms in established industries because of asymmetric information problems. However, firms in emerging industries tend to have substantial investment interest, which creates substantial volumes and therefore narrower spreads. Firms in emerging industries therefore may have narrower spreads than firms in established industries, although we predict otherwise. When factors are correlated, it is often necessary to use statistical methods to disentangle their conflicting effects. 14.6.2.1 Asymmetric Information Proxies Information Disclosure Rules Rules that require information disclosure decrease information asymmetries. Stock markets that require their listed firms to disclose reliable, comprehensive financial information on a regular and timely basis will have narrower spreads than those which do not require extensive disclosure.

See International Councils of Securities Associations immediacy, 70, 279, 294, 297, 398, 399 immediate-or-cancel orders, 83, 84 implementation risk, 363, 364, 366–67 implementation shortfalls, 424, 426 implicit transaction costs, 421, 422–23 inappropriate order exposure, 165 in-balance inventories, 283, 284 index arbitrage, 563, 577, 580 index components, 484 index creators, 485 index divisors, 485 indexed limit orders, 309 index enhancement funds, 354 index funds, 40, 484, 486–87 index futures market, 562–63 indexing, 197, 457–60 index managers, 486 index markets, 484, 487–93 index participations, 67 index portfolios, 468, 469, 489–91 index products, 484, 491–92 index replicators, 442 index trading mechanisms, 489 indication of interest, 107, 387 indirect compensation, 593 inefficient traders, 197 inelastic demand, 412 inferior prices, 70 infinitely lived contracts, 41 information asymmetries, 7, 312, 314–15, 323, 326–27, 332, 531–32 collection systems, 97 disclosure rules, 314 distribution systems, 98–99 and floor-based trading, 548–49 inside, 228, 584–88 public, 223, 241–43 of specialists, 501–2 technologies, 8, 524–26 unequal access to, 532 See also informed traders informationless trading strategy, 468 information-oriented technical traders, 194, 195, 196, 226, 230–32, 235, 243 informative prices, 4, 206–14, 218, 222, 224, 235, 237, 238–39, 241, 243 informed traders, 223–24, 252, 384–85 asymmetric information, 299, 310, 531 and block trading, 330 competition among, 239–40, 243 in crossing networks, 135 and dealers, 287–92, 295, 519 definition of, 177, 194, 197, 222 and informative prices, 224, 238–39, 243 liquidity and predictability, 236, 237, 239–40 market paradox, 238–39 profits, 237, 238 trading strategies, 196, 225–26 trading styles, 226–35 and transaction costs, 430 initial margin, 156 initial public offering (IPO), 39, 253 innovative market, 527–28 inside information, 228, 584–88 insider trading, 315, 584–99 bounty hunting for, 590 corporate control issue, 594 debate over, 591–97 definition of, 584 and inside information, 584–88 practical judicial issues, 588–91 proving, 590 inside spread, 280, 281 See also bid/ask spread inside the market, 70 Instinet, 35, 132, 543 institutional traders, 281, 283, 290 instrument(s) correlation of, 44 debt, 40–41 definition of, 4 and informed traders, 223 similar, 539 spread orders, 84 straddle, 37 U.S. markets by class, 45 See also trading instruments insurance companies, 65 insurance contracts, 43 interconnect access fees, 536 interdealer brokers, 58, 93 interest, 155–56, 315 interest rate swap, 42, 187 Intermarket Trading System, 105 Intermedia Communications, 363, 373 intermediate commodities, 188 internalization of orders, 161, 514, 520, 522 internal order crossing, 514, 520–21, 522, 537 internal rate of return, 446, 447 International Councils of Securities Associations (ICSA), 66 international equity derivatives markets, 50, 53 international futures markets, 54 International Organization of Securities Commissions (IOSCO), 66 International Securities Exchange, 50, 543 international stock markets, 50–52 Internet, 99, 267, 343, 545, 558 intertemporal cash flow timing problems, 178, 180 in the doghouse, 325 in the market, 74 in the price, 229 intrinsic values.


pages: 523 words: 111,615

The Economics of Enough: How to Run the Economy as if the Future Matters by Diane Coyle

"Robert Solow", accounting loophole / creative accounting, affirmative action, bank run, banking crisis, Berlin Wall, bonus culture, Branko Milanovic, BRICs, business cycle, call centre, Cass Sunstein, central bank independence, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation does not imply causation, Credit Default Swap, deindustrialization, demographic transition, Diane Coyle, different worldview, disintermediation, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Financial Instability Hypothesis, Francis Fukuyama: the end of history, George Akerlof, Gini coefficient, global supply chain, Gordon Gekko, greed is good, happiness index / gross national happiness, hedonic treadmill, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, illegal immigration, income inequality, income per capita, industrial cluster, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jane Jacobs, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, light touch regulation, low skilled workers, market bubble, market design, market fundamentalism, megacity, Network effects, new economy, night-watchman state, Northern Rock, oil shock, Pareto efficiency, principal–agent problem, profit motive, purchasing power parity, railway mania, rising living standards, Ronald Reagan, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, South Sea Bubble, Steven Pinker, The Design of Experiments, The Fortune at the Bottom of the Pyramid, The Market for Lemons, The Myth of the Rational Market, The Spirit Level, transaction costs, transfer pricing, tulip mania, ultimatum game, University of East Anglia, web application, web of trust, winner-take-all economy, World Values Survey, zero-sum game

But note that—referring back to the previous chapter—a number of increasingly important sectors of the economy such as music and software also have these characteristics of nonrivalry and nonexcludability. Moreover, many goods and services are characterized by a lack of information about their quality. This can be either because of an information asymmetry between buyer and seller (the seller of a used car knows much more about it than the customer), or because it is an experience good which must be consumed to know what it’s like, for example watching a movie. Information asymmetries and shortfalls are an important reason why markets might not work efficiently. It will be apparent that there are many ways in which markets can “fail,” more so than was the conventional wisdom in the 1980s and 1990s, and covering many more activities than those normally provided by the government.

The right structures will take decisions out of the hands of centralized hierarchies. They will involve a more productive and thoughtful interplay between markets and governments than we’ve typically had in the past, one taking account of the dramatic technological and structural change in the economy. Markets and governments need each other to function well, and indeed often “fail” in the same contexts. The existence of transactions costs and information asymmetries present a challenge to any institutional framework. The work of the 2009 Nobel laureates Elinor Ostrom and Oliver Williamson focuses precisely on the way these aspects of reality shape different kinds of institutional response. The utterly transformed world of information, due to ICTs, is revolutionizing the governance of every economy, and we’re only partway through the revolution. THE STRUCTURE OF THIS BOOK This book is divided into three parts.

Conventionally, market failure is presented as a rationale for government intervention in the economy; and conversely, many economists see government failure—as so clearly demonstrated by the communist countries but elsewhere too—as the justification for using markets to organize the economy. This “states versus markets” perspective is bogus, however. Debates about the scope of government intervention on close inspection turn out to be about the nature of government intervention.6 Markets and governments are likely to fail in similar ways because the “failures” stem from inherent problems such as information asymmetries and spillovers between individual decisions. These make it hard for any institution, whether market or state or some other structure, to bring about an ideal outcome. The deep changes in the structure of the economy have made current institutional and governance failures—in both markets and government—acute. The figures on the loss of trust in almost all institutions, described earlier, show that this is widely sensed.


pages: 243 words: 61,237

To Sell Is Human: The Surprising Truth About Moving Others by Daniel H. Pink

always be closing, Atul Gawande, barriers to entry, business cycle, call centre, Cass Sunstein, Checklist Manifesto, choice architecture, complexity theory, Credit Default Swap, Daniel Kahneman / Amos Tversky, disintermediation, future of work, George Akerlof, information asymmetry, Jeff Bezos, Kickstarter, longitudinal study, Marc Andreessen, Menlo Park, out of africa, Richard Thaler, rolodex, Ronald Reagan, Steve Jobs, The Market for Lemons, Upton Sinclair, Wall-E, zero-sum game

Legislatures pass “lemon laws” to protect consumers. But most important, prospective purchasers are on notice. When sellers know more than buyers, buyers must beware. It’s no accident that people in the Americas, Europe, and Asia today often know only two words of Latin. In a world of information asymmetry, the guiding principle is caveat emptor—buyer beware. Akerlof’s provocative thought piece recast how economists and others reckoned with individual transactions and entire markets. So with this example as a model, let’s try another intellectual finger exercise. Imagine a world not of information asymmetry, but of something closer to information parity, where buyers and sellers have roughly equal access to relevant information. What would happen then? Actually, stop imagining that world. You’re living in it. Go back to used cars. In the United States today, a prospective purchaser of, say, a used Nissan Maxima can arm herself with all manner of relevant information before even approaching a seller.

But the only way to truly influence others is to adopt “a frame of mind and heart that constantly seeks mutual benefit in all human interactions.”10 Because of Fisher’s and Covey’s influence, “win-win” has become a fixture in organizations around the world, though often more in parlance than in practice. One explanation for the disconnect between word and deed goes back to the upheaval I described in Chapter 3. Under conditions of information asymmetry, results frequently are win-lose. After all, when I know more than you, I can get what I want by beating you. And since information asymmetry was the defining condition of sales for so long, our muscle memory often takes us in that direction. But with the emergence of information parity (or at least something close to it), those instincts, developed for a different environment, can send us down the wrong path. When sellers and buyers are evenly matched, pushing for win-lose rarely leads to a win for anyone—and often ends in lose-lose.

He tells me, I thank him, and hang up.7 Girard files Mr. Kowalski’s name, along with a reminder in his calendar to call him, and moves to the next name on this list. “After the easy ones,” Girard writes, “there are many Kowalskis, if you keep searching.”8 That Girard found enough clueless Kowalskis to become the world’s greatest salesman—and that he remains out and about teaching sales skills—might seem to validate that information asymmetry and the ignoble tactics it allows are alive and well. But there’s one more thing you should know about Joe Girard. He hasn’t actually sold a car since 1977. He quit the business more than three decades ago to teach others how to sell. (The Deloitte & Touche audit his office sent me verifying his record is dated 1991 and covers a fifteen-year period beginning in 1963.) Girard’s techniques might have gleamed in the mid-1970s.


When Free Markets Fail: Saving the Market When It Can't Save Itself (Wiley Corporate F&A) by Scott McCleskey

Asian financial crisis, asset-backed security, bank run, barriers to entry, Bernie Madoff, break the buck, call centre, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, financial innovation, fixed income, information asymmetry, invisible hand, Isaac Newton, iterative process, Long Term Capital Management, margin call, money market fund, moral hazard, mortgage debt, place-making, Ponzi scheme, prediction markets, risk tolerance, shareholder value, statistical model, The Wealth of Nations by Adam Smith, time value of money, too big to fail, web of trust

They are also a part of the market—a common one if not a natural one. These so-called information asymmetries present regulatory challenges of their own, from a fairness and an efficiency point of view. 1 Rachel Beck, ‘‘Lobbyists Influence Financial Reform,’’ Associated Press, October 17, 2009. E1BAPP01 06/16/2010 172 16:33:47 & Page 172 Appendix 1 INFORMATION ASYMMETRIES ‘‘Information asymmetry’’ is simply an impressive way to say that one party to a deal knows more about the thing being bought or sold than the other (so impressive that it won three economists the Nobel Prize in 2001). If you have ever bought anything on eBay, you have been on the receiving end of an information asymmetry (hopefully without an unhappy ending). The clearest embodiment of asymmetric information is insider trading. Someone knows that ABC Corporation is going to acquire XYZ, Inc. for a share price nicely above the current price, so he goes in with both feet and rakes it in with both hands (hands that, we would hope, will end up in cuffs).

If a firm’s research department concludes that ABC shares will go down based on its own analysis but then recommends purchasing the shares to its customers, the practice is better termed a conflict of interest (also onerous) rather than an information asymmetry. It should be stressed that an act is not always illegal or unethical simply because it is based on information asymmetry. Financial markets are the same as the markets for puppies or houses or life insurance: One side has a better understanding of the quality of the products or the risk to the insurer than the other. But since it is harder to return a toxic asset than a refrigerator whose light will not turn on, regulators seek to identify those that cross the line into unfair transactions, and to level the field. One lesson learned from the financial crisis is that information asymmetries may be two or more steps removed from the ultimate victim. Consider our E1BAPP01 06/16/2010 16:33:47 Page 173 Summaries of Regulatory Concepts and Issues & 173 old friend, the residential mortgage-backed security (RMBS).

Pay no attention to them; good markets are fair as well as efficient. Beyond the obvious example of insider trading, there are more insidious manifestations of asymmetric information that concern regulators. A trader who has received a large order to buy a particular stock, perhaps from a pension fund or other institution, knows that this order will send the price of the stock higher. The rest of the market does not know it yet, and he could take advantage (illegally) of this knowledge by placing orders for his own account or the accounts of favored customers before he sends the price skyward by executing the institutional order. It is important to distinguish between knowledge and beliefs when thinking about asymmetric information. As the term information implies, it really pertains only to things that are known (such as that big institutional order or the takeover of XYZ Inc.).


pages: 354 words: 26,550

High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems by Irene Aldridge

algorithmic trading, asset allocation, asset-backed security, automated trading system, backtesting, Black Swan, Brownian motion, business cycle, business process, buy and hold, capital asset pricing model, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, computerized trading, diversification, equity premium, fault tolerance, financial intermediation, fixed income, high net worth, implied volatility, index arbitrage, information asymmetry, interest rate swap, inventory management, law of one price, Long Term Capital Management, Louis Bachelier, margin call, market friction, market microstructure, martingale, Myron Scholes, New Journalism, p-value, paper trading, performance metric, profit motive, purchasing power parity, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, short selling, Small Order Execution System, statistical arbitrage, statistical model, stochastic process, stochastic volatility, systematic trading, trade route, transaction costs, value at risk, yield curve, zero-sum game

First suggested by Bagehot (1971) and later developed by numerous researchers, the bid-ask spread reflects the expectations of market movements by the market maker using asymmetric information. When the quoting dealer receives order flow that he suspects may come from an informed trader and may leave the dealer at a disadvantage relative to the market movements, the dealer increases the spread he quotes in order to compensate himself against potentially adverse uncertainty in price movements. As a result, the wider the quoted bid-ask spread, the higher the dealer’s estimate of information asymmetry between his clients and the dealer himself. Given that the dealer has the same access to public information as do most of the dealer’s clients, the quoted bid-ask spread may serve as a measure of asymmetric information available in the market at large at any given point in time. Effective Bid-Ask Spread The effective bid-ask spread is computed as twice the difference between the latest trade price and the midpoint between the quoted bid and ask 147 Trading on Market Microstructure prices, divided by the midpoint between the quoted bid and ask prices.

This chapter describes information-based microstructure trading strategies. MEASURES OF ASYMMETRIC INFORMATION Asymmetric information present in the markets leads to adverse selection, or the ability of informed traders to “pick off” uninformed market participants. According to Dennis and Weston (2001) and Odders-White and Ready (2006), the following measures of asymmetric information have been proposed over the years: r r r r r Quoted bid-ask spread Effective bid-ask spread Information-based impact Adverse-selection components of the bid-ask spread Probability of informed trading Quoted Bid-Ask Spread The quoted bid-ask spread is the crudest, yet most readily observable measure of asymmetric information. First suggested by Bagehot (1971) and later developed by numerous researchers, the bid-ask spread reflects the expectations of market movements by the market maker using asymmetric information.

If bid-ask spreads were to compensate the dealer for order processing costs only, then the mid-price does not change in response to the Ask t * Mid t Bid t * * Time Sell Buy Sell FIGURE 11.1 Order-processing costs. Ask t Mid t Bid t * Time Sell FIGURE 11.2 Inventory costs. Askt Mid t Bid t * Time Sell FIGURE 11.3 Asymmetric information (adverse selection). Trading on Market Microstructure 151 order. If bid-ask spreads were to compensate the dealer for the risks associated with holding excess inventory, then any changes in prices would be temporary. If all orders were to carry information that led to permanent price changes, the bid-ask spreads would compensate the dealer for the potential risk of encountering adverse asymmetric information. Analyzing the bid-ask spreads of the market maker gives clues to the position sizes of the market maker’s inventory and allows the market maker to estimate the order flow faced by the market maker.


pages: 1,535 words: 337,071

Networks, Crowds, and Markets: Reasoning About a Highly Connected World by David Easley, Jon Kleinberg

Albert Einstein, AltaVista, clean water, conceptual framework, Daniel Kahneman / Amos Tversky, Douglas Hofstadter, Erdős number, experimental subject, first-price auction, fudge factor, George Akerlof, Gerard Salton, Gerard Salton, Gödel, Escher, Bach, incomplete markets, information asymmetry, information retrieval, John Nash: game theory, Kenneth Arrow, longitudinal study, market clearing, market microstructure, moral hazard, Nash equilibrium, Network effects, Pareto efficiency, Paul Erdős, planetary scale, prediction markets, price anchoring, price mechanism, prisoner's dilemma, random walk, recommendation engine, Richard Thaler, Ronald Coase, sealed-bid auction, search engine result page, second-price auction, second-price sealed-bid, Simon Singh, slashdot, social web, Steve Jobs, stochastic process, Ted Nelson, The Market for Lemons, The Wisdom of Crowds, trade route, transaction costs, ultimatum game, Vannevar Bush, Vickrey auction, Vilfredo Pareto, Yogi Berra, zero-sum game

Notice that this signaling mechanism works even if education has no direct effect on a worker’s productivity. Of course, education is also intrinsically valuable, but when we take information asymmetry into account, we see that education has a kind of two-fold power in the market. It trains workers for future employment; but beyond this, it also reduces information asymmetry about worker quality in a way that can potentially be necessary for the labor market to function effectively at all. 22.9 Quality Uncertainty On-Line: Reputation Sys- tems and Other Mechanisms Once we adopt the perspective that the availability of information is crucial in many markets, we can begin to appreciate that many of the standard mechanisms used in Web sites for on-line commerce are in fact motivated by considerations of asymmetric information and signaling. In this section we will discuss two of these mechanisms: reputation systems, and the role of ad-quality measures in sponsored-search advertising.

Of course, whether this actually happens depends on the actual numbers: how much it costs to provide the insurance, and how much people value the insurance compared to their alternatives. But just as in our earlier examples, we see how socially undesirable outcomes can occur in the market when there are imbalances in information. The information asymmetry we have focused on in the market for health insurance leads, just as in case of used cars or employment, to a type of adverse selection. Insurance companies cannot select for a population consisting only of healthy individuals; rather, if anyone buys insurance at all, the only thing one can be sure of is that it will be bought by those who are less healthy. There is another type of information asymmetry that occurs in the market for health insurance that we have so far ignored in our discussion. As in the previous examples, we have treated the health status of each individual, and thus his or her cost to insure, as fixed and given.

As in the previous examples, we have treated the health status of each individual, and thus his or her cost to insure, as fixed and given. But individuals can take actions which affect their health. If these actions are not observable to the insurance company then we have a new source of information asymmetry, since each individual knows more about his future behavior than the insurance company does. Once an individual purchases health insurance, his incentive to undertake costly actions to maintain his health is reduced, since he no longer bears the full cost of poor health. This introduces an effect known as moral hazard: when you’re shielded from the full cost of your potential bad behavior, you have less incentive to avoid engaging in it. Information Asymmetry in Trading and the Stock Market. It is useful to reflect further on these examples in light of one of the basic lessons of this chapter: that in any trade, each trader should ask why whoever is on the other side of the trade wants to make the trade.


pages: 288 words: 76,343

The Plundered Planet: Why We Must--And How We Can--Manage Nature for Global Prosperity by Paul Collier

agricultural Revolution, Berlin Wall, business climate, Doha Development Round, energy security, food miles, G4S, information asymmetry, Kenneth Arrow, megacity, new economy, offshore financial centre, oil shock, profit maximization, rent-seeking, Ronald Coase, Scramble for Africa, sovereign wealth fund, stem cell, Stewart Brand

It did so because in all the years that it had been imposing a profits tax not a single cent had been raised. Somehow, the copper companies kept failing to make any net profits: large revenues were always offset by large expenses. Information asymmetries and corruption may have found their apogee in the Democratic Republic of the Congo. In October 2009 the Financial Times reported that out of gold exports estimated to be around a billion dollars, the government was capturing revenues of only $37,000. When I raised the issue with the Minister of Finance he doubted the accuracy of the numbers but agreed that there was a massive problem of smuggling. The information asymmetry between tax authorities and a company can be narrowed if the authorities hire specialist accountancy firms to audit the company’s books. When the government of Nigeria belatedly did this in 2004 it received a large windfall back-payment.

Leveling the Playing Field That seemingly simple example of a corrupt official being bribed by a foreign company contained a second and more subtle type of problem. The corrupt minister was probably himself being ripped off by the company because he was on the wrong end of the asymmetric information problem that I introduced in the previous chapter. He simply did not know as much as the company offering the bribes about the true value of the contracts he was awarding. There is an institutional technology for overcoming the asymmetric information problem: selling the extraction rights through auction. Auctions can be complicated, but they can level the playing field between a savvy company and an ignorant government. The key is to get several companies to bid against each other. The rule of thumb seems to be that you need around four of them.

That way the deals would be open to international competition, ensuring fair value. The Chinese deals, negotiated in secrecy, had the potential to create all the problems we have encountered: corruption, asymmetric information, and time-inconsistency. However, finger-wagging at China has met with the predictable response. By 2008 the EITI executive was sufficiently concerned to ask me to suggest an alternative approach, one I will outline in the next chapter. Why Not Nationalize Resource Extraction? If resource-extraction companies have ripped off governments through a cocktail of corruption, asymmetric information, and discounts that reflect the time-consistency problem, and if prospecting is in any case best financed by government, why not let government handle the exploitation of natural assets? Why not run natural assets through state-owned companies?


pages: 491 words: 77,650

Humans as a Service: The Promise and Perils of Work in the Gig Economy by Jeremias Prassl

3D printing, Affordable Care Act / Obamacare, Airbnb, Amazon Mechanical Turk, Andrei Shleifer, autonomous vehicles, barriers to entry, call centre, cashless society, Clayton Christensen, collaborative consumption, collaborative economy, collective bargaining, creative destruction, crowdsourcing, disruptive innovation, Donald Trump, Erik Brynjolfsson, full employment, future of work, George Akerlof, gig economy, global supply chain, hiring and firing, income inequality, information asymmetry, invisible hand, Jeff Bezos, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Kickstarter, low skilled workers, Lyft, Mahatma Gandhi, Mark Zuckerberg, market friction, means of production, moral hazard, Network effects, new economy, obamacare, pattern recognition, platform as a service, Productivity paradox, race to the bottom, regulatory arbitrage, remote working, ride hailing / ride sharing, Robert Gordon, Ronald Coase, Rosa Parks, Second Machine Age, secular stagnation, self-driving car, shareholder value, sharing economy, Silicon Valley, Silicon Valley ideology, Simon Singh, software as a service, Steve Jobs, TaskRabbit, The Future of Employment, The Market for Lemons, The Nature of the Firm, The Rise and Fall of American Growth, transaction costs, transportation-network company, Travis Kalanick, two tier labour market, two-sided market, Uber and Lyft, Uber for X, uber lyft, union organizing, working-age population

Additional elements—from com- pliance with platform policies to how quickly and often a worker accepts new tasks—are factored into the equation, with any deviation sanctioned in real time. Algorithmic control is exercised in myriad ways, often eschewing direct orders or explicit instructions.14 Alex Rosenblat and Luke Stark’s study of Uber’s control mechanisms demonstrates how crowdwork conditions can easily be ‘shaped by the company’s deployment of a variety of design deci- sions and information asymmetries via the application to effect a “soft control” over workers’ routines’.15 Even though instructions are ‘carefully designed to be indirect, presumably to avoid the appearance of a company policy’,16 they are incredibly powerful: Individualized metrics . . . foster a ‘highly individualized sense of responsibility for one’s own job stability’, even though drivers have limited control over how passengers interact with the rating system or how Uber assesses it.

There are two closely related challenges to the on-demand economy’s claim to have fostered a revolutionary culture of innovation: first, that many of its supposedly innovative elements are, in fact, simply aimed at entrench- ing existing operators against future competitors; and second, that platforms’ business models might in fact disincentivize the investment in research, development, and working conditions that spurs innovation. Pernicious Innovation Take rating algorithms as an example. The dramatic increase in information available about workers and consumers alike has gone a long way towards alleviating the information asymmetries that traditionally plague two-sided markets. The case for productivity-enhancing innovation looks straightfor- ward: extensive information allows for easy matching of supply and demand, increasing service provision for platform users, and income for workers. Upon closer inspection, however, not all is quite as it seems. As we saw in the previous chapter, two of the most important functions of algorithmic * * * 88 The Innovation Paradox ratings are to control workers—and to lock them into a particular app’s ‘eco-system’: ratings need to be built up over time and cannot be taken from one platform to another.

The authors graciously concede that ‘because the inter- ests of digital, third-party platforms are not always perfectly aligned with the broader interests of society, some governmental involvement or oversight is likely to remain useful’: ibid. 21. Ibid., 130–1. In their worked example of airbnb (a property rental business), they suggest: [delegating] regulatory responsibility relating to information asymmetry to plat- forms like Airbnb (whose interests are naturally aligned with the global aggregation of information and the mitigation of adverse selection and moral hazard), and let [local housing associations] play a key role in the regulation of local externalities, as the guest-noise and strangers-in-the-building externalities are typically local and primarily affect [the association’s] membership


pages: 472 words: 117,093

Machine, Platform, Crowd: Harnessing Our Digital Future by Andrew McAfee, Erik Brynjolfsson

"Robert Solow", 3D printing, additive manufacturing, AI winter, Airbnb, airline deregulation, airport security, Albert Einstein, Amazon Mechanical Turk, Amazon Web Services, artificial general intelligence, augmented reality, autonomous vehicles, backtesting, barriers to entry, bitcoin, blockchain, British Empire, business cycle, business process, carbon footprint, Cass Sunstein, centralized clearinghouse, Chris Urmson, cloud computing, cognitive bias, commoditize, complexity theory, computer age, creative destruction, crony capitalism, crowdsourcing, cryptocurrency, Daniel Kahneman / Amos Tversky, Dean Kamen, discovery of DNA, disintermediation, disruptive innovation, distributed ledger, double helix, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Ethereum, ethereum blockchain, everywhere but in the productivity statistics, family office, fiat currency, financial innovation, George Akerlof, global supply chain, Hernando de Soto, hive mind, information asymmetry, Internet of things, inventory management, iterative process, Jean Tirole, Jeff Bezos, jimmy wales, John Markoff, joint-stock company, Joseph Schumpeter, Kickstarter, law of one price, longitudinal study, Lyft, Machine translation of "The spirit is willing, but the flesh is weak." to Russian and back, Marc Andreessen, Mark Zuckerberg, meta analysis, meta-analysis, Mitch Kapor, moral hazard, multi-sided market, Myron Scholes, natural language processing, Network effects, new economy, Norbert Wiener, Oculus Rift, PageRank, pattern recognition, peer-to-peer lending, performance metric, plutocrats, Plutocrats, precision agriculture, prediction markets, pre–internet, price stability, principal–agent problem, Ray Kurzweil, Renaissance Technologies, Richard Stallman, ride hailing / ride sharing, risk tolerance, Ronald Coase, Satoshi Nakamoto, Second Machine Age, self-driving car, sharing economy, Silicon Valley, Skype, slashdot, smart contracts, Snapchat, speech recognition, statistical model, Steve Ballmer, Steve Jobs, Steven Pinker, supply-chain management, TaskRabbit, Ted Nelson, The Market for Lemons, The Nature of the Firm, Thomas Davenport, Thomas L Friedman, too big to fail, transaction costs, transportation-network company, traveling salesman, Travis Kalanick, two-sided market, Uber and Lyft, Uber for X, uber lyft, ubercab, Watson beat the top human players on Jeopardy!, winner-take-all economy, yield management, zero day

Knowledge differentials, unfortunately, kept these transactions from happening. The idea that such “information asymmetries” are harmful not just for the less informed party but also for markets overall was formalized by economist George Akerlof in his classic 1970 paper “The Market for ‘Lemons.’ ” Akerlof showed that the used-car market could suffer greatly because of the existence of “lemons”‡—apparently fine cars that, in fact, had bad mechanical problems. Sellers know which cars are lemons but most buyers don’t, and this information asymmetry will keep the used-car market small and inefficient unless it’s addressed by, for example, having dealers offer money-back guarantees to customers who feel that they’ve been cheated. Akerlof showed that in extreme cases, information asymmetry could lead to complete market breakdown and the end of trade.

This insight was so counterintuitive and radical at the time that his paper was repeatedly rejected from the top journals in economics, with one referee explaining that the journal “did not publish papers on subjects of such triviality” while another took the opposite tack, writing “if this paper were correct, economics would be different,” so it couldn’t be correct. But Akerlof was right about the critical importance of information asymmetries—economics was different—and ultimately he was recognized with a Nobel prize for this work. Few information asymmetries are deeper or more important than the one that exists between someone who wants a ride across town and a stranger offering to provide that ride in a private car. Even if most drivers are completely honest and safe, the financial and personal risk of getting a bad one appears unacceptably high. Unless this inherent information asymmetry was overcome, the market for person-to-person rides would never take off. But by March of 2016, Uber was handling 50 million rides per month in the United States.

The great majority of Uber’s ride suppliers were not professional chauffeurs; they were simply people who wanted to make money with their labor and their cars. So how did this huge market overcome severe information asymmetries? In 2013, California passed regulations mandating that transportation network companies (TNCs) such as Uber and Lyft conduct criminal background checks on their drivers. These checks certainly provided some reassurance, but they were not the whole story. After all, UberX and its competitor Lyft both grew rapidly before background checks were in place, and by August 2016, BlaBlaCar still did not require them for its drivers. Instead, these companies used their platforms’ user interfaces to overcome the information asymmetries that plagued their markets. In particular, they asked all parties to rate each other after each transaction, and they prominently displayed everyone’s cumulative ratings.§ In addition, TNCs typically keep detailed records of each trip, using data from phones’ GPS sensors.


pages: 339 words: 95,988

Freakonomics: A Rogue Economist Explores the Hidden Side of Everything by Steven D. Levitt, Stephen J. Dubner

airport security, Broken windows theory, crack epidemic, desegregation, Exxon Valdez, feminist movement, George Akerlof, information asymmetry, Joseph Schumpeter, Kenneth Arrow, longitudinal study, mental accounting, moral hazard, More Guns, Less Crime, oil shale / tar sands, Paul Samuelson, peak oil, pets.com, profit maximization, Richard Thaler, school choice, sensible shoes, Steven Pinker, Ted Kaczynski, The Chicago School, The Market for Lemons, Thorstein Veblen, twin studies, War on Poverty

By then, the suspicion of lemonness will have faded; by then, some people will be selling their perfectly good year-old cars, and the lemon can blend in with them, likely selling for more than it is truly worth. It is common for one party to a transaction to have better information than another party. In the parlance of economists, such a case is known as an information asymmetry. We accept as a verity of capitalism that someone (usually an expert) knows more than someone else (usually a consumer). But information asymmetries everywhere have in fact been gravely wounded by the Internet. Information is the currency of the Internet. As a medium, the Internet is brilliantly efficient at shifting information from the hands of those who have it into the hands of those who do not. Often, as in the case of term life insurance prices, the information existed but in a woefully scattered way.

Does it matter if an activist who exposes the inner workings of the Ku Klux Klan isn’t open about how he got those secrets? January 8, 2006 Our book Freakonomics includes a chapter titled “How Is the Ku Klux Klan Like a Group of Real-Estate Agents?” This chapter was our effort to bring to life the economic concept known as information asymmetry, a state wherein one party to a transaction has better information than another party. It is probably obvious that real-estate agents typically have better information than their clients. The Klan story was perhaps less obvious. We argued that the Klan’s secrecy—its rituals, made-up language, passwords and so on—formed an information asymmetry that furthered its aim of terrorizing blacks and others. But the Klan was not the hero of our story. The hero was a man named Stetson Kennedy, a white Floridian from an old-line family who from an early age sought to assail racial and social injustices.

Or you might just log on to www.TributeDirect.com and buy that mahogany casket yourself for only $3,595, delivered overnight. Unless you decide to spend $2,300 for “The Last Hole” (a casket with golf scenes) or “Memories of the Hunt” (featuring big-racked bucks and other prey) or one of the much cheaper models that the funeral director somehow failed even to mention. The Internet, powerful as it is, has hardly slain the beast that is information asymmetry. Consider the so-called corporate scandals of the early 2000s. The crimes committed by Enron included hidden partnerships, disguised debt, and the manipulation of energy markets. Henry Blodget of Merrill Lynch and Jack Grubman of Salomon Smith Barney wrote glowing research reports of companies they knew to be junk. Sam Waksal dumped his ImClone stock when he got early word of a damaging report from the Food and Drug Administration; his friend Martha Stewart also dumped her shares, then lied about the reason.


Virtual Competition by Ariel Ezrachi, Maurice E. Stucke

Airbnb, Albert Einstein, algorithmic trading, barriers to entry, cloud computing, collaborative economy, commoditize, corporate governance, crony capitalism, crowdsourcing, Daniel Kahneman / Amos Tversky, David Graeber, demand response, disintermediation, disruptive innovation, double helix, Downton Abbey, Erik Brynjolfsson, experimental economics, Firefox, framing effect, Google Chrome, index arbitrage, information asymmetry, interest rate derivative, Internet of things, invisible hand, Jean Tirole, John Markoff, Joseph Schumpeter, Kenneth Arrow, light touch regulation, linked data, loss aversion, Lyft, Mark Zuckerberg, market clearing, market friction, Milgram experiment, multi-sided market, natural language processing, Network effects, new economy, offshore financial centre, pattern recognition, prediction markets, price discrimination, price stability, profit maximization, profit motive, race to the bottom, rent-seeking, Richard Thaler, ride hailing / ride sharing, road to serfdom, Robert Bork, Ronald Reagan, self-driving car, sharing economy, Silicon Valley, Skype, smart cities, smart meter, Snapchat, social graph, Steve Jobs, supply-chain management, telemarketer, The Chicago School, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, Travis Kalanick, turn-by-turn navigation, two-sided market, Uber and Lyft, Uber for X, uber lyft, Watson beat the top human players on Jeopardy!, women in the workforce, yield management

Economists have long recognized that information is a key component in promoting a competitive market, which in turn promotes consumer welfare.3 Indeed, the undistorted flow of information is one of the conditions of the theoretical economic model of “perfect competition,” under which consumers benefit from lower prices, wider choice, and better quality.4 Market transparency, the OECD noted, “increases efficiency by reducing customers’ search costs and allowing suppliers to benchmark their performance with that of their competitors.”5 Market transparency, besides helping buyers, helps sellers “to save costs by reducing their inventories, enabling quicker delivery of perishable products to consumers, or dealing with unstable demand etc.”6 In general, increased transparency ameliorates the problems of “information asymmetries.”7 This is when one party knows more key information than the other party (such as the seller of a used car who knows more about the car’s problems than the buyer).8 As the flow of information increases and becomes more balanced, sellers and buyers are more likely to make educated decisions, and markets become more efficient.9 We often see the benefits of increased transparency when we shop online.

When your friend inquires about the same room, the different price could reflect an interim change in supply or demand. Rarely will you and others simultaneously search on the The Rise of “Almost Perfect” Behavioral Discrimination 113 same website for the same room and communicate your findings. Thus, consumers may not know when pricing is dynamic, discriminatory, or both. Where Does the Power Reside? The power in our scenario favors those who hold and sell our personal data. These informational asymmetries support near-perfect behavioral discrimination. The first asymmetry is between the discriminating firm and its customers. The firm collects data on its customers and designs the algorithm. The firm may not know exactly how its pricing algorithm derived a particular price for a particular customer (see Chapters 7 and 8), but the firm does know the algorithm’s ultimate strategy (namely to increase profits by better discrimination).

Nor, in most countries, do individuals as of this book’s publication date have the right to view the data, and to verify or contest the data’s accuracy. Nor can we challenge the accuracy of categories in which we are placed. We may know that we are getting a lot of ads—such as substance abuse, lowerquality credit cards, or checking our prison records—but not know why these ads are directed at us.56 The second level of informational asymmetry is between the firm and its competitors. Because perfect price discrimination will remain elusive, firms will seek to refine their categorizations of consumers. Not all the 114 Behavioral Discrimination firms will have the same data. Firms with a data advantage will likely have better algorithms that can better segment customers, and for each group they will likely be better at identifying the group’s average reservation price (and a narrower distribution of individual reservation prices).


pages: 288 words: 64,771

The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality by Brink Lindsey

"Robert Solow", Airbnb, Asian financial crisis, bank run, barriers to entry, Bernie Sanders, Build a better mousetrap, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Cass Sunstein, collective bargaining, creative destruction, Credit Default Swap, crony capitalism, Daniel Kahneman / Amos Tversky, David Brooks, diversified portfolio, Donald Trump, Edward Glaeser, endogenous growth, experimental economics, experimental subject, facts on the ground, financial innovation, financial intermediation, financial repression, hiring and firing, Home mortgage interest deduction, housing crisis, income inequality, informal economy, information asymmetry, intangible asset, inventory management, invisible hand, Jones Act, Joseph Schumpeter, Kenneth Rogoff, Kevin Kelly, knowledge worker, labor-force participation, Long Term Capital Management, low skilled workers, Lyft, Mark Zuckerberg, market fundamentalism, mass immigration, mass incarceration, medical malpractice, Menlo Park, moral hazard, mortgage debt, Network effects, patent troll, plutocrats, Plutocrats, principal–agent problem, regulatory arbitrage, rent control, rent-seeking, ride hailing / ride sharing, Robert Metcalfe, Ronald Reagan, Silicon Valley, Silicon Valley ideology, smart cities, software patent, too big to fail, total factor productivity, trade liberalization, transaction costs, tulip mania, Uber and Lyft, uber lyft, Washington Consensus, white picket fence, winner-take-all economy, women in the workforce

Some more quality-conscious (and presumably higher-income) consumers are better off, but some more price-conscious (and presumably lower-income) consumers are worse off.5 Even if it works as well as it can, occupational licensing is thus regressive in its distributional consequences. Meanwhile, licensing regimes and the requirements they impose are all too often highly arbitrary. If the existence of occupational licensing were really a response to underlying market failures (e.g., information asymmetries) that made consumers especially vulnerable to abuse, the same types of occupations would be regulated in state after state. In reality, the scope of occupational licensing is all over the place. Although more than 1,100 different occupations are licensed at the state level, the highest number of occupations licensed in any one state is 177 (California takes this dubious prize).6 This fact strongly suggests that factors other than industry characteristics determine who gets regulated.

What characterizes all the areas of rent-seeking described in the previous chapters is that, in one way or another, democratic deliberation has broken down. The problem of narrow interests’ advantages in organizing and wielding influence is always with us, but it is especially severe in the cases at hand where the interests are so flush with resources. Furthermore, we identify four additional sources of bias that stack the deck even more in favor of the rent-seekers. The first source of bias is information asymmetries, in which the government’s dependence on regulated interests for policy-relevant information makes it especially open to capture. The second involves the exploitation by rent-seekers of a favorable “policy image” that short-circuits appropriate scrutiny of their self-serving claims. The third source of bias concerns the venue of decision making: when policies are crafted in obscure or insular settings that discourage monitoring and participation by outsiders, it becomes all the more likely that policymaking will be captured by insiders.

A study of dentistry by University of Minnesota economist Morris Kleiner found no evidence that patients in states with stricter regulation experienced improved outcomes—whether as measured by dental exams of new Air Force recruits, complaints filed with state licensing boards, or malpractice insurance rates.9 Other research by Kleiner has failed to establish any link between licensing and better outcomes for either mortgage brokerage or child-care services.10 An examination of schoolteachers found that imposition of state testing requirements did not improve the quality of teachers as measured by their educational backgrounds.11 Researchers studying Louisiana’s licensing of florists conducted an interesting experiment: 25 floral arrangements from Louisiana and 25 arrangements from neighboring and unregulated Texas, all randomly selected, were examined by a randomly selected panel of 8 florists from Texas and 10 from Louisiana. The judges gave virtually identical scores to the Texas and Louisiana arrangements; moreover, the licensed Louisiana florists and unlicensed Texas florists differed little in their ratings.12 Another study found that Florida’s relaxation of licensing restrictions on roofers following Hurricanes Frances and Katrina did not reduce the quality of roofing services despite the fact that asymmetric information problems, frequently cited to justify licensing, could be expected to be especially severe in a post-crisis environment.13 II THE PRICE OF INCUMBENT PROTECTION Occupational licensing may not offer much in the way of consumer protection, but it succeeds admirably as protectionism, shielding incumbent firms from competition and thereby boosting their incomes at consumers’ expense.


pages: 1,088 words: 228,743

Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen

Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, Bernie Madoff, Black Swan, Bretton Woods, business cycle, buy and hold, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, central bank independence, collateralized debt obligation, commoditize, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, G4S, George Akerlof, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, information asymmetry, interest rate swap, invisible hand, Kenneth Rogoff, laissez-faire capitalism, law of one price, London Interbank Offered Rate, Long Term Capital Management, loss aversion, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, Myron Scholes, negative equity, New Journalism, oil shock, p-value, passive investing, Paul Samuelson, performance metric, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, Robert Shiller, savings glut, selection bias, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, stocks for the long run, survivorship bias, systematic trading, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond, zero-sum game

Higher search costs for counterparties—whether those naturally needing to take the opposite position, or financial intermediaries or arbitrage capital looking for attractive opportunities—raise the cost of trading. Liquidity differences can often be explained by varying degrees of information asymmetry—a key determinant of illiquidity that can in extreme situations cause market breakdowns. At such times, the credibility of information about market prices—which comes from markets being continuously traded with transparent pricing—can influence asset valuations as much as information about economic fundamentals. General confidence in the financial system and in the health of counterparties supports the liquidity of all assets but especially that of more complex and opaque assets; the loss of such confidence raises concerns about information asymmetry and can result in virtual closing of more fragile markets. What is the (il-)liquidity premium? The illiquidity premium, often called the liquidity premium, is an asset’s ex ante excess return over a (more liquid) benchmark asset.

These illiquidity-related premia appear to raise the expected returns of certain alternative asset classes as well as less liquid pockets of traditional asset classes, such as corporate bonds and small-cap equities. Illiquidity premia are hardly constant over time; they apparently were bid down to near zero by early 2007 and then rose sky high during the 2008 liquidity drought. Disagreement and information asymmetries Another CAPM assumption—homogeneous expectations—is obviously unrealistic, but this was a very convenient modeling device. In the past decade, disagreement models showed how differences in investor beliefs can influence financial markets through several channels: gradual information flow, limited attention, and heterogeneous views. Disagreement is especially important for explaining the high level of trading volume, but it also can help explain correlation or volatility risk premia as well as some cross-sectional patterns in equity returns.

On time-varying expected returns I mention Shiller (1981), Poterba–Summers (1986), Fama–French (1989), and Campbell–Cochrane (1999), on skewness Harvey–Siddique (2000), on learning Brav–Heaton (2002) and Pastor–Veronesi (2009). On supply–demand factors I cite Scholes (1972) and Lamont–Thaler (2003), on index inclusion effects Shleifer (1986) and Wurgler–Zhuravskaya (2002), on inflation-linked bonds D’Amico et al. (2010), on market frictions Garleanu–Pedersen (2009a), on liquidity Acharya–Pedersen (2005), on disagreement Hong–Stein (2007), and on information asymmetries Vayanos–Woolley (2008). On the efficient markets hypothesis, I recommend Fama’s surveys (1970, 1991, 1998), on extensions Grossman–Stiglitz (1980) and Lo (2004), on the many criticisms Soros (2008), Akerlof–Shiller (2009), and Fox (2009), and on defense Rubinstein (2001), Cochrane (2007), and Ball (2009). 6 Behavioral finance • Behavioral finance states that investor irrationality causes systematic mispricings that rational arbitrageurs cannot fully offset due to scarce capital and riskiness of “arbitrage”


pages: 270 words: 79,180

The Middleman Economy: How Brokers, Agents, Dealers, and Everyday Matchmakers Create Value and Profit by Marina Krakovsky

Affordable Care Act / Obamacare, Airbnb, Al Roth, Ben Horowitz, Black Swan, buy low sell high, Chuck Templeton: OpenTable:, Credit Default Swap, cross-subsidies, crowdsourcing, disintermediation, diversified portfolio, experimental economics, George Akerlof, Goldman Sachs: Vampire Squid, income inequality, index fund, information asymmetry, Jean Tirole, Joan Didion, Kenneth Arrow, Lean Startup, Lyft, Marc Andreessen, Mark Zuckerberg, market microstructure, Martin Wolf, McMansion, Menlo Park, Metcalfe’s law, moral hazard, multi-sided market, Network effects, patent troll, Paul Graham, Peter Thiel, pez dispenser, ride hailing / ride sharing, Robert Metcalfe, Sand Hill Road, sharing economy, Silicon Valley, social graph, supply-chain management, TaskRabbit, The Market for Lemons, too big to fail, trade route, transaction costs, two-sided market, Uber for X, uber lyft, ultimatum game, Y Combinator

A Course on Middlemen * * * The most admirable middlemen never got a formal education in being a middleman because no such classes exist. Yet there’s plenty of material for such an education because lots of social scientists have studied, from one angle or another, the questions of how middlemen provide value and profit from their roles between buyers and sellers. For example, economic theory has much to say about transaction-cost economics, two-sided markets, and intermediaries’ ability to reduce information asymmetries between buyers and sellers. In particular, game theory informs our understanding of repeated interactions, reputations, shirking and cheating, and third-party enforcement. Social psychology and experimental economics show how acting on behalf of others affects people’s behavior and impressions. And sociology offers insights into the ways the structures of social networks create opportunities for middlemen.

The Internet has also made it cheaper and easier to start a software business, a trend that, as we saw in the chapter on Risk Bearers, gave rise to micro-VCs, those middlemen who sift through thousands of business ideas each year to pick the ones most likely to bring impressive returns to investors. Several middleman roles are timeless. The chapter on Risk Bearers showed that we have always relied on middlemen to even out ups and downs of uncertain demand and supply; today’s “Uber of” this or that is just the latest technological application of this basic role. The chapters on Certifiers and Enforcers showed how effective middlemen reduce informational asymmetries between buyers and sellers. The Insulator chapter showed how a middleman can act as an equalizer, righting the balance of power between the less experienced players on one side and the experts on the other or enabling the novices to tout their merits and ask for more of what they want than they could comfortably do on their own. In many situations, the middleman gives the less informed, more vulnerable players more knowledge and power, thus serving not as a third wheel in a relationship between two parties but as the indispensable fulcrum between the two sides.

And yet, as the chapters on Certifiers and Enforcers showed, middlemen must be discriminating to avoid adverse selection and moral hazard. Therefore, to profit from risk, middlemen, like successful insurers, must be astute at teasing apart these two types of risk: •Internal risk. This is my term for what finance scholars call counterparty risk, or risk due to the characteristics or actions of a trading partner. In other words, internal risks are risks caused by asymmetric information (adverse selection and moral hazard). Risk-bearing middlemen should avoid internal risk because it can only harm them and their partners on the other side. That’s why, for example, a lender should be wary of lending money to someone with no job and no assets. •External risk. This is what economists call exogenous risk and what lawyers call acts of God or force majeure: risks that trading partners cannot control.


pages: 375 words: 88,306

The Sharing Economy: The End of Employment and the Rise of Crowd-Based Capitalism by Arun Sundararajan

additive manufacturing, Airbnb, AltaVista, Amazon Mechanical Turk, autonomous vehicles, barriers to entry, basic income, bitcoin, blockchain, Burning Man, call centre, collaborative consumption, collaborative economy, collective bargaining, commoditize, corporate social responsibility, cryptocurrency, David Graeber, distributed ledger, employer provided health coverage, Erik Brynjolfsson, Ethereum, ethereum blockchain, Frank Levy and Richard Murnane: The New Division of Labor, future of work, George Akerlof, gig economy, housing crisis, Howard Rheingold, information asymmetry, Internet of things, inventory management, invisible hand, job automation, job-hopping, Kickstarter, knowledge worker, Kula ring, Lyft, Marc Andreessen, megacity, minimum wage unemployment, moral hazard, moral panic, Network effects, new economy, Oculus Rift, pattern recognition, peer-to-peer, peer-to-peer lending, peer-to-peer model, peer-to-peer rental, profit motive, purchasing power parity, race to the bottom, recommendation engine, regulatory arbitrage, rent control, Richard Florida, ride hailing / ride sharing, Robert Gordon, Ronald Coase, Ross Ulbricht, Second Machine Age, self-driving car, sharing economy, Silicon Valley, smart contracts, Snapchat, social software, supply-chain management, TaskRabbit, The Nature of the Firm, total factor productivity, transaction costs, transportation-network company, two-sided market, Uber and Lyft, Uber for X, uber lyft, universal basic income, Zipcar

These issues, discussed in my 2015 University of Chicago Law Review paper that I coauthored with Molly Cohen, include new solutions to old forms of information asymmetry, new and old “externalities,” and an increasingly blurred boundary between professional and personal modes of exchange.10 Information Asymmetry: When One Party Knows More than the Other Most forms of peer-to-peer exchange are characterized by asymmetric information—knowledge relevant to the intended exchange that is possessed by one trading party but not by the other: for example, a passenger who enters a taxicab may not know the qualifications or intentions of its driver, or a hotelier knows more about the quality of her short-term accommodation than a potential guest does. Similarly, a borrower knows more about her creditworthiness than a lender does. These and other forms of information asymmetry can lead to a lower level of economic activity than society might find desirable.

Well, the assertion that new marketplaces will result in perfect competition and depress earning levels focuses on one older aspect of economic theory while ignoring a different aspect that has gained a great deal of attention in the last 40 years: that of “information asymmetry.” As I defined and discussed in chapter 6, sharing economy platforms can reduce many forms of information asymmetry. The predictions of economic theory are that such reductions will increase, rather than reduce, wages over time. Let me explain the consequences of information asymmetry, and in particular, the effect of “adverse selection” further by appealing to the example of used car markets that George Akerlof famously used in his Nobel Prize–winning work. In Akerlof’s model, there are two kinds of used cars—those of high quality, and those of low quality (the “lemons”).

Part of this could be due to uncertainty about quality—I’m not going to get into a taxi unless I’m sure the driver is reliable and won’t rip me off. Or information asymmetry can lead to the situation of “adverse selection”: if there’s no good way of distinguishing between lower and higher quality providers, then a customer is likely to be willing to pay, on average, a price commensurate with the value they’d get from an average quality provider. Noticing this, the higher quality providers will be reluctant to transact, since they’re not getting a fair price for the higher value they deliver. This lowers the average quality in the market, further lowering the willingness of customers to pay, inducing further unwillingness to transact, and so on, until only the lowest quality providers are left, and the market either unravels, or remains, like Craigslist, on the fringes of the economy. Furthermore, information asymmetry can also lead to “moral hazard”—because parties’ imperfect information limits their ability to contract, one trading partner might display behavior that is less careful (e.g., reckless driving), of lower effort (e.g., lower levels of cleanliness), or somehow riskier than the partner otherwise would have chosen.


Super Thinking: The Big Book of Mental Models by Gabriel Weinberg, Lauren McCann

affirmative action, Affordable Care Act / Obamacare, Airbnb, Albert Einstein, anti-pattern, Anton Chekhov, autonomous vehicles, bank run, barriers to entry, Bayesian statistics, Bernie Madoff, Bernie Sanders, Black Swan, Broken windows theory, business process, butterfly effect, Cal Newport, Clayton Christensen, cognitive dissonance, commoditize, correlation does not imply causation, crowdsourcing, Daniel Kahneman / Amos Tversky, David Attenborough, delayed gratification, deliberate practice, discounted cash flows, disruptive innovation, Donald Trump, Douglas Hofstadter, Edward Lorenz: Chaos theory, Edward Snowden, effective altruism, Elon Musk, en.wikipedia.org, experimental subject, fear of failure, feminist movement, Filter Bubble, framing effect, friendly fire, fundamental attribution error, Gödel, Escher, Bach, hindsight bias, housing crisis, Ignaz Semmelweis: hand washing, illegal immigration, income inequality, information asymmetry, Isaac Newton, Jeff Bezos, John Nash: game theory, lateral thinking, loss aversion, Louis Pasteur, Lyft, mail merge, Mark Zuckerberg, meta analysis, meta-analysis, Metcalfe’s law, Milgram experiment, minimum viable product, moral hazard, mutually assured destruction, Nash equilibrium, Network effects, nuclear winter, offshore financial centre, p-value, Parkinson's law, Paul Graham, peak oil, Peter Thiel, phenotype, Pierre-Simon Laplace, placebo effect, Potemkin village, prediction markets, premature optimization, price anchoring, principal–agent problem, publication bias, recommendation engine, remote working, replication crisis, Richard Feynman, Richard Feynman: Challenger O-ring, Richard Thaler, ride hailing / ride sharing, Robert Metcalfe, Ronald Coase, Ronald Reagan, school choice, Schrödinger's Cat, selection bias, Shai Danziger, side project, Silicon Valley, Silicon Valley startup, speech recognition, statistical model, Steve Jobs, Steve Wozniak, Steven Pinker, survivorship bias, The Present Situation in Quantum Mechanics, the scientific method, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, transaction costs, uber lyft, ultimatum game, uranium enrichment, urban planning, Vilfredo Pareto, wikimedia commons

It is also not always completely transparent to principals how agents are compensated, which might cause principals to make different decisions than they would if they had the full picture. If you knew that your financial adviser was getting paid to recommend a financial product to you, you might be less likely to invest in it. Disclosure laws and the increase in open information via the internet can reduce the effects of asymmetric information. Sometimes, though, the consumer has the upper hand when it comes to asymmetric information. This is often the case with insurance products, where the person or company applying for insurance usually knows more about their own risk profile than the insurance company does. When parties select transactions that they think will benefit them, based at least partially on their own private information, that’s called adverse selection.

The only way this system works, though, is if healthy, lower-risk people continue paying into the system, allowing insurers to spread out the cost of higher-risk individuals. This helps keep premiums from rising too high, making care more affordable for everyone. That’s why the ACA mandate was so important to the viability of the overall system. The mental models from the last section (tragedy of the commons, externalities, etc.) and those from this section (moral hazard, information asymmetry, etc.) are signs of market failure, where open markets without intervention can create suboptimal results, or fail. To correct a market failure, an outside party must intervene in some way. Unfortunately, these interventions themselves can also fail, a result called government failure or political failure. Antibiotics present a good case study in market and political failure. As we described earlier, overuse of antibiotics can reduce their efficacy as a common resource because bacteria have a chance of evolving to develop resistance each time an antibiotic is used.

., 192 Hyman, Ray, 62 hydra effect, 51, 52 hyperbolic discounting, 87 hypothesis, 136, 161 alternative, 163, 164, 166, 167 null, 163, 164 see also experiments hysteresis, 194 IBM, 241 iCloud, 97 idea maze, 301 ignorance, veil of, 21 “I Know an Old Lady” (Bonne and Mills), 58 immigration, 15–16 immune system, 194 imposter syndrome, 268–72 incentives, 55 perverse, 50–51, 54 income, U.S. household, 148–49, 191 independence, 205 India, 50–51, 235 individualist versus collectivist, in organizational culture, 274 inertia, 102–3, 105–8, 110, 112, 113, 119, 120, 129, 290, 296 infantry, in organizations and projects, 253 inflation, 179–80, 182–83 inflection point, 115 Influence: The Psychology of Persuasion (Cialdini), 215 influence models, 215, 220, 221, 226, 229, 230, 289 authority, 219–20, 226 commitment, 216, 220 liking, 216–17, 220 reciprocity, 215–16, 220, 222, 229, 289 scarcity, 219, 220 social proof, 217–20, 229 information asymmetry, 45–47 information overload, 60, 146 Ingham, Harrington, 196 in-group favoritism, 127, 217 Inkster, James A., 91 innovations, 302 disruptive, 308, 310–11 innovators, in technology adoption life cycle, 116–17, 289, 311 Innovator’s Dilemma, The (Christensen), 310 insincerity, manipulative, 264 Instagram, 220, 247, 291, 310 instant gratification, 87 institutional knowledge, 257 insurance, 43, 46, 191 health, 42, 46, 47, 190 key person, 305 Intel, 308, 310 intelligence quotient (IQ), 138, 250–52 interest, compound, 69, 85 interest rates, 85, 182–83 internalizing, 41–42 internet, 290 messaging services, 119 introverts, 249–50 intuition, 30–31, 33, 132 invention, simultaneous, 291–92 inverse fallacy, 156–57 inverse thinking, 1–2, 291 investments, investors, 180–84, 192, 272, 288 cargo cult, 316 Invisible Armies (Boot), 239 iPad, 290 iPod, 296–97 IQ (intelligence quotient), 138, 250–52 Iraq, 196, 234, 243, 276 irreversible decisions, 61–62, 223–24 Iverson, Allen, 246 Jacobi, Carl, 1 James, LeBron, 246 Janz, Christoph, 298–99 Japan, 241 jelly beans, 169–71 Jobs, Steve, 64, 296–97 jobs to be done, 296, 299–300 John, Tommy, 83 Johnson, Magic, 246 jokes, 35–36 Jordan, Michael, 246 Journal of Experimental Psychology, 13, 17 Joy, Bill, 247 Joy’s law, 247, 248 judicial rulings, 63, 144 Jurassic Park, 121 justice, distributive versus procedural, 224–25 Justice, U.S.


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Economics Rules: The Rights and Wrongs of the Dismal Science by Dani Rodrik

airline deregulation, Albert Einstein, bank run, barriers to entry, Bretton Woods, business cycle, butterfly effect, capital controls, Carmen Reinhart, central bank independence, collective bargaining, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Donald Davies, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, Fellow of the Royal Society, financial deregulation, financial innovation, floating exchange rates, fudge factor, full employment, George Akerlof, Gini coefficient, Growth in a Time of Debt, income inequality, inflation targeting, informal economy, information asymmetry, invisible hand, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labor-force participation, liquidity trap, loss aversion, low skilled workers, market design, market fundamentalism, minimum wage unemployment, oil shock, open economy, Pareto efficiency, Paul Samuelson, price stability, prisoner's dilemma, profit maximization, quantitative easing, randomized controlled trial, rent control, rent-seeking, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, school vouchers, South Sea Bubble, spectrum auction, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, trade liberalization, trade route, ultimatum game, University of East Anglia, unorthodox policies, Vilfredo Pareto, Washington Consensus, white flight

Work by Michael Spence, Joseph Stiglitz, and George Akerlof showed that these types of markets could exhibit a variety of distinctive features, including signaling (costly investment in behavior that has no immediate apparent benefit), rationing (refusal to provide a good or service, even at a higher price), and market collapse. This work earned these three economists a joint Nobel Prize in 2001 and spawned a huge literature that hums along to this day. As a result, we understand much better the workings of credit and insurance markets, where information asymmetries are rife.†† Today, economists are increasingly turning their attention to markets in which consumers do not behave fully rationally. This reorientation has produced a new field called behavioral economics, which attempts to integrate the insights of psychology with the formal modeling approaches of economics. These new frameworks hold great promise when consumers behave in ways that cannot be explained by extant models—when, for example, they walk half a mile to get to another store where a soccer ball sells for $2 less but would not do the same to save $100 on an expensive stereo.

In addition to monopolies and duopolies, we have “monopolistic competition” (a large number of firms, each with market power in a different brand), Bertrand versus Cournot competition (different assumptions about how prices are set), static versus dynamic models (which affect the degree of collusion that can be sustained by firms), simultaneous versus sequential moves (which determine whether there might be first-mover advantages), and so on. Depending on what we assume along these and many other dimensions, we have learned from decades of modeling that imperfect competition can produce a bewildering array of possibilities. More important, thanks to the transparency of the assumptions, we have also learned what each one of these outcomes is predicated on. In the 1970s, economists began to model another aspect of markets: asymmetric information. This is an important feature of real-world markets. Workers have a better sense of their ability than do employers. Creditors know whether they are likely to default or not, while lenders do not. Buyers of used cars do not know whether they’re buying a lemon, but sellers do. Work by Michael Spence, Joseph Stiglitz, and George Akerlof showed that these types of markets could exhibit a variety of distinctive features, including signaling (costly investment in behavior that has no immediate apparent benefit), rationing (refusal to provide a good or service, even at a higher price), and market collapse.

The irrelevance of sunk costs (payments already made that cannot be recouped) and the equivalence between financial costs and opportunity costs (the value of choices not exercised) do not hold under less than full rationality, to cite but two examples. Although grossly simplified, this telescopic account should give a sense of the expanding diversity of the profession’s explanatory models. We have moved beyond competitive models to imperfect competition, asymmetric information, and behavioral economics. Idealized, flawless markets have given way to markets that can fail in all sorts of ways. Rational behavior is being overlaid with findings from psychology. Typically, the expansion has its roots in empirical observations that seem to contradict existing models. Why, for example, were many firms paying their workers wages that were substantially higher than the going market wage for apparently similar workers?


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The Inner Lives of Markets: How People Shape Them—And They Shape Us by Tim Sullivan

"Robert Solow", Airbnb, airport security, Al Roth, Alvin Roth, Andrei Shleifer, attribution theory, autonomous vehicles, barriers to entry, Brownian motion, business cycle, buy and hold, centralized clearinghouse, Chuck Templeton: OpenTable:, clean water, conceptual framework, constrained optimization, continuous double auction, creative destruction, deferred acceptance, Donald Trump, Edward Glaeser, experimental subject, first-price auction, framing effect, frictionless, fundamental attribution error, George Akerlof, Goldman Sachs: Vampire Squid, Gunnar Myrdal, helicopter parent, information asymmetry, Internet of things, invisible hand, Isaac Newton, iterative process, Jean Tirole, Jeff Bezos, Johann Wolfgang von Goethe, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, late fees, linear programming, Lyft, market clearing, market design, market friction, medical residency, multi-sided market, mutually assured destruction, Nash equilibrium, Occupy movement, Pareto efficiency, Paul Samuelson, Peter Thiel, pets.com, pez dispenser, pre–internet, price mechanism, price stability, prisoner's dilemma, profit motive, proxy bid, RAND corporation, ride hailing / ride sharing, Robert Shiller, Robert Shiller, Ronald Coase, school choice, school vouchers, sealed-bid auction, second-price auction, second-price sealed-bid, sharing economy, Silicon Valley, spectrum auction, Steve Jobs, Tacoma Narrows Bridge, technoutopianism, telemarketer, The Market for Lemons, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, trade route, transaction costs, two-sided market, uber lyft, uranium enrichment, Vickrey auction, Vilfredo Pareto, winner-take-all economy

The process of calling references and conducting in-person interviews to gather soft information about whether you really trust this person remains largely unchanged from when we were first hiring sitters a dozen years ago. Their imperfections notwithstanding, the advent of babysitter platforms is bad news for brick-and-mortar nanny placement services, whose businesses are surely suffering. But we’re still skeptical that any intermediary, however diligent, will overcome the anxieties of the modern helicopter parent. We doubt that day will ever arrive. Asymmetric information is dead? Long live asymmetric information. The Network Externalities of Ladies’ Night The calculation of how to set prices is a lot more complicated on platforms than in one-sided markets because they are defined by what economists call network externalities, where one person’s purchase makes the item more valuable for other would-be consumers.15 Obviously, this isn’t the case for groceries: the happiness I get from a box of Oreos isn’t affected by whether you prefer to spend your money on Oreos or chocolate-chip cookies or kale.

When it comes to selling lemons, you really can fool most of the people most of the time. It’s why, despite their best efforts, no amount of antifraud efforts by Amazon or eBay or anyone else will rid the world of conmen. As long as there’s money to be made off easy marks, there will be operators able to separate fools from their money. And if somehow tomorrow morning we were to figure out a technology to end information asymmetry, someone else would figure out by tomorrow afternoon some way of making more of it. 4 THE POWER OF SIGNALS IN A WORLD OF CHEAP TALK FACE TATTOOS AND OTHER SIGNS OF HIDDEN QUALITIES When fifteen-year-old Robert Torres came home in 1977 with the letters “SF” tattooed on his left hand, his horror-struck mother, Frances Hernandez, asked him why on earth he’d gone and “marked [himself] for life.”

In fact, the story of eBay’s early days is partly about the perils of market transactions and how they undermine the fundamentalist vision of markets as the answer to all the world’s problems. They’re insights that are worth keeping in mind today, for internet commerce participants and entrepreneurs alike. But whatever problems eBay and others encountered initially, the tinkerers and innovators of Silicon Valley did prevail. While asymmetric information—when the seller knows more than the buyer—complicates the job of turning the economy into an internet bazaar, eBay and its e-commerce brethren have found many ways to get the market to work reasonably well. And as we’ll see, their successes have provided economists with yet more fodder for their model building and experiments—often from within the companies themselves. E-Commerce Comes of Age Skoll came to Silicon Valley just as Omidyar and others were trying to figure out how to transform the World Wide Web into something that could serve as a platform for transparent market exchange.


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The Price of Inequality: How Today's Divided Society Endangers Our Future by Joseph E. Stiglitz

"Robert Solow", affirmative action, Affordable Care Act / Obamacare, airline deregulation, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collapse of Lehman Brothers, collective bargaining, colonial rule, corporate governance, Credit Default Swap, Daniel Kahneman / Amos Tversky, Dava Sobel, declining real wages, deskilling, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, framing effect, full employment, George Akerlof, Gini coefficient, income inequality, income per capita, indoor plumbing, inflation targeting, information asymmetry, invisible hand, jobless men, John Harrison: Longitude, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, London Interbank Offered Rate, lone genius, low skilled workers, Marc Andreessen, Mark Zuckerberg, market bubble, market fundamentalism, mass incarceration, medical bankruptcy, microcredit, moral hazard, mortgage tax deduction, negative equity, obamacare, offshore financial centre, paper trading, Pareto efficiency, patent troll, Paul Samuelson, payday loans, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, Simon Kuznets, spectrum auction, Steve Jobs, technology bubble, The Chicago School, The Fortune at the Bottom of the Pyramid, The Myth of the Rational Market, The Spirit Level, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, ultimatum game, uranium enrichment, very high income, We are the 99%, wealth creators, women in the workforce, zero-sum game

On October 31, 2011, MF Global Holdings, a brokerage firm run by Jon Corzine, filed for bankruptcy protection in New York. It was the eighth-largest corporate bankruptcy in U.S. history and the biggest failure by a securities firm since Lehman Brothers Holdings Inc. filed for Chapter 11 in September 2008. 10. While there may be some debate about when taking advantage of information asymmetries is unethical (reflected in the maxim “caveat emptor,” putting the obligation on the buyer to beware of the possibility of information asymmetries), there is no doubt that the banks stepped over the line. See the discussion in later chapters over the large fines paid by the banks for practices that were fraudulent and deceptive. 11. This predatory behavior took a number of forms. One way was to charge very high interest rates, sometimes obfuscated by fees. The abolition of usury laws (which limit the interest rates lenders can charge) provided lenders greater scope for charging exorbitant interest rates; and lenders found ways of circumventing whatever regulations there were.

Hoff, “Market Failures and the Distribution of Wealth: A Perspective from the Economics of Information,” Politics and Society 24, no. 4 (1996): 411–32; and Hoff, “The Second Theorem of the Second Best,” Journal of Public Economics 25 (1994): 223–42. 55. The exciting story is told in the bestseller by Dava Sobel, Longitude: The True Story of a Lone Genius Who Solved the Greatest Scientific Problem of His Time (New York: Walker, 1995). 56. Technically, the problems with incentive pay arise when there are information asymmetries. The employer doesn’t fully know the quality of the products produced by the worker (otherwise, he would specify that). In a trial, the judge and jury worry that the strength of an expert’s opinion might be affected if his compensation depended on the outcome of the trial. 57. Given this, one might ask, why are those in finance, supposedly experts in economics, so wedded to these distortionary incentive schemes.

“Accord Reached Settling Lawsuit over BP Oil Spill,” New York Times, March 3, 2012, p. A1. Propublica maintained an active media oversight of the aftermath of the BP spill, including corruption in the clean-up process. See http://www.propublica.org/topic/gulf-oil-spill/. 5. R. H. Coase, “The Problem of Social Cost,” Journal of Law and Economics 3 (1960): 1–44. 6. This is especially the case when there are information asymmetries—where one party has easier access to information. If one group has less information about the harm than another (a common situation), then the more informed is in a better position to avoid the harm. Other market imperfections can also affect the efficiency of alternative assignments of property rights. For example, if one group is credit constrained, it may not be able to pay. 7. In many cases, it is not always clear who is exerting an externality on whom.


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Willful: How We Choose What We Do by Richard Robb

activist fund / activist shareholder / activist investor, Alvin Roth, Asian financial crisis, asset-backed security, Bernie Madoff, capital asset pricing model, cognitive bias, collapse of Lehman Brothers, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, delayed gratification, diversification, diversified portfolio, effective altruism, endowment effect, Eratosthenes, experimental subject, family office, George Akerlof, index fund, information asymmetry, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, lake wobegon effect, loss aversion, market bubble, market clearing, money market fund, Pareto efficiency, Paul Samuelson, Peter Singer: altruism, principal–agent problem, profit maximization, profit motive, Richard Thaler, Silicon Valley, sovereign wealth fund, survivorship bias, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, transaction costs, ultimatum game

We could have pointed at a chair and turned it into gold. They still wouldn’t have invested.” I believed that values in credit markets were extraordinary. (Of course, some deals that appear lucrative from a distance are not; at the time I believed I knew which were which.) Yet I simply couldn’t beam my beliefs into investors’ heads. Gradually, I saw that investors’ reluctance had little to do with the usual factors: aversion to risk, information asymmetries, aversion to blame, aversion to ambiguity, herd mentality, or irrational fear. Investors could not fully adopt my conviction about any given opportunity before it disappeared. They could not act on a hunch that I (and others) might just be right. To do so, an investor would have to suspend her belief in reasonably efficient markets—usually, low asset prices signify risk, but not in the collapsing markets of 2008.

Dostoevsky, Notes from Underground, 21. 7. Ibid., 25. 8. Nietzsche, Philosophy in the Tragic Age, 54–55. TWO Two Realms of Human Behavior 1. Kierkegaard, Either/Or, 163–164. 2. Becker, Economic Approach, 5. Neoclassical economics could be challenged on the assumption of perfect exchange, i.e., markets in equilibrium, and many have done so. Trading may break down due to heterogeneous goods and information asymmetries, imperfect performance on contracts, prices set via strategic bargaining rather than a Walrasian auctioneer, sheer deceit—you name it. In this case, observed behavior will fail to conform to neoclassical models and economists’ policy prescriptions will not fit the real world. See, e.g., Kohn, “Value and Exchange.” But that is not our focus. Here we are concerned with motives at the level of the individual. 3.

See also mercy ambiguity effect, 24 American Work-Sports (Zarnowski), 191 Anaximander, 190 anchoring, 168 angel investors, 212–213n1 “animal spirits,” 169 Antipater of Tarsus, 134–135, 137 “anxious vigilance,” 73, 82 arbitrage, 70, 78 Aristotle, 200, 220n24 Asian financial crisis (1997–1998), 13 asset-backed securities, 93–95 asset classes, 75 astrology, 67 asymmetric information, 96, 210n2 authenticity, 32–37, 114 of challenges, 176–179 autism, 58, 59 auto safety, 139 Bank of New York Mellon, 61 Battle of Waterloo, 71, 205 Bear Stearns, 85 Becker, Gary, 33, 108–109 behavioral economics, 4, 10, 198–199 assumptions underlying, 24 insights of, 24–25 rational choice complemented by, 6 Belgium, 191 beliefs: attachment to, 51 defined, 50 evidence inconsistent with, 54, 57–58 formation of, 53, 92 persistence of, 26–28, 54 transmissibility of, 92–93, 95–96 Bentham, Jeremy, 127, 197–198 “black swans,” 62–64 blame aversion, 57, 72 brain hemispheres, 161 Brexit, 181–185 “bull markets,” 78 capital asset pricing model, 64 care altruism, 38, 104, 108–114, 115, 120, 135, 201 Casablanca (film), 120, 125 The Cask of Amontillado (Poe), 126–127 challenges, 202–203 authenticity of, 176–179 staying in the game linked to, 179–181 changes of mind, 147–164 charity, 40, 45–46, 119, 128 choice: abundance of, 172–174 intertemporal, 149–158, 166 purposeful vs. rational, 22–23 Christofferson, Johan, 83, 86, 87, 88 Cicero, 133–134 Clark, John Bates, 167 cognitive bias, 6, 23, 51, 147–148, 167, 198–199 confirmation bias, 200 experimental evidence of, 10–11, 24 for-itself behavior disguised as, 200–201 gain-loss asymmetry, 10–11 hostile attribution bias, 59 hyperbolic discounting as, 158 lawn-mowing paradox and, 33–34 obstinacy linked to, 57 omission bias, 200 rational choice disguised as, 10–11, 33–34, 199–200 salience and, 29, 147 survivor bias, 180 zero risk bias, 24 Colbert, Claudette, 7 Columbia University, 17 commitment devices, 149–151 commodities, 80, 86, 89 commuting, 26, 38–39 competitiveness, 11, 31, 41, 149, 189 complementary skills, 71–72 compound interest, 79 confirmation bias, 57, 200 conspicuous consumption, 31 consumption planning, 151–159 contrarian strategy, 78 cooperation, 104, 105 coordination, 216n15 corner solutions, 214n8 cost-benefit analysis: disregard of, in military campaigns, 117 of human life, 138–143 credit risk, 11 crime, 208 Dai-Ichi Kangyo Bank (DKB), 12–14, 15, 17, 87, 192–193 Darwin, Charles, 62–63 depression, psychological, 62 de Waal, Frans, 118 Diogenes of Seleucia, 134–135, 137 discounting of the future, 10, 162–164 hyperbolic, 158, 201 disjunction effect, 174–176 diversification, 64–65 divestment, 65–66 Dostoevsky, Fyodor, 18 drowning husband problem, 6–7, 110, 116, 123–125 effective altruism, 110–112, 126, 130, 135–136 efficient market hypothesis, 69–74, 81–82, 96 Empire State Building, 211–212n12 endowment effect, 4 endowments, of universities, 74 entrepreneurism, 27, 90, 91–92 Eratosthenes, 190 ethics, 6, 104, 106–108, 116, 125 European Union, 181–182 experiential knowledge, 59–61 expert opinion, 27–28, 53, 54, 56–57 extreme unexpected events, 61–64 fairness, 108, 179 family offices, 94 Fear and Trembling (Kierkegaard), 53–54 “felicific calculus,” 197–198 financial crisis of 2007–2009, 61, 76, 85, 93–94, 95 firemen’s muster, 191 flow, and well-being, 201–202 Foot, Philippa, 133–134, 135 for-itself behavior, 6–7, 19, 21, 27, 36, 116, 133–134, 204–205, 207–208 acting in character as, 51–53, 55–56, 94–95, 203 acting out of character as, 69, 72 analyzing, 20 authenticity and, 33–35 charity as, 39–40, 45–46 comparison and ranking lacking from, 19, 24, 181 consequences of, 55–64 constituents of, 26–31 defined, 23–24 difficulty of modeling, 204 expert opinion and, 57 extreme unexpected events and, 63–64 flow of time and, 30 free choice linked to, 169–172 in groups, 91–100 incommensurability of, 140–143 in individual investing, 77–78 in institutional investing, 76 intertemporal choice and, 168, 175, 176 job satisfaction as, 189 mercy as, 114 misclassification of, 42, 44, 200–201 out-of-character trading as, 68–69 purposeful choice commingled with, 40–43, 129, 171 rationalizations for, 194–195 in trolley problem, 137 unemployment and, 186 France, 191 Fuji Bank, 14 futures, 80–81 gain-loss asymmetry, 10–11 Galperti, Simone, 217n1 gambler’s fallacy, 199 gamifying, 177 Garber, Peter, 212n1 Germany, 191 global equity, 75 Good Samaritan (biblical figure), 103, 129–130, 206 governance, of institutional investors, 74 Great Britain, 191 Great Depression, 94 Greek antiquity, 190 guilt, 127 habituation, 201 happiness research (positive psychology), 25–26, 201–202 Hayek, Friedrich, 61, 70 hedge funds, 15–17, 65, 75, 78–79, 93, 95 herd mentality, 96 heroism, 6–7, 19–20 hindsight effect, 199 holding, of investments, 79–80 home country bias, 64–65 Homer, 149 Homo ludens, 167–168 hostile attribution bias, 59 housing market, 94 Huizinga, Johan, 167–168 human life, valuation of, 138–143 Hume, David, 62, 209n5 hyperbolic discounting, 158, 201 illiquid markets, 74, 94 index funds, 75 individual investing, 76–82 Industrial Bank of Japan, 14 information asymmetry, 96, 210n2 innovation, 190 institutional investing, 74–76, 82, 93–95, 205 intergenerational transfers, 217n1, 218n4 interlocking utility, 108 intertemporal choice, 149–159, 166 investing: personal beliefs and, 52–53 in start-ups, 27 Joseph (biblical figure), 97–99 Kahneman, Daniel, 168 Kantianism, 135–136 Keynes, John Maynard, 12, 58, 167, 169, 188–189 Kierkegaard, Søren, 30, 53, 65, 88 Knight, Frank, 145, 187 Kranton, Rachel E., 210–211n2 labor supply, 185–189 Lake Wobegon effect, 4 lawn-mowing paradox, 33–34, 206 Lehman Brothers, 61, 86, 89, 184 leisure, 14, 17, 41, 154, 187 Libet, Benjamin, 161 life, valuation of, 138–143 Life of Alexander (Plutarch), 180–181 Locher, Roger, 117, 124 long-term vs. short-term planning, 148–149 loss aversion, 70, 199 lottery: as rational choice, 199–200 Winner’s Curse, 34–36 love altruism, 104, 116, 123–125, 126, 203 lying, vs. omitting, 134 Macbeth (Shakespeare), 63 MacFarquhar, Larissa, 214n6 Madoff, Bernard, 170 malevolence, 125–127 Malthus, Thomas, 212n2 manners, in social interactions, 104, 106, 107, 116, 125 market equilibrium, 33 Markowitz, Harry, 65 Marshall, Alfred, 41, 167 Mass Flourishing (Phelps), 189–191 materialism, 5 merchant’s choice, 133–134, 137–138 mercy, 104, 114–116, 203 examples of, 116–120 inexplicable, 45–46, 120–122 uniqueness of, 119, 129 mergers and acquisitions, 192 “money pump,” 159 monks’ parable, 114, 124 Montaigne, Michel de, 114, 118 mortgage-backed securities, 93 Nagel, Thomas, 161 Napoleon I, emperor of the French, 71 neoclassical economics, 8, 10, 11, 22, 33 Nietzsche, Friedrich, 21, 43, 209n5 norms, 104, 106–108, 123 Norway, 66 Nozick, Robert, 162 observed care altruism, 108–112 Odyssey (Homer), 149–150 omission bias, 200 On the Fourfold Root of the Principle of Sufficient Reason (Schopenhauer), 209n5 “on the spot” knowledge, 61, 70, 80, 94, 205 Orico, 13 overconfidence, 57, 200 “overearning,” 44–45 The Palm Beach Story (film), 7 The Paradox of Choice (Schwartz), 172 parenting, 108, 141, 170–171 Pareto efficiency, 132–133, 136, 139–140 Peirce, Charles Sanders, 53–54, 67, 94 pension funds, 66, 74–75, 93, 95 permanent income hypothesis, 179 Pharaoh (biblical figure), 97–99 Phelps, Edmund, 17, 189–191 Philip II, king of Macedonia, 181 planning, 149–151 for consumption, 154–157 long-term vs. short-term, 148–149 rational choice applied to, 152–158, 162 play, 44–45, 167, 202 pleasure-pain principle, 18 Plutarch, 180–181 Poe, Edgar Allan, 126 pollution, 132–133 Popeye the Sailor Man, 19 portfolio theory, 64–65 positive psychology (happiness research), 25–26, 201–202 preferences, 18–19, 198 aggregating, 38–39, 132, 164 altruism and, 28, 38, 45, 104, 110, 111, 116 in behavioral economics, 24, 168 beliefs’ feedback into, 51, 55 defined, 23 intransitive, 158–159 in purposeful behavior, 25, 36 risk aversion and, 51 stability of, 33, 115, 147, 207, 208 “time-inconsistent,” 158, 159, 166, 203 present value, 7, 139 principal-agent problem, 72 Principles of Economics (Marshall), 41 prisoner’s dilemma, 105 private equity, 75 procrastination, 3, 4, 19, 177–178 prospect theory, 168 protectionism, 185–187 Prussia, 191 public equities, 75 punishment, 109 purposeful choice, 22–26, 27, 34, 36, 56, 133–134, 204–205 altruism compatible with, 104, 113–114, 115–116 commensurability and, 153–154 as default rule, 43–46 expert opinion and, 57 extreme unexpected events and, 62–63 flow of time and, 30 for-itself behavior commingled with, 40–43, 129, 171 mechanistic quality of, 68 in merchant’s choice, 135, 137–138 Pareto efficiency linked to, 132 rational choice distinguished from, 22–23 regret linked to, 128 social relations linked to, 28 stable preferences linked to, 33 in trolley problem, 135–136 vaccination and, 58–59 wage increases and, 187.


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Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth by Michael Jacobs, Mariana Mazzucato

balance sheet recession, banking crisis, basic income, Bernie Sanders, Bretton Woods, business climate, business cycle, Carmen Reinhart, central bank independence, collaborative economy, complexity theory, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, decarbonisation, deindustrialization, dematerialisation, Detroit bankruptcy, double entry bookkeeping, Elon Musk, endogenous growth, energy security, eurozone crisis, factory automation, facts on the ground, fiat currency, Financial Instability Hypothesis, financial intermediation, forward guidance, full employment, G4S, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Internet of things, investor state dispute settlement, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, knowledge economy, labour market flexibility, low skilled workers, Martin Wolf, mass incarceration, Mont Pelerin Society, neoliberal agenda, Network effects, new economy, non-tariff barriers, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, quantitative easing, QWERTY keyboard, railway mania, rent-seeking, road to serfdom, savings glut, Second Machine Age, secular stagnation, shareholder value, sharing economy, Silicon Valley, Steve Jobs, the built environment, The Great Moderation, The Spirit Level, Thorstein Veblen, too big to fail, total factor productivity, transaction costs, trickle-down economics, universal basic income, very high income

Senior’s 1836 An Outline of the Science of Political Economy, London, Richard Griffin & Co. 21 For a recent application of this argument in defence of inequality, see N. G. Mankiw, ‘Defending the one percent’, Journal of Economic Perspectives, vol. 27, no. 3, Summer 2013, pp. 21–34. 22 I recognised this early in my own work on information asymmetries, in a major controversy with Steven N. S. Cheung over whether the institution of sharecropping (which I argued could be explained by information asymmetries) mattered (see J. E. Stiglitz, ‘Incentives and risk sharing in sharecropping’, The Review of Economic Studies, vol. 41, no. 2, 1974, pp. 219–55 and S. Cheung, ‘Transaction costs, risk aversion and the choice of contractual arrangements’, Journal of Law and Economics, vol. 19, no. 1, 1969). North has perhaps done more to bring institutional analysis into the mainstream than anyone else: see D.

At the level of the economy as a whole, it is competition between firms which is believed to generate innovation, and therefore leads to long-run economic growth. The orthodox model understands that markets do not always work well. It therefore uses the concept of ‘market failure’ to explain why suboptimal outcomes occur and how they can be improved. Markets fail under various circumstances: when firms have monopolistic power which restricts competition; when there are information asymmetries between producers and consumers; when there are ‘externalities’ or impacts on third parties which are not properly reflected in market prices; and where public and common goods exist whose benefits cannot be captured by individual producers or consumers.36 The propensity of real-world markets to fail in these various ways means that ‘free’ markets do not maximise welfare. So the theory of market failure provides a rationale for government intervention.

So public policy interventions always have to balance the goal of correcting market failures with the risk of generating government failures which outweigh them.37 Broadly speaking, it is this general model of capitalism which underpins most public economic commentary and policy-making today. And it leads to some familiar policy conclusions. Chief among these is that markets generally produce positive outcomes which increase welfare, and should therefore be allowed to operate without much interference wherever possible. A basic regulatory framework of employment, consumer and environmental protection is required to correct for clear externalities and information asymmetries; but governments should not seek to direct markets or shape the businesses which operate in them. The ‘invisible hand’ of the market knows best, generating the highest welfare-producing activities where firms seek to maximise value for their shareholders. Even where the market might seem to get it wrong, governments cannot presume to know better. So governments should be extremely wary of seeking to ‘pick winners’ through industrial and innovation policy; of seeking to push banks and other financial institutions to make specific forms of investments; or of investing in the private economy themselves.


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The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory by Kariappa Bheemaiah

accounting loophole / creative accounting, Ada Lovelace, Airbnb, algorithmic trading, asset allocation, autonomous vehicles, balance sheet recession, bank run, banks create money, Basel III, basic income, Ben Bernanke: helicopter money, bitcoin, blockchain, Bretton Woods, business cycle, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, cashless society, cellular automata, central bank independence, Claude Shannon: information theory, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, complexity theory, constrained optimization, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, David Graeber, deskilling, Diane Coyle, discrete time, disruptive innovation, distributed ledger, diversification, double entry bookkeeping, Ethereum, ethereum blockchain, fiat currency, financial innovation, financial intermediation, Flash crash, floating exchange rates, Fractional reserve banking, full employment, George Akerlof, illegal immigration, income inequality, income per capita, inflation targeting, information asymmetry, interest rate derivative, inventory management, invisible hand, John Maynard Keynes: technological unemployment, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, knowledge economy, large denomination, liquidity trap, London Whale, low skilled workers, M-Pesa, Marc Andreessen, market bubble, market fundamentalism, Mexican peso crisis / tequila crisis, MITM: man-in-the-middle, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, natural language processing, Network effects, new economy, Nikolai Kondratiev, offshore financial centre, packet switching, Pareto efficiency, pattern recognition, peer-to-peer lending, Ponzi scheme, precariat, pre–internet, price mechanism, price stability, private sector deleveraging, profit maximization, QR code, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, Real Time Gross Settlement, rent control, rent-seeking, Satoshi Nakamoto, Satyajit Das, savings glut, seigniorage, Silicon Valley, Skype, smart contracts, software as a service, software is eating the world, speech recognition, statistical model, Stephen Hawking, supply-chain management, technology bubble, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Nature of the Firm, the payments system, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, trade liberalization, transaction costs, Turing machine, Turing test, universal basic income, Von Neumann architecture, Washington Consensus

This is because, first, the banking network consists of a number of banks that have relatively similar business and risk models and whose defaults tend to be highly correlated. Banks realize that in a situation of distress, they are underwritten and likely to be supported by the United States government and the governments of Europe (Freeman, 2011 ). As a result, they tend to structure themselves along similar lines and this causes a herd mentality that reduces the diversity of behavior, notably when dealing with risk. Second, there is information asymmetry within the banking networks as banks do not share their information with each other. Thus the tools, such as the aforementioned stress tests and Living Wills, being developed to reconstruct the network and estimate systemic risk, are done using partial amounts of publicly available information. These tests would be greatly improved if the banks publicly reported more data and informed us of their connections with other banks.

A simple, secure swap then takes place, allowing Transferwise to execute the transfer up to 89% cheaper than with a bank (http://www.telegraph.co.uk/ money/transferwise/how-does-it-work-and-is-it-safe/). 21 61 Chapter 2 ■ Fragmentation of Finance underwriting process is often not integrative of the due diligence process and often involves depending on third-party providers, it leads to duplication of efforts, additional costs to the investors, and information asymmetries owing to the siloed structure of the entire operation. However, companies like Kabbage are showing us that via the use of Big Data analyses, these steps can be automated. Based on the digital footprint of the company, the lending institution can use advanced analytics to perform its due diligence with a better understanding of the risk involved, with a higher level of transparency, and with less manual intervention at higher speeds.

Big data also allows the analysis of other attributes of financial information, which allows investors to gain a more holistic understanding of the company’s character. Using smart contracts, this automated due diligence can then be leveraged to automate the underwriting process, which reduces execution time and reduces the number of supplementary intermediaries that are currently employed, thus reducing operational risks and information asymmetries. The P2P lending sector is already making strides in this direction to connect savers and lenders. Companies like MoneyCircles connect savers with borrowers who are part of their social circles. Lenders can create or join circles based on their Gmail, Facebook, Twitter, or LinkedIn networks and loan money based on their criteria. The conditions are embedded into a smart contract and the transactions occur via a blockchain.


The Economics Anti-Textbook: A Critical Thinker's Guide to Microeconomics by Rod Hill, Anthony Myatt

American ideology, Andrei Shleifer, Asian financial crisis, bank run, barriers to entry, Bernie Madoff, business cycle, cognitive dissonance, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, different worldview, endogenous growth, equal pay for equal work, Eugene Fama: efficient market hypothesis, experimental economics, failed state, financial innovation, full employment, gender pay gap, Gini coefficient, Gunnar Myrdal, happiness index / gross national happiness, Home mortgage interest deduction, Howard Zinn, income inequality, indoor plumbing, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, liberal capitalism, low skilled workers, market bubble, market clearing, market fundamentalism, Martin Wolf, medical malpractice, minimum wage unemployment, moral hazard, Pareto efficiency, Paul Samuelson, Peter Singer: altruism, positional goods, prediction markets, price discrimination, principal–agent problem, profit maximization, profit motive, publication bias, purchasing power parity, race to the bottom, Ralph Nader, random walk, rent control, rent-seeking, Richard Thaler, Ronald Reagan, shareholder value, The Myth of the Rational Market, the payments system, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, ultimatum game, union organizing, working-age population, World Values Survey, Yogi Berra

Credit markets are a particularly important type of market dealing in ‘relational contracts’, both because of their central role in a capitalist economy and because asymmetric information is intrinsic to these markets. (We will have more to say about credit markets, and how asymmetric information and limited rationality played major roles in the global financial meltdown of 2008/09, in the Postscript.) Asymmetric information gives rise to a cluster of well-known problems. First, it allows some people to benefit at the expense of those they are supposed to serve – the so-called ‘principal agent’ problem. Second, it contributes to ‘moral hazard’, where incentives are changed by certain kinds of contracts. (For example, individuals may have less incentive to prevent fires after buying fire insurance, and asymmetric information means that we can’t easily monitor this changed behaviour.) Third, it contributes to ‘adverse selection’, where particular contracts disproportionately attract undesirable customers.

The editors of the International Breastfeeding Journal write that ‘the lack of a breastfeeding 82 Questions for your professor: How do we measure consumer surplus if advertising and marketing change people’s preferences? Does it matter if they buy things they would not want with perfect information? 2.2 Incomplete and asymmetric information The textbook economics story of consumer choice with its assumptions of informative advertising and perfect information leading to optimal choices is particularly misleading in situations where incomplete and asymmetric information is a central feature. This provides an opportunity for manipulative marketing by producers. Let’s consider a couple of examples. Example: marketing prescription drugs No one should have been too surprised when a recent study finally revealed that Prozac, the popular antidepressant taken by 40 million people, and three other drugs in its class are no more effec­tive for most people than a placebo (a sugar pill that the patient believes is a drug).

The misallocation of resources parallels what we saw in the earlier example, where preferences were altered by advertising. The real default case: incomplete and asymmetric information Despite the pervasiveness of informational problems and the inefficiencies they give rise to, textbook economics focuses on the improbable assumptions of given tastes 85 4  |  People as consumers (which we look at in the next chapter), the drug makers are regularly among the most profitable corporations in the world. and perfect information that helps make Adam Smith’s good-news story of the invisible hand work for consumers. But incomplete and asymmetric information ­– that is, buyers and sellers knowing different things – is a better description of reality for almost all goods. As the examples we give suggest, ignorance about what we buy and use is commonplace and in many situations buyers’ ignorance has important consequences.


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Other People's Money: Masters of the Universe or Servants of the People? by John Kay

Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, buy and hold, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, corporate governance, Credit Default Swap, cross-subsidies, dematerialisation, disruptive innovation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial innovation, financial intermediation, financial thriller, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, income inequality, index fund, inflation targeting, information asymmetry, intangible asset, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, John Meriwether, light touch regulation, London Whale, Long Term Capital Management, loose coupling, low cost airline, low cost carrier, M-Pesa, market design, millennium bug, mittelstand, money market fund, moral hazard, mortgage debt, Myron Scholes, NetJets, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, Paul Samuelson, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, regulatory arbitrage, Renaissance Technologies, rent control, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, Schrödinger's Cat, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, Washington Consensus, We are the 99%, Yom Kippur War

In Michel Albert’s Swiss village, community pressures handled the problems of information asymmetry, adverse selection and moral hazard. Information asymmetry was reduced, though not necessarily eliminated, by geographical proximity and personal ties. The obligation to participate was informed by the link between economic and social life, and for most it was no obligation at all. Some people were better guardians of their herds than others, some shirked their responsibilities, and others discharged them more than conscientiously, but these differences were ignored in the interests of maintaining a harmonious community. Insurance markets exist for risks that involve a substantial degree of randomness – which reduces the problem of information asymmetry, and where the insured has limited influence over the incidence of risk – which reduces the effect of moral hazard.

Both Ruskin and Friedman are sometimes right and sometimes wrong. The ‘Greenspan doctrine’ regards the exchange of risk as similar to the exchange of milk and coffee: the effect of the trade is to ‘allocate (risk) to those investors most able and willing to take it’.11 But three centuries after Colbert, a different strand of thought in modern economics revives the notion that trade is tricky by stressing ‘information asymmetry’ – people trade because they have different knowledge, or different perceptions of the same knowledge. These two approaches to thinking about trade in risk have a long history. Michel Albert, a French economist turned insurance company boss, offered an entertaining account of the development of the global insurance market in the eighteenth century. He explained how, in Edward Lloyd’s coffee house in London, leisured English gentlemen gathered to gamble on the fate of ships at sea.

The long-term interests of ordinary retail investors are best served by ensuring that investment decisions are made on the basis of the best information, which should not be confused with the most data. This elision leads to the emphasis on ‘transparency’. While it is difficult to quarrel with an objective of transparency, the demand for transparency has led to the provision of more and more material of little or no value to users. The answer to information asymmetry is not always the provision of more information, especially when most of this ‘information’ is simply noise, or boilerplate (standardised documentation bolted on to every report). Companies justifiably complain about the ever-increasing volume of data they are required to produce, while users of accounting find less and less of relevance in them. The notion that all investors have, or could have, identical access to corporate data is a fantasy, but the attempt to make it a reality generates a raft of regulation which inhibits engagement between companies and their investors and impedes the collection of substantive information that is helpful in assessing the fundamental value of securities.


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Don't Be Evil: How Big Tech Betrayed Its Founding Principles--And All of US by Rana Foroohar

"side hustle", accounting loophole / creative accounting, Airbnb, AltaVista, autonomous vehicles, banking crisis, barriers to entry, Bernie Madoff, Bernie Sanders, bitcoin, book scanning, Brewster Kahle, Burning Man, call centre, cashless society, cleantech, cloud computing, cognitive dissonance, Colonization of Mars, computer age, corporate governance, creative destruction, Credit Default Swap, cryptocurrency, data is the new oil, death of newspapers, Deng Xiaoping, disintermediation, don't be evil, Donald Trump, drone strike, Edward Snowden, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Etonian, Filter Bubble, future of work, game design, gig economy, global supply chain, Gordon Gekko, greed is good, income inequality, informal economy, information asymmetry, intangible asset, Internet Archive, Internet of things, invisible hand, Jaron Lanier, Jeff Bezos, job automation, job satisfaction, Kenneth Rogoff, life extension, light touch regulation, Lyft, Mark Zuckerberg, Marshall McLuhan, Martin Wolf, Menlo Park, move fast and break things, move fast and break things, Network effects, new economy, offshore financial centre, PageRank, patent troll, paypal mafia, Peter Thiel, pets.com, price discrimination, profit maximization, race to the bottom, recommendation engine, ride hailing / ride sharing, Robert Bork, Sand Hill Road, search engine result page, self-driving car, shareholder value, sharing economy, Shoshana Zuboff, Silicon Valley, Silicon Valley startup, smart cities, Snapchat, South China Sea, sovereign wealth fund, Steve Jobs, Steven Levy, subscription business, supply-chain management, TaskRabbit, Telecommunications Act of 1996, The Chicago School, the new new thing, Tim Cook: Apple, too big to fail, Travis Kalanick, trickle-down economics, Uber and Lyft, Uber for X, uber lyft, Upton Sinclair, WikiLeaks, zero-sum game

Even Lawrence Lessig, the digital law expert who favors many of the policies that the platforms support, said that Google’s deal was the equivalent of a “digital bookstore, not a digital library.”23 What he means is that even as Google was presenting the entire project as being done for the benefit of users, Google itself would ultimately benefit the most. More content meant more opportunities to sell advertising. Why did the authors and publishers ever agree to this initial settlement? Because they didn’t know any better. As with the people who took subprime mortgages from big banks, there was a huge information asymmetry in the dealings of the publishers with Big Tech, which was holding pretty much all the important inside information about just how valuable the digital monetization of searching such content could be. Google understood the new digital world that it was, in fact, creating and dominating. The publishers did not, and were desperate in the short term to stop the Big Tech behemoth from eating their lunch.

Schmidt replied, “I think judgment matters. If you have something that you don’t want anyone to know, maybe you shouldn’t be doing it in the first place.” Translation: Your privacy isn’t our problem. According to Nobel Prize–winning economist Paul Romer, much of our willingness to trade our right to privacy for the sleekest new iPhone model has to do with the fact that “there are tremendous information asymmetries in these markets. Do both parties understand enough to know whether the transaction taking place is in their mutual interest?” he asked, rhetorically. Romer (like me) would argue that they do not; he believes that the complexity of today’s data markets “means that notions like ‘consent’ [to long and complex disclosures about how your data might be used by platform companies] have become meaningless.”

Turner’s conclusion, which mirrors that of a growing number of economists, is that the gig economy reduces friction in labor markets, meaning it solves a real need and creates convenience, but it also creates fragmentation that tends to work better for employers, who can leverage superior technology and information, than for workers. The fact that all the data is owned by Uber, and not the driver, and that drivers can’t see any of it, also creates a huge information asymmetry between workers and the company, as a study done by another nonprofit group, the Data & Society Research Institute, found. Drivers risk “deactivation” for canceling unprofitable fares and absorb the risk of unknown fares, “even though Uber promotes the idea that they are entrepreneurs who are knowingly investing in such risk.” These “entrepreneurial consumers,”17 as the Federal Trade Commission has described Uber drivers themselves (buying into the company’s own language, which would designate drivers themselves as consumers of Uber’s value rather than producers of it), have no access to the wealth of data on consumers that allow the company itself to make such incredible profits.


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Wall Street: How It Works And for Whom by Doug Henwood

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, affirmative action, Andrei Shleifer, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, business cycle, capital asset pricing model, capital controls, central bank independence, computerized trading, corporate governance, corporate raider, correlation coefficient, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, dematerialisation, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, experimental subject, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, George Gilder, hiring and firing, Hyman Minsky, implied volatility, index arbitrage, index fund, information asymmetry, interest rate swap, Internet Archive, invisible hand, Irwin Jacobs, Isaac Newton, joint-stock company, Joseph Schumpeter, kremlinology, labor-force participation, late capitalism, law of one price, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, London Interbank Offered Rate, Louis Bachelier, market bubble, Mexican peso crisis / tequila crisis, microcredit, minimum wage unemployment, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, oil shock, Paul Samuelson, payday loans, pension reform, plutocrats, Plutocrats, price mechanism, price stability, prisoner's dilemma, profit maximization, publication bias, Ralph Nader, random walk, reserve currency, Richard Thaler, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, selection bias, shareholder value, short selling, Slavoj Žižek, South Sea Bubble, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond

This greatly complicates the mainstream notion of prices as a signaling mechanism for balancing supply and demand; there may be lots of noise mixed in with the signals. As they say on Wall Street, when something looks too good to be true, it probably is. Or as one of the major figures in the development of information asymmetry theory, Joseph Stiglitz, put it, "If it's such a good idea, why are you telling me, instead of investing your own money?" (quoted in Kane 1993). This is a remarkably blunt statement for Stiglitz, whose normal mode is the symbols of pure mathematized theory. Interest in "information asymmetry" is usually traced to George Akerlof s 1969 paper on the "lemons" problem — not the fruit, but bum autos. Would-be buyers of used cars have no way of knowing whether the vehicle they're contemplating is any good. So the price must reflect the possibility that it is a lemon, meaning that the sellers of good cars get an unfairly low price — while the sellers of bad ones still get an unfairly high one.

Stein cited surveys showing that "U.S. executives ranked share price increases as their second most important objectives out of nine choices, ahead of such alternatives as improved product portfolio,-^ market share, or company image. In contrast, Japanese executives ranked share price increases as the least important of the nine objectives." This is no mere cultural difference, but a reflection of the contrasting systems under which the two nations' managers operate. Stein's analysis is related to a branch of economics that sprouted during the 1980s from seeds planted in the 1970s — the study of information asymmetry. Since a party to a transaction can never know if the other is telling the truth, each has to be at least a little suspicious of the other. But protective actions resulting from such suspicions may leave both parties worse off than they would have been had both parties been honest and trusting. What, for example, does a low price mean? It may mean a real bargain — but it may also be a hint of damaged goods.

While it's not clear whether that U.S. outperformance is a permanent thing or just a shorter-term cyclical affair, it can't be denied that the old Axis powers experienced extraordinary growth in investment and income during the first 45 years after Wodd War II's end. It may be that as capitalist economies mature, and liquid balances swell, they may tend toward a more fluid style of finance and ownership. irrational expectations Information asymmetry theorists generally assume that market participants are the rational self-maximizers of mainstream theory; they can just never be certain of the knowledge and motives of their counterparts. As Robert Gordon said of the closely related New Keynesian school, "any attempt to build a model based on irrational behavior or submaximizing behavior is viewed as cheating" (quoted in Dymski 1994). While it's safe to believe that financial players are self-maximizers, their rationality is another matter.


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Beyond the Random Walk: A Guide to Stock Market Anomalies and Low Risk Investing by Vijay Singal

3Com Palm IPO, Andrei Shleifer, asset allocation, buy and hold, capital asset pricing model, correlation coefficient, cross-subsidies, Daniel Kahneman / Amos Tversky, diversified portfolio, endowment effect, fixed income, index arbitrage, index fund, information asymmetry, liberal capitalism, locking in a profit, Long Term Capital Management, loss aversion, margin call, market friction, market microstructure, mental accounting, merger arbitrage, Myron Scholes, new economy, prediction markets, price stability, profit motive, random walk, Richard Thaler, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, survivorship bias, transaction costs, Vanguard fund

Improvement in liquidity means that the cost of transacting will fall, causing the price to increase. The third reason proceeds from investor recognition. An increase in investor awareness, for example, can affect the stock price in several ways. First, the firm’s operating performance may improve because of increased monitoring by investors and by enhanced access to capital markets. Second, the firm’s liquidity may improve due to less information asymmetry as a result of greater production of information by investors and analysts. IMPERFECT SUBSTITUTES The imperfect-substitutes argument relies on the concurrent growth in indexing and the price impact of changes to the S&P 500. There is a permanent price increase for firms added to the S&P 500 index (see Table 8.1). There are two arguments to suggest that there is no new information. First, before the advent of indexing (between 1962 and 1976), there was no price change.

There is an improvement in operating performance, and the empirical evidence suggests that focus-increasing spin-offs are the only ones that outperform their peers. The non-focus-increasing spin-offs do not outperform their peers. Another explanation for the abnormal performance is a reduction in asymmetry of information between the management and investors. When a company operates in a single segment, external earnings and performance estimates are more accurate than when a company operates in multiple segments. A reduction in information asymmetry means that there is less risk and, therefore, the stock price is higher. 313 314 Beyond the Random Walk References for Further Reading Abarbanell, Jeffrey S., Brian J. Bushee, and Jana Smith Raedy. 2003. Institutional Investor Preferences and Price Pressure: The Case of Corporate Spin-offs. Journal of Business, forthcoming. Allen, Jeffrey. 2001. Private Information and Spin-off Performance.

Firm Performance and Focus: Long-Run Stock Market Performance Following Spinoffs. Journal of Financial Economics 54(1), 75–101. Dittmar, Amy. 2003. Capital Structure in Corporate Spinoffs. Journal of Business, forthcoming. Johnson, Shane A., Daniel P. Klein, and Verne L. Thibodeaux. 1996. The Effects of Spin-Offs on Corporate Investment and Performance. Journal of Financial Research 19(2), 293–307. Krishnaswami, Sudha, and Venkat Subramanian. 1999. Information Asymmetry, Valuation, and the Corporate Spin-off Decision. Journal of Financial Economics 53, 73–112. Maxwell, William, and Ramesh P. Rao. 2003. Do Spin-offs Expropriate Wealth from Bondholders? Journal of Finance, forthcoming. McConnell, John, M. Ozbilgin, and Sunil Wahal. 2001. Spin-offs, Ex Ante. Journal of Business 74(2), 245–80. Miles, James, and James Rosenfeld. 1983. An Empirical Analysis of the Effects of Spinoff Announcements on Shareholder Wealth.


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The New Division of Labor: How Computers Are Creating the Next Job Market by Frank Levy, Richard J. Murnane

Atul Gawande, business cycle, call centre, computer age, Computer Numeric Control, correlation does not imply causation, David Ricardo: comparative advantage, deskilling, Frank Levy and Richard Murnane: The New Division of Labor, Gunnar Myrdal, hypertext link, index card, information asymmetry, job automation, knowledge economy, knowledge worker, low skilled workers, low-wage service sector, pattern recognition, profit motive, Robert Shiller, Robert Shiller, Ronald Reagan, speech recognition, talking drums, telemarketer, The Wealth of Nations by Adam Smith, working poor

However, since motivation is another attribute that employers cannot measure with pencil-and-paper tests, IBM and its competitors cannot reliably assess job applicants’ motivation. IBM’s reputation for high-quality management training attracts to the firm highly motivated individuals who welcome the challenge of improving their skills by participating in well-designed, rigorous training programs. Thus, because of information asymmetry and self-selection, IBM’s strong training programs help the firm to attract and retain skilled managers.6 The IBM and Cisco cases illustrate that large, successful companies believe they can teach the skills needed to excel at complex communication and expert thinking tasks. The cases also show that technology is 130 CHAPTER 7 not a substitute for face-to-face classroom interactions in some critical parts of the learning process.

IBM invests in training its managers to lead “the IBM way” because it sees substantial benefits in having all its managers follow a common set of IBM-specific guidelines. This, however, can be only part of the answer since the expensive part of Basic Blue is the week in Armonk that focuses on improving participants’ skills in managing complex personal interactions. These skills are valued not only by IBM, but also by its competitors. Economic theorists have shown that the answer to this puzzle rests in part on asymmetric information. In the hiring process, it is difficult to identify people who are skilled at complex communication. Scores on pencil-and-paper tests don’t provide the needed information, which is why neither IBM nor its competitors can identify those job applicants who are skilled at complex communication. Through the training process and by observing managers’ performances over time, IBM learns who its most skilled managers are.

Lessons from Cisco Networking Academies,” in The Knowledge Economy and Postsecondary Education, ed. Patricia Albjerg Graham and Nevzer G. Stacey (Washington, D.C.: National Academy Press, 2002), 127–57. 5. As discussed later, the community server also keeps track of students’ grades on chapter tests and the semester examination, eliminating the bookkeeping activities that consume a great deal of time for most teachers. 6. For rich discussions of the asymmetric information and self-selection ideas, see Daron Acemoglu and Jorn-Steffan Pischke, “Beyond Becker: Training in Imperfect Labour Markets,” Economic Journal 109, no. 453 (February 1999): F112–42; and David Autor, “Why Do Temporary Help Firms Provide Free General Skills Training?” Quarterly Journal of Economics 116, no. 4 (November 2001): 1409–48. CHAPTER 8. Standards-Based Education Reform in the Computer Age 1.


pages: 466 words: 127,728

The Death of Money: The Coming Collapse of the International Monetary System by James Rickards

Affordable Care Act / Obamacare, Asian financial crisis, asset allocation, Ayatollah Khomeini, bank run, banking crisis, Ben Bernanke: helicopter money, bitcoin, Black Swan, Bretton Woods, BRICs, business climate, business cycle, buy and hold, capital controls, Carmen Reinhart, central bank independence, centre right, collateralized debt obligation, collective bargaining, complexity theory, computer age, credit crunch, currency peg, David Graeber, debt deflation, Deng Xiaoping, diversification, Edward Snowden, eurozone crisis, fiat currency, financial innovation, financial intermediation, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, G4S, George Akerlof, global reserve currency, global supply chain, Growth in a Time of Debt, income inequality, inflation targeting, information asymmetry, invisible hand, jitney, John Meriwether, Kenneth Rogoff, labor-force participation, Lao Tzu, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market design, money market fund, money: store of value / unit of account / medium of exchange, mutually assured destruction, obamacare, offshore financial centre, oil shale / tar sands, open economy, plutocrats, Plutocrats, Ponzi scheme, price stability, quantitative easing, RAND corporation, reserve currency, risk-adjusted returns, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Satoshi Nakamoto, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, special drawing rights, Stuxnet, The Market for Lemons, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, too big to fail, trade route, undersea cable, uranium enrichment, Washington Consensus, working-age population, yield curve

In an extreme case, there might be no market at all for used cars because buyers and sellers are too far apart on price, even though there would theoretically be a market-clearing price if both sides to the transaction knew all the facts. Used cars are just one illustration of the asymmetric information problem, which can apply to a vast array of goods and services, including financial transactions. Interestingly, gold does not suffer this problem because it has a uniform grade. Absent fraud, there are no “lemons” when it comes to gold bars. A touchstone for economists since 1970, Akerlof’s work has been applied to numerous problems. The implications of his analysis are profound. If communication can be improved, and information asymmetries reduced, markets become more efficient and perform their price discovery functions more smoothly, reducing costs to consumers. In 1980 the challenge of analyzing information’s role in efficient markets was picked up by a twenty-six-year-old economist named Ben S.

The policy debate over forward guidance as an adjunct to market manipulation is a continuation of one of the most long-standing areas of intellectual inquiry in modern economics. This inquiry involves imperfect information or information asymmetry: a situation in which one party has superior information to another that induces suboptimal behavior by both parties. This field took flight with a 1970 paper by George Akerlof, “The Market for ‘Lemons,’” that chose used car sales as an example to make its point. Akerlof was awarded the Nobel Prize in Economics in 2001 in part for this work. The seller of a used car, he states, knows perfectly well whether the car runs smoothly or is of poor quality, a “lemon.” The buyer does not know; hence an information asymmetry arises between buyer and seller. The unequal information then conditions behavior in adverse ways. Buyers might assume that all used cars are lemons, otherwise the sellers would hang on to them.

But uncertainty caused by the Fed’s policy flip-flops makes the discount rate difficult to ascertain and causes employers to reduce or delay hiring. In effect, the Fed’s efforts to stimulate the economy are actually retarding it. Free markets matter not because of ideology but because of efficiency; they are imperfect, yet they are better than the next best thing. Akerlof illustrates the costs of information asymmetry at one point in time, while Bernanke shows the costs of information uncertainty over time. Both are correct about these theoretical costs, but both ignore the full costs of trying to fix the problem with government intervention. Akerlof was at least humble about these limitations, while Bernanke exhibited a central planner’s hubris throughout his career. Adam Smith and Friedrich Hayek warned of the impossibility of the Fed’s task and the dangers of attempting it, but Charles Goodhart points to a greater danger.


pages: 293 words: 88,490

The End of Theory: Financial Crises, the Failure of Economics, and the Sweep of Human Interaction by Richard Bookstaber

"Robert Solow", asset allocation, bank run, bitcoin, business cycle, butterfly effect, buy and hold, capital asset pricing model, cellular automata, collateralized debt obligation, conceptual framework, constrained optimization, Craig Reynolds: boids flock, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, dark matter, disintermediation, Edward Lorenz: Chaos theory, epigenetics, feminist movement, financial innovation, fixed income, Flash crash, Henri Poincaré, information asymmetry, invisible hand, Isaac Newton, John Conway, John Meriwether, John von Neumann, Joseph Schumpeter, Long Term Capital Management, margin call, market clearing, market microstructure, money market fund, Paul Samuelson, Pierre-Simon Laplace, Piper Alpha, Ponzi scheme, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, Richard Feynman, risk/return, Saturday Night Live, self-driving car, sovereign wealth fund, the map is not the territory, The Predators' Ball, the scientific method, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, tulip mania, Turing machine, Turing test, yield curve

In the 2008 meltdown, that complexity could arrive in the form of things like synthetic collateralized debt obligations—derivatives based on derivatives. If we are going to use the analogy of war in economics and finance, the battlefield where Boyd’s dictum most applies is the realm of information. One tactic in this battlefield is to create informational asymmetries. If the market is becoming efficient, if information is immediately accessible to everyone at the same time, then either create new private information or else speed up your access to the public information. Derivatives play a role in the first approach, with investment banks such as Goldman Sachs creating information asymmetries by constructing financial instruments such as credit default swaps that they understand better than the buyers. For the second approach, consider the news feeds that are pushed to high-frequency traders with millisecond response times.

., 18 halting problem, 51 Hammond, Grant, 174 hedge funds, 131, 136; crises of, 187; and financial crisis of 2008, 160–163 (see also financial crisis of 2008) Heisenberg, Werner, 56–57 heuristics: bank/dealer, 135–136; baseball gaze, 179–181; as a coarse response, 68, 72–73; of the cockroach, 66–67 (see cockroach); and computational irreducibility, 65; during crises, 102; description of, 69–70; and emergent phenomenon, 65; for escape strategy, 68; of financial agents, 135–136; of financial institutions, 101; for foraging, 68; of the great tit, 67; liquidity crises and, 151; and the omniscient planner, 66–67; versus optimization, 69–71, 74, 89; of the peahen, 67; of the red stag deer, 67; reflexivity and, 137–138; of the salamander, 67; in sexual versus asexual reproduction, 72–73; take-the-best and, 67; and winner-take-all mechanism, 67–68 Hilbert, David, 54–56 Hobsbawm, Eric, 6 Houseman, John, 127 Humphrys, Mark, 43. See also MGonz Iceland, 11 IKB, 165 imperfect knowledge economics, 175. See also Frydman, Roman; Goldberg, Michael impossibility theorem, 53, 55–57 (see also Gödel, Kurt); implications for limits to knowledge, 51; proof of, 199 induction, 15, 180–184; and crises, 184 Industrial Revolution, 5–6, 188 informational asymmetries, 120 informational irreducibility, 109–111 Institute for New Economic Thinking, 89 insurance companies, 131 International Monetary Fund, 11 Jagger, Mick, 45 Jevons, William Stanley, 3, 91; and cryptography, 7; and the development of marginal utility, 7; The Principles of Science, 7; and the representative agent, 82; studies at University College, 6; and sunspots, 8–11; The Theory of Political Economy, 6–7; and the three-body problem, 28–29; and travels to Australia, 6 Kahneman, Daniel, 45–47 Kay, John, 3 Keynes, John Maynard, 38, 84–85, 173, 183 Knightian uncertainty, 50 Kuhn, Thomas; and crisis science, 91; and differing paradigms argument, 107; and normal science, 58, 91, 178 Kundera, Milan, 12, 116; and eternal recurrence, 41; and planet of inexperience, 60–61; The Unbearable Lightness of Being, 41, 60–61 (see also Unbearable Lightness of Being, The) Lakatos, Imre, 91 Laplace, Pierre-Simon, 56–57 Lee, Bruce, 120–121 Lehman Brothers, 11, 14 Leibniz, Gotfried Wilhelm, 109, 116 leverage, 15, 139–141, 143; and the financial crisis of 2008, 156 (see also financial crisis of 2008); and regulation, 156 Lewis, Michael, 185 Library of Babel, 61–63, 123; as Arrow-Debreu world, 63; and computational irreducibility, 62–64; and the Conway’s Game of Life, 123; and the limits of knowledge, 62–63 (see also limits of knowledge); map versus territory and, 64 (see also map versus territory); and radical uncertainty, 63, 123–125 limits of knowledge, 177; and complexity, 111; and fallibility, 123, 183; and use of heuristics, 86; and limits to modeling, 177; in self-referential systems, 51–56 liquidity, 48, 139–141, 143; and crisis dynamics, 151–154; and demand, 144–147, 151–155, 186; and dynamics, 144; and the financial crisis of 2008, 156 (see also financial crisis of 2008); and heterogenous decision cycles, 152–154; interaction with, 152–154; and leverage, 151–154; and margin calls, 151–153; and the market makers, 152–155; and regulation, 156; and supply, 144–147, 151–155, 186 Long-term Capital Management (LTCM), 112–113 Lucas, Robert, 3, 13, 89, 105; and ergodicity, 42 Lukmanier electric line, 133 Luria, Alexsander, 76–77 Lynch, Merrill, 162–163, 166 Madame Bovary, 116.

As unsatisfying as it may be, models have to be adjusted as often as the agents and the related environment and institutions adjust in unforeseen ways. One feature of the agent-based modeling approach is that making such adjustments is integral to the fabric of the model. This stands in contrast to the deductive approach, where changes at a minimum need to rework the intricately balanced mathematical structure, and at worst require resetting the underlying axioms. Even economic models with asymmetric information or with the body English of behavioral assumptions do not accept the limits to knowledge that prevent us from laying out the model until it is run. Yet, people need to know the model, some model, and solve it for an optimization, perhaps constrained in some way, in order to determine how to act.9 Problems emerge for economics from the human characteristic of being the children of our experiences, both experiences in the past and the hazy prospects of future experiences.


pages: 571 words: 105,054

Advances in Financial Machine Learning by Marcos Lopez de Prado

algorithmic trading, Amazon Web Services, asset allocation, backtesting, bioinformatics, Brownian motion, business process, Claude Shannon: information theory, cloud computing, complexity theory, correlation coefficient, correlation does not imply causation, diversification, diversified portfolio, en.wikipedia.org, fixed income, Flash crash, G4S, implied volatility, information asymmetry, latency arbitrage, margin call, market fragmentation, market microstructure, martingale, NP-complete, P = NP, p-value, paper trading, pattern recognition, performance metric, profit maximization, quantitative trading / quantitative finance, RAND corporation, random walk, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, Silicon Valley, smart cities, smart meter, statistical arbitrage, statistical model, stochastic process, survivorship bias, transaction costs, traveling salesman

Working paper 8–2013, Singapore Management University. CHAPTER 18 Entropy Features 18.1 Motivation Price series convey information about demand and supply forces. In perfect markets, prices are unpredictable, because each observation transmits everything that is known about a product or service. When markets are not perfect, prices are formed with partial information, and as some agents know more than others, they can exploit that informational asymmetry. It would be helpful to estimate the informational content of price series, and form features on which ML algorithms can learn the likely outcomes. For example, the ML algorithm may find that momentum bets are more profitable when prices carry little information, and that mean-reversion bets are more profitable when prices carry a lot of information. In this chapter, we will explore ways to determine the amount of information contained in a price series. 18.2 Shannon's Entropy In this section we will review a few concepts from information theory that will be useful in the remainder of the chapter.

Therefore, the strategy is merely the experiment designed to test the validity of this theory. Team members are data scientists with a deep knowledge of financial markets and the economy. Remember, the theory needs to explain a large collection of important features. In particular, a theory must identify the economic mechanism that causes an agent to lose money to us. Is it a behavioral bias? Asymmetric information? Regulatory constraints? Features may be discovered by a black box, but the strategy is developed in a white box. Gluing together a number of catalogued features does not constitute a theory. Once a strategy is finalized, the strategists will prepare code that utilizes the full algorithm and submit that prototype to the backtesting team described below. Chapters 10 and 16 are dedicated to this station, with the understanding that it would be unreasonable for a book to reveal specific investment strategies. 1.3.1.4 Backtesters This station assesses the profitability of an investment strategy under various scenarios.

In practice, we can estimate E0[T] as an exponentially weighted moving average of T values from prior bars, and (2P[bt = 1] − 1) as an exponentially weighted moving average of bt values from prior bars. Third, we define a tick imbalance bar (TIB) as a T*-contiguous subset of ticks such that the following condition is met: where the size of the expected imbalance is implied by |2P[bt = 1] − 1|. When θT is more imbalanced than expected, a low T will satisfy these conditions. Accordingly, TIBs are produced more frequently under the presence of informed trading (asymmetric information that triggers one-side trading). In fact, we can understand TIBs as buckets of trades containing equal amounts of information (regardless of the volumes, prices, or ticks traded). 2.3.2.2 Volume/Dollar Imbalance Bars The idea behind volume imbalance bars (VIBs) and dollar imbalance bars (DIBs) is to extend the concept of tick imbalance bars (TIBs). We would like to sample bars when volume or dollar imbalances diverge from our expectations.


State-Building: Governance and World Order in the 21st Century by Francis Fukuyama

Asian financial crisis, Berlin Wall, Bretton Woods, centre right, corporate governance, demand response, Doha Development Round, European colonialism, failed state, Fall of the Berlin Wall, Francis Fukuyama: the end of history, George Akerlof, Hernando de Soto, information asymmetry, liberal world order, Live Aid, Nick Leeson, Pareto efficiency, Potemkin village, price stability, principal–agent problem, rent-seeking, road to serfdom, Ronald Coase, structural adjustment programs, technology bubble, The Market for Lemons, The Nature of the Firm, transaction costs, Washington Consensus, Westphalian system

When South Korea’s current account began to deteriorate in 1996–97, the currency came under irresistible pressure as short-term capital was withdrawn. This situation set the stage for the economic crisis of late 1997. The problem in Russia and other postcommunist countries was somewhat different. The privatization of state-owned enterprises is of course an appropriate goal of economic reform, but it requires a substantial degree of institutional capacity to implement properly. Privatization inevitably creates huge information asymmetries, and it is the job of governments to correct them. Assets and ownership rights have to be properly identified, valued, and transferred transparently; the rights of new minority shareholders have to be protected to prevent asset-stripping, tunneling, and other abuses. Thus, while privatization involves a reduction in the scope of state functions, it requires functioning markets and a high degree of state capacity to implement.

Open-ended employment contracts and authority relationships permitted more flexible adjustment to unforeseen future states of the world. In addition, market efficiency rests on the existence of a large number of market participants in competition with one another. But large numbers tend to turn into small numbers in many specialized contracting situations, allowing contractors to take advantage of asymmetric information. Again, the solution was to bring these activities within the boundaries of the hierarchy through vertical integration. Economics put its distinctive stamp on organizational theory, however, when it began to import its own individualistic behavioral assumptions inside the boundaries of the firm. Organizations are collections of individuals who manifest both cooperative and competitive or self-interested behavior.


Principles of Corporate Finance by Richard A. Brealey, Stewart C. Myers, Franklin Allen

3Com Palm IPO, accounting loophole / creative accounting, Airbus A320, Asian financial crisis, asset allocation, asset-backed security, banking crisis, Bernie Madoff, big-box store, Black-Scholes formula, break the buck, Brownian motion, business cycle, buy and hold, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, carried interest, collateralized debt obligation, compound rate of return, computerized trading, conceptual framework, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-subsidies, discounted cash flows, disintermediation, diversified portfolio, equity premium, eurozone crisis, financial innovation, financial intermediation, fixed income, frictionless, fudge factor, German hyperinflation, implied volatility, index fund, information asymmetry, intangible asset, interest rate swap, inventory management, Iridium satellite, Kenneth Rogoff, law of one price, linear programming, Livingstone, I presume, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, market bubble, market friction, money market fund, moral hazard, Myron Scholes, new economy, Nick Leeson, Northern Rock, offshore financial centre, Ponzi scheme, prediction markets, price discrimination, principal–agent problem, profit maximization, purchasing power parity, QR code, quantitative trading / quantitative finance, random walk, Real Time Gross Settlement, risk tolerance, risk/return, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, short selling, Silicon Valley, Skype, Steve Jobs, The Nature of the Firm, the payments system, the rule of 72, time value of money, too big to fail, transaction costs, University of East Anglia, urban renewal, VA Linux, value at risk, Vanguard fund, yield curve, zero-coupon bond, zero-sum game, Zipcar

So we now turn to a completely different theory of financing. 18-4 The Pecking Order of Financing Choices The pecking-order theory starts with asymmetric information—a fancy term indicating that managers know more about their companies’ prospects, risks, and values than do outside investors. Managers obviously know more than investors. We can prove that by observing stock price changes caused by announcements by managers. For example, when a company announces an increased regular dividend, stock price typically rises, because investors interpret the increase as a sign of management’s confidence in future earnings. In other words, the dividend increase transfers information from managers to investors. This can happen only if managers know more in the first place. Asymmetric information affects the choice between internal and external financing and between new issues of debt and equity securities.

This leads to a pecking order, in which investment is financed first with internal funds, reinvested earnings primarily; then by new issues of debt, and finally with new issues of equity. New equity issues are a last resort when the company runs out of debt capacity, that is, when the threat of costs of financial distress brings regular insomnia to existing creditors and to the financial manager. We will take a closer look at the pecking order in a moment. First, you must appreciate how asymmetric information can force the financial manager to issue debt rather than common stock. Debt and Equity Issues with Asymmetric Information To the outside world Smith & Company and Jones, Inc., our two example companies, are identical. Each runs a successful business with good growth opportunities. The two businesses are risky, however, and investors have learned from experience that current expectations are frequently bettered or disappointed. Current expectations price each company’s stock at $100 per share, but the true values could be higher or lower: Now suppose that both companies need to raise new money from investors to fund capital investment.

(Issuing equity also reveals the manager’s pessimism immediately. Most managers prefer to wait. A debt issue lets bad news come out later through other channels.) The story of Smith and Jones illustrates how asymmetric information favors debt issues over equity issues. If managers are better informed than investors and both groups are rational, then any company that can borrow will do so rather than issuing fresh equity. In other words, debt issues will be higher in the pecking order. Taken literally this reasoning seems to rule out any issue of equity. That’s not right, because asymmetric information is not always important and there are other forces at work. For example, if Smith had already borrowed heavily, and would risk financial distress by borrowing more, then it would have a good reason to issue common stock.


pages: 408 words: 108,985

Rewriting the Rules of the European Economy: An Agenda for Growth and Shared Prosperity by Joseph E. Stiglitz

Airbnb, balance sheet recession, bank run, banking crisis, barriers to entry, Basel III, basic income, Berlin Wall, bilateral investment treaty, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, corporate social responsibility, creative destruction, credit crunch, deindustrialization, discovery of DNA, diversified portfolio, Donald Trump, eurozone crisis, Fall of the Berlin Wall, financial intermediation, Francis Fukuyama: the end of history, full employment, gender pay gap, George Akerlof, gig economy, Gini coefficient, hiring and firing, housing crisis, Hyman Minsky, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, investor state dispute settlement, invisible hand, Isaac Newton, labor-force participation, liberal capitalism, low skilled workers, market fundamentalism, mini-job, moral hazard, non-tariff barriers, offshore financial centre, open economy, patent troll, pension reform, price mechanism, price stability, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, Robert Shiller, Robert Shiller, Ronald Reagan, selection bias, shareholder value, Silicon Valley, sovereign wealth fund, TaskRabbit, too big to fail, trade liberalization, transaction costs, transfer pricing, trickle-down economics, tulip mania, universal basic income, unorthodox policies, zero-sum game

. ** EFSI resources are made up from a €26 billion guarantee funded from the European Union’s budget, complemented by €7.5 billion of the European Investment Bank’s capital. The intent is to leverage these funds enormously. †† A key malfunction of the financial markets is related to credit rationing: the inability of a borrower to get access to funds at any interest rate, even though similarly situated borrowers do get credit. It is caused in turn by imperfect information and information asymmetries. Such market failures are particularly pervasive in the provision of long-term credit. Another related market failure is the lack of a full set of risk (insurance) markets. By now, there exists an extensive literature explaining how government, even when it faces similar limitations, can improve societal welfare. Part II Making Markets Work for Fairness and Efficiency Chapter 4 Promoting Competitive Markets: Incentives, Regulations, and Innovation Among Western nations, markets have long played a central role in organizing the production and distribution of goods and services.

But even in Europe, the failure to make markets work as they should—competitive markets with the private interests of key decision makers such as CEOs aligned with society’s interests—has resulted in a less productive and less equal Europe. There are policies that can help Europe’s private sector work better, not only for itself in the long run, but for all of society. The chapters in Part II of this book describe some of the key ways in which this can be done. The worst manifestations of dysfunctional markets are those in which some entities make money by taking advantage of others, whether through market power or information asymmetries. Any new rulebook that does not address these instances of market failure will be incomplete, and no sector has failed to perform as it should so much as the financial sector. We devote Chapter 5 entirely to it. The efficiency of all sectors (including finance) and their ability to serve society depends on robust competition. Firms with market power use that power to exploit others by raising prices to garner more profits for themselves.

The ECB has resisted deep reform of the repo market because it long championed these transactions for improving the transmission of monetary policy in the Eurozone and accelerating financial integration. Similarly, the ECB, the Bank of England, and the European Commission together designed plans for simple, transparent, and standardized securitization. This plan would reduce the opacity, information asymmetries, conflicts of interest, and perverse incentives that made securitization the focal point of the global financial crisis. But these reforms do not adequately address the fundamental flaw of securitization, which is the separation of risk bearing from loan origination. Thus, it is worrying that many in Europe are actively encouraging the revival of securitization markets without adequately taking into account their risks and limitations.


pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

affirmative action, Albert Einstein, algorithmic trading, Andy Kessler, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, business cycle, capital asset pricing model, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Fall of the Berlin Wall, financial independence, financial innovation, financial thriller, fixed income, full employment, global reserve currency, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, happiness index / gross national happiness, haute cuisine, high net worth, Hyman Minsky, index fund, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, job automation, Johann Wolfgang von Goethe, John Meriwether, joint-stock company, Jones Act, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Martin Wolf, mega-rich, merger arbitrage, Mikhail Gorbachev, Milgram experiment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, negative equity, NetJets, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, plutocrats, Plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Thaler, Right to Buy, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, Satyajit Das, savings glut, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, survivorship bias, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, the new new thing, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond, zero-sum game

Figure 17.4 sets out the information lost in the process of securitizing mortgages. Everybody now relied on someone else to do their risk analysis. William Heyman, former head of market regulation at the US SEC, observed: “In manufacturing, the market price is set by the smartest guy with the best, cheapest production process. In securities markets, the price is set by the dumbest guy with the most money to lose.”16 Figure 17.4. Information asymmetries in securitization Source: Adapted from BIS Committee on the Global Financial System. Paper Chains These risk chains relied on voluminous documents, which only lawyers read but without necessarily understanding what was going on. As became apparent later, the legal basis for some transactions was also flawed. The key to mortgages is the note, the actual IOU where the borrower agrees to pay back the loan.

See also investment banks Iania, Leonardo, 126 IBM, 244 Icahn, Carl, 137, 146 Iceland, 279, 345 collapse of banking system, 275 stock market, 84 Ideal Husband, The, 53 IFIL Investments, 222 Ikebe, Yukiko, 40 illiquid markets, 287 Immelt, Jeffrey, 63, 344 imports from China, 85 income, annuities, 70 increase in borrowing levels, 265-268 incubators, 247, 254 independent contracting, 181 indexed gold put options (IGPOs), 216 India, 22 gold in, 27 rupees, 21-22 individual retirement accounts (IRAs), 48 industrialization, 38 inflation, 49, 145 after fall of the Berlin Wall, 101 effect on conglomerates, 60 hyperinflation, 22 in Zimbabwe, 22 information asymmetries in securitization, 271 determining from noise, 125-127 transparency, 283 infrastructure, 124 innovation, 77 innovative debt structures. See debt Inside Job, The, 316, 353 insolvency, 280 Institute of Theoretical Physics (Copenhagen, Denmark), 101 insurance bonds, 176 life, securitization of, 178 prices, 209. See also options profits, 121 risk, 124 intellectual property rights, securitization of, 168 interest rates cutting of, 340-341 lowering of, 348 International Accounting Standards Board, 289 International Grain Council, 334 International Institute of Finance (IIF), 289 International Monetary Fund (IMF), 96 international reply coupons (IRCs), 33 Internet bubble (1990s), 54 stocks, 58 InterNorth, 55 interviews on financial TV shows, 94 invention of money, 24-25 investment banks, 57, 309 leveraged buyouts (LBOs), 147-148 percentage of jobs in, 313 separation from commercial banks, 66 investments alternative, 252 exotic products, 73-74 hedge funds Amaranth, 250-252 clientele, 247-250 fees, 245 Hedgestock, 252 markets, 241 returns, 243-244 Sharpe ratios, 246-247 strategies, 241-243 incentives, 348 IO (interest only) bonds, 178 Ireland, 83, 344 Irish Times, The, 356 Iron Chef, The, 168 Irving, John, 29 Ising model, 204 It’s A Wonderful Life, 65, 180 Italy, derivatives, 215-216 ITT Corporation, 60 J Jackson, Marjorie, 156 Jackson, Michael, 21 Jackson, Tony, 363 James, Oliver, 274 Japan debt, 357 financialization, 38-39 housewife traders, 40-41 lost decades, 357 retirement, 49-50 six sigma, 60 Jefferson County, Alabama, 211-214 Jefferson, Thomas, 91 Jenkins, Simon, 302 Jenson, Michael, 120, 138-141 Jiabao, Wen, 86-87 Jian, Ma, 295 Jintao, Hu, 363 jobbers, 53 jobs certifications, 309-310 finance, 307-308 Jobs, Steve, 164 John F.

., Fred, 243 Science Museum (London), 351 Scion Funds, 256 Scissors, Derek, 350 Seabright, Paul, 35 Seagram, 79 Second World War, 84, 102 Secret of FX, The, 40 Secret, The, 45 Secrets of Wealth, 96 Securities, exotic products, 73-74 Securities and Exchange Commission (SEC), 131 Securities Exchange Company, 34 Securities Industry and Financial Markets Association (Sifma), 213 securitization, 68, 169, 188, 207 adjusted rate mortgages (ARMs), 183-184 bonds, 173 central banks, 281-282 chain reaction in markets, 202-204 of debt, 188-192 failure of bonds, 204-205 housing market, 179-182 information asymmetries in, 271 of intellectual property rights, 168 of life insurance policies, 178 models, 177 rating agencies, 282 regulators understanding of, 282 risks, 170, 172 security, trading, 66 self-employment, 181 self-regulating markets, 102 selling, 311 senior debt, 148 senior management, knowledge of business operations, 292-293 senior tranches, 171 Sentamu, John, 346 seppuku, ritualized suicide, 200 September 11, 2001, 44 September, 2008 market crash, 341-343 sequential tranching, 178 Serin, Casey, 187 setsuyaku no tatsujin (master penny-pincher), 39 sewer bonds, 214.


pages: 346 words: 90,371

Rethinking the Economics of Land and Housing by Josh Ryan-Collins, Toby Lloyd, Laurie Macfarlane

"Robert Solow", agricultural Revolution, asset-backed security, balance sheet recession, bank run, banking crisis, barriers to entry, basic income, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, collective bargaining, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, debt deflation, deindustrialization, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, garden city movement, George Akerlof, ghettoisation, Gini coefficient, Hernando de Soto, housing crisis, Hyman Minsky, income inequality, information asymmetry, knowledge worker, labour market flexibility, labour mobility, land reform, land tenure, land value tax, Landlord’s Game, low skilled workers, market bubble, market clearing, Martin Wolf, means of production, money market fund, mortgage debt, negative equity, Network effects, new economy, New Urbanism, Northern Rock, offshore financial centre, Pareto efficiency, place-making, price stability, profit maximization, quantitative easing, rent control, rent-seeking, Richard Florida, Right to Buy, rising living standards, risk tolerance, Second Machine Age, secular stagnation, shareholder value, the built environment, The Great Moderation, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, universal basic income, urban planning, urban sprawl, working poor, working-age population

II). 4 Of course land prices can also fall as economies deteriorate and indeed when an economic shock hits land prices can fall more rapidly than economic growth – further explored in Chapter 5. 5 The classical economists were building on a long tradition: ancient civilisations taxed land and property for thousands of years before consumption, income or corporation taxes were invented (Blöchliger, 2015, p. 6). 6 Rent extraction may also overshoot and capture even more than the true change in land values because of information asymmetries and price stickiness. For example, there is evidence that landlords do not lower rents when economic growth declines or when their costs fall (for example with interest rate cuts that reduce their mortgage payments). However, when their costs increase (e.g. tax changes) they insist they have to pass on the cost to tenants. 7 See Orbanes (2007) for a detailed historical account of the game. 8 See Gaffney (1994, pp. 35–39) for a description of the legacy of Henry George. 9 Lloyd George’s ‘People’s Budget’ of 1909 proposed to introduce a 20% land tax (see Chapter 4, section 4.3). 10 For a detailed account of the development of neoclassical economics’ concept of capital from a pro-Georgist perspective, see Gaffney (1994b).

We hope that the arguments presented thus far will be enough to convince readers that a libertarian, free-market-orientated approach to the land problem makes little sense. Because legal frameworks are essential for land to become property at all, any analysis of the land problem that starts from the premise of minimising state involvement cannot succeed. There can never be an entirely free market in landed property. The complex drivers, time lags and information asymmetries inherent in the property market strongly suggest that there can be no self-correcting equilibrium in landownership or land values, as envisaged in neoclassical economic theory. This is supported by the historical record, which is one of consistent booms and busts, or financial cycles (Anderson, 2009; Borio, 2014; Kindleberger and Aliber, 2005). For the same reasons, we do not think the ‘land problem’ is one that can be addressed by any one ‘big bang’ solution on its own.

For macroeconomics too, the significance of property prices, which largely reflect underlying land values, and their interaction with financial markets and banking, had long been neglected in models popular with central banks. Proponents of these so-called ‘dynamic stochastic general equilibrium’ models argued that, unlike an older generation of models, they were properly ‘micro-founded’ on optimising behaviour at the level of individual households and firms. To the book’s diagnosis of how this came about, I would add a failure to use correct micro-foundations that took into account the asymmetric information revolution initiated by George Akerlof, Michael Spence and Joseph Stiglitz, and the research of Angus Deaton and Christopher Carroll on how households behave when facing uncertainty and liquidity constraints.2 The global financial crisis has highlighted the mistake made by most of the macroeconomics profession and central banks in not incorporating asset prices, including property prices, credit and household balance sheets more generally in their models and their understanding.


pages: 354 words: 92,470

Grave New World: The End of Globalization, the Return of History by Stephen D. King

9 dash line, Admiral Zheng, air freight, Albert Einstein, Asian financial crisis, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Sanders, bilateral investment treaty, bitcoin, blockchain, Bonfire of the Vanities, borderless world, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collateralized debt obligation, colonial rule, corporate governance, credit crunch, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, debt deflation, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, Edward Snowden, eurozone crisis, facts on the ground, failed state, Fall of the Berlin Wall, falling living standards, floating exchange rates, Francis Fukuyama: the end of history, full employment, George Akerlof, global supply chain, global value chain, hydraulic fracturing, Hyman Minsky, imperial preference, income inequality, income per capita, incomplete markets, inflation targeting, information asymmetry, Internet of things, invisible hand, joint-stock company, Kickstarter, Long Term Capital Management, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, moral hazard, Nixon shock, offshore financial centre, oil shock, old age dependency ratio, paradox of thrift, Peace of Westphalia, plutocrats, Plutocrats, price stability, profit maximization, quantitative easing, race to the bottom, rent-seeking, reserve currency, reshoring, rising living standards, Ronald Reagan, Scramble for Africa, Second Machine Age, Skype, South China Sea, special drawing rights, technology bubble, The Great Moderation, The Market for Lemons, the market place, The Rise and Fall of American Growth, trade liberalization, trade route, Washington Consensus, WikiLeaks, Yom Kippur War, zero-sum game

By reducing the cost of information – and by creating global online ‘hubs’ like Alibaba and Amazon, where buyers and sellers can ‘virtually’ meet one another – the global marketplace should expand, competition should intensify and pricing should become more transparent. All in all, the allocation of resources should improve, leaving output higher, prices lower and everyone – other than inefficient rent-seeking companies – happier. Yet this argument assumes that technology only works by reducing barriers to entry, limiting information asymmetries and encouraging price discovery. That’s much too narrow a view. Technology also fundamentally alters production techniques and hugely skews the distribution of income and wealth. In both cases, technology can be enormously damaging to globalization. The decision on where to locate production facilities ultimately depends on a trade-off between the forces of dispersion and agglomeration.

They weren’t outsiders looking in on a Minsky world: they were, collectively, very much part of that world.14 UNDERMINING THE NEW WISDOM The financial crisis was not, however, a story about euphoria alone. It stemmed from a combination of factors, each of which challenged what had become conventional thinking over the previous three decades. Markets themselves were failing, thanks in part to asymmetric information: the ultimate investors in US sub-prime mortgages were often blissfully unaware of the risks they were taking, largely because the underlying nature of their risky investments was typically camouflaged through the copious use of collateralized debt obligations and other innovative financial ‘disguises’.15 Incentives were badly skewed: those who made commission from selling risky products were typically able to pass the risk on to others – often thousands of miles away – using ‘pile ’em high and sell ’em cheap’ tactics.

King, The End of Alchemy: Money, banking and the future of the global economy, Little, Brown, London, 2016. 13.Sherman McCoy, the protagonist in Wolfe’s Bonfire of the Vanities, is a Wall Street trader whose life goes horribly wrong just when it seemed to be going so well: he was a self-styled Master of the Universe. 14.For a discussion of the effects of dysfunctional belief systems, see R. Hausmann, ‘Through the Venezuelan looking glass’, Project Syndicate, August 2016, available at: https://www.project-syndicate.org/commentary/venezuela-destructive-belief-systems-by-ricardo-hausmann-2016-08 15.The classic article on asymmetric information is George Akerlof, ‘The market for lemons: Quality, uncertainty and the market mechanism’, Quarterly Journal of Economics, 84:3 (1970), pp. 488–500. 16.See, for example, E. Passari and H. Rey, Financial Flows and the International Monetary System, National Bureau of Economic Research Working Paper No. 21172, Cambridge, MA, May 2015. 17.The pre-2000 figures come from M. Obstfeld and A.M.


pages: 356 words: 103,944

The Globalization Paradox: Democracy and the Future of the World Economy by Dani Rodrik

affirmative action, Asian financial crisis, bank run, banking crisis, bilateral investment treaty, borderless world, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, central bank independence, collective bargaining, colonial rule, Corn Laws, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, Doha Development Round, en.wikipedia.org, endogenous growth, eurozone crisis, financial deregulation, financial innovation, floating exchange rates, frictionless, frictionless market, full employment, George Akerlof, guest worker program, Hernando de Soto, immigration reform, income inequality, income per capita, industrial cluster, information asymmetry, joint-stock company, Kenneth Rogoff, land reform, liberal capitalism, light touch regulation, Long Term Capital Management, low skilled workers, margin call, market bubble, market fundamentalism, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, microcredit, Monroe Doctrine, moral hazard, night-watchman state, non-tariff barriers, offshore financial centre, oil shock, open borders, open economy, Paul Samuelson, price stability, profit maximization, race to the bottom, regulatory arbitrage, savings glut, Silicon Valley, special drawing rights, special economic zone, The Wealth of Nations by Adam Smith, Thomas L Friedman, Tobin tax, too big to fail, trade liberalization, trade route, transaction costs, tulip mania, Washington Consensus, World Values Survey

Perhaps the most consummate fox among today’s economists is Joe Stiglitz, whose research constitutes a nearly endless catalogue of the ways in which markets can fail. Stiglitz won a Nobel Prize in 2001 (along with George Akerlof and Mike Spence) for theoretical work showing how “asymmetric information” distorts incentives in a wide range of markets. If you know more than I do about the value of what you are selling me—whether it is your used car, your labor, or your debt—then we’re in for a troubled relationship. Prices in such transactions tend to provide the wrong signals. Many trades that should not happen do, while others that should happen don’t. Many of the pathologies of financial markets—boom-and-bust cycles, financial panics, lack of access to credit by otherwise creditworthy borrowers—can be explained by information asymmetries of this type (often interacting with other market distortions). Unlike many others who have done work on market failures, Stiglitz actually takes the results of this research seriously.

If the answer is not an unqualified yes to these and a multitude of other similar questions, financial markets will fail. Unfortunately, such failings are legion, which is why we have become so accustomed to the financial market pathologies they produce. Economists are not unaware of these problems. The economics literature is chockful of analyses of these failings, which go by names such as asymmetric information, limited liability, moral hazard, agency costs, multiple equilibria, systemic risk, implicit guarantees, information cascades, and so on. Each one of these phenomena has been studied to death with intricate mathematical reasoning and empirical illustrations. By now most economists also understand that these problems have not been adequately addressed in the global economy. Domestic finance is underpinned by common standards, deposit insurance, bankruptcy rules, court-enforced contracts, a lender-of-last-resort, a fiscal backstop, and an alphabet soup of regulatory and supervisory agencies.


pages: 222 words: 70,132

Move Fast and Break Things: How Facebook, Google, and Amazon Cornered Culture and Undermined Democracy by Jonathan Taplin

1960s counterculture, affirmative action, Affordable Care Act / Obamacare, Airbnb, Amazon Mechanical Turk, American Legislative Exchange Council, Apple's 1984 Super Bowl advert, back-to-the-land, barriers to entry, basic income, battle of ideas, big data - Walmart - Pop Tarts, bitcoin, Brewster Kahle, Buckminster Fuller, Burning Man, Clayton Christensen, commoditize, creative destruction, crony capitalism, crowdsourcing, data is the new oil, David Brooks, David Graeber, don't be evil, Donald Trump, Douglas Engelbart, Douglas Engelbart, Dynabook, Edward Snowden, Elon Musk, equal pay for equal work, Erik Brynjolfsson, future of journalism, future of work, George Akerlof, George Gilder, Google bus, Hacker Ethic, Howard Rheingold, income inequality, informal economy, information asymmetry, information retrieval, Internet Archive, Internet of things, invisible hand, Jaron Lanier, Jeff Bezos, job automation, John Markoff, John Maynard Keynes: technological unemployment, John von Neumann, Joseph Schumpeter, Kevin Kelly, Kickstarter, labor-force participation, life extension, Marc Andreessen, Mark Zuckerberg, Menlo Park, Metcalfe’s law, Mother of all demos, move fast and break things, move fast and break things, natural language processing, Network effects, new economy, Norbert Wiener, offshore financial centre, packet switching, Paul Graham, paypal mafia, Peter Thiel, plutocrats, Plutocrats, pre–internet, Ray Kurzweil, recommendation engine, rent-seeking, revision control, Robert Bork, Robert Gordon, Robert Metcalfe, Ronald Reagan, Ross Ulbricht, Sam Altman, Sand Hill Road, secular stagnation, self-driving car, sharing economy, Silicon Valley, Silicon Valley ideology, smart grid, Snapchat, software is eating the world, Steve Jobs, Stewart Brand, technoutopianism, The Chicago School, The Market for Lemons, The Rise and Fall of American Growth, Tim Cook: Apple, trade route, transfer pricing, Travis Kalanick, trickle-down economics, Tyler Cowen: Great Stagnation, universal basic income, unpaid internship, We wanted flying cars, instead we got 140 characters, web application, Whole Earth Catalog, winner-take-all economy, women in the workforce, Y Combinator

In a world where YouTube, Google, and Facebook treat all content as a commodity—a means to an end—it isn’t surprising that it’s devalued in the public mind. The false democracy that places art and random uploads side by side has, I believe, led too many to believe that art is easy to make and therefore not valuable. As James DeLong said, “Google can continue to do well even if it leaves providers of its [content] gasping like fish on a beach.” Once upon a time a critic such as Pauline Kael or Greil Marcus could help me navigate this information asymmetry, driving interest in work they deemed to be of quality. The hegemony of the blockbuster in music, books, and film allows marketers to bypass critics, rendering them almost irrelevant to the process. Do you think the producer of Michael Bay’s Transformers spends one minute worrying about critics? And don’t confuse the critics I’m talking about with the crowd at Rotten Tomatoes. The great critic Pauline Kael was someone I trusted deeply.

The classic notion of “global labor arbitrage” (capital will always seek out the lowest-priced labor in a globalized economy) works at scale here. Researcher Sara Kingsley at the University of Massachusetts found real problems with the crowdwork model. A direct and limitless supply of labor and tasks should produce a perfectly competitive market; however, data collected from our yearlong study of crowdwork suggests that the reverse is true. Rife with asymmetric information problems, crowdsourcing labor markets are arguably not just imperfect, but imperfect by design. Kingsley found that Amazon could constantly lower the piecework price it paid on Mechanical Turk and that it was continually opening up new low-labor-cost countries, such as India, to the platform. Given that Amazon runs a monopsony book business, it’s no surprise that it might apply the same techniques to other business sectors.


pages: 354 words: 118,970

Transaction Man: The Rise of the Deal and the Decline of the American Dream by Nicholas Lemann

Affordable Care Act / Obamacare, Airbnb, airline deregulation, Albert Einstein, augmented reality, basic income, Bernie Sanders, Black-Scholes formula, buy and hold, capital controls, computerized trading, corporate governance, cryptocurrency, Daniel Kahneman / Amos Tversky, dematerialisation, diversified portfolio, Donald Trump, Elon Musk, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, fixed income, future of work, George Akerlof, gig economy, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, index fund, information asymmetry, invisible hand, Irwin Jacobs, Joi Ito, Joseph Schumpeter, Kenneth Arrow, Kickstarter, life extension, Long Term Capital Management, Mark Zuckerberg, mass immigration, means of production, Metcalfe’s law, money market fund, Mont Pelerin Society, moral hazard, Myron Scholes, new economy, Norman Mailer, obamacare, Paul Samuelson, Peter Thiel, price mechanism, principal–agent problem, profit maximization, quantitative trading / quantitative finance, Ralph Nader, Richard Thaler, road to serfdom, Robert Bork, Robert Metcalfe, rolodex, Ronald Coase, Ronald Reagan, Sand Hill Road, shareholder value, short selling, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, Social Responsibility of Business Is to Increase Its Profits, Steve Jobs, TaskRabbit, The Nature of the Firm, the payments system, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, too big to fail, transaction costs, universal basic income, War on Poverty, white flight, working poor

Aside from their both being interested in agency problems, another point of agreement between them was that Harvard Business School was, as Jensen put it, evil incarnate because it taught mainly by the case method, which was anecdotal rather than quantitative, and therefore intellectually second-rate. When Jensen left for Harvard, Meckling felt betrayed and broke off their friendship forever. When a challenge to financial economics—in particular to the efficient market hypothesis—began to emerge, roughly speaking from the left, within the profession, it had two major components. One was the idea of information asymmetry: markets could not price everything perfectly if all participants did not have equal access to accurate information. The other was behavioral economics, which focused on the many ways the human mind was naturally prone to misperceive reality and how that would affect people’s interactions with economic markets. Both ideas, by positing that markets behaved imperfectly, were opening the door to a role for government in improving the way markets functioned, and this was a highly offensive idea to Jensen.

Hofstadter, Richard Holy Cross Hospital home equity loans Honda H-1B visas Hong Kong Hoover, Herbert Hoover, Larry Hopkins, Harry hostile takeovers; see also leveraged buyouts House of Mirth, The (Wharton) housing: abandoned; discrimination in; price of; in projects; see also mortgages How to Win Friends and Influence People (Carnegie) Hoyer, Steny Hubbard, L. Ron Hubler, Howie Huffington, Arianna Hyde Park Iacocca, Lee IBM Icahn, Carl identity politics Illinois legislature immigrants, undocumented index funds, invention of India individualism; end of Industrial Revolution; corporate revolution compared to inequality: economic, see wealth, concentration of; racial, see racism inflation; interest rates and; wages and information asymmetry Inner-City Muslim Action Network Instagram institutions: individualism vs.; loss of faith in; as mature groups; as necessary for pluralism; transaction-based order vs.; see also corporations; federal government; Organization Man insurance companies Intel Interest Equalization Tax interest groups; desire to eliminate; successes of; types of interest rates; deregulation and; Greenspan and; inflation and; on mortgages Internal Revenue Service International Nickel International Typographical Union Internet; bubble of 2000; early conceptions of; financial industry on; as predicted in fiction; regulation of; see also networks; Silicon Valley interstate banking Interstate Commerce Commission Investing in US investment banking; academic paradigm shift in; antitrust suit against; changes to in 1970s; commercial banking vs.; computerization of; deregulation of, see deregulation; diversified portfolios in; Glass-Steagall Act and, see Glass-Steagall Act; SEC and, see Securities and Exchange Commission; shifting clients of; see also Morgan Stanley; specific financial instruments Irish Americans Italian Americans Itô, Kiyosi ITT Jackson, Andrew Jackson, Jesse Jackson, Mahalia Jacobs, Irwin Japan; auto industry in Jdate Jefferson, Thomas Jensen, Michael; as advocate for free markets; background of; character of; corporations studied by; at Harvard; on integrity; in Landmark; mind shift of; at Rochester; at University of Chicago Jensen, Stephanie Jews; in finance Jhering, Rudolf von Jobs, Steve Johns Hopkins University Johnson, Earl Johnson, Jonathan Jones, Doug Journal of Applied Corporate Finance Journal of Financial Economics J.P.

As the Treasury was working on its report about Long-Term Capital Management, Yellen’s deputy, Doug Elmendorf, was working with her to try to figure out where she stood on derivatives regulation. Because it tracks so closely with what actually happened ten years later, one memo from Elmendorf to Yellen, from December 1998, is eerily prescient about the possibility for disaster that the new financial system had created. Elmendorf wrote: One specific effect of asymmetric information [meaning that in over-the-counter derivatives markets, no party to a transaction knew the underlying economic condition of the other parties] is to increase the risk of a general financial panic (“systemic risk”). Because market participants cannot judge the financial health of institutions they deal with, bad news about one institution has a contagion effect on other institutions, reducing their access to capital as well.


pages: 288 words: 16,556

Finance and the Good Society by Robert J. Shiller

Alvin Roth, bank run, banking crisis, barriers to entry, Bernie Madoff, buy and hold, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, cognitive dissonance, collateralized debt obligation, collective bargaining, computer age, corporate governance, Daniel Kahneman / Amos Tversky, Deng Xiaoping, diversification, diversified portfolio, Donald Trump, Edward Glaeser, eurozone crisis, experimental economics, financial innovation, financial thriller, fixed income, full employment, fundamental attribution error, George Akerlof, income inequality, information asymmetry, invisible hand, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, land reform, loss aversion, Louis Bachelier, Mahatma Gandhi, Mark Zuckerberg, market bubble, market design, means of production, microcredit, moral hazard, mortgage debt, Myron Scholes, Nelson Mandela, Occupy movement, passive investing, Ponzi scheme, prediction markets, profit maximization, quantitative easing, random walk, regulatory arbitrage, Richard Thaler, Right to Buy, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, selection bias, self-driving car, shareholder value, Sharpe ratio, short selling, Simon Kuznets, Skype, Steven Pinker, telemarketer, Thales and the olive presses, Thales of Miletus, The Market for Lemons, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, Vanguard fund, young professional, zero-sum game, Zipcar

The movement toward securitization of home mortgage debt became particularly strong in the United States thanks to powerful impetus from government support. But, lacking the subsidy e ectively given by the U.S. government via Fannie Mae and Freddie Mac, mortgage securitization has not been common anywhere else.6 Before the crisis of 2007 nance theorists saw clear innovation in mortgage securitization. Securitized mortgages are, in the abstract, a way of solving an information asymmetry problem—more particularly the problem of “lemons.” This problem, rst given a theoretical explanation by George Akerlof, refers to the aversion many people have to buying anything on the used market, like a used car. They worry that they can’t judge whether the item has defects, and that they will get stuck with a lemon. The seller knows whether a particular item is of good quality or not, but the buyer does not—at least not without expending a good deal of costly e ort to nd out. 7 In a nutshell, Akerlof’s theory holds that if you think that the seller is going to pass o the bad stu on you, you won’t pay more for it than the lowest price.

In much of the rest of the world, although there has been some limited attempt at mortgage securitization, investors have mostly held mortgages indirectly by owning shares in the mortgage originators. 7. Franco Modigliani and Merton Miller (1963) assumed that investors did not have to expend any resources to acquire information about the assets they invest in. George Akerlof shared the 2001 Nobel Prize in economics for a 1970 article that detailed how information asymmetry sometimes prevents markets from existing. 8. Akerlof (1970). 9. Hill (1997). 10. National Commission on the Causes of the Financial and Economic Crisis in the United States (2011): 196. 11. Shiller (2008). 12. Davis (2006) and Caplin et al. (1997). Chapter 6. Traders and Market Makers 1. Montesquieu (1773 [1748]): Volume II, Book XX, Chapter II, p. 2. 2. Montague (2007): 119. 3. O’Reilly et al. (2002). 4.

“Human Experience Seeking Correlates with Hippocampus Volume: Convergent Evidence from Manual Tracing and Voxel-Based Morphometry.” Neuropsychologia 45:2874–81. Marx, Karl. 1906. Capital: A Critique of Political Economy. New York: Modern Library. Marx, Karl, and Friedrich Engels. 1906 [1848]. Manifesto of the Communist Party. Chicago: Charles H. Kerr & Co. Mayer, Colin. 1990. “Financial Systems, Corporate Finance, and Economic Development.” In R. Glenn Hubbard, ed., Asymmetric Information, Corporate Finance, and Investment, 307–32. Chicago: University of Chicago Press. Melamed, Leo. 2009. For Crying Out Loud: From Open Outcry to Electronic Screen. Hoboken, NJ: Wiley. Mian, Atif, and Amir Su . 2010. “Household Leverage and the Recession of 2007 to 2009.” IMF Economic Review 58:74–117. Mian, Atif, Amir Su , and Francesco Trebbi. 2011. “Foreclosures, House Prices, and the Real Economy.”


pages: 306 words: 82,765

Skin in the Game: Hidden Asymmetries in Daily Life by Nassim Nicholas Taleb

availability heuristic, Benoit Mandelbrot, Bernie Madoff, Black Swan, Brownian motion, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, cellular automata, Claude Shannon: information theory, cognitive dissonance, complexity theory, David Graeber, disintermediation, Donald Trump, Edward Thorp, equity premium, financial independence, information asymmetry, invisible hand, knowledge economy, loss aversion, mandelbrot fractal, mental accounting, microbiome, moral hazard, Murray Gell-Mann, offshore financial centre, p-value, Paul Samuelson, Ponzi scheme, price mechanism, principal–agent problem, Ralph Nader, random walk, rent-seeking, Richard Feynman, Richard Thaler, Ronald Coase, Ronald Reagan, Rory Sutherland, Silicon Valley, Steven Pinker, stochastic process, survivorship bias, The Nature of the Firm, transaction costs, urban planning, Yogi Berra

It exists at the intersection of Greco-Roman law (as reflected from people in Semitic territories’ contact with the school of law of Berytus), Phoenician trading rules, Babylonian legislations, and Arab tribal commercial customs and, as such, it provides a repository of ancient Mediterranean and Semitic lore. I hence view Sharia as a museum of the history of ideas on symmetry in transactions. Sharia establishes the interdict of gharar, drastic enough to be totally banned in any form of transaction. It is an extremely sophisticated term in decision theory that does not exist in English; it means both uncertainty and deception—my personal take is that it means something beyond informational asymmetry between agents: inequality of uncertainty. Simply, as the aim is for both parties in a transaction to have the same uncertainty facing random outcomes, an asymmetry becomes equivalent to theft. Or more robustly: No person in a transaction should have certainty about the outcome while the other one has uncertainty. Gharar, like every legalistic construct, will have its flaws; it remains weaker than Antipater’s approach.

But there is an associated problem in the course of the transactions: how much should the seller reveal to the buyer? The question “Is it ethical to sell something to someone knowing the price will eventually drop?” is an ancient one—but its solution is no less straightforward. The debate goes back to a disagreement between two stoic philosophers, Diogenes of Babylon and his student Antipater of Tarsus, who took the higher moral ground on asymmetric information and seems to match the ethics endorsed by this author. Not a piece from both authors is extant, but we know quite a bit from secondary sources, or, in the case of Cicero, tertiary. The question was presented as follows, retailed by Cicero in De Officiis. Assume a man brought a large shipment of corn from Alexandria to Rhodes, at a time when corn was expensive in Rhodes because of shortage and famine.


pages: 586 words: 160,321

The Euro and the Battle of Ideas by Markus K. Brunnermeier, Harold James, Jean-Pierre Landau

Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, battle of ideas, Ben Bernanke: helicopter money, Berlin Wall, Bretton Woods, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, collective bargaining, credit crunch, Credit Default Swap, currency peg, debt deflation, Deng Xiaoping, different worldview, diversification, Donald Trump, Edward Snowden, en.wikipedia.org, Fall of the Berlin Wall, financial deregulation, financial repression, fixed income, Flash crash, floating exchange rates, full employment, German hyperinflation, global reserve currency, income inequality, inflation targeting, information asymmetry, Irish property bubble, Jean Tirole, Kenneth Rogoff, Martin Wolf, mittelstand, money market fund, Mont Pelerin Society, moral hazard, negative equity, Neil Kinnock, new economy, Northern Rock, obamacare, offshore financial centre, open economy, paradox of thrift, pension reform, price stability, principal–agent problem, quantitative easing, race to the bottom, random walk, regulatory arbitrage, rent-seeking, reserve currency, road to serfdom, secular stagnation, short selling, Silicon Valley, South China Sea, special drawing rights, the payments system, too big to fail, union organizing, unorthodox policies, Washington Consensus, WikiLeaks, yield curve

In light of the risks at the heart of banks’ business model, we may ask why savers do not cut out the middle man by lending directly to borrowers rather than depositing their funds into a bank. The answer is that banks are in general better at lending than individual savers for a number of reasons. First, banks identify more easily projects that are worth funding and pursuing. Underlying these arguments is what economists refer to as asymmetric information: Borrowers know more about their projects than any individual lender, but dedicated lenders, such as banks, can at least mitigate information asymmetries. Second, owing to their expertise, banks can more easily enforce repayment than an individual lender. Third, banks can lend to many different borrowers, making it easier to diversify idiosyncratic risks. Modern Banking and Capital Markets The Initial Blaming of Anglo-American Banking Modern banks have moved beyond this traditional model of banking.

For example, the regulator could allow foreign firms with similar expertise to enter the market. Another simple form of attracting new capital is to force banks to issue new equity. On their own, individual firms would be reluctant to do so because of the associated stigma, but centrally enforced, coordinated actions are of course free of such considerations. Thorough and publically communicated asset quality reviews could have a similar effect: they would reduce asymmetric information, reduce the stigma, and encourage the issuance of additional equity. The issuance of “contingent convertible bond,” so called CoCos, was pushed as a “cheaper” alternative. Cocos is a hybrid fixed-income security that counts toward capital requirements as it can be converted into equity in case a pre-specified trigger is reached. CoCos have come under increased criticism lately and remain untested as an effective crisis management tool.

Index Abe, Shinzo, 285 Ackermann, Joseph (“Joe”), 166, 330 Adam, Konrad, 65 Adenauer, Konrad, 40, 47–48 AEG (firm), 49 Agenzia per la Promozione dello Sviluppo ne Mezzogiorno (Italian organization), 240 Agreement on Net Financial Assets (ANFA), 325 AIG (firm), 314 aircraft industry, 71 Allais, Maurice, 68, 71 Alternative für Deutschland (German party), 65 Andrieux, François, 44 Anglo-American economic perspective, 249–51 Anglo-Irish Bank, 303–4, 338 Anglo-Saxon financial capitalism, 162 anti-Semitism, 55, 61 Argentina, 126, 295, 330 Aron, Raymond, 65 Asia Infrastructure Investment Bank, 275 Asian economic crisis, 22, 157, 165; IMF and, 290, 293; US and, 262 Asian Monetary Fund (proposed), 22 Asmussen, Jörg, 199, 264, 337–38, 350, 355 asset-based securities, 360; alternatives to, 367 assets: asset quality reviews, 202; collateral policy on, 192–93; ESBies (European safe bonds), 113–14; government guarantees for, 194–95; held by US banks, 255; mark-to-market assets, 163–64; purchased by China, 280–81; purchased by Russia, 283–84; ring-fencng of, 213–14; safe assets, 182–83, 222–26 asymmetric information, 162 austerity, 380; debate over stimulus versus, 148–54; in Italy, 335 Bagehot, Walter, 131, 193, 332 Balcerowicz, Leszek, 147 Balladur, Edouard, 80–81 Balogh, Thomas, 258 Banca d’Italia, 242, 325 Banco d’España (Spanish central bank), 323 Banco Espirito Sancto (Portuguese bank), 201–2 bank debts, 303–4 Bank Deutscher Länder, 344 Bankia (Spanish bank), 189, 192 banking, 157–59; bail-ins of, 197–203; bank failures, 201–2; capital markets and, 162–66; collateral policy for, 192–93; in currency unions, 90, 211–22; direct recapitalization of, 195–97; ECB’s supervision of, 368–72; Eurosystem, 321–25; exposure limits in, 185; in France and Germany, 46–48; during global financial crisis, 173–74; interaction of banks with states, 182–83; interbank market in, 166–72; as issue for troika, 302; money creation in, 160–61; recapitalization of banks, 357; traditional, 159–62; in UK, following Lehman collapse, 269; zombie and vampire banks, 189 banking unions, 211–12 Bank of Cyprus, 199 Bank of England, 89, 157, 319 bankruptcies, 256–59 Banque de France, 325 Barber, Tony, 272 Barre, Raymond, 72 Barroso, José Manuel, 19, 113, 230, 301 Basel II regulations, 208 Bastiat, Fréderic, 57, 69–70 Bayerische Hypotheken- und Wechsel-Bank (Germany), 171 Bear Stearns (firm), 264 Beck, Ulrich, 27 Belgium: on currency unions, 210; Dexia bank bailed out by, 217; on UK’s threat to leave EU, 277; universal banking in, 159 Belka, Marek, 302 BELLs (Bulgaria, Estonia, Latvia, and Lithuania), 147 Berlusconi, Silvio, 94, 116–17, 243, 247, 335; on euro, 248; meets with Merkel and Sarkozy, 246, 336; Putin and, 285 Bernanke, Ben, 314 Biagi, Marco, 244 Bismarck, Otto von, 58 Blair, Tony, 268–69 Blanchard, Olivier, 143, 301 blue Eurobonds, 112 Böhm, Franz, 62 Bossi, Umberto, 335–36 Bowe, John, 304 Brady Plan, 291 Brazil, 330 Bresciani-Turroni, Costantino, 238 Bretton Woods system, 77–79; alternatives to, 312; gold standard and, 90; IMF created by, 288 Bridge of Spies (film, Spielberg), 45 Britain.


pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

"Robert Solow", Albert Einstein, Andrei Shleifer, anti-communist, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black-Scholes formula, Blythe Masters, Bretton Woods, British Empire, business cycle, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, corporate raider, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, different worldview, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, global supply chain, Gunnar Myrdal, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, Kickstarter, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, Ponzi scheme, price discrimination, price stability, principal–agent problem, profit maximization, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, unorthodox policies, value at risk, Vanguard fund, Vilfredo Pareto, wealth creators, zero-sum game

Milton Friedman, who died in 2006, said the test of an economic theory is that it should explain a lot with a little. But the modern theory of the invisible hand that Friedman and others promoted explains too much with too little. At its core, it says simply: self-interest plus competition equals nirvana. There is no mention in this equation of the institutions of modern capitalism, such as multinational corporations, derivatives markets, universal banks, and mutual funds. Information asymmetries, uncertainty, copycat behavior, network effects, and disaster myopia—the invisible hand metaphor abstracts from all of these awkward features of reality, too. Don’t worry, its defenders say, the market will take care of things. Just make sure that competition reigns, prevent the emergence of monopolies, and a good outcome is guaranteed. Actually, some free market economists aren’t saying this anymore.

With this admirably catholic education, it was perhaps not surprising that Minsky failed to adhere to the increasingly rigid orthodoxy that took hold of economics during the postwar decades. In some ways, he was a throwback. He expressed his thoughts in clear English, used equations sparingly, and made little attempt to keep up with intellectual fashion. But what Minsky lacked in modernity, he more than made up for in insight. Although he rarely made explicit reference to concepts such as the prisoner’s dilemma, asymmetric information, or disaster myopia, his analysis displayed an acute awareness of the various sources of market failure. A keen student of Keynes’s Treatise on Probability as well as The General Theory, he had never accepted that financial markets aggregated economic data efficiently, or that decisions involving the future could be represented as a process of taking mathematical expectations of known probabilities.

American International Group (AIG) America Online (AOL) Ameriquest Mortgage Company Amherst College AMRESCO Amtrak “Anatomy of Market Failure, The” (Bator) Anderson, Martin anti-Semitism antitrust laws Apostles Apple Army, U.S. Air Corps Corps of Engineers ARPANET Arrow, Kenneth Arthur, W. Brian Arthur Andersen Asch, Solomon asset-backed securities (ABSs) Associates First Capital asymmetric information AT&T Atomic Energy Commission, U.S. Attlee, Clement Australia Axelrod, Robert Aylwin, Patricio Bachelier, Louis Bagehot, Walter Baker, James Bank of America Bank of England Monetary Policy Committee Bankers’ Panic (1907) Bankers Trust Bank for International Settlements Baran, Paul Barclays Bank Barings Bank Barone, Enrico Barro, Robert Barron’s Bartlett, Bruce Bator, Francis Baumol, William Bayh-Dole Act (1984) B&C lending Bear Stearns Beatles Beauty Contest theory Bebchuk, Lucian Becker, Gary behavioral economics Bell Laboratories Beneficial Finance Bennett, Alan Bentham, Jeremy Berkshire Hathaway Inc.


No Slack: The Financial Lives of Low-Income Americans by Michael S. Barr

active measures, asset allocation, Bayesian statistics, business cycle, Cass Sunstein, conceptual framework, Daniel Kahneman / Amos Tversky, financial exclusion, financial innovation, Home mortgage interest deduction, income inequality, information asymmetry, labor-force participation, late fees, London Interbank Offered Rate, loss aversion, market friction, mental accounting, Milgram experiment, mobile money, money market fund, mortgage debt, mortgage tax deduction, New Urbanism, p-value, payday loans, race to the bottom, regulatory arbitrage, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, the payments system, transaction costs, unbanked and underbanked, underbanked

The information might improve comparison shopping. Of course, revealing such information would also reduce broker and creditor profit margins. But as the classic market competition model relies on full information and assumes rational behavior based on understanding, this proposal attempts to remove market frictions from information failures and to move market competition more toward its ideal. De-biasing consumers would reduce information asymmetry and lead to better competitive outcomes. Improving Truth in Lending Optimal disclosure will not occur in all markets through competition alone because in some contexts firms have incentives to hide information about products or prices and consumers may not insist on competition based on transparency because they misforecast their own behavior. Competition under a range of plausible scenarios will not necessarily generate psychologically informative and actionable disclosure.

Surely the government must regulate all aspects of this transaction.” In reality, the government does not regulate as the borrower believes, and the lender does not necessarily behave as the borrower hopes. Instead, information is hidden from the borrower, information that, if available, would improve market competition and the borrower’s outcomes. Given the consumer’s probably false background assumptions and the reality of asymmetric information favoring the lender and broker, we suggest that creditors be required to reveal useful information to the borrower at the time of the mortgage loan offer, including disclosure of the borrower’s credit score and the borrower’s qualifications for the lender’s mortgage products and rates. Creditors could be required to offer information regarding the typical repayment histories for borrowers of this type with this mortgage product.

Many borrowers may be unable to compare complex loan products and act optimally for themselves based on such an understanding (see, for example, Ausubel 1991). We thus deploy an opt-out strategy to make it easier for borrowers to choose a standard product and harder for borrowers to choose a product that they are less likely to understand. At the same time, lenders may seek to extract surplus from borrowers because of asymmetric information about future income or default probabilities (see Bond, Musto, and Yilmaz 2005), and, in the short term, lenders and brokers may benefit from selling borrowers loans they cannot afford. Thus a pure default would be undermined by firms, and regulation needs to take account of this market pressure by pushing back. Lenders would be required to offer eligible borrowers a standard mortgage (or set of mortgages), such as a fixed-rate, self-amortizing thirty-year mortgage loan or a standard adjustable-rate mortgage product, according to reasonable underwriting standards.


pages: 462 words: 129,022

People, Power, and Profits: Progressive Capitalism for an Age of Discontent by Joseph E. Stiglitz

"Robert Solow", affirmative action, Affordable Care Act / Obamacare, barriers to entry, basic income, battle of ideas, Berlin Wall, Bernie Madoff, Bernie Sanders, business cycle, Capital in the Twenty-First Century by Thomas Piketty, carried interest, central bank independence, clean water, collective bargaining, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, crony capitalism, deglobalization, deindustrialization, disintermediation, diversified portfolio, Donald Trump, Edward Snowden, Elon Musk, Erik Brynjolfsson, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, Firefox, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, George Akerlof, gig economy, global supply chain, greed is good, income inequality, information asymmetry, invisible hand, Isaac Newton, Jean Tirole, Jeff Bezos, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John von Neumann, Joseph Schumpeter, labor-force participation, late fees, low skilled workers, Mark Zuckerberg, market fundamentalism, mass incarceration, meta analysis, meta-analysis, minimum wage unemployment, moral hazard, new economy, New Urbanism, obamacare, patent troll, Paul Samuelson, pension reform, Peter Thiel, postindustrial economy, price discrimination, principal–agent problem, profit maximization, purchasing power parity, race to the bottom, Ralph Nader, rent-seeking, Richard Thaler, Robert Bork, Robert Gordon, Robert Mercer, Robert Shiller, Robert Shiller, Ronald Reagan, secular stagnation, self-driving car, shareholder value, Shoshana Zuboff, Silicon Valley, Simon Kuznets, South China Sea, sovereign wealth fund, speech recognition, Steve Jobs, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Rise and Fall of American Growth, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, two-sided market, universal basic income, Unsafe at Any Speed, Upton Sinclair, uranium enrichment, War on Poverty, working-age population

While there can still be market efficiency if there is perfect price discrimination, the real world of imperfect price discrimination is marked by pervasive inefficiencies and distortions. See, e.g., Stiglitz, “Monopoly, Non-Linear Pricing and Imperfect Information: The Insurance Market,” Review of Economic Studies 44, no. 3 (1977): 407–30. Reprinted in Selected Works of Joseph E. Stiglitz, Volume I: Information and Economic Analysis (Oxford: Oxford University Press, 2009), 168–92. AI also results in information asymmetries. Some firms know more than others, and the Big Tech firms know more than consumers. Markets are only efficient in the absence of distortionary asymmetries in information, whether those were natural or created by the market. Big Data is increasing these asymmetries, and thereby potentially making resource allocations less efficient. 19.Jennifer Valentino-DeVries, Jeremy Singer-Vine, and Ashkan Soltani, “Websites Vary Prices, Deals Based on Users’ Information,” Wall Street Journal, Dec. 24, 2012. 20.To use the colorful language of Nobel Prize winners George Akerlof and Robert Shiller, to “phish for phools.”

In all economies, large banks and other financial institutions can exert disproportionate power. 87.Vincent Larivière, Stefanie Haustein, and Philippe Mongeon, “The Oligopoly of Academic Publishers in the Digital Era,” PLoS ONE 10, no. 6 (2015): e0127502, https://doi.org/10.1371/journal.pone.0127502. 88.Research over the past half century has identified a large number of “market failures,” circumstances in which markets fail to produce efficient outcomes, including the absence of perfect risk and capital markets and imperfect and asymmetric information. This chapter (and more broadly this book) has focused on one market failure—lack of competition—because I believe it is central to the maladies facing the economy. 89.CEO compensation in the US has increased enormously over the past four decades, and is much larger than in other advanced countries. These levels of compensation cannot be justified in terms of productivity—it’s not that our CEOs are that much more productive than CEOs elsewhere, or our CEOs are that much more productive relative to workers today than they were forty years ago.

Sampson, Great American City: Chicago and the Enduring Neighborhood Effect (Chicago: University of Chicago Press, 2011). 14.More generally, the spatial allocation of economic activity is not efficient because of strong congestion and other location-specific externalities (externalities, recall, arise whenever the full consequences of an individual’s decisions are not reflected in the costs he has to bear; and whenever there are externalities, markets are not efficient.) 15.The role played was partially inadvertent, a by-product of World War II, as government helped move people from the rural to the urban sector for war production and as it helped ensure that those returning from the war had the skills necessary for success in the new industrial economy, through the GI Bill. For a greater elaboration of this point, see the studies cited in chapter 6, note 7. 16.Modern economic theory (based on asymmetric information) has explained why this is so, and why the problems are inherent. 17.This idea has been elaborated in Joseph E. Stiglitz and Jungyoll Yun, “Integration of Unemployment Insurance with Retirement Insurance,” Journal of Public Economics, 89, no. 11–12 (2005): 2037–67; and “Optimal Provision of Loans and Insurance Against Unemployment From A Lifetime Perspective” (NBER Working Paper No. 19064, 2013). 18.I am indebted to Alan Krueger for discussions on these issues.


pages: 220 words: 73,451

Democratizing innovation by Eric von Hippel

additive manufacturing, correlation coefficient, Debian, disruptive innovation, hacker house, informal economy, information asymmetry, inventory management, iterative process, James Watt: steam engine, knowledge economy, longitudinal study, meta analysis, meta-analysis, Network effects, placebo effect, principal–agent problem, Richard Stallman, software patent, transaction costs, Vickrey auction

One consequence of the information asymmetry between users and manufacturers is that users tend to develop innovations that are functionally novel, requiring a great deal of user-need information and use-context information for their development. In contrast, manufacturers tend to develop innovations that are improvements on well-known needs and that require a rich understanding of solution information for their development. For example, firms that use inventory-management systems, such as retailers, tend to be the developers of new approaches to inventory management. In contrast, manufacturers of inventory-management systems and equipment tend to develop improvements to the equipment used to implement these user-devised approaches (Ogawa 1998). If we extend the information-asymmetry argument one step further, we see that information stickiness implies that information on hand will also differ among individual users and manufacturers.

Consumers know this too, and few will be so foolish as to contact a major soup producer like Campbell’s with a request for a special, “just-right” can of soup. But what about manufacturers that specialize in custom products? Isn’t it their business to respond to special requests? To understand which way the innovate-or-buy choice will go, one must consider both transaction costs and information asymmetries specific to users and manufacturers. I will talk mainly about transaction costs in this chapter and mainly about information asymmetries in chapter 5. I begin this chapter by discussing four specific and significant transaction costs that affect users’ innovate-or-buy decisions. Next I review a case study that illustrates these. Then, I use a simple quantitative model to further explore when user firms will find it more cost-effective to develop a solution—a new product or service—for themselves rather than hiring a manufacturer to solve the problem for them.

That is, the color of the circuit boards in the user factory became an item the problem solvers needed to know only when engineers, in the course of their development of the component placer, decided to use a vision system in the component-placing machine they were designing, and the fact that the boards were yellow became relevant only when the engineers chose a video camera and lighting that could not distinguish the metalized patterns on the board against a yellow background. Clearly, it can be costly to transfer the many items of information that a product or service developer might require—even if each individual item has low stickiness—from one site to another. How Information Asymmetries Affect User Innovation vs. Manufacturer Innovation An important consequence of information stickiness is that it results in information asymmetries that cannot be erased easily or cheaply. Different users and manufacturers will have different stocks of information, and may find it costly to acquire information they need but do not have. As a result, each innovator will tend to develop innovations that draw on the sticky information it already has, because that is the cheapest course of action (Arora and Gambardella 1994; von Hippel 1994).


pages: 665 words: 146,542

Money: 5,000 Years of Debt and Power by Michel Aglietta

bank run, banking crisis, Basel III, Berlin Wall, bitcoin, blockchain, Bretton Woods, British Empire, business cycle, capital asset pricing model, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, David Graeber, debt deflation, dematerialisation, Deng Xiaoping, double entry bookkeeping, energy transition, eurozone crisis, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, forward guidance, Francis Fukuyama: the end of history, full employment, German hyperinflation, income inequality, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invention of writing, invisible hand, joint-stock company, Kenneth Arrow, Kickstarter, liquidity trap, margin call, means of production, money market fund, moral hazard, Nash equilibrium, Network effects, Northern Rock, oil shock, planetary scale, plutocrats, Plutocrats, price stability, purchasing power parity, quantitative easing, race to the bottom, reserve currency, secular stagnation, seigniorage, shareholder value, special drawing rights, special economic zone, stochastic process, the payments system, the scientific method, too big to fail, trade route, transaction costs, transcontinental railway, Washington Consensus

It is the guarantor of a computerised settlements system, but it is not a bank, in that it does not make loans or issue its own debts. However, doing the job of a financial intermediary involves a lot more than arranging networks to connect different actors, however effective these may be. It also requires specialised information and a specific expertise for selecting assets and distinguishing good projects from bad.2 That is to say, the informational asymmetries that result from the act of credit cannot be eliminated by transfer technologies. This is why the Internet giants will very likely be uninterested in becoming financial intermediaries. If they were to become such, what would define them as banks would be the combination of a capacity for intermediation and a payments network. They would then be regulated as banks in their banking activities.

There was a multiplication of derivatives markets, some of which were weak links on account of their lack of liquidity and concentrated arbitrageurs. Risk propagates itself by transferring across different segments of the market. From this we can deduce a certain reticence towards providing liquidity in stress situations, above all in over-the-counter markets without clearing mechanisms and without a central settlements agent. Abundant macroeconomic liquidity can thus coexist with insufficient market liquidity, on account of informational asymmetries and counterparty risks. Banking crises are the most serious crises because they strike at the heart of the monetary system’s functioning. They show how insufficient the law of reflux is in ensuring this system’s stability. Contagion leads to three categories of banking crises. The original crises are panics produced by the conversion of deposits into cash. These should normally be averted by way of deposit insurance.

Rather, it lies in the attempt to understand the characteristics proper to the banking principle within finance. These characteristics mean that the law of reflux is fulfilled in the centralisation of the relations between interbanking correspondents within multilateral clearing systems.47 Banks are institutions that offer non-tradable credits combined with the provision of payment services. They invest in specific information whose quality cannot be evaluated by depositors. This asymmetric information structure, linked to network effects in the payment system, implies that the most effective relationship is for deposits to be valued at par in units of account, and hence convertible at par into the base currency. This relationship expanded greatly in the second half of the nineteenth century, when deposits became transferable via cheques. Payments by cheque transfer deposits from one bank to another and create interbank positions.


pages: 401 words: 93,256

Alchemy: The Dark Art and Curious Science of Creating Magic in Brands, Business, and Life by Rory Sutherland

3D printing, Alfred Russel Wallace, barriers to entry, basic income, Black Swan, butterfly effect, California gold rush, call centre, Captain Sullenberger Hudson, Cass Sunstein, cognitive dissonance, Daniel Kahneman / Amos Tversky, Dava Sobel, delayed gratification, Donald Trump, double helix, Downton Abbey, Elon Musk, Firefox, George Akerlof, gig economy, Google Chrome, Google X / Alphabet X, Grace Hopper, Hyperloop, Ignaz Semmelweis: hand washing, IKEA effect, information asymmetry, James Dyson, John Harrison: Longitude, loss aversion, low cost airline, Mason jar, Murray Gell-Mann, Peter Thiel, placebo effect, race to the bottom, Richard Feynman, Richard Thaler, Rory Sutherland, shareholder value, Silicon Valley, social intelligence, Steve Jobs, supply-chain management, the map is not the territory, The Market for Lemons, The Wealth of Nations by Adam Smith, ultimatum game, universal basic income, Upton Sinclair, US Airways Flight 1549, Veblen good

It may correct itself if better boards arise, or if a shrewd company such as Samsung cannily attaches its name to the best. Noticeably, brands such as Juul and Vype are starting to emerge in the similarly haphazard vaping market. In many ways, expensive advertising and brands arise as a solution to a problem identified by George Akerlof in his 1970 paper ‘The Market for Lemons’ in the Quarterly Journal of Economics. The problem is known as ‘information asymmetry’, whereby the seller knows more about what he is selling than the buyer knows about what he is buying. This lesson was learned the hard way in Eastern Bloc countries under communism; brands were considered un-Marxist, so bread was simply labelled ‘bread’. Customers had no idea who had made it or whom to blame if it arrived full of maggots, and couldn’t avoid that make in future if it did, because all bread packaging looked the same.

This matters, because conversations about the marketing of brands tend to focus on hair-splitting distinctions between fairly good products. We often forget that, without this assurance of quality, there simply isn’t enough trust for markets to function at all, which means that perfectly good ideas can fail. Branding isn’t just something to add to great products – it’s essential to their existence. Evolution solved the problem of asymmetric information and trust for flowers and bees back when our ancestors were still living in trees. Bees have been around for at least 20 million years, floral plants a good deal longer. My analogy between signalling in the biological world and advertising in the commercial world may explain something I have noticed for years: if you talk to economists, they tend to hate advertising and barely understand it at all, while if you talk to biologists they understand it perfectly.


High-Frequency Trading by David Easley, Marcos López de Prado, Maureen O'Hara

algorithmic trading, asset allocation, backtesting, Brownian motion, capital asset pricing model, computer vision, continuous double auction, dark matter, discrete time, finite state, fixed income, Flash crash, High speed trading, index arbitrage, information asymmetry, interest rate swap, latency arbitrage, margin call, market design, market fragmentation, market fundamentalism, market microstructure, martingale, natural language processing, offshore financial centre, pattern recognition, price discovery process, price discrimination, price stability, quantitative trading / quantitative finance, random walk, Sharpe ratio, statistical arbitrage, statistical model, stochastic process, Tobin tax, transaction costs, two-sided market, yield curve

Being closer to actual normality and independence of observations (Figure 1.2) allows the application of standard statistical techniques, which means faster calculations, shorter cycles and thus faster reaction. The upshot of this new paradigm is clear: even if connectivity speed ceased to be a significant edge, HFT would still exist. MORE THAN SPEED Easley et al (1996) linked liquidity to informational asymmetry by identifying how market makers adjust their bid–ask spreads to the probability of informed trading (PIN). Because informed traders monetise their superior knowledge of a security’s future price by adversely selecting uninformed traders, market makers must update their quoted levels and sizes in real time in a manner that reflects their estimate of PIN. HF traders react to information leaked by LF traders in order to anticipate their actions.

This allows HF traders to place numerous independent bets every day on the same instrument or portfolio, thus 2 i i i i i i “Easley” — 2013/10/8 — 11:31 — page 3 — #23 i i THE VOLUME CLOCK: INSIGHTS INTO THE HIGH-FREQUENCY PARADIGM taking advantage of the multiplicative effect postulated by the “fundamental law of active management”, ie, that a tiny predictive power on a sufficiently large number of independent bets yields a high information ratio and thus a profit (Grinold 1989). The goal is to exploit the inefficiencies derived from the market’s microstructure, such as rigidities in price adjustment within and across markets, agents’ idiosyncratic behaviour and asymmetric information. As a consequence of this higher frequency, the identification of opportunities, risk control, execution and other investment management activities must be automated. Not all algorithmic trading occurs at high frequency, but all high-frequency trading requires algorithms. It is useful to contrast the divergent worlds of the low-frequency (LF) traders and the HF traders. Financial analysts’ conferences are one milieu where LF traders converse on subjects as broad and complex as monetary policy, asset allocation, stock valuations and financial statement analysis.


pages: 421 words: 110,406

Platform Revolution: How Networked Markets Are Transforming the Economy--And How to Make Them Work for You by Sangeet Paul Choudary, Marshall W. van Alstyne, Geoffrey G. Parker

3D printing, Affordable Care Act / Obamacare, Airbnb, Alvin Roth, Amazon Mechanical Turk, Amazon Web Services, Andrei Shleifer, Apple's 1984 Super Bowl advert, autonomous vehicles, barriers to entry, big data - Walmart - Pop Tarts, bitcoin, blockchain, business cycle, business process, buy low sell high, chief data officer, Chuck Templeton: OpenTable:, clean water, cloud computing, connected car, corporate governance, crowdsourcing, data acquisition, data is the new oil, digital map, discounted cash flows, disintermediation, Edward Glaeser, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, financial innovation, Haber-Bosch Process, High speed trading, information asymmetry, Internet of things, inventory management, invisible hand, Jean Tirole, Jeff Bezos, jimmy wales, John Markoff, Khan Academy, Kickstarter, Lean Startup, Lyft, Marc Andreessen, market design, Metcalfe’s law, multi-sided market, Network effects, new economy, payday loans, peer-to-peer lending, Peter Thiel, pets.com, pre–internet, price mechanism, recommendation engine, RFID, Richard Stallman, ride hailing / ride sharing, Robert Metcalfe, Ronald Coase, Satoshi Nakamoto, self-driving car, shareholder value, sharing economy, side project, Silicon Valley, Skype, smart contracts, smart grid, Snapchat, software is eating the world, Steve Jobs, TaskRabbit, The Chicago School, the payments system, Tim Cook: Apple, transaction costs, Travis Kalanick, two-sided market, Uber and Lyft, Uber for X, uber lyft, winner-take-all economy, zero-sum game, Zipcar

When collectors heard about it, the brew fetched bids exceeding $78,100.15 The Case of the Ambiguous Ale is an example of market failure—a situation in which “good” interactions (fair and mutually satisfactory) fail to occur, or “bad” interactions do. If you can’t find an item you want on eBay, then a good interaction has failed to occur. If you did find an item you wanted but got cheated, abused, or deceived, then a bad interaction has occurred. In general, there are four main causes of market failures: information asymmetry, externalities, monopoly power, and risk. Information asymmetry arises whenever one party to an interaction knows facts that other parties don’t and uses that knowledge for personal advantage. Consider the problem of counterfeit goods, when the seller knows that the goods are fake but does not inform the buyer. Fakes account for Skullcandy headphones with lousy sound quality, Gucci handbags with broken stitching, Duracell batteries that don’t hold a charge, OtterBox mobile phone cases that are not drop-proof, and Viagra that provides no lift.

However, platform governance involves design principles that traditional finance theory overlooks. The single most heavily cited article on corporate governance is a literature survey that considers only “the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment.”17 The focus here is on the information asymmetry arising from the separation of ownership and control—a critical element of governance design, but far from sufficient.18 Information asymmetry between the community of users and the firm also matters, and their interests too must be aligned. Additionally, platform governance rules must pay special heed to externalities. These are endemic in network markets, since, as we’ve seen when examining network effects, the spillover benefits users generate are a source of platform value.

• Industries characterized by extreme information asymmetries. Economic theory suggests that fair, efficient markets require that all participants have equal access to information about goods, services, prices, and other crucial variables. But in many traditional markets, one set of participants has far better access than others. Used car dealers, for example, knew much more about the condition and history of the cars they sold, as well as about supply and demand variables, than their customers—hence the distrust in which they were held. Data aggregating and sharing platforms such as Carfax are now leveling the field, making detailed information about used car values available to anyone willing to pay a small fee. Other markets where information asymmetries have made fair dealing difficult, from health insurance to home mortgages, are ripe for similar changes.


pages: 267 words: 72,552

Reinventing Capitalism in the Age of Big Data by Viktor Mayer-Schönberger, Thomas Ramge

accounting loophole / creative accounting, Air France Flight 447, Airbnb, Alvin Roth, Atul Gawande, augmented reality, banking crisis, basic income, Bayesian statistics, bitcoin, blockchain, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, Cass Sunstein, centralized clearinghouse, Checklist Manifesto, cloud computing, cognitive bias, conceptual framework, creative destruction, Daniel Kahneman / Amos Tversky, disruptive innovation, Donald Trump, double entry bookkeeping, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Ford paid five dollars a day, Frederick Winslow Taylor, fundamental attribution error, George Akerlof, gig economy, Google Glasses, information asymmetry, interchangeable parts, invention of the telegraph, inventory management, invisible hand, James Watt: steam engine, Jeff Bezos, job automation, job satisfaction, joint-stock company, Joseph Schumpeter, Kickstarter, knowledge worker, labor-force participation, land reform, lone genius, low cost airline, low cost carrier, Marc Andreessen, market bubble, market design, market fundamentalism, means of production, meta analysis, meta-analysis, Moneyball by Michael Lewis explains big data, multi-sided market, natural language processing, Network effects, Norbert Wiener, offshore financial centre, Parag Khanna, payday loans, peer-to-peer lending, Peter Thiel, Ponzi scheme, prediction markets, price anchoring, price mechanism, purchasing power parity, random walk, recommendation engine, Richard Thaler, ride hailing / ride sharing, Sam Altman, Second Machine Age, self-driving car, Silicon Valley, Silicon Valley startup, six sigma, smart grid, smart meter, Snapchat, statistical model, Steve Jobs, technoutopianism, The Future of Employment, The Market for Lemons, The Nature of the Firm, transaction costs, universal basic income, William Langewiesche, Y Combinator

This and similar behavior leads to the information asymmetries we mentioned earlier. Data-rich markets do not eliminate such asymmetries; but because more preference information on data-rich markets generally leads to better matches, there is less of an incentive to keep information from others: vastly improved matching aims to identify the transaction partner that gets the most value out of a transaction, the partner who is thus willing to pay the highest price, arguably outweighing some of the advantages in negotiations that many information asymmetries may offer. In data-rich markets, each exchange between potential partners reveals more information, even if not leading to a transaction, and thus betters the outcome. And advanced matching even helps where information asymmetries persist by carefully orchestrating the matching process to improve overall welfare.

They’re the first people to identify a new market, patent an invention, launch an efficient means of production, or introduce some other “new combination”—a way to coordinate human activity—before anyone else is aware of it. For Schumpeter and his acolytes, the resulting information asymmetry creates an economic incentive. Even though the market becomes less efficient, that is the price we pay for innovation. Hence, information imbalances aren’t necessarily bad—up to a point. The incentives created by information asymmetries are essential to innovation, but the reward for innovation cannot be permanent without harming the market. Asymmetries must be fleeting and temporal lest market predators exploit their information monopoly forever, creating a vacuum, a black hole in which information is trapped. Information vacuums force buyers to make suboptimal decisions. Thankfully, most information asymmetries are temporary. Competitors copy or emulate innovations and catch up, erasing the innovator’s information advantage.

Some participants, for example, may not reveal their preferences openly, in order to strengthen their negotiating positions and force a better deal. This may sound like a sensible strategy for an individual, but if it is widespread, it hurts everyone by making it difficult for others to process the information being shared. Moreover, if market participants have to assume that others are not transparent, they must factor this into their decision-making. In his classic example of information asymmetry, George Akerlof cites the market for used cars. Because it’s difficult to inspect the condition of every component of a car without disassembling it, buyers cannot really ascertain if a car they are considering purchasing is a “peach” or a “lemon” at the time of the transaction. As every used car in the market could potentially be a lemon, buyers are less inclined to pay extra for a purported peach, while sellers who actually have a car in great condition must absorb the market’s informational inefficiencies, and in most cases they either decide not to sell their cars or to sell them for less than they feel they’re worth.


pages: 340 words: 100,151

Secrets of Sand Hill Road: Venture Capital and How to Get It by Scott Kupor

activist fund / activist shareholder / activist investor, Airbnb, Amazon Web Services, asset allocation, barriers to entry, Ben Horowitz, carried interest, cloud computing, corporate governance, cryptocurrency, discounted cash flows, diversification, diversified portfolio, estate planning, family office, fixed income, high net worth, index fund, information asymmetry, Lean Startup, low cost airline, Lyft, Marc Andreessen, Myron Scholes, Network effects, Paul Graham, pets.com, price stability, ride hailing / ride sharing, rolodex, Sand Hill Road, shareholder value, Silicon Valley, software as a service, sovereign wealth fund, Startup school, Travis Kalanick, uber lyft, VA Linux, Y Combinator, zero-sum game

Or to mix my sports metaphors, you get only a few real shots on goal in your lifetime while we VCs get several. Because of this imbalance, specifically regarding investment decisions, information asymmetry can come into play (often at the expense of the founder). The VCs are repeat players and thus have the benefit of lots of years of developing their understanding of the various mechanics (especially when negotiating term sheets), whereas founders have been through the process only a handful of times, at most. What I hope to lay out for founders is a better understanding of and appreciation for the interplay between VCs and founders in order to level the playing field. Information asymmetry should not pollute the foundation of a marriage that could last ten years or more. Does that timeline surprise you? That you are likely entering into a (minimum) ten-year marriage of sorts with your venture partners?

CHAPTER 9 The Alphabet Soup of Term Sheets: Part One (Economics) Now, let’s assume your startup story is compelling enough that you receive a term sheet from a VC. This is an exciting moment for many founders . . . and then their eyes start to cross. What do all those terms mean? How do you evaluate them? What’s standard, what’s not; what’s a good deal versus a bad deal? As I mentioned at the beginning of this book, the term sheet is where information asymmetry between VCs and founders comes into play the most, and often at the expense of the founder. This is because VCs have been through this process many times and have negotiated hundreds of term sheets. By contrast, founders only get a few shots on goal in a lifetime and likely can count the number of term sheets they have negotiated on one hand. This is normal, but it puts the founder at a disadvantage that I would very much like to correct.

And this takes us right back to where we started this book. VCs and entrepreneurs working together to achieve wonderful things. Here’s What I Believe about Good VCs Good VCs help entrepreneurs achieve their business goals by providing guidance, support, a network of relationships, and coaching. Good VCs recognize the limitations of what they can do as board members and outside advisors as a result of the informational asymmetry they have with respect to founders and other executives who live and breathe the company every day. Good VCs give advice in areas in which they have demonstrated expertise, and have the wisdom to avoid opining on topics for which they are not the appropriate experts. Good VCs appropriately balance their duties to the common shareholders with those they owe to their limited partners.


pages: 354 words: 105,322

The Road to Ruin: The Global Elites' Secret Plan for the Next Financial Crisis by James Rickards

"Robert Solow", Affordable Care Act / Obamacare, Albert Einstein, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Bayesian statistics, Ben Bernanke: helicopter money, Benoit Mandelbrot, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Black Swan, blockchain, Bonfire of the Vanities, Bretton Woods, British Empire, business cycle, butterfly effect, buy and hold, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, cellular automata, cognitive bias, cognitive dissonance, complexity theory, Corn Laws, corporate governance, creative destruction, Credit Default Swap, cuban missile crisis, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, disintermediation, distributed ledger, diversification, diversified portfolio, Edward Lorenz: Chaos theory, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, fiat currency, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, Fractional reserve banking, G4S, George Akerlof, global reserve currency, high net worth, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Isaac Newton, jitney, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, mutually assured destruction, Myron Scholes, Naomi Klein, nuclear winter, obamacare, offshore financial centre, Paul Samuelson, Peace of Westphalia, Pierre-Simon Laplace, plutocrats, Plutocrats, prediction markets, price anchoring, price stability, quantitative easing, RAND corporation, random walk, reserve currency, RFID, risk-adjusted returns, Ronald Reagan, Silicon Valley, sovereign wealth fund, special drawing rights, stocks for the long run, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transfer pricing, value at risk, Washington Consensus, Westphalian system

The elite herd hears the lioness of neonationalism and has started to run. Economists have spent decades identifying imperfections in the free market model. Price signals are moved by market manipulation. Monopoly power is used to restrict supply and peg prices. Information asymmetries allow sellers to deprive buyers through hidden defects. This and more are freely admitted without ruffling the general equilibrium. Instead elites propose public policy remedies. Monopolies are addressed by antitrust enforcement. Asymmetric information is addressed by warranties. Such remedies are legion. Remedial costs and benefits are hotly debated. Yet the general equilibrium goes unquestioned. The root of general equilibrium is rational behavior. Rational people save for retirement. Rational people buy more on sale.


pages: 343 words: 91,080

Uberland: How Algorithms Are Rewriting the Rules of Work by Alex Rosenblat

"side hustle", Affordable Care Act / Obamacare, Airbnb, Amazon Mechanical Turk, autonomous vehicles, barriers to entry, basic income, big-box store, call centre, cashless society, Cass Sunstein, choice architecture, collaborative economy, collective bargaining, creative destruction, crowdsourcing, disruptive innovation, don't be evil, Donald Trump, en.wikipedia.org, future of work, gender pay gap, gig economy, Google Chrome, income inequality, information asymmetry, Jaron Lanier, job automation, job satisfaction, Lyft, marginal employment, Mark Zuckerberg, move fast and break things, Network effects, new economy, obamacare, performance metric, Peter Thiel, price discrimination, Ralph Waldo Emerson, regulatory arbitrage, ride hailing / ride sharing, self-driving car, sharing economy, Silicon Valley, Silicon Valley ideology, Skype, social software, stealth mode startup, Steve Jobs, strikebreaker, TaskRabbit, Tim Cook: Apple, transportation-network company, Travis Kalanick, Uber and Lyft, Uber for X, uber lyft, union organizing, universal basic income, urban planning, Wolfgang Streeck, Zipcar

Given that each group of drivers—full-timers, part-timers, and hobbyists—has unique needs, Uber has found ways to divide and conquer by pitting drivers against each other. Chapter 3 then examines the storytelling that Uber relies upon to expand its empire. Entrepreneurship has a noble heritage in the United States, a fact that Uber makes use of when recruiting its drivers. Despite the company’s grandiose promises, however, the experience that Uber delivers to its drivers is a far cry from actual entrepreneurship. Uber’s pay structure, information asymmetries, and management controls are indicators that ridehail work is not the entrepreneurial endeavor the company makes it out to be. A lingering question—can we trust Uber to be a fair and honest broker?—is the subject of chapter 4. When we think about tech-mediated transactions, the technology part sounds pretty neutral—it’s just an engine that works behind the scenes. But in the age of Uber, “technology” isn’t as innocent as it sounds.

., Min Kyung Lee, Daniel Kusbit, Evan Metsky, and Laura Dabbish, “Working with Machines: The Impact of Algorithmic and Data-Driven Management on Human Workers,” in Proceedings of the 33rd Annual ACM SIGCHI Conference, Seoul, South Korea, April 2015 (New York: ACM, 2015), 1603–1612, https://dl.acm.org/citation.cfm?id=2702548. 7. Uber Help, “Insurance,” February 14, 2018, https://help.uber.com/h/a4afb2ed-75af-4db6–8fdb-dccecfcc3fd7?state=x31lXMTG_n8G9rQNXx_5L3qgzdIE8–7bHzhAoksAf1g%3D&_csid=KofAFMlupm3NY9go3S0D_A#_. 8. Alex Rosenblat and Luke Stark, “Algorithmic Labor and Information Asymmetries: A Case Study of Uber’s Drivers,” International Journal of Communication 10, no. 27 (2016), http://ijoc.org/index.php/ijoc/article/view/4892. 9. Douglas O’Connor, Thomas Colopy, Matthew Manahan, and Elie Gurfinkel v. Uber Technologies, Inc., August 16, 2013, http://uberlawsuit.com/Complaint.pdf. 10. The quote, by Robert Jon Hendricks, comes from Douglas O’Connor, Thomas Colopy, Matthew Manahan, and Elie Gurfinkel vs.

Kaleigh Rogers, “Love in the Time of Ridesharing,” Motherboard, May 27, 2016, https://motherboard.vice.com/en_us/article/yp33yg/love-in-the-time-of-ridesharing-uber-lyft-romance-technology. 70. Lobel, “The Law of the Platform”; Calo and Rosenblat, “The Taking Economy.” 71. Tressie McMillan Cottom, “Credentials, Jobs and the New Economy,” Inside Higher Ed, March 2, 2017, www.insidehighered.com/views/2017/03/02/impact-new-economy-profit-colleges-and-their-students-essay. 72. Alex Rosenblat and Luke Stark, “Algorithmic Labor and Information Asymmetries: A Case Study of Uber’s Drivers,” International Journal of Communication 10, no. 27 (2016): 3762, http://ijoc.org/index.php/ijoc/article/view/4892. 73. A portion of my fieldwork cited here and at different points throughout this book has also been used in a joint research project and related publications. See, e.g., Alexandra Mateescu, Alex Rosenblat, and Julia Ticona, “Mapping Inequalities in the On-Demand Economy” (unpublished white paper, New York: Data & Society Research Institute, January 31, 2018). 74.


pages: 442 words: 39,064

Why Stock Markets Crash: Critical Events in Complex Financial Systems by Didier Sornette

Asian financial crisis, asset allocation, Berlin Wall, Bretton Woods, Brownian motion, business cycle, buy and hold, capital asset pricing model, capital controls, continuous double auction, currency peg, Deng Xiaoping, discrete time, diversified portfolio, Elliott wave, Erdős number, experimental economics, financial innovation, floating exchange rates, frictionless, frictionless market, full employment, global village, implied volatility, index fund, information asymmetry, intangible asset, invisible hand, John von Neumann, joint-stock company, law of one price, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, market design, market fundamentalism, mental accounting, moral hazard, Network effects, new economy, oil shock, open economy, pattern recognition, Paul Erdős, Paul Samuelson, quantitative trading / quantitative finance, random walk, risk/return, Ronald Reagan, Schrödinger's Cat, selection bias, short selling, Silicon Valley, South Sea Bubble, statistical model, stochastic process, stocks for the long run, Tacoma Narrows Bridge, technological singularity, The Coming Technological Singularity, The Wealth of Nations by Adam Smith, Tobin tax, total factor productivity, transaction costs, tulip mania, VA Linux, Y2K, yield curve

The phenomenon of “herding,” discussed at length in the remainder of this chapter, can also be considered an example of market failure, as it leads to important deviations from “fundamental” or “equilibrium” prices. This research has fertilized many novel approaches that are working out ways in which rational behavior could lead to less-than-optimal market outcomes. Another important step has been the introduction of so-called “information asymmetry,” which describes situations in which different parties to a transaction possess different amounts of information. Such “asymmetric information,” the fact that people are not equal with respect to the quality and quantity of information they use to make decisions, blossomed in the seventies as a way to explain the behavior of financial markets, which are indeed extremely susceptible to information difficulties. The present situation is that economics has moved away from the dead certainties of the past into a much more interesting universe of research possibilities including, as we shall see, imperfection, bounded rationalities, behaviors, and even psychology.

When the imitation strength becomes close to a critical value, the crash hazard rate 162 chapter 5 diverges with a characteristic power law behavior. This leads to a specific power law acceleration of the market price, providing our first predictive precursory pattern anticipating a crash. The imitation between agents leading to an accelerating crash hazard rate may result, for instance, from a progressive shift in the belief of investors about market liquidity, without invoking asymmetric information, and independently of the price behavior and its deviation from its fundamental value [132]. THE PRICE-DRIVEN MODEL The price-driven model inverts the logic of the previous risk-driven model: here, again as a result of the action of rational investors, the price is driving the crash hazard rate rather than the reverse. The price itself is driven up by the imitation and herding behavior of the “noisy” investors.


pages: 280 words: 79,029

Smart Money: How High-Stakes Financial Innovation Is Reshaping Our WorldÑFor the Better by Andrew Palmer

Affordable Care Act / Obamacare, algorithmic trading, Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, Black-Scholes formula, bonus culture, break the buck, Bretton Woods, call centre, Carmen Reinhart, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Graeber, diversification, diversified portfolio, Edmond Halley, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, eurozone crisis, family office, financial deregulation, financial innovation, fixed income, Flash crash, Google Glasses, Gordon Gekko, high net worth, housing crisis, Hyman Minsky, implied volatility, income inequality, index fund, information asymmetry, Innovator's Dilemma, interest rate swap, Kenneth Rogoff, Kickstarter, late fees, London Interbank Offered Rate, Long Term Capital Management, longitudinal study, loss aversion, margin call, Mark Zuckerberg, McMansion, money market fund, mortgage debt, mortgage tax deduction, Myron Scholes, negative equity, Network effects, Northern Rock, obamacare, payday loans, peer-to-peer lending, Peter Thiel, principal–agent problem, profit maximization, quantitative trading / quantitative finance, railway mania, randomized controlled trial, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, short selling, Silicon Valley, Silicon Valley startup, Skype, South Sea Bubble, sovereign wealth fund, statistical model, Thales of Miletus, transaction costs, Tunguska event, unbanked and underbanked, underbanked, Vanguard fund, web application

Far from being enslaved by a human-capital contract, a young person has the option to change careers entirely. You might think you are backing a high-earning computer programmer, but it turns out that your money is funding a low-earning chemistry teacher. The information asymmetry that all markets must grapple with is particularly great when it comes to investing in people: no investor can hope to understand the aspirations, integrity, and self-discipline of a young person like the young person himself. With a traditional loan, the asymmetry still exists, but the obligation to repay at least offers greater protection to the interests of the investor. Information asymmetry goes hand in hand with a problem known as “adverse selection.” Imagine that the year is 2003, and an investor decides to put her money into a promising young Harvard undergraduate named Mark Zuckerberg.

“Part of what went wrong over the long term was two things: computing power and the Greenspan consensus [named for Alan Greenspan, a former chairman of the Federal Reserve] that markets worked,” says the former employee. “The finance industry could slice, dice, and analyze information in ways they couldn’t before. Information was available, which meant markets could function properly. People thought information asymmetry was the problem, and now that problem was solved. Everyone thought they could price risk. That was an illusion: you have to know what you are looking at.” What the agencies—and the industry as a whole—should have been looking at was the probability of a national downturn in American housing prices. Securitization is a technique that relies on diversification, which means that the thing it cannot survive is a systemic event that affects every asset in the pool.

Hedging: An investment strategy designed to offset price movements in one asset by holding a position in another. A farmer might lock in a price for his crop via the futures market, hedging himself against a sharp fall in market prices. High-frequency trading: A trading strategy that is characterized by extreme speed. High-frequency traders pursue a variety of investment approaches, from following short-term price trends to making markets. Information asymmetry: When one party knows more about a transaction than the other. Companies with very short track records or people seeking health-insurance coverage will, for example, usually be better informed about their circumstances than a potential equity investor or an insurance provider. Leverage: The amount of debt that a borrower carries relative to equity. If a bank has 5 percent equity, it has a leverage ratio of twenty to one.


pages: 298 words: 43,745

Understanding Sponsored Search: Core Elements of Keyword Advertising by Jim Jansen

AltaVista, barriers to entry, Black Swan, bounce rate, business intelligence, butterfly effect, call centre, Claude Shannon: information theory, complexity theory, correlation does not imply causation, en.wikipedia.org, first-price auction, information asymmetry, information retrieval, intangible asset, inventory management, life extension, linear programming, longitudinal study, megacity, Nash equilibrium, Network effects, PageRank, place-making, price mechanism, psychological pricing, random walk, Schrödinger's Cat, sealed-bid auction, search engine result page, second-price auction, second-price sealed-bid, sentiment analysis, social web, software as a service, stochastic process, telemarketer, the market place, The Present Situation in Quantum Mechanics, the scientific method, The Wisdom of Crowds, Vickrey auction, Vilfredo Pareto, yield management

At the individual level, how does one distinguish between signal and noise? Our answer lies with the signaling theory and, when focusing specifically on search engine results, a concept known as information foraging theory. Signaling theory Research into consumer searching on the Web characteristically has an inherent assumption of information asymmetry. In other words, we are making the assumption that consumers search to even out an information imbalance. Otherwise, why would someone search (other than for entertainment) if not to correct an information imbalance? Information asymmetry is a characteristic in decision-making situations and transactions where one of the participants has more and/or better information than others engaged in the transaction. This information inequality creates an imbalance of power. Therefore, the participant with less information wants to move to a condition of information symmetry to gain more control. 64 Understanding Sponsored Search Hence, people search.

Note that this was based on data from a particular search engine and set of sponsored-search efforts, so click potential for a given sponsored-search effort may vary. 78 Understanding Sponsored Search Table 4.3.╇ Changes in conversion potential by ad rank Rank 1 2 3 4 5 6 7 8 9 10 Click potential (%) Conversion rate (%) Conversion potential (%) Change in conversion potential (%) 100.0 59.8 47.5 39.0 34.8 31.3 24.0 20.0 15.3 13.9 100.0 91.1 75.1 72.4 69.3 71.9 67.6 64.9 72.3 87.7 100.0 54.5 35.7 28.2 24.1 22.5 16.2 13.0 11.1 12.2 – −46 −34 −21 −15 −7 −28 −20 −15 10 Perception Choice Set Ad Selection –The searcher must attend to the choice sets – Choices must rise above noise level – The number of choices affects the searcher’s selection time – Information scent is used for selection User Motivation and Awareness – Addressing information asymmetry – Reducing uncertainty Ad attributes – Signals are contained within the ad itself – Where the ad appears on the SERP is also a signal Ad – Ad is a guide post to take the potential consumer to the landing page – Searchers selects ads that reduce information asymmetry – Ads must contain relevant signals and placed where searchers notice them Figure 4.5.╇ Interactive process of searcher/potential customer and advertisement. Note the slight rise in conversion potential at position 10, due primarily from an increase in the conversion rate in the data.

The Three Hit Theory posits that the optimum number of exposures (e.g., hits) to an advertisement to induce learning is three. The first exposure is to gain consumers’ awareness. The second exposure is to show the relevance of the product. The third exposure is to show the benefits of the product. This is also related to wear-in and wear-out aspects of advertisements. Signaling theory states that in situations where there is information asymmetry, a signal credibly relays information about a product or service to the consumer. The basis of signaling theory comes from biology and economics, but it also can be applied to understand human communication. The more difficult it is for consumers to assess aspects of a product prior to purchase, the more likely they are to rely on more costly signals to form expectations about the suitability of a product [5].


The End of Accounting and the Path Forward for Investors and Managers (Wiley Finance) by Feng Gu

active measures, Affordable Care Act / Obamacare, barriers to entry, business cycle, business process, buy and hold, Claude Shannon: information theory, Clayton Christensen, commoditize, conceptual framework, corporate governance, creative destruction, Daniel Kahneman / Amos Tversky, discounted cash flows, disruptive innovation, diversified portfolio, double entry bookkeeping, Exxon Valdez, financial innovation, fixed income, hydraulic fracturing, index fund, information asymmetry, intangible asset, inventory management, Joseph Schumpeter, Kenneth Arrow, knowledge economy, moral hazard, new economy, obamacare, quantitative easing, quantitative trading / quantitative finance, QWERTY keyboard, race to the bottom, risk/return, Robert Shiller, Robert Shiller, shareholder value, Steve Jobs, The Great Moderation, value at risk

The empirical evidence on the merits of quarterly reporting is very sparse and mixed. One study (Arthur Kraft, Huai Zhang, and Renhui Fu, 2012, “Financial Reporting Frequency, Information Asymmetry, and the Cost of Equity,” Journal of Accounting and Economics, 54: 132–149) reports that quarterly statements enhance corporate transparency (investors’ information), but the main findings of this study come from comparing quarterly to annual reports. Our suggestion maintains semiannual reports. On the other hand, a research on Singaporean companies found: “ . . . mandatory quarterly reporting does not reduce information asymmetry . . . ” (Peter Kajüter, Florian Klassman, and Martin Nienhaus, Causal Effects of Quarterly Reporting—An Analysis of Benefits and Costs, working paper (University of Muenster, Abstract, 2015).)

Managers are privy, for example, to recent sales and cost trends, the progress of drugs or software products under development, customer defection rate (churn), new contracts signed, and emerging markets penetration rate, among many other important business developments. No information vendor, Internet chat room, or even a sophisticated analyst can provide investors such “inside” information. No advances in information technology and investors’ processing capacity (Edgar, XBRL) can overcome the fundamental information asymmetry—managers know more than THE BOOK IN A NUTSHELL xv investors—inherent to capital markets. You might not like it, but that’s how it is and will be. In fact, in subsequent chapters we provide empirical evidence suggesting that the quality of the overall information used by investors continuously deteriorates and share prices reveal less of companies’ value and future prospects. Not the buzz, hype, and financial Internet chatter, which are surely deafening; rather the hard, fundamental data so crucial for investors’ decisions.

Meaningful information disclosure isn’t effortless. Data must be organized (not originally collected; any well-run company has all the information we prescribe) and investors’ questions answered. It would be helpful, therefore, if these managerial efforts were rewarded; and, indeed, they are. The reward to managers and companies lies in the removal of the detrimental effects on companies of inadequate disclosure and lack of transparency—information asymmetry, in the economics jargon. Simply put, the fast-diminishing usefulness of financial information we documented isn’t good for companies and their managers, because it increases investors’ uncertainty about companies’ growth prospects, as we have shown in Chapter 6, and increased uncertainty translates directly into lower share prices and higher cost of capital.12 Indeed, extensive evidence links investors’ information uncertainty to share price decline and volatility increase, particularly for medium and small companies (thin institutional holdings, low analysts following), for which investors’ information is generally constrained.13 So, it’s obviously in managers’ best interest to responsibly enhance disclosure to arrest the diminishing usefulness of financial information.


pages: 409 words: 125,611

The Great Divide: Unequal Societies and What We Can Do About Them by Joseph E. Stiglitz

"Robert Solow", accounting loophole / creative accounting, affirmative action, Affordable Care Act / Obamacare, agricultural Revolution, Asian financial crisis, banking crisis, Berlin Wall, Bernie Madoff, Branko Milanovic, Bretton Woods, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, clean water, collapse of Lehman Brothers, collective bargaining, computer age, corporate governance, credit crunch, Credit Default Swap, deindustrialization, Detroit bankruptcy, discovery of DNA, Doha Development Round, everywhere but in the productivity statistics, Fall of the Berlin Wall, financial deregulation, financial innovation, full employment, George Akerlof, ghettoisation, Gini coefficient, glass ceiling, global supply chain, Home mortgage interest deduction, housing crisis, income inequality, income per capita, information asymmetry, job automation, Kenneth Rogoff, Kickstarter, labor-force participation, light touch regulation, Long Term Capital Management, manufacturing employment, market fundamentalism, mass incarceration, moral hazard, mortgage debt, mortgage tax deduction, new economy, obamacare, offshore financial centre, oil shale / tar sands, Paul Samuelson, plutocrats, Plutocrats, purchasing power parity, quantitative easing, race to the bottom, rent-seeking, rising living standards, Ronald Reagan, school vouchers, secular stagnation, Silicon Valley, Simon Kuznets, The Chicago School, the payments system, Tim Cook: Apple, too big to fail, trade liberalization, transaction costs, transfer pricing, trickle-down economics, Turing machine, unpaid internship, upwardly mobile, urban renewal, urban sprawl, very high income, War on Poverty, Washington Consensus, We are the 99%, white flight, winner-take-all economy, working poor, working-age population

The banks adopted incentive structures that were designed to induce shortsighted and excessively risky behavior. The stock options that they used to pay some of their senior executives, moreover, provided incentives for bad accounting, including incentives to engage in extensive off-balance-sheet accounting. The bankers seemingly didn’t understand the risks that were being created by securitization—including those arising from information asymmetries: The originators of the mortgages did not end up holding on to them, so the originators didn’t bear the consequences of any failure at due diligence. The bankers also misestimated the extent of correlation among default rates in different parts of the country—not realizing that a rise in the interest rate or an increase in unemployment might have adverse effects in many parts of the country—and they underestimated the risk of real estate price declines.

CREDENTIALED ACCOMPLICES There is one other set of accomplices—the economists who provided the arguments that those in the financial markets found so convenient and self-serving. These economists provided models—based on unrealistic assumptions of perfect information, perfect competition, and perfect markets—in which regulation was unnecessary. Modern economic theories, particularly those focusing on imperfect and asymmetric information and on systematic irrationalities, especially with respect to risk judgments, had explained how flawed those earlier “neoclassical” models were. They had shown that those models were not robust—even slight deviations from the extreme assumptions destroyed the conclusions. But these insights were simply ignored. Some important strands in recent economic theory, moreover, encouraged central bankers to focus solely on fighting inflation.


pages: 554 words: 158,687

Profiting Without Producing: How Finance Exploits Us All by Costas Lapavitsas

"Robert Solow", Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, borderless world, Branko Milanovic, Bretton Woods, business cycle, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, computer age, conceptual framework, corporate governance, credit crunch, Credit Default Swap, David Graeber, David Ricardo: comparative advantage, disintermediation, diversified portfolio, Erik Brynjolfsson, eurozone crisis, everywhere but in the productivity statistics, financial deregulation, financial independence, financial innovation, financial intermediation, financial repression, Flash crash, full employment, global value chain, global village, High speed trading, Hyman Minsky, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, job satisfaction, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, London Interbank Offered Rate, low skilled workers, M-Pesa, market bubble, means of production, money market fund, moral hazard, mortgage debt, Network effects, new economy, oil shock, open economy, pensions crisis, price stability, Productivity paradox, profit maximization, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, Robert Shiller, Robert Shiller, savings glut, Scramble for Africa, secular stagnation, shareholder value, Simon Kuznets, special drawing rights, Thales of Miletus, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, total factor productivity, trade liberalization, transaction costs, union organizing, value at risk, Washington Consensus, zero-sum game

Consequently the relationship between borrower and lender takes the contractual form of the lender advancing money to the borrower for a given period of time in exchange for a proportionately fixed share of the proceeds from the project (interest).8 The lender must also practise information collection and monitoring of the borrower in order, first, to minimize the chances of the borrower undertaking fraudulent or careless action (moral hazard) and, second, to avoid attracting disproportionate numbers of poor quality borrowers (adverse selection). The outcome of moral hazard and adverse selection could be the rationing of credit actually provided by lenders, and hence the failure of credit markets to clear.9 In this light, banks and other financial institutions are providers of services that presumably improve the efficiency of the interaction between borrowers and lenders. It is evident that information asymmetry among borrowers and lenders reduces efficiency since it forces the lender to carry the costs of monitoring. Banks are institutions that specialize in collecting information and monitoring borrowers; these tasks can be undertaken cheaply due to the size of banks but also because of the peculiar nature of banks as businesses. Banks borrow short-term funds from many lenders (depositors) and make longer-term loans to many borrowers.

Conceptually and analytically, the bills view is capable of dominating the goldsmiths view of banking. The second point is even more important as it relates directly to contemporary banking theory. The goldsmiths view lies at the foundations of the conventional fractional reserve approach to banking; it also provides underpinnings for contemporary microeconomics of banking which seeks to explain the emergence of banks in terms of information asymmetries between borrower and lender, as was seen in earlier sections of this chapter. Banks are treated as fundamentally passive financial intermediaries that acquire reserves by collecting loanable funds thus creating a basis on which to engage in lending. In contrast, the bills view is the foundation of the alternative and far more fruitful contemporary approach to banking that is associated with post-Keynesianism.

Townsend, ‘Optimal Contracts and Competitive Markets with Costly State Verification’, Journal of Economic Theory 22, 1979. 9 See, for instance, Joseph Stiglitz and Andrew Weiss, ‘Credit Rationing in Markets with Imperfect Information’, American Economic Review 71:3, 1981, pp. 393–410; Nobuhiro Kiyotaki and John Moore, ‘Credit Cycles’, Journal of Political Economy 105:2, 1997. 10 Once again, the literature is very broad; see, very selectively, Hayne Leland and David H. Pyle, ‘Informational Asymmetries, Financial Structure and Financial Intermediation’, The Journal of Finance 32, 1977; John Bryant, ‘A Model of Reserves, Bank Runs, and Deposit Insurance’, Journal of Banking and Finance 4, 1980; Douglas Diamond and Philip Dybvig, ‘Bank Runs, Deposit Insurance and Liquidity’, Journal of Political Economy 91, 1983; Douglas Diamond, ‘Financial Intermediation and Delegated Monitoring’, Review of Economic Studies 51, 1984; John H.


pages: 385 words: 111,113

Augmented: Life in the Smart Lane by Brett King

23andMe, 3D printing, additive manufacturing, Affordable Care Act / Obamacare, agricultural Revolution, Airbnb, Albert Einstein, Amazon Web Services, Any sufficiently advanced technology is indistinguishable from magic, Apple II, artificial general intelligence, asset allocation, augmented reality, autonomous vehicles, barriers to entry, bitcoin, blockchain, business intelligence, business process, call centre, chief data officer, Chris Urmson, Clayton Christensen, clean water, congestion charging, crowdsourcing, cryptocurrency, deskilling, different worldview, disruptive innovation, distributed generation, distributed ledger, double helix, drone strike, Elon Musk, Erik Brynjolfsson, Fellow of the Royal Society, fiat currency, financial exclusion, Flash crash, Flynn Effect, future of work, gig economy, Google Glasses, Google X / Alphabet X, Hans Lippershey, Hyperloop, income inequality, industrial robot, information asymmetry, Internet of things, invention of movable type, invention of the printing press, invention of the telephone, invention of the wheel, James Dyson, Jeff Bezos, job automation, job-hopping, John Markoff, John von Neumann, Kevin Kelly, Kickstarter, Kodak vs Instagram, Leonard Kleinrock, lifelogging, low earth orbit, low skilled workers, Lyft, M-Pesa, Mark Zuckerberg, Marshall McLuhan, megacity, Metcalfe’s law, Minecraft, mobile money, money market fund, more computing power than Apollo, Network effects, new economy, obamacare, Occupy movement, Oculus Rift, off grid, packet switching, pattern recognition, peer-to-peer, Ray Kurzweil, RFID, ride hailing / ride sharing, Robert Metcalfe, Satoshi Nakamoto, Second Machine Age, selective serotonin reuptake inhibitor (SSRI), self-driving car, sharing economy, Shoshana Zuboff, Silicon Valley, Silicon Valley startup, Skype, smart cities, smart grid, smart transportation, Snapchat, social graph, software as a service, speech recognition, statistical model, stem cell, Stephen Hawking, Steve Jobs, Steve Wozniak, strong AI, TaskRabbit, technological singularity, telemarketer, telepresence, telepresence robot, Tesla Model S, The Future of Employment, Tim Cook: Apple, trade route, Travis Kalanick, Turing complete, Turing test, uber lyft, undersea cable, urban sprawl, V2 rocket, Watson beat the top human players on Jeopardy!, white picket fence, WikiLeaks

Especially when it becomes very clear that there is little or no representation in government for the largest generation of voters, or where interests of incumbent industries and lobby groups resist technology change, especially in countries like the United States. Advice in health care, financial services and technical areas, along with principles of government, have been predicated for the last 100 years on the concept of information asymmetry—the fact that the government or “adviser” knows something you don’t know. Increasingly that information asymmetry simply doesn’t exist, and so it is getting harder and harder for governments to claim that they are acting in the best interests of the public when the influence of lobby or special interest groups is blatantly obvious. One thing is certain. The disruptions that technology and the Augmented Age bring will be perhaps the most impactful on society’s operation that we’ve seen since the start of the Industrial Revolution in the 1750s.

Whether it is the latest industry data, the latest research or just information about the last stocks or symptoms you looked up on the web, machines will have more data, more immediate access and the ability to have instant recall at anytime day or night. Simply put, for the last 200 years, advisers have worked on the principle of information asymmetry, where they have had better information than their clients. Today, we are at the point where machine intelligence has information asymmetry over advisers, and that’s only going to get more acute and more asymmetrical as time goes on. The only possible hope for human advisers is that they co-opt machine intelligence into their process. The Best Advice Is Real Time At best, an adviser is “just a phone call away”, but at worst is only available by appointment, dependent on availability.

The Best Advice Is Real Time At best, an adviser is “just a phone call away”, but at worst is only available by appointment, dependent on availability. Advice, however, no longer needs to be hinged on access to the adviser as a precursor to whether you can get access to certain information. The first concept we need to challenge is simply that you need to “go to an adviser” to get advice. Advisers have used their information asymmetry previously to insist that unless you come to them, you won’t get the right advice, or they have used asymmetry to price in a premium into the service or product. So if you wanted the right advice, not only did you have to jump through their hoops, go to their branch, office or clinic, but you also had to pay a premium for the best advice, maybe waiting days or even weeks to get to see the best advisers. Your ability to pay, or your access to a specific network, no longer needs to be a factor as to whether you can get good advice on things like your money, health care, fitness, etc.


pages: 511 words: 132,682

Competition Overdose: How Free Market Mythology Transformed Us From Citizen Kings to Market Servants by Maurice E. Stucke, Ariel Ezrachi

affirmative action, Airbnb, Albert Einstein, Andrei Shleifer, Bernie Sanders, Boeing 737 MAX, Cass Sunstein, choice architecture, cloud computing, commoditize, corporate governance, Corrections Corporation of America, Credit Default Swap, crony capitalism, delayed gratification, Donald Trump, en.wikipedia.org, George Akerlof, gig economy, Goldman Sachs: Vampire Squid, Google Chrome, greed is good, hedonic treadmill, income inequality, income per capita, information asymmetry, invisible hand, job satisfaction, labor-force participation, late fees, loss aversion, low skilled workers, Lyft, mandatory minimum, Mark Zuckerberg, market fundamentalism, mass incarceration, Menlo Park, meta analysis, meta-analysis, Milgram experiment, mortgage debt, Network effects, out of africa, payday loans, Ponzi scheme, precariat, price anchoring, price discrimination, profit maximization, profit motive, race to the bottom, Richard Thaler, ride hailing / ride sharing, Robert Bork, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, Shoshana Zuboff, Silicon Valley, Snapchat, Social Responsibility of Business Is to Increase Its Profits, Stanford prison experiment, Stephen Hawking, The Chicago School, The Market for Lemons, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Thomas Davenport, Thorstein Veblen, Tim Cook: Apple, too big to fail, transaction costs, Uber and Lyft, uber lyft, ultimatum game, Vanguard fund, winner-take-all economy

., “How Virgin Flight from Florida Ran Low”; Perry, “Spain Probes Ryanair”; Massey, “Ryanair Ordered to ‘Review’ Fuel Policy”; Perry, “Airline Pilots Reveal”; Smith, “Confessions.” 62.Emma Glanfield, “Eleven Planes Forced to Make Mayday Landings at British Airports Last Year Because They Were Running Out of Fuel,” Daily Mail (London), February 24, 2015, http://www.dailymail.co.uk/news/article-2947077/. 63.Glanfield, “Eleven Planes.” 64.The UK’s competition authority observed that: Buyers may not know, for example, how quality varies across brands. Markets where customers may be unsure about quality include those for professional services, used goods and complex mechanical or electronic products. When, as a result of information asymmetries, customers are unable to form an accurate assessment of product quality (e.g. if they consistently underestimate the probability of product failure), a market may operate inefficiently. Imperfect information about quality can be a particularly severe problem for infrequently purchased goods or goods the quality of which cannot be verified even after purchase—so-called credence goods. OECD, The Role and Measurement of Quality in Competition Analysis, 113 (United Kingdom).

McGregor, “Police Forced to Waste Millions of Taxpayer’s Money Bailing Out Collapsed Private Forensics Firm,” Evolve Politics, February 1, 2018, https://evolvepolitics.com/police-forced-to-waste-millions-of-taxpayers-money-bailing-out-collapsed-private-forensics-firm/. 64.Forensic Science Regulator Annual Report for the period November 2017 –November 2018 (published on March 15, 2019), page 3, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/786137/FSRAnnual_Report_2018_v1.0.pdf. 65.House of Lords Science and Technology Committee, “Forensic Science Inquiry,” https://www.parliament.uk/business/committees/committees-a-z/lords-select/science-and-technology-committee/inquiries/parliament-2017/forensic-science; Science and Technology Select Committee, Forensic Science and the Criminal Justice System: A Blueprint for Change, 3rd Report of Session 2017–19, published May 1, 2019, HL Paper 333, https://publications.parliament.uk/pa/ld201719/ldselect/ldsctech/333/33302.htm. 66.Tom McTague, “George Osborne on Course to Privatise More Public Assets Than Any Chancellor since 1979,” Independent, December 26, 2015, https://www.independent.co.uk/news/uk/politics/george-osborne-on-course-to-sell-off-more-public-assets-than-any-chancellor-for-more-than-30-years-a6786926.html. 67.International Monetary Fund, Fiscal Monitor: Managing Public Wealth (October 2018), 5, https://www.imf.org/en/Publications/FM/Issues/2018/10/04/fiscal-monitor-october-2018. 68.IMF, Fiscal Monitor. 69.Most notable are asymmetric information, uncertainty as to outcome of treatment, and the fact that many social services may be viewed as “uneconomic” or “unquantifiable.” 70.See, for example, “The Mandate: A Mandate from the Government to NHS England,” https://www.gov.uk/government/publications/nhs-mandate-2017-to-2018. 71.In fact, large sums of money allocated for the NHS have actually been spent on private care providers.


pages: 510 words: 120,048

Who Owns the Future? by Jaron Lanier

3D printing, 4chan, Affordable Care Act / Obamacare, Airbnb, augmented reality, automated trading system, barriers to entry, bitcoin, book scanning, Burning Man, call centre, carbon footprint, cloud computing, commoditize, computer age, crowdsourcing, David Brooks, David Graeber, delayed gratification, digital Maoism, Douglas Engelbart, en.wikipedia.org, Everything should be made as simple as possible, facts on the ground, Filter Bubble, financial deregulation, Fractional reserve banking, Francis Fukuyama: the end of history, George Akerlof, global supply chain, global village, Haight Ashbury, hive mind, if you build it, they will come, income inequality, informal economy, information asymmetry, invisible hand, Jaron Lanier, Jeff Bezos, job automation, John Markoff, Kevin Kelly, Khan Academy, Kickstarter, Kodak vs Instagram, life extension, Long Term Capital Management, Marc Andreessen, Mark Zuckerberg, meta analysis, meta-analysis, Metcalfe’s law, moral hazard, mutually assured destruction, Network effects, new economy, Norbert Wiener, obamacare, packet switching, Panopticon Jeremy Bentham, Peter Thiel, place-making, plutocrats, Plutocrats, Ponzi scheme, post-oil, pre–internet, race to the bottom, Ray Kurzweil, rent-seeking, reversible computing, Richard Feynman, Ronald Reagan, scientific worldview, self-driving car, side project, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, Skype, smart meter, stem cell, Steve Jobs, Steve Wozniak, Stewart Brand, Ted Nelson, The Market for Lemons, Thomas Malthus, too big to fail, trickle-down economics, Turing test, Vannevar Bush, WikiLeaks, zero-sum game

In a physical store, you would immediately notice if a cashier eyed you and decided what price you should pay. Differential pricing is worthy of attention only because of its starkness. Even if differential pricing turns out to be rare, the key point is that it’s hard for ordinary people who interact with Siren Servers to get enough context to make the best decisions. If not differential pricing, then some other scheme will appear in order to take advantage of information asymmetry. After all, that is what information asymmetry is for. Waiting for Robin Hood You might expect a compensatory server to always magically appear on cue. Such a server might, for instance, perform cost comparisons so as to alert consumers to differential pricing or other hazards. Sometimes the Internet will indeed produce a service that does really help. An example is Flightfox,4 a service that solicits real people to act as travel agents to help customers plan exceptionally difficult itineraries.

Moral hazard has never met a more efficient amplifier than a digital network. The more influential digital networks become, the more potential moral hazard we’ll see, unless we change the architecture. A First Pass at a Definition A Siren Server, as I will refer to such a thing, is an elite computer, or coordinated collection of computers, on a network. It is characterized by narcissism, hyperamplified risk aversion, and extreme information asymmetry. It is the winner of an all-or-nothing contest, and it inflicts smaller all-or-nothing contests on those who interact with it. Siren Servers gather data from the network, often without having to pay for it. The data is analyzed using the most powerful available computers, run by the very best available technical people. The results of the analysis are kept secret, but are used to manipulate the rest of the world to advantage.

The problem in question is known as the “Market for Lemons,” after the title of the famous paper, which helped earn its author, George Akerlof, a Nobel Prize13 in Economics. The lemons in the paper were not from the lemonade stand we encountered earlier, but were instead crummy used cars for sale. The paper detailed how a prevalence of bad used cars distorted markets through the mechanism of information asymmetry. Buyers worried that sellers knew more about a used car’s problems than they were letting on, which put a pervasive burden on the market, stunted it, and made it less efficient. A truly transparent form of digital market might perhaps offer a reduced occurrence of this sort of degradation. At least that was the hope in the air in the early years of network research, before the advent of Siren Servers.


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The Market for Force: The Consequences of Privatizing Security by Deborah D. Avant

barriers to entry, continuation of politics by other means, corporate social responsibility, failed state, hiring and firing, information asymmetry, interchangeable parts, Mikhail Gorbachev, Nelson Mandela, Peace of Westphalia, principal–agent problem, private military company, profit motive, RAND corporation, rent-seeking, rolodex, The Nature of the Firm, trade route, transaction costs

Furthermore, being part of an organization can Private security and the control of force 47 use and oversee force is delegated, which mediate problems of common agency.23 Williamson adds that internal organizations are more likely to make allowances for quasi-moral involvement.24 He builds on this quasi-moral involvement in his analysis of public versus private provision of sovereign transactions.25 Sovereign transactions (foreign affairs, the military, foreign intelligence, managing the money supply and, possibly, the judiciary) are characterized by particular “contractual hazards” – asset specificity and probity.26 Transactions that are long term, highly incomplete, and require loyalty (to leadership and mission) and integrity are best provided by public bureaucracies.27 Like all relationships of delegation, public bureaucracies are subject to agency slippage, and many have documented the loss of flexibility and bureaucratic disabilities that sometimes arise.28 Market-based solutions may ameliorate these but, so long as the environmental conditions favor hierarchies, at a cost – either opportunistic incentives will increase, convergent expectations will erode, adaptations will not be appropriate, or cost will rise. Studies on privatization in the US have yielded a large body of literature consistent with Williamson’s claims.29 In a widely acclaimed 23 24 25 26 27 28 29 promote convergent expectations, mediate information asymmetry (and the strategic use of it), and has advantages for settling disputes. Ibid., pp. 29, 40. Common agency refers to the situation where principals must solve collective action problems among themselves even as they try to minimize agency slippage. This problem can take the form of multiple principles – where two or more organizationally distinct principals delegate to an agent – or common agency – where a principal is made up of more than one actor.

When mechanisms point in different directions, however, they will “collide and chafe,” presenting actors with imperatives and opportunities that pull them in different directions, portending friction, instability, and change – situations we recognize as less effective control.60 In the next three sections, I develop this argument for how privatization should matter for the control of force in three different situations: (1) when states contract for private delivery of security services, (2) when states regulate security services exports, and (3) when non-state actors finance security services. State contracts for private force How should state contracts with PSCs affect the control over force? A key variable will be the quality of the state and state forces to begin with. As indicated in the previous discussion, economic analyses assume appropriate institutions and focus on expected difficulties with monitoring and information asymmetry that should make the private delivery of sovereign tasks problematic.61 Not all states, though, have such institutions in the first place. Williamson’s description of the necessary circumstances for assuming that states best provide sovereign services corresponds to the environment in what Joel Migdal has called “strong” states – states that are coherent, capable and legitimate.62 60 61 62 See, for instance, Paul Pierson, “When Effect Becomes Cause: Policy Feedback and Political Change,” World Politics 45 (July 1993): 595–628; Paul Pierson, “Increasing Returns, Path Dependence, and the Study of Politics,” American Political Science Review Vol. 94, No. 2 (June 2000): 251–67; Douglass North, Institutions, Institutional Change and Economic Performance (Cambridge: Cambridge University Press, 1990); Robert L.

Given the trade-off between their ability to direct the bureaucracy to respond and their ability to only select from contractors, strong states risk paying more for private military services or losing some of their capacity to monitor and oversee the provision of these services. Depending on the level of competition and the degree to which the government specifies the details of security services, states may pay more for contractors to supply sovereign services than they would for their militaries, or be more likely to suffer problems in monitoring and information asymmetry that should increase the slippage between government goals and policy on the ground – in other words, privatizing sovereign services in strong states is likely to lead to some functional loss.64 When new threats arise and/or PSCs offer services that the state’s military is not set up to deliver, PSCs may offer short run benefits. Over the long term, though, functional control in strong states would be better served by encouraging bureaucratic change than by relying on PSCs.


The Data Journalism Handbook by Jonathan Gray, Lucy Chambers, Liliana Bounegru

Amazon Web Services, barriers to entry, bioinformatics, business intelligence, carbon footprint, citizen journalism, correlation does not imply causation, crowdsourcing, David Heinemeier Hansson, eurozone crisis, Firefox, Florence Nightingale: pie chart, game design, Google Earth, Hans Rosling, information asymmetry, Internet Archive, John Snow's cholera map, Julian Assange, linked data, moral hazard, MVC pattern, New Journalism, openstreetmap, Ronald Reagan, Ruby on Rails, Silicon Valley, social graph, SPARQL, text mining, web application, WikiLeaks

Because local newspapers have this direct impact in their neighborhood and sources become digitalized, a journalist must know how to find, analyze and visualize a story from data. — Jerry Vermanen, NU.nl A Remedy for Information Asymmetry Information asymmetry—not the lack of information, but the inability to take in and process it with the speed and volume that it comes to us—is one of the most significant problems that citizens face in making choices about how to live their lives. Information taken in from print, visual, and audio media influence citizens’ choices and actions. Good data journalism helps to combat information asymmetry. — Tom Fries, Bertelsmann Foundation An Answer to Data-Driven PR The availability of measurement tools and their decreasing prices—in a self-sustaining combination with a focus on performance and efficiency in all aspects of society—have led decision-makers to quantify the progresses of their policies, monitor trends, and identify opportunities.


pages: 137 words: 36,231

Information: A Very Short Introduction by Luciano Floridi

agricultural Revolution, Albert Einstein, bioinformatics, carbon footprint, Claude Shannon: information theory, conceptual framework, double helix, Douglas Engelbart, Douglas Engelbart, George Akerlof, Gordon Gekko, industrial robot, information asymmetry, intangible asset, Internet of things, invention of writing, John Nash: game theory, John von Neumann, Laplace demon, moral hazard, Nash equilibrium, Nelson Mandela, Norbert Wiener, Pareto efficiency, phenotype, Pierre-Simon Laplace, prisoner's dilemma, RAND corporation, RFID, Thomas Bayes, Turing machine, Vilfredo Pareto

Many games are based on incomplete information, with at least one player lacking information about at least one of the features (a)-(c). An interesting class of incomplete information games is based on the concept of asymmetric information. Asymmetric information Suppose we treat the interactions between John and his insurer, called Mark, as a game. We know that John is very absent-minded (he tends to forget to switch off the lights of his car) and not entirely trustworthy (he tends to lie and likes to blame his wife for his mistakes). Mark, however, does not have all this information about John. So this is a case of asymmetric information: one player has relevant information that the other player misses. Mark is underinformed, and this can lead to two well-known types of problems: moral hazard and adverse selection. An adverse selection scenario is one in which an absent-minded player like John is more likely to buy an insurance for his car battery because the underinformed player, like Mark, cannot adjust his response to him (e.g. by negotiating a higher premium) due to his lack of information (this is the relevant point here; Mark might also be bound by legal reasons even if he had enough information).

In Chapter 1, we saw how human society has come to depend, for its proper functioning and growth, on the management and exploitation of information processes. Unsurprisingly, in recent years the scientific study of economic information has bloomed. In 2001, George Akerlof (born 1940), Michael Spence (born 1943), and Joseph E. Stiglitz (born 1943) were awarded what is known as the Nobel Prize in Economics `for their analyses of markets with asymmetric information'. Indeed, information-theoretical approaches to economic topics have become so popular and pervasive that one may be forgiven for mistaking economics for a branch of information science. In the rest of this chapter, we will look at some essential ways in which economic information is used. For the sake of simplicity, and following current trends, the presentation will be framed in game-theoretic terms.

Because of a known asymmetry in information, underinformed players tend to over-react. Mark will ask a higher premium from every customer because some of them will be like John. There arises a need for `good' players to inform the underinformed players about themselves (indicate their `types') and thus counterbalance the asymmetric relation. We have already encountered Spence and Stiglitz. Each of them developed an influential analysis of how asymmetric information might be overcome: signalling and screening, respectively. Signalling may be described in terms of derivative information (see Chapter 2): the informed player provides reliable information which derivatively indicates the player's type to the underinformed player. Since signalling has been hugely influential in the literature on contract theory, here is the textbook example, slightly adapted.


pages: 436 words: 98,538

The Upside of Inequality by Edward Conard

affirmative action, Affordable Care Act / Obamacare, agricultural Revolution, Albert Einstein, assortative mating, bank run, Berlin Wall, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Climatic Research Unit, cloud computing, corporate governance, creative destruction, Credit Default Swap, crony capitalism, disruptive innovation, diversified portfolio, Donald Trump, en.wikipedia.org, Erik Brynjolfsson, Fall of the Berlin Wall, full employment, future of work, Gini coefficient, illegal immigration, immigration reform, income inequality, informal economy, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), invention of the telephone, invisible hand, Isaac Newton, Jeff Bezos, Joseph Schumpeter, Kenneth Rogoff, Kodak vs Instagram, labor-force participation, liquidity trap, longitudinal study, low skilled workers, manufacturing employment, Mark Zuckerberg, Martin Wolf, mass immigration, means of production, meta analysis, meta-analysis, new economy, offshore financial centre, paradox of thrift, Paul Samuelson, pushing on a string, quantitative easing, randomized controlled trial, risk-adjusted returns, Robert Gordon, Ronald Reagan, Second Machine Age, secular stagnation, selection bias, Silicon Valley, Simon Kuznets, Snapchat, Steve Jobs, survivorship bias, The Rise and Fall of American Growth, total factor productivity, twin studies, Tyler Cowen: Great Stagnation, University of East Anglia, upwardly mobile, War on Poverty, winner-take-all economy, women in the workforce, working poor, working-age population, zero-sum game

The study concludes, “The growth in modern retail, characterized by larger chains of larger establishments . . . is raising wage rates relative to traditional mom-and-pop retail stores.”32 There’s likewise little evidence that business has increasingly benefited from using asymmetrical information to gain price advantages. It is true that companies like Google have proprietary information, which gives them an advantage relative to their competitors. But it’s hard to see how it uses that information to the net disadvantage rather than the net benefit of the vast majority of its customers. Customers freely give their information to Google to gain the benefits Google provides. It’s hard to believe they would do that if the costs outweighed the benefits. Given the vast quantities of information Google and the Internet provide to the public, it is hard to believe that the asymmetrical informational advantages of sellers over buyers are growing rather than declining. Today customers are able to use the Internet to second-guess doctors, car salesmen, auto mechanics, real estate brokers, and lenders—the transactions where the middle and working classes have traditionally faced significant asymmetrical informational disadvantages.

Today customers are able to use the Internet to second-guess doctors, car salesmen, auto mechanics, real estate brokers, and lenders—the transactions where the middle and working classes have traditionally faced significant asymmetrical informational disadvantages. The Internet allows us to check the fair price of nearly everything. That’s not to deny the existence of isolated cases of oligopolistic pricing power, asymmetrical informational disadvantages, or even monopsony. They exist, to be sure. Rather, it is hard to believe that the frequency and scope of these misallocations have risen to the trillion-dollar scale necessary to account for the increase in income inequality that we see today. Were that the case, it is doubtful that the growth of the United States would be accelerating relative to other high-wage economies as it has.

For a variety of reasons, the apparent increase in corporate profits seems unlikely to stem from a permanent decline in competitiveness due to a rise in oligopolistic pricing power, monopsony, or asymmetrical information. In fact, there is little reason to believe competitiveness has permanently declined but for rising profitability. The long-term rise in profitability seems confined to the IT-related sector, where survival bias hides the true return on investment and disruptive turmoil, near-zero incremental costs, and free products indicate fierce competition and anything but business as usual. Moreover, the long-term rise in profitability is likely overstated by a temporary rise in profitability in the aftermath of the financial crisis. Misdiagnosis of these trends can lead to solutions that do more harm than good. If asymmetrical information, oligopolies, and monopsony are not the source of rising corporate profits, then the policies that would solve those issues will do harm to the economy.


Investment: A History by Norton Reamer, Jesse Downing

activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, asset allocation, backtesting, banking crisis, Berlin Wall, Bernie Madoff, break the buck, Brownian motion, business cycle, buttonwood tree, buy and hold, California gold rush, capital asset pricing model, Carmen Reinhart, carried interest, colonial rule, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, debt deflation, discounted cash flows, diversified portfolio, dogs of the Dow, equity premium, estate planning, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, family office, Fellow of the Royal Society, financial innovation, fixed income, Gordon Gekko, Henri Poincaré, high net worth, index fund, information asymmetry, interest rate swap, invention of the telegraph, James Hargreaves, James Watt: steam engine, joint-stock company, Kenneth Rogoff, labor-force participation, land tenure, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, margin call, means of production, Menlo Park, merger arbitrage, money market fund, moral hazard, mortgage debt, Myron Scholes, negative equity, Network effects, new economy, Nick Leeson, Own Your Own Home, Paul Samuelson, pension reform, Ponzi scheme, price mechanism, principal–agent problem, profit maximization, quantitative easing, RAND corporation, random walk, Renaissance Technologies, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Sand Hill Road, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spinning jenny, statistical arbitrage, survivorship bias, technology bubble, The Wealth of Nations by Adam Smith, time value of money, too big to fail, transaction costs, underbanked, Vanguard fund, working poor, yield curve

Contrary to common conception, this was not passed out of a desire for reform; rather, it was passed prior to the collapse of the firm and was meant to aid and insulate the South Sea Company from competition for investors’ funds by preventing other smaller entities from marketing shares, as they did not possess the required charter.9 Nonetheless, the Bubble Act came to be used to regulate these early companies and made them less likely to do widespread harm. Ultimately, the South Sea Bubble reminded investors of exploitable information asymmetries between the body of shareholders and management, and it drove many to approach the task of allocating money with greater scrutiny and diligence. In the end, of course, the fraudulent activities of Enron and Bernie Madoff are echoes of this forerunner some three centuries earlier. Adam Smith, the oft-cited “father of modern economics,” took an entirely adversarial view of the structure of the joint-stock companies The Democratization of Investment 69 and the notion of investment management more broadly.

So, they worked together to get to the bottom of it, only to find that much of the earlier work was rife with inconsistencies and ambiguity.12 They determined that new work was required, and that was precisely what they produced, publishing their results in the American Economic Review in 1958 with a paper entitled “The Cost of Capital, Corporation Finance and the Theory of Investment.”13 The result was the Modigliani-Miller theorem, which was among the work for which Merton Miller would win the Nobel Prize in Economics in 1990 and would help Modigliani win the 1985 prize (along with his work on the life-cycle hypothesis).14 The Modigliani-Miller theorem first established several conditions under which their results would hold: no taxes or bankruptcy costs, no asymmetric information, a random walk pricing process, and an efficient market. If these conditions hold, the value of a firm should be unaffected by the capital structure it adopts. In other words, the sum of the value of the debt and the value of the equity should remain constant regardless of how 234 Investment: A History that sum is distributed across debt and equity individually. Given that these assumptions do not hold perfectly in the real world, there have been reformulations of the theorem to account for taxes.


pages: 588 words: 131,025

The Patient Will See You Now: The Future of Medicine Is in Your Hands by Eric Topol

23andMe, 3D printing, Affordable Care Act / Obamacare, Anne Wojcicki, Atul Gawande, augmented reality, bioinformatics, call centre, Clayton Christensen, clean water, cloud computing, commoditize, computer vision, conceptual framework, connected car, correlation does not imply causation, creative destruction, crowdsourcing, dark matter, data acquisition, disintermediation, disruptive innovation, don't be evil, Edward Snowden, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Firefox, global village, Google Glasses, Google X / Alphabet X, Ignaz Semmelweis: hand washing, information asymmetry, interchangeable parts, Internet of things, Isaac Newton, job automation, Julian Assange, Kevin Kelly, license plate recognition, lifelogging, Lyft, Mark Zuckerberg, Marshall McLuhan, meta analysis, meta-analysis, microbiome, Nate Silver, natural language processing, Network effects, Nicholas Carr, obamacare, pattern recognition, personalized medicine, phenotype, placebo effect, RAND corporation, randomized controlled trial, Second Machine Age, self-driving car, Silicon Valley, Skype, smart cities, Smart Cities: Big Data, Civic Hackers, and the Quest for a New Utopia, Snapchat, social graph, speech recognition, stealth mode startup, Steve Jobs, the scientific method, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, Turing test, Uber for X, uber lyft, Watson beat the top human players on Jeopardy!, WikiLeaks, X Prize

Still, however, the majority of biomedical publications are inaccessible without a subscription, and purchase of a single article is ridiculously expensive (often $30–$50). We’ll come back to this issue and the need for open access later, but at least for now an abstract, or summary, of each article is usually available. There is a common thread about Goodsell and the Lepps that is fundamental—information asymmetry. Doctors have all the data, information, and knowledge. Patients can remain passive or ignorant of their medical information, or, if they choose to be active, they typically have to call repeatedly or beg to get their data, such as the results of laboratory tests or a scan. Before it can change, we have to deal with some entrenched clinical terms and practices that exemplify the problem.

The typical response from the medical profession for this anomaly is that patients cannot understand the information or will get terribly confused and anxious without proper context and knowledge. Only with spoon-feeding by doctors and health care professionals will these concerns be eschewed. There is also the more self-serving fear that data access might facilitate or even stimulate malpractice litigation. This deep-seated defense of information asymmetry, a patent outgrowth of profound paternalism, will ultimately prove to be untenable.3,4 The digitization of medical information, and the way it will naturally flow to individuals, will drive information parity and apposite ownership in the future. That certainly isn’t how it works now. Ironically, when you’re alive, the medical community owns your records, lab tests, scans, and biopsy and tissue specimens.

identity theft stemming from, 226 importance of knowing, 149–152 lab tests, 150–151 of modern health care, 139–141 opacity of the market, 141–142 open access to biomedical publications, 209–211 outsourcing health care, 147–149 remote monitoring versus hospitalization, 192 smartphone information spread improving, 51 smartphones and diagnostic apps, 8 Theranos blood tests, 106–107 transparency, 151–158 waste in health care expenditures, 142–147 Couric, Katie, 61 Coursera, 197 Court Ventures, 224 The Creative Destruction of Medicine (Topol), 13 Creativity, 45, 51–53 Crowdsourcing, 153, 206, 212–213, 269 Cures for disease, 238 Cystic fibrosis, 203, 205 Cytomegalovirus (CMV), 262 Daschle, Tom, 169 Data analysis via smartphone, 6–7 Data brokers, 223–225, 243 Data collection and management access and ownership, 22, 125–127, 281–282 clinical trials, 214–215 DNA database, 71–72 Global Burden of Disease, 257–258 information asymmetry, 26–27 interoperability and fragmentation of data, 136–138 mapping malaria spread data, 262 medical device hacking, 230–231 medications information, 132–134 MOOMs, 204–207 ownership of your body’s data, 281–282 patient-generated data, 135–136 physicians transferring responsibilities to patients, 178–179 predictive analysis, 240–246 security and privacy concerns, 220–235 supercomputer manipulation, 248–249 See also Records, medical Data mining, 214, 239, 243 Data pooling, 4–6, 205 Datacoup, 200 DataDonors, 200 Davis, Ernest, 241 Dawson, Nick, 137 De novo mutations, 85 Death cancer, 268 Global Burden of Disease, 258(fig.)


pages: 389 words: 98,487

The Undercover Economist: Exposing Why the Rich Are Rich, the Poor Are Poor, and Why You Can Never Buy a Decent Used Car by Tim Harford

Albert Einstein, barriers to entry, Berlin Wall, business cycle, collective bargaining, congestion charging, Corn Laws, David Ricardo: comparative advantage, decarbonisation, Deng Xiaoping, Fall of the Berlin Wall, George Akerlof, information asymmetry, invention of movable type, John Nash: game theory, John von Neumann, Kenneth Arrow, Kickstarter, market design, Martin Wolf, moral hazard, new economy, Pearl River Delta, price discrimination, Productivity paradox, race to the bottom, random walk, rent-seeking, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, sealed-bid auction, second-price auction, second-price sealed-bid, Shenzhen was a fishing village, special economic zone, spectrum auction, The Market for Lemons, Thomas Malthus, trade liberalization, Vickrey auction

If buyers and sellers were both ignorant about whether a car was a lemon or a peach there would be no problem: buyers would be willing to pay up to $2,500 for a car that had a 50/50 chance of being a peach; sellers, equally ignorant, would be willing to accept any offer over $2,000. Of course they will strike a deal. It’s only when one negotiator knows too much and the other too little that agreement becomes impossible. Because the problem is caused by an uneven grasp on the facts, economists tend to call it “asymmetric information.” Ripping the “world of truth” apart, this imbalance in information can completely destroy perfect markets. Inside information and health insurance Akerlof ’s “lemons” problem would be troublesome enough if it applied only to secondhand cars, furnished accommodations, and dubious restaurants in the world’s beauty spots. Unfortunately, it also damages the market for more important goods—most notably, health insurance.

Jerome, I suspect myself to be a lemon, I’d be well • 113 • T H E U N D E R C O V E R E C O N O M I S T advised to buy all the medical insurance going. On the other hand, if you feel fine and all your ancestors lived to be a hundred, then perhaps you will buy medical insurance only if it is extremely cheap. After all, you hardly expect to need it. Thanks to Akerlof ’s proof that markets whose players have asymmetric information are doomed, we know that the insurance market may disappear just as the market for good-quality used cars did. You, whose body is a succulent peach, will not find the typical insurance package a good deal; while Mr. Jerome and I, whose bodies are bitter little lemons, will embrace the typical insurance package with open arms. The result is that the insurance company only sells insurance to people who are confident they will use it.

To return to Akerlof ’s original example of the market for secondhand cars, both buyers and sellers have an incentive to try to fix the problem: sellers want to get a decent price for their peaches, and buyers want to buy peaches. If inside information is wrecking the chance of a mutually beneficial deal, both sides will want to find a way to bridge the information gap. Akerlof won the Nobel Prize in 2001 for his work on the problem of asymmetric information; he shared it with two economists who proposed partial solutions. Michael Spence argued that the person with the information might be able to communicate it in a way that the person without the information could trust. Joe Stiglitz looked at the problem in reverse and explored ways in which the person without the information might uncover it. Spence realized that it wasn’t enough for a seller of peaches simply to say, “All my cars are peaches,” because talk is cheap.


pages: 196 words: 55,862

Riding for Deliveroo: Resistance in the New Economy by Callum Cant

Airbnb, call centre, collective bargaining, deskilling, Elon Musk, future of work, gig economy, housing crisis, illegal immigration, information asymmetry, invention of the steam engine, Mark Zuckerberg, means of production, new economy, Pearl River Delta, race to the bottom, ride hailing / ride sharing, sharing economy, Silicon Valley, strikebreaker, union organizing, Winter of Discontent, women in the workforce

For an analysis of how this kind of cutting-edge organizing and inquiry actually took place in the early tech industry, see E. Brophy (2006) System error: labour precarity and collective organizing at Microsoft. Canadian Journal of Communication 31. 18. R. Edwards (1979) Contested terrain: the transformation of the workplace in the twentieth century. Heinemann. 19. A. Rosenblat, and L. Stark (2016) Algorithmic labor and information asymmetries: a case study of Uber’s drivers. International Journal of Communication 10. 20. D. Feenan, (2018) The birth of the strike. Jacobin. http://jacobinmag.com/2018/05/strikes-history-london-sailors-coal-heavers. 21. Marx, Capital, volume 1, p. 712. 22. W. Benbow (1832) Grand national holiday and congress of the productive classes. Marxists.org. www.marxists.org/history/england/chartists/benbow-congress.htm. 23.

Edwards (1979) Contested terrain: the transformation of the workplace in the twentieth century. Heinemann. 2. F. W. Taylor (2014) The principles of scientific management. Martino Publishing. 3. H. Braverman (1975) Labor and monopoly capital: the degradation of work in the twentieth century. Monthly Review Press. 4. K. Marx (1967) Capital, volume I, 4th edn. International Publishers, p. 313. 5. A. Rosenblat, and L. Stark (2016) Algorithmic labor and information asymmetries: a case study of Uber’s drivers. International Journal of Communication 10. 6. H. Garlick (2017) Dark kitchens: is this the future of takeaway? Financial Times. www.ft.com/content/d23c44fe-4b0b-11e7-919a-1e14ce4af89b. 7. S. Usborne (2018) What is the true human cost of your £5 hand car wash? Guardian. www.theguardian.com/world/2018/jul/16/true-human-cost-5-pound-hand-car-wash-modern-slavery. 8.


pages: 398 words: 105,032

Soonish: Ten Emerging Technologies That'll Improve And/or Ruin Everything by Kelly Weinersmith, Zach Weinersmith

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 23andMe, 3D printing, Airbnb, Alvin Roth, augmented reality, autonomous vehicles, connected car, double helix, Elon Musk, en.wikipedia.org, Google Glasses, hydraulic fracturing, industrial robot, information asymmetry, Kickstarter, low earth orbit, market design, megastructure, microbiome, moral hazard, multiplanetary species, orbital mechanics / astrodynamics, personalized medicine, placebo effect, Project Plowshare, QR code, Schrödinger's Cat, self-driving car, Skype, stem cell, Tunguska event

By now, we’re all used to the idea that so-and-so remembers your birthday because Facebook told her to, but what if it’s more than just birthdays? There’s something off-putting about a world where a lot of someone’s working knowledge of you is externalized and projected onto a heads-up display. And if you don’t have AR glasses, there’s a tremendous information asymmetry between you and the people who do have them. Since information asymmetry is a serious matter in warfare (especially so in modern warfare), one idea is to give this sort of software to peacekeepers. Imagine if a soldier’s job is to police a village. It’d help if he had glasses that could recognize faces and display stats on his heads-up display. He’s now a soldier who remembers every villager’s name and knows every villager’s needs, not to mention his religion, politics, and friendship networks.

., 81 homosexuality, 310 house-building factory, 135 houses: programmable, 126 reconfigurable, 109–11 housing, 134–37, 157 complexity of, 137 inspection of, 145–46 Howard Hughes Medical Institute, 212 Hull, Richard, 80, 82, 84, 92 human genome, 214, 234–35 Human Genome Project, 220 Human Metabolome Database, 244 Huntington’s disease, 196n, 237 Hussein, Saddam, 48, 49 hydraulic fracturing (“fracking”), 99 “Hydrocolloid Printing: A Novel Platform for Customized Food Production” (2009 paper), 162 hydrogen, 4, 73–76, 78, 79, 94, 208–9 hydrogen bombs, 98, 100 hydrogen sulfide, 327 HygroScope, 104 hypertension, 246 hypocholesterolemia, 246 hypothalamus, 189 Hypurin, 198n Ice Age, 223 iGEM (International Genetically Engineered Machine), 216 IKEA, 129, 137 Illinois, University of: at Urbana-Champaign, 182 Veterinary School at, 184 Illusio, 185 immune system, 207, 238, 241–42 organ transplants and, 258–59 immunosuppressive drugs, 258–59, 275 immunotherapy, 242 income distribution, 154 Industrial Revolution, 154 inertial confinement fusion, 86–87 infinite universes, 329, 330 information asymmetry, 181 Innovega, 176 Instagram, 247, 250 Institute of Advanced Architecture of Catalonia, 151 insulin, 198, 207 insurance, 250 Interactive Robogami, 108 international arms trade, 48 International Space Station, 15–16, 41, 42–43 Internet, 109, 122, 216, 262, 269 intracortical neural recording, 295–99 Iowa State University, 179 iPhone, 216 Iraq, 48, 49–50 iron, 54 irritable bowel syndrome, 206 isopropanol, 208–9 isotopes, 73–74 ITER (International Thermonuclear Experimental Reactor), 88–89, 91–94 ivacaftor, 236, 248 Japan, 136 JAXA (Japan Aerospace Exploration Agency), 65 J.


pages: 561 words: 157,589

WTF?: What's the Future and Why It's Up to Us by Tim O'Reilly

4chan, Affordable Care Act / Obamacare, Airbnb, Alvin Roth, Amazon Mechanical Turk, Amazon Web Services, artificial general intelligence, augmented reality, autonomous vehicles, barriers to entry, basic income, Bernie Madoff, Bernie Sanders, Bill Joy: nanobots, bitcoin, blockchain, Bretton Woods, Brewster Kahle, British Empire, business process, call centre, Capital in the Twenty-First Century by Thomas Piketty, Captain Sullenberger Hudson, Chuck Templeton: OpenTable:, Clayton Christensen, clean water, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, computer vision, corporate governance, corporate raider, creative destruction, crowdsourcing, Danny Hillis, data acquisition, deskilling, DevOps, Donald Davies, Donald Trump, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Filter Bubble, Firefox, Flash crash, full employment, future of work, George Akerlof, gig economy, glass ceiling, Google Glasses, Gordon Gekko, gravity well, greed is good, Guido van Rossum, High speed trading, hiring and firing, Home mortgage interest deduction, Hyperloop, income inequality, index fund, informal economy, information asymmetry, Internet Archive, Internet of things, invention of movable type, invisible hand, iterative process, Jaron Lanier, Jeff Bezos, jitney, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Kevin Kelly, Khan Academy, Kickstarter, knowledge worker, Kodak vs Instagram, Lao Tzu, Larry Wall, Lean Startup, Leonard Kleinrock, Lyft, Marc Andreessen, Mark Zuckerberg, market fundamentalism, Marshall McLuhan, McMansion, microbiome, microservices, minimum viable product, mortgage tax deduction, move fast and break things, move fast and break things, Network effects, new economy, Nicholas Carr, obamacare, Oculus Rift, packet switching, PageRank, pattern recognition, Paul Buchheit, peer-to-peer, peer-to-peer model, Ponzi scheme, race to the bottom, Ralph Nader, randomized controlled trial, RFC: Request For Comment, Richard Feynman, Richard Stallman, ride hailing / ride sharing, Robert Gordon, Robert Metcalfe, Ronald Coase, Sam Altman, school choice, Second Machine Age, secular stagnation, self-driving car, SETI@home, shareholder value, Silicon Valley, Silicon Valley startup, skunkworks, Skype, smart contracts, Snapchat, Social Responsibility of Business Is to Increase Its Profits, social web, software as a service, software patent, spectrum auction, speech recognition, Stephen Hawking, Steve Ballmer, Steve Jobs, Steven Levy, Stewart Brand, strong AI, TaskRabbit, telepresence, the built environment, The Future of Employment, the map is not the territory, The Nature of the Firm, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thomas Davenport, transaction costs, transcontinental railway, transportation-network company, Travis Kalanick, trickle-down economics, Uber and Lyft, Uber for X, uber lyft, ubercab, universal basic income, US Airways Flight 1549, VA Linux, Watson beat the top human players on Jeopardy!, We are the 99%, web application, Whole Earth Catalog, winner-take-all economy, women in the workforce, Y Combinator, yellow journalism, zero-sum game, Zipcar

But if the seller of a good can learn the buyer’s willingness-to-pay, he can make the buyer a take-it-or-leave it offer that will extract all of his surplus.” If the growing complaints of Uber drivers about lower fares, too many competing drivers, and longer wait times between pickups are any indication, Uber is optimizing for passengers and for its own profitability by extracting surplus from drivers. Despite the information asymmetry in favor of the platforms, I suspect that, over time, driver wages will need to increase at some rate that is independent of the simple supply and demand curves that characterize Uber and Lyft’s algorithms today. Even if there are enough drivers, the quality of drivers deeply influences the customer experience. Driver turnover is a key metric. As long as there are lots of people willing to try working for the service, it is possible to treat drivers as a disposable commodity.

Drivers must show up to work with much less perfect knowledge of that demand and the potential income they can derive from it. Michael Spence, George Akerlof, and Joseph Stiglitz received the Nobel Memorial Prize in Economics in 2001 precisely for their analysis in the 1970s of the ways that the efficient market hypothesis, so central to much economic thinking, breaks down in the face of asymmetric information. Algorithmically derived knowledge is a new source of asymmetric market power. Hal Varian noted this problem in 1995, writing in a paper called “Economic Mechanism Design for Computerized Agents” that “to function effectively, a computerized agent has to know a lot about its owner’s preferences: e.g., his maximum willingness-to-pay for a good. But if the seller of a good can learn the buyer’s willingness-to-pay, he can make the buyer a take-it-or-leave it offer that will extract all of his surplus.”


pages: 225 words: 61,388

Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa by Dambisa Moyo

affirmative action, Asian financial crisis, Bob Geldof, Bretton Woods, business cycle, buy and hold, colonial rule, correlation does not imply causation, credit crunch, diversification, diversified portfolio, en.wikipedia.org, European colonialism, failed state, financial innovation, financial intermediation, Hernando de Soto, income inequality, information asymmetry, invisible hand, Live Aid, M-Pesa, market fundamentalism, Mexican peso crisis / tequila crisis, microcredit, moral hazard, Ponzi scheme, rent-seeking, Ronald Reagan, sovereign wealth fund, The Chicago School, trade liberalization, transaction costs, trickle-down economics, Washington Consensus, Yom Kippur War

In Zambia, as in other African countries where micro-finance has started to blossom, the risk of lending to the most risky is often reduced through joint liability – the notion that members of a group of borrowers are all liable for any loans that a micro-finance lender makes to them. Consider again a group of borrowers in a small rural village, where the lender has virtually no information on the individual borrowers. Joint liability gets around this information asymmetry in a number of ways. When forming their groups, borrowers have an incentive at the onset to match themselves with other good borrowers, and exclude those known to be high-risk. Naturally, this self-selection mechanism helps the lender screen the borrowers and reduce the risk of default. Joint liability also addresses the moral hazard lenders typically face – that is, the risk that once a loan is made, once the borrower has secured the cash, she defaults.

This type of lending to the poor is criticized as loan-sharking (charging punitive and exorbitant rates), as fuelling Ponzi schemes (borrowing from one lender to pay off another) and as simply supporting reckless consumption. However, with ever-increasing numbers of micro-lenders, and growing participation in this type of lending, the interest rates charged inevitably become lower and, in this sense, more competitive. As to the Ponzi scheme criticism, the objection merely points to the need for more information concerning borrowers – who’s good and who’s bad (which, by the way, is exactly the information asymmetry that the Grameen model mitigates). And on the issue of consumption versus investment, this applies to any loan, any time, anywhere. The important point, not to be overlooked, is that the previously unbankable and excluded poor are now part of a functioning financial dynamic. With this comes a culture of borrowing and repayment crucial for financial development in a well-oiled successful economy.


pages: 239 words: 69,496

The Wisdom of Finance: Discovering Humanity in the World of Risk and Return by Mihir Desai

activist fund / activist shareholder / activist investor, Albert Einstein, Andrei Shleifer, assortative mating, Benoit Mandelbrot, Brownian motion, capital asset pricing model, carried interest, Charles Lindbergh, collective bargaining, corporate governance, corporate raider, discounted cash flows, diversified portfolio, Eugene Fama: efficient market hypothesis, financial innovation, follow your passion, George Akerlof, Gordon Gekko, greed is good, housing crisis, income inequality, information asymmetry, Isaac Newton, Jony Ive, Kenneth Rogoff, longitudinal study, Louis Bachelier, moral hazard, Myron Scholes, new economy, out of africa, Paul Samuelson, Pierre-Simon Laplace, principal–agent problem, Ralph Waldo Emerson, random walk, risk/return, Robert Shiller, Robert Shiller, Ronald Coase, Silicon Valley, Steve Jobs, Thales and the olive presses, Thales of Miletus, The Market for Lemons, The Nature of the Firm, The Wealth of Nations by Adam Smith, Tim Cook: Apple, transaction costs, zero-sum game

The problem has two dimensions—first, they may be motivated to help us but they undoubtedly have their own agenda (providing for their own families, the desire to leave work early); second, we can’t always know if they’re working on our behalf—we simply can’t watch them all the time and they may know much more than we do (Do I really know the quality of concrete they used in my home? Do I really know if I need that MRI? Or, who owns that MRI center?). Now imagine that same problem on a much larger scale, with the trillions of dollars invested in companies. In all these companies, shareholders can’t monitor managers, and managers know much more about what is going on than shareholders ever could—that’s called informational asymmetry. How do you know if Tim Cook has the right strategy? How do you know how hard Tim Cook is working? There simply isn’t any way to know those things definitively. And managers aren’t evil, but they sometimes have their own personal agendas, which may not be coincident with those of the owners. Might Tim Cook build a new headquarters at One Infinite Loop with shareholder funds that is much nicer than required so he can enjoy it and enjoy the adulation of his employees and colleagues?

See also annuities aggregate outcomes, 21, 25, 30–31 chance and randomness, 21–22 contract of bottomry, 23 deductibles, 29 disorder and chaos, 34 families and, 29–30 history of, 22–24 Independent Order of Odd Fellows, 24 mandate, 29 modern image of, 22 risk aversion and diminishing marginal utility of wealth, 166–67 Roman burial societies, 23–24 “rules of jettison” or law of general average, 23 witchcraft and, 24–25 investors CEO deaths, reaction to, 78, 80 diffuse ownership, 78, 81, 82 informational asymmetry, 79 pension and endowment funds, 82 Ishiguro, Kazuo, 9, 133 J James, William 15 Jefferson, Thomas, 139–40 Jensen, Michael, 137–38 Johnson, Samuel, 7, 59, 74 “On the Death of Dr. Robert Levet,” 68–69 Journal of Law and Economics, 115 Joyce, James, 91–92, 161 Jura, 128 K Kafka, Franz, 47 Kant, Immanuel, 154–55 Keynes, John Maynard, 51 Kirshner, Julius, 103 Klein, Francesca, 101 Koestler, Arthur, 128 Koons, Jeff, xi, 8, 127, 129–31, 137, 140–41 Celebration series, 140 effective use of leverage, 140–41 Play-Doh, 129 Popeye, 141 L Laplace, Pierre-Simon, 20 LeFevre, Gregg, 174 Lehman Brothers insolvency, 147–48 Let’s Make a Deal (TV show), 16 leverage, 8 benefits and drawbacks, 123–26, 135 Bentham and Smith conflict on, 121–22 “bonus” of leverage, 137–38 debt overhang, 132–35 definition, 123–24 leveraged buyout, 127 risk and return, 125–27 static trade-off theory, 126 leverage, personal and artistic, 127–30 commitment device, 131, 137–40 connection to debt overhang, 132–35 degree of leverage, 130–32 effective use, 138–39 failure and rebirth, 149–50 life-cycle hypothesis, 135–36 role of reputation, 139–40 Levin, Jerry, 108–11 Levine, Joseph, 93–94 Little Feat, 99 Luna, Elle, 90–91 M Macfarlane, Alan, 24 Mad Max (film), 54–55 Maltese Falcon, The (Hammett), 11 Mann, Bruce, 143, 145, 147 Mao Zedong, 67 Marcus, Steven, 11 Mars, Kenneth, 93 Mariani, Paul, 33 McNamee, Roger, 108 Melville, Herman, 46–49 Merchant of Venice, The (Shakespeare), 8, 120 (illus.), 122–23 mergers, 8 AOL–Time Warner merger mistakes, 109–12 asymmetric mergers (bolt-on acquisitions), 111 Ford Motor and Firestone Tire partnership, 117–18 General Motors and Fisher Body merger, 113–17 Hewlett Packard and Autonomy acquisition, 109 integration planning, 110 mergers of equals, 111 serial acquirers, 111 synergies, 109–10 Merton, Robert, 40 Miller, Alice, 95 Milton, John, xi, 7, 59, 68–69, 74 “When I Consider How My Light Is Spent,” 70–71 Miracle Worker, The (film, play), 96 Miranda, Lin-Manuel, 75 Molho, Anthony, 103 Monte Dei Paschi di Siena, 100 Monte delle doti, 101–4 “Monty Hall” problem, 16 moral hazard, 28–30 Morris, Robert, 142 career, 143–45 financier of the revolution, 143 relative to J.


pages: 448 words: 117,325

Click Here to Kill Everybody: Security and Survival in a Hyper-Connected World by Bruce Schneier

23andMe, 3D printing, autonomous vehicles, barriers to entry, bitcoin, blockchain, Brian Krebs, business process, cloud computing, cognitive bias, computer vision, connected car, corporate governance, crowdsourcing, cryptocurrency, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Heinemeier Hansson, Donald Trump, drone strike, Edward Snowden, Elon Musk, fault tolerance, Firefox, Flash crash, George Akerlof, industrial robot, information asymmetry, Internet of things, invention of radio, job automation, job satisfaction, John Markoff, Kevin Kelly, license plate recognition, loose coupling, market design, medical malpractice, Minecraft, MITM: man-in-the-middle, move fast and break things, move fast and break things, national security letter, Network effects, pattern recognition, profit maximization, Ralph Nader, RAND corporation, ransomware, Rodney Brooks, Ross Ulbricht, security theater, self-driving car, Shoshana Zuboff, Silicon Valley, smart cities, smart transportation, Snapchat, Stanislav Petrov, Stephen Hawking, Stuxnet, The Market for Lemons, too big to fail, Uber for X, Unsafe at Any Speed, uranium enrichment, Valery Gerasimov, web application, WikiLeaks, zero day

Perhaps it would be more accurate to use a health-insurance model: sickness is inevitable, and contagions can spread widely, so insurers should focus on risk prevention and incident response rather than straight reimbursement. Insurance companies are starting to figure out how to price premiums for cybersecurity insurance, though—in some cases scoring companies according to their security practices. More will happen once we better clarify liabilities. CORRECT INFORMATION ASYMMETRIES Recently, I had occasion to research baby monitors. They’re surveillance devices by design, and can pick up a lot more than a baby’s cries. Of course, I had a lot of security questions. How is the audio and video transmission secured? What’s the encryption algorithm? How are encryption keys generated, and who has copies of them? If data is stored on the cloud, how long is it stored and how is it secured?

., 190 wiretapping by, 168 FDA, 137, 145, 151 Federal Communications Commission (FCC), 149 FedRAMP, 123 Felten, Ed, 223 financial crisis (2008), 125–26 FinFisher, 64–65 FireEye, 42 flash crash, 85 Ford Foundation, 224 Fort Hood shooting (2009), 202 Freeh, Louis, 193 FTC, 148, 154 Gamma Group, 30, 65 Gartner tech analyst firm, 101 GDPR (General Data Protection Regulation) [EU], 151, 184–88 Geer, Dan, 163, 217 George, Richard, 170 Gerasimov Doctrine, 71 Germany, BSI and BND in, 173 GGE (Group of Governmental Experts), UN, 158 Gmail, 153 Goldsmith, Jack, 163 Google: Advanced Protection Program, 47 censorship by, 60 controls exerted by, 61, 62 and EU regulations, 185 identification systems in, 199 lobbying by, 154 state investigation of, 187 surveillance via, 58–59, 169, 196 governments, 144–59 asymmetry between, 91–92 censorship by, 60 and defense over offense, 160–79 functions of, 10 and industry, 176–79 information sharing by, 176 and infrastructure, 117 insecurity favored by, 57 international cooperation, 156–59 international espionage, 171–72 jurisdictional arbitrage, 156 and liability law, 128–33 lobbying of, 154–55 mistrust of, 208, 220 policy challenges in, 99, 100–101, 192–206 regulatory bodies, 121, 144, 150–52, 156–59, 192 and security standards, 167 supply-chain attacks on, 87–89 surveillance by, 64–68, 172, 195, 208 vulnerability disclosure by, 163 Greer, John, 126 GTT Communications, 115 Gutenberg, Johannes, 24 hacking: catastrophic, 9, 16, 217 class breaks, 33, 95 contests in, 85 costs of, 102–3 cyberweapons in, 73 increasing threat of, 79 international havens of, 156 through fish tank, 29 hacking back, 203–4 HackingTeam, 30, 45, 65 HAMAS, 93 Hancock Health, 74 harm, legal definition of, 130 Harris Corporation, 168 Hathaway, Melissa, 114 Hayden, Michael, 170 Healey, Jason, 158, 160 Heartbleed, 21, 114–15 Hello Barbie (doll), 106 Hilton Hotels, 185 Hizballah, 93 Honan, Mat, 29 Hotmail, 153 HP printers, 62 Huawai (Chinese company), 87 Human Rights Watch, 223 humans, as system component, 7 IBM, 33 iCloud, 7 hacking of, 78 and privacy, 190 quality standards for, 111, 123, 135 Idaho National Laboratory, 79, 90 identification, 51–55, 199–200 attribution, 52–55 breeder documents for, 51 impersonation of, 51, 75 identity, 44 identity theft, 50–51, 74–76, 106, 171 Ilves, Toomas Hendrik, 221 iMessage, 170 impersonation, 51, 75 IMSI (international mobile subscriber identity), 168–70 industry lobbying groups, 183 information asymmetries, 133–38 information security, 78 infrastructure: critical, use of term, 116 security of, 116–18 Inglis, Chris, 28 innovation, 155 insecurity, 56–77 cost of, 126 criminals’ benefit from, 74–77 and cyberwar, 68–74 insurance industry, 132–33 integrity, attacks on, 78–82 intellectual property theft, 66, 72–73, 75 interconnections, vulnerabilities in, 28–30, 90 International Organization for Standardization (ISO), 140 Internet: advertising model of, 57, 60 changing concepts of, 5, 218 connectivity of, 5, 91, 105–6 demilitarization of, 212–15 dependence on, 89–90 development phase of, 22–23, 157 explosive growth of, 5, 146 global, 7, 16, 161 governance model of, 157 government regulation of, 152–55 horizontal growth of, 146 industry standards for, 23, 122–23 lack of encryption on, 170–72 maintenance and upkeep of, 143 nonlinear system of, 211 private ownership of infrastructure, 126 resilience of, 210–12 as social equalizer, 214, 217 surveillance and control via, 64–68 viral dissident content on, 158 Internet+: authentication in, 49–51 coining of term, 8 cybersecurity safety board for, 177 risks and dangers of, 217–18 simultaneous vulnerabilities in, 94 Internet+ security: closing the skills gap, 141–42 correcting information asymmetries in, 133–38 correcting misaligned incentives in, 124–28 current state of, 9 defense in, see attack vs. defense enforcement of, 121 funding maintenance and upkeep in, 143 incentives and policy solutions for, 100–103, 120–43 increasing research in, 142–43 liabilities clarified for, 128–33 litigation for, 121 meanings of, 15–17 and privacy, 9 public education about, 138–41 public policies for, 120–21 standards for, 122–23, 140–41, 157–59 as wicked problem, 11, 99 Internet Engineering Task Force (IETF), 23, 167 Internet of Things (IoT), 5 as computerization of everything, 7 Cybersecurity Improvement Act, 180 in developmental stage, 8 patching of, 37–38 smartphone as controller hub for, 48 Internet Policy Research Initiative, MIT, 224 Investigatory Powers Act (UK), 195 iPhones, 3–4 encryption on, 174, 197 new versions of, 42–43 IPsec, 167 Iran: cyberattack by, 71, 116, 178 hackers in, 45 Stuxnet attack on, 79 Iraq, 212 ISIS, 69, 93 ISPs: connections via, 113–14 Tier 1 type, 115 ISS World (“Wiretappers’ Ball”), 65 jobs, in cybersecurity, 141–42 John Deere, 59–60, 62, 63 Joyce, Rob, 45, 53, 54, 164, 166 Kaplan, Fred, 73 Kaspersky Lab, 29, 74, 87 Kello, Lucas, 71 Kelly, John, 66 Keurig coffee makers, 62 key escrow, 194 KICTANet, Kenya, 214 labeling requirements, 134–35 LabMD, unfair practices of, 130–31 Landau, Susan, 175, 176, 223 Las Vegas shooting (2017), 202 Ledgett, Rick, 163–64, 166 lemons market, 134 Lenovo, 187 letters of marque, 204 Level 3 ISP, 115 liability law, 125, 128–33 Liars and Outliers (Schneier), 101, 209 Library of Congress, 42 license plate scanners, 201 linear systems, 210 Lloyd’s of London, 90 Lynn, William, 198 machine learning, 7, 82–87 adversarial, 84 algorithms beyond human comprehension, 111–12 autonomous, 82–83, 85 Maersk, 71, 94 malware, 26, 30, 196 man-in-the-middle attacks, 49, 169 market economics, and competition, 6 mass shootings, 202 May, Theresa, 197 McConnell, Mike, 198 McVeigh, Timothy, 202 medical devices: bugs in, 41 and government regulations, 151 hacking, 16 and privacy, 151 Meltdown vulnerability, 21 Merkel, Angela, 66 metadata, 174 Microsoft, 57, 190 Microsoft Office, new versions of, 42, 43 military systems, autonomous, 86 Minecraft video game, 94 miniaturization, 7 Mirai botnet, 29, 37, 77, 94, 130 money laundering, 183 monocultures, vulnerabilities in, 31 Moonlight Maze, 66 “movie-plot threats,” 96 Mozilla, 163 Munich Security Conference, 70 My Friend Cayla (doll), 106 Nader, Ralph, Unsafe at Any Speed, 182 National Cyber Office (NCO), 146–50 National Cyber Security Centre (UK), 173 National Cybersecurity Safety Board (proposed), 177 National Institute of Standards and Technology (NIST), Cybersecurity Framework of, 123, 147 National Intelligence Council, 211–12 National Science Foundation (NSF), 147 National Security Council, 163 National Security Strategy, 117 National Transportation Safety Board, 177 Netflix, 148 net neutrality, 61, 119 network effect, 60 networks: “air gapped,” 118 collective action required of, 23–24 end-to-end model of, 23 firewalls for, 102 iCloud, 111 secure connections in, 113–14, 125 and spam, 100 telephone, 119 New America, 223 New York Cyber Task Force, 213 NOBUS (nobody but us), 164–65, 169, 170 norms, 157–59 North Korea: cyberattack by, 71 cybercrimes by, 76, 157 hacking by, 54, 71, 78 threats by, 70, 72 Norwegian Consumer Council, 105–6 NotPetya malware, 71, 77, 89, 94 NSA: attribution in, 53–55 BULLRUN program, 167–68 credential stealing by, 45 cyberattack tools of, 165–67 on cybersecurity, 86 cyberweapons stolen from, 73 disclosing and fixing vulnerabilities, 162–67 encryption circumvented by, 171, 193 intelligence-gathering hacks by, 116, 118 missions of, 160–61, 172 mistrust of, 208 reorganization (2016) in, 173 and security standards, 167–70 splitting into three organizations, 172–73 supply-chain attacks by, 87 surveillance by, 65, 66–67, 190, 202 NSO Group, 65 Nye, Joseph, 157 Obama, Barack, 66, 69, 92, 117, 163, 180, 208 Ochoa, Higinio O.

., 190 wiretapping by, 168 FDA, 137, 145, 151 Federal Communications Commission (FCC), 149 FedRAMP, 123 Felten, Ed, 223 financial crisis (2008), 125–26 FinFisher, 64–65 FireEye, 42 flash crash, 85 Ford Foundation, 224 Fort Hood shooting (2009), 202 Freeh, Louis, 193 FTC, 148, 154 Gamma Group, 30, 65 Gartner tech analyst firm, 101 GDPR (General Data Protection Regulation) [EU], 151, 184–88 Geer, Dan, 163, 217 George, Richard, 170 Gerasimov Doctrine, 71 Germany, BSI and BND in, 173 GGE (Group of Governmental Experts), UN, 158 Gmail, 153 Goldsmith, Jack, 163 Google: Advanced Protection Program, 47 censorship by, 60 controls exerted by, 61, 62 and EU regulations, 185 identification systems in, 199 lobbying by, 154 state investigation of, 187 surveillance via, 58–59, 169, 196 governments, 144–59 asymmetry between, 91–92 censorship by, 60 and defense over offense, 160–79 functions of, 10 and industry, 176–79 information sharing by, 176 and infrastructure, 117 insecurity favored by, 57 international cooperation, 156–59 international espionage, 171–72 jurisdictional arbitrage, 156 and liability law, 128–33 lobbying of, 154–55 mistrust of, 208, 220 policy challenges in, 99, 100–101, 192–206 regulatory bodies, 121, 144, 150–52, 156–59, 192 and security standards, 167 supply-chain attacks on, 87–89 surveillance by, 64–68, 172, 195, 208 vulnerability disclosure by, 163 Greer, John, 126 GTT Communications, 115 Gutenberg, Johannes, 24 hacking: catastrophic, 9, 16, 217 class breaks, 33, 95 contests in, 85 costs of, 102–3 cyberweapons in, 73 increasing threat of, 79 international havens of, 156 through fish tank, 29 hacking back, 203–4 HackingTeam, 30, 45, 65 HAMAS, 93 Hancock Health, 74 harm, legal definition of, 130 Harris Corporation, 168 Hathaway, Melissa, 114 Hayden, Michael, 170 Healey, Jason, 158, 160 Heartbleed, 21, 114–15 Hello Barbie (doll), 106 Hilton Hotels, 185 Hizballah, 93 Honan, Mat, 29 Hotmail, 153 HP printers, 62 Huawai (Chinese company), 87 Human Rights Watch, 223 humans, as system component, 7 IBM, 33 iCloud, 7 hacking of, 78 and privacy, 190 quality standards for, 111, 123, 135 Idaho National Laboratory, 79, 90 identification, 51–55, 199–200 attribution, 52–55 breeder documents for, 51 impersonation of, 51, 75 identity, 44 identity theft, 50–51, 74–76, 106, 171 Ilves, Toomas Hendrik, 221 iMessage, 170 impersonation, 51, 75 IMSI (international mobile subscriber identity), 168–70 industry lobbying groups, 183 information asymmetries, 133–38 information security, 78 infrastructure: critical, use of term, 116 security of, 116–18 Inglis, Chris, 28 innovation, 155 insecurity, 56–77 cost of, 126 criminals’ benefit from, 74–77 and cyberwar, 68–74 insurance industry, 132–33 integrity, attacks on, 78–82 intellectual property theft, 66, 72–73, 75 interconnections, vulnerabilities in, 28–30, 90 International Organization for Standardization (ISO), 140 Internet: advertising model of, 57, 60 changing concepts of, 5, 218 connectivity of, 5, 91, 105–6 demilitarization of, 212–15 dependence on, 89–90 development phase of, 22–23, 157 explosive growth of, 5, 146 global, 7, 16, 161 governance model of, 157 government regulation of, 152–55 horizontal growth of, 146 industry standards for, 23, 122–23 lack of encryption on, 170–72 maintenance and upkeep of, 143 nonlinear system of, 211 private ownership of infrastructure, 126 resilience of, 210–12 as social equalizer, 214, 217 surveillance and control via, 64–68 viral dissident content on, 158 Internet+: authentication in, 49–51 coining of term, 8 cybersecurity safety board for, 177 risks and dangers of, 217–18 simultaneous vulnerabilities in, 94 Internet+ security: closing the skills gap, 141–42 correcting information asymmetries in, 133–38 correcting misaligned incentives in, 124–28 current state of, 9 defense in, see attack vs. defense enforcement of, 121 funding maintenance and upkeep in, 143 incentives and policy solutions for, 100–103, 120–43 increasing research in, 142–43 liabilities clarified for, 128–33 litigation for, 121 meanings of, 15–17 and privacy, 9 public education about, 138–41 public policies for, 120–21 standards for, 122–23, 140–41, 157–59 as wicked problem, 11, 99 Internet Engineering Task Force (IETF), 23, 167 Internet of Things (IoT), 5 as computerization of everything, 7 Cybersecurity Improvement Act, 180 in developmental stage, 8 patching of, 37–38 smartphone as controller hub for, 48 Internet Policy Research Initiative, MIT, 224 Investigatory Powers Act (UK), 195 iPhones, 3–4 encryption on, 174, 197 new versions of, 42–43 IPsec, 167 Iran: cyberattack by, 71, 116, 178 hackers in, 45 Stuxnet attack on, 79 Iraq, 212 ISIS, 69, 93 ISPs: connections via, 113–14 Tier 1 type, 115 ISS World (“Wiretappers’ Ball”), 65 jobs, in cybersecurity, 141–42 John Deere, 59–60, 62, 63 Joyce, Rob, 45, 53, 54, 164, 166 Kaplan, Fred, 73 Kaspersky Lab, 29, 74, 87 Kello, Lucas, 71 Kelly, John, 66 Keurig coffee makers, 62 key escrow, 194 KICTANet, Kenya, 214 labeling requirements, 134–35 LabMD, unfair practices of, 130–31 Landau, Susan, 175, 176, 223 Las Vegas shooting (2017), 202 Ledgett, Rick, 163–64, 166 lemons market, 134 Lenovo, 187 letters of marque, 204 Level 3 ISP, 115 liability law, 125, 128–33 Liars and Outliers (Schneier), 101, 209 Library of Congress, 42 license plate scanners, 201 linear systems, 210 Lloyd’s of London, 90 Lynn, William, 198 machine learning, 7, 82–87 adversarial, 84 algorithms beyond human comprehension, 111–12 autonomous, 82–83, 85 Maersk, 71, 94 malware, 26, 30, 196 man-in-the-middle attacks, 49, 169 market economics, and competition, 6 mass shootings, 202 May, Theresa, 197 McConnell, Mike, 198 McVeigh, Timothy, 202 medical devices: bugs in, 41 and government regulations, 151 hacking, 16 and privacy, 151 Meltdown vulnerability, 21 Merkel, Angela, 66 metadata, 174 Microsoft, 57, 190 Microsoft Office, new versions of, 42, 43 military systems, autonomous, 86 Minecraft video game, 94 miniaturization, 7 Mirai botnet, 29, 37, 77, 94, 130 money laundering, 183 monocultures, vulnerabilities in, 31 Moonlight Maze, 66 “movie-plot threats,” 96 Mozilla, 163 Munich Security Conference, 70 My Friend Cayla (doll), 106 Nader, Ralph, Unsafe at Any Speed, 182 National Cyber Office (NCO), 146–50 National Cyber Security Centre (UK), 173 National Cybersecurity Safety Board (proposed), 177 National Institute of Standards and Technology (NIST), Cybersecurity Framework of, 123, 147 National Intelligence Council, 211–12 National Science Foundation (NSF), 147 National Security Council, 163 National Security Strategy, 117 National Transportation Safety Board, 177 Netflix, 148 net neutrality, 61, 119 network effect, 60 networks: “air gapped,” 118 collective action required of, 23–24 end-to-end model of, 23 firewalls for, 102 iCloud, 111 secure connections in, 113–14, 125 and spam, 100 telephone, 119 New America, 223 New York Cyber Task Force, 213 NOBUS (nobody but us), 164–65, 169, 170 norms, 157–59 North Korea: cyberattack by, 71 cybercrimes by, 76, 157 hacking by, 54, 71, 78 threats by, 70, 72 Norwegian Consumer Council, 105–6 NotPetya malware, 71, 77, 89, 94 NSA: attribution in, 53–55 BULLRUN program, 167–68 credential stealing by, 45 cyberattack tools of, 165–67 on cybersecurity, 86 cyberweapons stolen from, 73 disclosing and fixing vulnerabilities, 162–67 encryption circumvented by, 171, 193 intelligence-gathering hacks by, 116, 118 missions of, 160–61, 172 mistrust of, 208 reorganization (2016) in, 173 and security standards, 167–70 splitting into three organizations, 172–73 supply-chain attacks by, 87 surveillance by, 65, 66–67, 190, 202 NSO Group, 65 Nye, Joseph, 157 Obama, Barack, 66, 69, 92, 117, 163, 180, 208 Ochoa, Higinio O.


pages: 183 words: 17,571

Broken Markets: A User's Guide to the Post-Finance Economy by Kevin Mellyn

banking crisis, banks create money, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, business cycle, buy and hold, call centre, Carmen Reinhart, central bank independence, centre right, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, crony capitalism, currency manipulation / currency intervention, disintermediation, eurozone crisis, fiat currency, financial innovation, financial repression, floating exchange rates, Fractional reserve banking, global reserve currency, global supply chain, Home mortgage interest deduction, index fund, information asymmetry, joint-stock company, Joseph Schumpeter, labor-force participation, light touch regulation, liquidity trap, London Interbank Offered Rate, market bubble, market clearing, Martin Wolf, means of production, mobile money, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Ponzi scheme, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, rising living standards, Ronald Coase, seigniorage, shareholder value, Silicon Valley, statistical model, Steve Jobs, The Great Moderation, the payments system, Tobin tax, too big to fail, transaction costs, underbanked, Works Progress Administration, yield curve, Yogi Berra, zero-sum game

A very wise Japanese central bank veteran,Takayoshi Hatayama, has envisioned a world in which banks melt away slowly until they are little more than highly regulated deposit-takers and providers of net settlement for an essentially new financial ecology created by technology companies, mobile operators, specialist payments companies (think PayPal and Western Union), electronic money schemes, and non-bank financiers and investment vehicles. This would indeed amount to the reconstruction of finance. Download from Wow! eBook <www.wowebook.com> Trust In Financial Market Meltdown, I explain how a bank account has always been a one-sided contract in which the bank knows a lot about what the depositor is doing with his or her money, but the depositor has no clue about what the bank is doing with it. This is called information asymmetry and is a key source of profit for financial services companies. Financial firms always know a great deal more about market conditions, especially the price of money, than their customers. However, post-crisis, they have to regain the trust they have forfeited. This will require them to become much more—at the risk of using a hackneyed term—transparent. This is not just a matter of improving disclosure of contractual terms—so-called plain-English documents and the like.

., 139 Finance-driven economy, 1, 72 anti-capitalism, 2 capitalism, 1 chronic debt crisis, 22 corporate America, 20 current movie artificial bank earnings, 7 asset prices, 6 banking implosions, 6 borrowers and investors connection, 10 borrowing demand, 7 catastrophic financial bubble, 10 civilization, 10 corporatism, 9 democratic crony capitalism, 9 Dodd-Frank act, 8 economic growth and social stability, 10 financial repression, 9 Glass-Steagall Act, 8 human ingenuity, 10 interbank funding markets, 6 low interest rates and easy money, 6 market collapse, 10 money market, 6 overexuberence, 6 overinvestment and speculation, 6 pre-crisis conditions, 8 printing money, 7 private capital, 7 167 168 Index Finance-driven economy (continued) profitability, 7 quantitative easing, 8 recovery, 8 regulation, 8 regulatory capital rules, 8 resources and tools, 9 shell-shocked enterprises and households, 8 end of employment, 21–22 financial leverage magic and poison CEO class, 14–15 consumer debt, 15–16 disconnection problem, 11–12 market bargain, 10 real economy, 10 wealth financialization, 13–14 working capital, 11 global financial crisis, 2 Great Moderation, 16–18 Great Panic, 18–19 household sector agony, 19–20 investor class, 22 Marx, Karl asset bubble, 5 cash nexus, 4 dot-com bubble, 5 economic revolution, 3 First World War, 4 free markets, 3 French Revolution, 3 globalization, 3 Great Depression, 5 liberalism, 3 normalcy, 4 overproduction and speculation, 3 Wall Street, 4, 5 revolutionary socialism, 2 sovereign debt, 8, 22 Finance reconstruction, 142 bank bashing, 146 “bankers”, 142 business model, challenges, 145 Citigroup, 145 cyclical businesses, 143 government management, 142 legitimacy bonus culture, 148–150 privileged opportunity, longestablished bank, 146 short-term share-price manipulation, 148 state and legal systems, 147 stock price, 147 mark-to-market price, 144 “producers”, 143 profession, definition, 163 prudence, 145, 161–163 root-and-branch transformation, 145 talent pool, 144 “the race for talent”, 143 trust cash management, 160 Financial Market Meltdown, 159 FSA, 159 hackneyed term, 159 information asymmetry, 159 non-bank financial service provider, 161 oversold/up-sold products, 159 utility Anglo-Saxon-type banking systems, 156 big data tools, 158 bills-of-exchange market, 150 branch and payment services, 157 clearinghouse creation, 158 core banking, 154 economic value transmission, 150 exchange of claims, 151 fee-income growth, 155 fiat money system, 151 financial intermediation, 150 financial transactions, 157 flexible contractor/subcontractor relationship, 158 information technology, 156 “liquidity premium”, 152 multidivisional/M-form organization, 153 non-interest income, 155 old-media companies, 157 Index overhead value analysis, 154 “privileged opportunity”, 152 quill pen–era practice, 158 sheer utility value, 155 silos, product business, 153 transaction accounts, 152 venture capital industry, 142 “War for Talent”, 143 Financial crises, 23 affordable housing, 24 banking “transmission” mechanism, 43 Basel III process, 50–51 basel process, 27–28 consumer banking(see Consumer banking) Dodd-Frank, 49–50 domestic banking system, 38 European Union, 51–53 FDIC, 40 finance-driven economy’s leverage machine, 43 Financial Market Meltdown, 25 GDP, 38 Government Policy and Central Banks, market meltdown(see Regulation process) government policy failure, 45 “government-sponsored” public companies, 24 Great Depression, 44 GSEs, 24 legal missteps, 47–48 New Deal, 43 panic-stricken markets, 40 political missteps, 45–47 Ponzi scheme, 42 postwar financial order, 25–27 printing money, 38 private profits and socialized losses, 40 private-sector demand, 43 public-sector demand, 42 quantitative approach, 25 TARP, 39 too-big-to-fail institutions, 41 Triple A bonds, 41 US Federal Reserve System, 38 Financial liberalization, 89 Financial Market Meltdown, 25, 61, 89, 109, 159 Financial repression, 9, 78, 111 Financial Services Authority (FSA), 60, 159 Food and Drug Administration (FDA), 69 Fordism, 68 Free-market capitalism, 89 Free markets, 3 French Revolution, 3 Front-end trading systems, 107 FSA.See Financial Services Authority G GDP, 11 “Giro” payments systems, 151 Global imbalance, 96 Globalization, 3 Global whirlwinds, 93 Asia, finance movement cultural differences, 110–111 Financial Market Meltdown, 109 Interest Equalization Tax, 109 language, law, and business culture, 109 primacy, 109 austerity(see Austerity) British Empire, 30 Chimerica, 97 China and United States cross-Pacific economy, 97 foreign interference and aggression, 98 headline growth rates, 97 repression revolution and series, 97–98 Second World War, 98 Smoot-Hawley Tariff, 98 surpluse trade, 97 sustainable development, 98 Chinese ascendancy, 113 clearing and settlement bottleneck, 106–107 Dynastic China, 112 169 Download from Wow!


Global Governance and Financial Crises by Meghnad Desai, Yahia Said

Asian financial crisis, bank run, banking crisis, Bretton Woods, business cycle, capital controls, central bank independence, corporate governance, creative destruction, credit crunch, crony capitalism, currency peg, deglobalization, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, floating exchange rates, frictionless, frictionless market, German hyperinflation, information asymmetry, knowledge economy, liberal capitalism, liberal world order, Long Term Capital Management, market bubble, Mexican peso crisis / tequila crisis, moral hazard, Nick Leeson, oil shock, open economy, price mechanism, price stability, Real Time Gross Settlement, rent-seeking, short selling, special drawing rights, structural adjustment programs, Tobin tax, transaction costs, Washington Consensus

References Allen, F. and Gale, D. (1998) “Optimal financial crises,” Journal of Finance, 53: 1245–1284. Allen, F. and Gale, D. (2000) “Bubbles and crises,” Economic Journal, 110: 236–255. Allen, F. and Gorton, G. (1993) “Churning bubbles,” Review of Economic Studies, 60: 813–836. 42 Franklin Allen and Douglas Gale Allen, F., Morris, S. and Postlewaite, A. (1993) “Finite bubbles with short sale constraints and asymmetric information,” Journal of Economic Theory, 61: 206–229. Calomiris, C. and Gorton, G. (1991) “The origins of banking panics, models, facts, and bank regulation,” in G. Hubbard (ed.), Financial Markets and Financial Crises, University of Chicago Press, Chicago, IL. Calomiris, C. and Kahn, C. (1991) “The role of demandable debt in structuring optimal banking arrangements,” American Economic Review, 81: 497–513.

The disruptions provoked by financial liberalization in countries with weak financial structures and in international markets rigged with self-fulfilling speculation, triggered crises of a magnitude not seen since the Great Depression. The sources of these crises starting in Latin America, Asia, Russia, were very different from the sovereign debt crises of the 1980s. They originated in capital markets with predominant role of private debtors as well as creditors. They implied fundamentals of a microeconomic variety due to financial fragility: gross undervaluation of credit risk, overindebtedness, acute asymmetric information. They developed in interaction between the sharp deterioration of creditworthiness, the breakup of pegged exchange rate regimes and the surge of volatility and correlation in asset prices. The Fund’s apparatus was hardly fit to meet the challenge of emerging market crises. The Mexican crisis in 1994 –95 was a harbinger from which proper lessons were not drawn. The lack of proper warning indicators, the surprise before the magnitude of the reversal in capital flows, the gross underrating of the severity of the recession in the aftermath, the lack of foresight of contagion throughout Latin America, were features of poor performance to be repeated in Asia on a much larger scale.

Did this particular combination produce incentives that led to the failure of this maximisation-cum-equilibrium process because it created a situation characterised by factors such as excess liquidity (through a massive growth in inflows), and increased financial fragility (via augmenting the weight of ‘speculative’ and ‘Ponzi’ finance)? Did this particular combination also make significantly worse other common economic problems, such as asymmetric information by, for example, liberalisation being so sudden that it led to the interaction, on one side, of international financial institutions with very little knowledge of the institutional dynamics of emerging markets and, on the other, of still inexperienced domestic financial players?2 This chapter attempts to answer these questions regarding the above-mentioned financial crises. The first part will try to show that no matter how hard these financially-liberalised LDCs, which have had sudden and massive surges in capital inflows, tried to deal with the problem of ‘absorption’ of these inflows, they ended up in a financial crisis.


pages: 310 words: 85,995

The Future of Capitalism: Facing the New Anxieties by Paul Collier

"Robert Solow", accounting loophole / creative accounting, Airbnb, assortative mating, bank run, Berlin Wall, Bernie Sanders, bitcoin, Bob Geldof, bonus culture, business cycle, call centre, central bank independence, centre right, Commodity Super-Cycle, computerized trading, corporate governance, creative destruction, cuban missile crisis, David Brooks, delayed gratification, deskilling, Donald Trump, eurozone crisis, financial deregulation, full employment, George Akerlof, Goldman Sachs: Vampire Squid, greed is good, income inequality, industrial cluster, information asymmetry, intangible asset, Jean Tirole, job satisfaction, Joseph Schumpeter, knowledge economy, late capitalism, loss aversion, Mark Zuckerberg, minimum wage unemployment, moral hazard, negative equity, New Urbanism, Northern Rock, offshore financial centre, out of africa, Peace of Westphalia, principal–agent problem, race to the bottom, rent control, rent-seeking, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, Silicon Valley, Silicon Valley ideology, sovereign wealth fund, The Wealth of Nations by Adam Smith, theory of mind, too big to fail, trade liberalization, urban planning, web of trust, zero-sum game

Breaking up monopolies forces competition into the sector, but since the technological scale economies continue to push towards monopoly, policy intervention has to be sustained. Even then, by blocking the scale economies, policy imposes inefficiency. Price controls aim to restrain the company from exploiting the scale economies for its own benefit, forcing it to pass the gains on to consumers. Its limitation we have already encountered in a different context – asymmetric information. In its previous incarnation, it was about the gap between what the management of a firm knows, and what fund managers can find out. Now it is about the gap between what the management of a firm knows and what the regulator knows. The most spectacular asymmetries have been in financial markets, between the regulators and the banks, but the problem is endemic. The firm has far better knowledge of its costs and its market than can possibly be gathered by a regulator, and so the problem can never be fully resolved.

To locate a specific entry, please use your ebook reader’s search tools. 3G mobile phone network, 88 Abedi, Salman, 212, 213 abortion, 99, 102 AfD (Alternative for Germany), 5 Africa, 8, 110–11, 192, 193 capital flight, 208 HIV sufferers in, 120–21 need for modern firms, 37 and World Bank/IMF, 118† youth’s hope of escape to Europe, 121 African Americans, 13 Akerlof, George, 18, 34, 35, 50–51 Amazon, 87, 91, 146, 147 anger management programmes, 160 Apple, 148 asymmetric information, 88, 90, 185 auction theory, 146–7, 148 Bank of England, 39 Bear Stearns, 71, 75, 86 belief systems and belonging, 34, 40–41, 42, 53–6, 165, 211–15 CEO compensation committees, 77–8 Clark’s ‘family culture’, 107–8 the ethical family, 97–8, 99–105, 108, 109, 210 formation through narratives, 34, 40–41, 42, 53–6, 165, 211–15 GM-Toyota comparisons, 72–4 and ISIS, 42 Johnson & Johnson’s Credo, 39–40, 40*, 41, 72, 74*, 79 and leadership, 41–2, 43, 95 of personal fulfilment, 28, 99, 100–101, 102, 103, 108–9, 213 polarization within polities, 38, 63, 202–5 and schools, 165 Theory of Signalling, 41, 43, 53, 63, 95 and trust, 27, 29*, 48, 53–4, 55–6, 59, 63, 73–4, 79, 94–5, 210 see also belonging, narrative of; reciprocity value-based echo-chambers, 38, 61–2, 64–5, 212, 215 see also nationalism belonging, narrative of absent from Utilitarian discourse, 16, 59, 66–7, 210–11 avoided by politicians, 66–7, 68, 211, 215 as a basic drive, 27, 31, 42–3, 65, 66 and belief systems, 34, 40–41, 42, 53–6, 211–15 in Bhutan, 37† civil society networks/groups, 180–81 and ‘common knowledge’, 32–3, 34, 54, 55, 66, 212 families as natural units for, 32, 97–8, 104 heyday of the ethical state, 49, 68, 114 and home ownership, 68, 181–2, 184 and ISIS, 42, 212, 213 and language, 32, 33, 54, 57 and mutual regard/reciprocity, 25, 40–41, 49, 53–6, 67, 68, 98, 181, 182, 210–11, 212–13 place-based identity, 51–6, 65–8, 211–14, 215 and purposive action, 68, 98, 114, 211, 212, 213 and salient identity, 51–6 Bennett, Alan, The History Boys, 7* Bentham, Jeremy, 9–10, 12, 13 Berlusconi, Silvio, 14 Besley, Tim, 18–19, 35 Betts, Alex, 27 BHS, 80, 172 Bhutan, 37†, 63 Biafra, 58 Bitcoin, 37–8, 193 Blackpool, 4 Bonhoeffer, Dietrich, Letters and Papers from Prison, 108 The Bottom Billion (Collier), 27 Brazil, 58 Brexit vote (June 2016), 5, 125, 131, 196, 215 British Academy, 7 British Motor Corporation, 74 Brooks, David, The Road to Character, 108 Buiter, Willem, 186 Bush, George W., 120–21 business zones, 150 ‘Butskellism’, 49* Cadbury, 77 Cameron, David, 205 Canada, 22 capitalism competition, 21, 25, 56, 85, 86 ‘creative destruction’ concept, 21 current failings of, 4–5, 17, 25, 42, 45–6, 48, 201, 212–13 and decline of social trust, 5, 45–6, 48, 55, 59, 69 as essential for prosperity, 4–5, 18, 20, 25, 201 and families, 37 first mover advantage, 148 and greed, 10, 19, 25–7, 28, 31, 42, 58, 69, 70†, 81, 95 and Marx’s alienation, 17–18 and oppositional identities, 56, 74 vested interests, 85, 86, 135–6, 207 see also firms Catalan secession movement, 58 causality, narrative of, 33, 34 CDC Group, 122, 149* Chaucer, Geoffrey, The Canterbury Tales, 129 Chicago, University of, 166 childhood adoption, 110–11 children in ‘care’, 104, 105, 110, 111, 157 children ‘reared by wolves’, 31–2 cognitive development, 105–6, 170, 175–6 fostering, 104, 105, 111 identity acquisition, 32 impact of parental unemployment, 160–61 learning of norms, 33, 35, 107–8 non-cognitive development, 105, 163, 169–70, 171–3, 174, 175–6 ‘rights of the child’ concept, 103–4 in single-parent families, 101, 102, 104–5, 155, 160 trusted mentors, 169–70 see also family China, 118–19, 149, 203 Chira, Susan, 52–3 Chirac, Jacques, 14, 120–21 Christian Democratic parties, 5, 14 Citigroup, 186 Clark, Gregory, The Son Also Rises, 106–8 Clarke, Ken, 206 class divide assortative mating among new elite, 99–100, 154, 188–9 author’s proposed policies, 19–20, 21, 183–4, 187–8, 190, 207–8 and breadth of social networks, 169 and Brexit vote, 5, 196 and cognitive development, 105–6 divergence dynamic, 7, 18, 48, 98–108, 154–61, 170–71, 172–80, 181–90 ‘elite’ attitudes to less-well educated, 4, 5, 12, 16, 53, 59, 60–61, 63 and family life, 20, 98, 99–106, 157–62 and fracture to skill-based identities, 3–5, 51–6, 78 and home ownership, 68, 181, 182–3 need for socially mixed schools, 164–5 and non-cognitive development, 105, 163, 169–70, 171–3, 174, 175–6 and parental hothousing, 100, 101, 105–6 post-school skills development, 170–76 pre-emptive support for stressed families, 20, 155, 157–60, 161–3, 208 and reading in pre-teens, 167–9 and recent populist insurgencies, 5 retirement insecurities, 179–80 and two-parent families, 155–6, 157 unravelling of shared identity, 15, 50, 51–6, 57*, 58–61, 63, 215 see also white working class climate change, 44, 67, 119 Clinton, Hillary, 5, 9, 203–4 coalition government, UK (2010–15), 206 cognitive behavioral therapy, 160 Cold War, 113, 114, 116 end of, 5–6, 115, 203 Colombia, 120 communism, 32, 36–7, 85–6 communitarian values care, 9, 11, 12, 16, 29, 31, 42, 116 fairness, 11, 12, 14, 16, 29, 31, 34, 43, 116, 132–3 hierarchy, 11, 12, 16, 38–9, 43, 99–100 left’s abandonment of, 16, 214* liberty, 11, 12, 16, 42 loyalty, 11, 12, 16, 29, 31, 34, 42–3, 116 new vanguard’s abandonment of, 9, 11–13, 14–15, 16, 17, 49–50, 113, 116–18, 121, 214 post-war settlement, 8–9, 49, 113–16, 122 and reciprocal obligations, 8–9, 11–12, 13, 14, 19, 33, 34, 40–41, 48–9, 201, 212–15 roots in nineteenth-century co-operatives, 8, 13, 14, 201 sanctity, 11, 16, 42–3 Smith and Hume, 21–2† values and reason, 29–30, 43–4 see also belonging, narrative of; obligation, narrative of; reciprocity; social democracy Companies Act, UK, 82 comparative advantage, 20, 120, 192, 194 Confederation of British Industry (CBI), 79 conservatism, 30, 36 Conservative Party, 14, 49, 205, 206 contraception, 98–9, 102 co-operative movement, 8, 13, 14, 201 Corbyn, Jeremy, 202, 204–5 Crosland, Anthony, The Future of Socialism, 17, 18, 19 Cuban Missile Crisis (1962), 114 debutante balls, 188 Denmark, 63, 178, 214* Descartes, Rene, 31 Detroit, 128, 129, 144 Deutsche Bank, 78, 185 development banks, 149–50 Development Corporations Act (1981), 150 Dickens, Charles, Bleak House, 108 digital networks detachment of narratives from place, 38, 61–2 economies of scale, 86–7 global e-utilities, 37, 38, 86–7, 89–90, 91 social media, 27, 61, 87, 173, 207, 215 value-based echo-chambers, 38, 61–2, 64–5, 212, 215 Draghi, Mario, 153 Dundee Project, 161–2 Dutch Antilles, 193 East Asia, 147, 192 eBay, 87 economic man, 10, 19, 25, 26–7, 31, 34–5, 196, 209, 210, 215 economic rent theory, 19, 91, 133–9, 140–44, 186–8, 192, 195, 207 education and collapse of social democracy, 50, 52, 53, 54, 55, 59, 63 and empathy, 12 and European identity, 57* expansion of universities, 99–100, 127 and growth of the middle class, 100 inequality in spending per pupil, 167 mis-ranking of cognitive and non-cognitive training, 174–6 need for socially mixed schools, 164–5 post-school skills development, 170–76 pre-school, 105–6, 163–4 quality of teaching, 165–6 reading in pre-teens, 167–9 and shocks to norms of ethical family, 98, 99–105 symbols of cognitive privilege, 175 teaching methods, 166–7 vocational education, 171–6 zero-sum aspects of success, 189 electoral systems, 206 Emerging Market economies, 129, 130–31 empires, age of, 113 The Enigma of Reason (Mercier and Sperber), 29 enlightened self-interest, 33, 40*, 97–8, 101, 109, 112, 113, 114, 117, 184, 213 Enron, 80 ethnicity, 3, 20, 56, 62, 64, 65, 211 Europe Christian Democrats in, 5, 14 class divides, 3, 4, 5, 125 decline in social trust, 45 and knowledge industries, 192 metropolitan-provincial divides, 3, 4, 125 and migration, 121, 197 and shared identity, 57–8, 64, 66, 125 social democracy in, 8–9, 49, 50 European Central Bank, 153 European Commission, 57 European Investment Bank, 149 European Union (EU, formerly EEC), 66, 67, 114, 115, 116, 117 Brexit vote (June 2016), 5, 125, 131, 196, 215 Eurozone crisis, 153 public policy as predominantly national, 212 universities in, 170 evolutionary theory, 31, 33†, 35–6, 66 externalities, 145–6 Facebook, 87 Fairbairn, Carolyn, 79 fake news, 33–4 family, 19 African norms, 110–11 benefits for single parents, 160 Clark’s ‘family culture’, 107–8 entitled individual vs family obligation, 99–103, 104–6, 108–9, 210 equality within, 39, 154 erosion of mutual obligations, 101–2, 210 identity acquisition, 32 ideologies hostile to, 36–7 impact of unemployment/poverty, 4, 7, 160–61 importance of, 36, 37 and increased longevity, 110, 161 in-kind support for parenting, 161 nuclear dynastic family, 102, 110, 154 one-parent families, 101, 102, 104–5, 155, 160 parental hothousing, 100, 101, 105–6 post-1945 ethical family, 97–8, 99–105, 108, 210 pressures on young parents, 159–60, 161–3 and public policy, 21, 154–5, 157–70, 171–3, 177, 209 and reciprocity, 97–8, 101, 102 shocks to post-1945 norms, 98–105 shrinking of extended family, 101–2, 109–10, 161 social maternalism concept, 154–5, 157–8, 190 two-parent families as preferable, 155–6, 157 see also childhood; marriage Farage, Nigel, 202 fascism, 6, 13*, 47, 113 Federalist papers, 82 feminism, 13, 99 Fillon, François, 204 financial crisis, global (2008–9), 4, 34, 71, 160 no bankers sent to gaol for, 95–6 financial sector, 77–9, 80–81, 83–5 asymmetric information, 88, 185 co-ordination role, 145–6 economies of scale, 87 localized past of, 84, 146 toxic rivalries in, 189 trading in financial assets, 78–9, 84, 184–5, 186, 187 Finland, 63 firms, 19, 21, 69 CEO pay, 77–8, 79, 80–81 competition, 21, 25, 56, 85, 86 control/accountability of, 75–81, 82–5 cultures of good corporate behaviour, 94–5 demutualization in UK, 83, 84 deteriorating behaviour of, 18, 69, 78, 80–81 economies of scale, 17–18, 37, 86–7, 88–91, 126–7, 144–5, 146–7 ethical, 70–71, 172, 209–10 and ethical citizens, 93–4, 95, 96 failure/bankruptcy of, 70, 71, 72, 74, 75–6 flattening of hierarchies in, 39 Friedman’s profit nostrum, 69–70, 71, 76, 78–9, 210 global e-utilities, 37, 38, 86–7, 89–90, 91 ideologies hostile to, 37, 81 low productivity-low cost business model, 173–4 ‘maximising of shareholder value’, 69–70, 76, 79, 82–3 ‘mutuals’, 83 need for bankslaughter crime, 95–6 new network features, 86–7 policing the public interest, 93–4 public dislike of, 69, 95–6 public interest representation on boards, 92–3 regulation of, 87–90, 174 reward linked to short-term performance, 77, 78–81 sense of purpose, 39–40, 41, 70–75, 80–81, 93–4, 96 shareholder control of, 76–7, 79, 80, 82–3 societal role of, 81–2, 92–3, 96, 209–10 utility services, 86, 89, 90 worker interests on boards, 83, 84–5 Fisher, Stephen, 196* Five Star, 125 Ford, 70, 71 France, 7, 63, 67, 114 écoles maternelles in, 164 labour market in, 176, 189 pensions policy, 180 presidential election (2017), 5, 9, 204 universities in, 170 working week reduced in, 189 Frederiksen, Mette, 214* Friedman, Milton, 15, 69–70, 71, 76 The Full Monty (film), 7, 129 G20 group, 118 G7 group, 118 G8 group, 194 Ganesh, Janan, 125 Geldof, Bob, 169 General Agreement on Tariffs and Trade (GATT), 114, 115, 116–17 General Motors (GM), 72, 73–4, 75, 86, 172 geographic divide, 3, 16, 18, 19, 215 author’s proposed policies, 19, 207 and Brexit vote, 125, 196 broken cities, 4, 7, 19, 48, 125, 129–30, 147–9 business zones, 150 co-ordination problem over new clusters, 145–50, 207 decline of provincial cities, 4, 7, 19, 48, 125, 129–30, 131, 144–5 economic forces driving, 126–30 and education spending, 167 first mover disadvantage, 148–9 ideological responses, 130–32 investment promotion agencies, 150–51 and local universities, 151–2 and metropolitan disdain, 125 need for political commitment, 153 as recent and reversible, 152–3 regenerating provincial cities, 19, 142, 144–50 and spending per school pupil, 167 widening of since 1980, 125 George, Henry, 133–6, 141 Germany 2017 election, 5, 205 local banks in, 146 Nazi era, 57 and oppositional identities, 56–7 oversight of firms in, 76 post-war industrial relations policy, 94–5 and post-war settlement, 114 re-emergence of far right, 5 rights of refugees in, 14 ‘social market economy’, 49 TVET in, 171–2, 174, 175 vereine (civil society groups), 181 worker interests on boards, 84–5 global divide, 7–8, 20, 59–60, 191–8, 208 globalization, 4, 18, 20, 126–7, 128, 129, 130–31, 191–8 Goldman Sachs, 70†, 83–4, 94 Google, 87 Great Depression (1930s), 114 Green, Sir Philip, 80 Grillo, Beppe, 202 ‘Grimm and Co’, Rotherham, 168–9 Gunning, Jan Willem, 165 Haidt, Jonathan, 11–12, 14, 16, 28, 29, 132–3 Haiti, 208 Halifax Building Society, 8, 84 Hamon, Benoît, 9, 204 Harvard-MIT, 7, 152 Hershey, 77 HIV sufferers in poor countries, 120–21 Hofer, Norbert, 202 Hollande, Francois, 9, 204 Hoover, 148 housing market, 181–4 buy-to-let, 182, 183, 184 and lawyers, 187 mortgages, 84, 176, 182, 183–4 proposed stock transfer from landlords to tenants, 184 Hume, David, 14, 21, 21–2†, 29 Huxley, Aldous, Brave New World (1932), 5 Iceland, 63 Identity Economics, 50–56, 65–7 ideologies based on hatred of ‘other’ part of society, 43, 56, 213, 214 ‘end of history’ triumphalism, 6, 43–4 hostile to families, 36–7 hostile to firms, 37, 81 hostile to the state, 37–8 and housing policy, 183 and migration, 198 New Right, 14–15, 26, 81, 129 norms of care and equality, 116, 132–3 polarization of politics, 38, 63, 202–5 pragmatic eschewal of, 17, 18, 21, 22, 29–30 and principle of reason, 9, 13, 14, 15, 21, 43 Rawlsian vanguard, 13–14, 30, 49–50, 53, 67, 112, 113, 201, 202, 203, 214 return of left-right confrontation, 5, 6, 81, 202–5 and rights, 12–14, 44, 112 seduction of, 6 and twentieth century’s catastrophes, 5–6, 22 views on an ethical world, 112 see also Marxism; rights ideology; Utilitarianism IFC (International Finance Corporation), 122 Imperial Chemical Industries (ICI), 69–70, 75 India, 118–19 individualism entitled individual vs family obligation, 99–103, 104–6, 108–9, 210 fulfilment through personal achievement, 28, 99, 100–101, 102, 103, 108–9, 213 New Right embrace of, 14–15, 53, 81, 214–15 as rampant in recent decades, 19, 214–15 reciprocity contrasted with, 44–5 and withering of spatial community, 61–2 industrial revolution, 8, 126 inequality and assortative mating among new elite, 99–100, 154, 188–9 and divergence dynamic, 7, 18, 48, 98–108, 154–61, 170–71, 172–80, 181–90 and financial sector, 185 and geographic divide, 3, 7–8, 20, 125 global divide, 7–8, 20, 59–60, 191–8, 208 persistence of, 106–8 Rawls’ disadvantaged groups, 3–4, 13–14, 16, 50, 53, 121, 203–4, 214 and revolt against social democracy, 15–16 rising levels of, 3–5, 106, 125, 181, 190 and Utilitarian calculus, 132 innovation, 185–6, 208 International Monetary Fund (IMF), 114, 117 international relations achievement of post-WW2 leaders, 113–16, 122 building of shared identity, 114–16 core concepts of ethical world, 112, 113–14 erosion of ethical world, 116–18 expansion of post-war ‘clubs’, 116–18, 210 new, multipurpose club needed, 118–19, 122 and patriotism narrative, 67 situation in 1945, 112–13, 122 investment promotion agencies, 150–51 Irish Investment Authority, 151 Islamist terrorism, 42, 212, 213 Italy, 4, 58, 160 James, William, 29* Janesville (US study), 178 Japan, 72–3, 94, 101, 149, 192 John Lewis Partnership, 83, 172 Johnson, Robert Wood, 39–40, 72 Johnson & Johnson, 39–40, 41, 72, 74*, 79 Jolie, Angelina, 112 JP Morgan, 71* Juppé, Alain, 204 Kagame, Paul, 22 Kay, John, 82*, 84, 211 Keynes, John Maynard, 115 General Theory (1936), 47 kindergartens, 163 Knausgård, Karl Ove, 173 knowledge revolution, 126, 127–8 Kranton, Rachel, 35, 50–51 Krueger, Anne, 141 Krugman, Paul, 47 labour market flexicurity concept, 178 function of, 176–7 and globalization, 192, 194–6 and immigration, 194, 195, 196 investment in skills, 176–7 job security, 176, 177 and low productivity-low cost business model, 173–4 minimum wage strategies, 147, 174, 176, 180 need for reductions in working hours, 189 need for renewed purpose in work, 190 regulation of, 174, 189 and robotics revolution, 178–9 role of state, 177–8, 189 see also unemployment Labour Party, 49, 206 Marxist take-over of, 9, 204–5 language, 31, 32, 33, 39–40, 54, 57 Larkin, Philip, 99, 156 lawyers, 13–14, 45 Buiter’s three types, 186 and shell companies, 193, 194 surfeit of, 186–7 taxation of private litigation proposal, 187–8 Le Pen, Marine, 5, 63, 125, 202, 204 leadership and belief systems, 41–2, 43, 95 building of shared identity, 39–42, 49, 68, 114–16 changing role of, 39 and flattening of hierarchies, 39 and ISIS, 42 political achievements in post-war period, 113–16, 122 and pragmatist philosophy, 22 and shared purpose in firms, 39–40, 41, 71–5 strategic use of morality, 39–40, 41 transformation of power into authority, 39, 41–2, 57 League of Nations, 116 Lee Kwan Yew, 22, 147 Lehman Brothers, 71*, 76 liberalism, 30 libertarianism, 12–13, 15 New Right failures, 16, 21 Silicon Valley, 37–8 lobbying, 85, 141 local government, 182, 183 London, 3, 125, 127–8, 165–6, 193 impact of Brexit on, 131, 196 migration to, 195–6 Macron, Emmanuel, 67, 204 Manchester terror attack (2017), 212, 213 market economy, 19, 20, 21, 25, 48 and collapse of clusters, 129–30, 144–5 failure over pensions, 180 failure over skill-formation, 173–4 mutual benefit from exchange, 28 market fundamentalists, 147, 150 marriage assortative mating, 35, 99–100, 154, 188–9 cohabitation prior to, 99, 100 as ‘commitment technology’, 109, 155–6 divorce rates, 98, 99, 100–101, 102, 103 and female oppression, 156 religious associations, 109, 156 and rent-seeking, 141 ‘shotgun weddings’, 103 and unemployment, 103 Marxism, 13*, 26, 30, 43, 47, 113, 203, 214 alienation concept, 17–18 and the family, 36–7 late capitalism concept, 6 takeover of Labour Party, 9, 204–5 and ‘useful idiots’, 205* view of the state, 37 Maxwell, Robert, 80 May, Theresa, 205 Mayer, Colin, 18, 70 media celebrities, 6, 112, 204 Mélenchon, Jean-Luc, 5, 202, 204 mental health, 157, 158–9, 162 Mercier, Hugo, 29 meritocratic elites, 3–4, 5, 12–17, 20 Rawlsian vanguard, 13–14, 30, 49–50, 53, 67, 112, 113, 201, 202, 203, 214 Utilitarian vanguard, 9–10, 11–13, 15–16, 18, 52, 53, 59, 66–7, 209 see also Utilitarianism WEIRD (Western, Educated, Industrial, Rich and Developed), 3–4, 12, 14, 16, 17, 20, 116, 121, 133, 214* and white working class, 5, 16 Merkel, Angela, 14, 205 metropolitan areas, 3, 4, 7, 16, 19, 48, 125 co-ordination problem over new clusters, 145–50, 207 economies of agglomeration, 18, 19, 129, 131, 133–44, 195, 196, 207 gains from public goods, 134–5, 138–9 migration to, 195–6 political responses to dominance of, 131–2 scale and specialization in, 126–8, 130, 144–5 and taxation, 131, 132–43, 187, 207 Middle East, 192 Middleton, Kate, 188–9 migration, 121, 194–8, 203 as driven by absolute advantage, 20, 194–5, 208–9 and housing market, 182, 183 Mill, John Stuart, 9–10 minimum wage strategies, 147, 174, 176, 180 Mitchell, Andrew, 188 Mitchell, Edson, 78 modernist architecture, 12 Monarch Airlines, 75 monopolies, natural, 86–7, 88 and asymmetric information, 88, 90 auctioning of rights, 88–9 taxation of, 91–2 utility services, 86, 89, 90 ‘moral hazard’, 179 morality and ethics deriving from values not reason, 27, 28–9, 42–3 and economic man, 10, 19, 25, 26–7, 31, 34–5 and empathy, 12, 27 evolution of ethical norms, 35–6 Haidt’s fundamental values, 11–12, 14, 16, 29, 42–3, 132–3 and market economy, 21, 25, 28, 48 and modern capitalism, 25–6 and new elites, 3–4, 20–21 Adam Smith’s theories, 26–8 use for strategic purposes, 39–40, 41 and Utilitarianism, 9–10, 11, 14, 16, 55, 66–7, 209, 214 motivated reasoning, 28–9, 36, 86, 144, 150, 167 Museveni, President, 121 narratives and childhood mentors, 169–70 and consistency, 41, 67, 81, 96 conveyed by language, 31, 33, 57 detachment from place by e-networks, 38, 61–2 and heyday of social democracy, 49 and identity formation, 32 mis-ranking of cognitive and non-cognitive training, 174–6 moral norms generated from, 33, 97–8 and purposive action, 33–4, 40–41, 42, 68 and schools, 165 of shared identity, 53–6, 81 use of by leaders, 39–42, 43, 49, 80–81 see also belonging, narrative of; obligation, narrative of; purposive action National Health Service (NHS), 49, 159 national identity and citizens-of-the-world agenda, 59–61, 63, 65 contempt of the educated for, 53, 59, 60–61, 63 and distinctive common culture, 37†, 63 established in childhood, 32 esteem from, 51–3 fracture to skill-based identities, 3–5, 51–6, 78 legacy of Second World War, 15, 16 methods of rebuilding, 64, 65–8, 211–15 and new nationalists, 62–3, 67, 203, 204, 205 patriotism narrative, 21, 63, 67, 215 place-based identity, 51–6, 65–8, 211–14, 215 and polarization of society, 54–5 and secession movements, 58 unravelling of shared identity, 15, 50, 51–6, 57*, 58–61, 63, 215 and value identity, 64–5 National Review, 16 nationalism, 34 based on ethnicity or religion, 62–3 capture of national identity notion by, 62, 67, 215 and narratives of hatred, 56, 57, 58–9 and oppositional identities, 56–7, 58–9, 62–3, 68, 215 traditional form of, 62 natural rights concept, 12, 13 Nestlé, 70, 71 Netherlands, 206 networked groups as arena for exchanging obligations, 28 and ‘common knowledge’, 32–3, 34, 54, 55, 66, 212 decline of civil society networks/ groups, 180–81 and early man, 31 evolution of ethical norms, 35–6 exclusion of disruptive narratives, 34 families as, 97–8 leadership’s use of narratives, 39–42, 49 narratives detached from place, 38, 61–2 value-based echo-chambers, 38, 61–2, 64–5, 212, 215 see also family; firms Neustadt, Richard, 39* New York City, 5, 125, 128, 143–4, 193 NGOs, 71, 118, 157–8 ‘niche construction’, 35*, 36* Nigeria, 58 Noble, Diana, 149* Norman, Jesse, 21–2† North Atlantic Treaty Organization (NATO), 114, 115, 116, 117 North Korea, 85 Northern League, Italy, 58 Norway, 63, 206, 208–9 Nozick, Robert, 14–15 obligation, narrative of, 11, 12–13, 16, 19, 29, 33 and collapse of social democracy, 53–6, 210 entitled individual vs family obligation, 99–103, 104–6, 108–9, 210 in ethical world, 112, 113–22 and expansion of post-war ‘clubs’, 117–18, 210 fairness and loyalty instilled by, 34 heyday of the ethical state, 48–9, 68, 196–7 and immigration, 196–7 and leadership, 39, 40–41, 49 ‘oughts’ and ‘wants’, 27, 28, 33, 43 and secession movements, 58 and Adam Smith, 27, 28 see also reciprocity; rescue, duty of oil industry, 192 Organization for Economic Co-operation and Development (OECD), 114–15, 125 Orwell, George, Nineteen Eighty-Four (1949), 5 Oxford university, 7, 70, 100 Paris, 5, 7, 125, 128, 174, 179 patriotism, 21, 63, 67, 215 Pause (NGO), 157–8 pension funds, 76–7, 79–81, 179–80, 185 Pew Research Center, 169 Pinker, Steven, 12* Plato, The Republic, 9, 11, 12, 15, 43 Playboy magazine, 99 political power and holders of economic rent, 135–6, 144 leadership selection systems in UK, 204–5, 206 minimum age for voting, 203 need to restore the centre, 205–7 polarization within polities, 38, 63, 202–5 polities as spatial, 38, 61–2, 65, 68, 211–13 and shared identity, 8, 57–61, 65, 114–16, 211–15 transformation into authority, 41–2, 57–8 trust in government, 4, 5, 48, 59, 210, 211–12 populism, political, 6, 22, 43, 58–9, 202 and geographic divide, 130–31 headless-heart, 30, 60, 112, 119, 121, 122 media celebrities, 6, 112, 204 pragmatism as opposed to, 30 and US presidential election (2016), 5, 203–4 pragmatist philosophy, 6, 9, 19, 21, 21–2†, 46, 201 author’s proposed policies, 19–20, 21, 207–15 limitations of, 30 and Macron in France, 204 and migration, 198 and post-war settlement, 113, 116, 122 and social democracy, 18, 201–2 successful leaders, 22 and taxation, 132, 207 and teaching methods, 166–7 values and reason, 29–30, 43–4 proportional representation, 206 protectionism, 113, 114, 130–31 psychology, social, 16, 54 co-ordination problems, 32–3 esteem’s trumping of money, 174 Haidt’s fundamental values, 11–12, 14, 16, 29, 42–3, 132–3 narratives, 31, 32, 33–4, 38, 39–42, 49, 53–6 norms, 33, 35–6, 39, 42–3, 44, 97–8, 107–8 ‘oughts’ and ‘wants’, 27, 28, 33, 43 personal achievement vs family obligation, 99–103, 104–6, 108–9, 210 ‘theory of mind’, 27, 55 Public Choice Theory, 15–16 public goods, 134–5, 138–9, 186, 202, 213 public ownership, 90 Puigdemont, Carles, 202 purposive action, 18, 21, 25, 26, 34, 40*, 53–4, 68, 112, 211–13 autonomy and responsibility, 38–9 and belonging narrative, 68, 98, 114, 211, 212, 213 in Bhutan, 37† decline in ethical purpose across society, 48 and heyday of social democracy, 47, 49, 114 and narratives, 33–4, 40–41, 42, 68 in workplace, 190 Putnam, Robert, 45–6, 106 Bowling Alone, 181 ‘quality circles’, 72–3 Rajan, Raghuram, 178 Rand, Ayn, 32 rational social woman, 31, 50–51, 196 Rawls, John, 13–14 Reagan, Ronald, 15, 26 Reback, Gary, 90 reciprocity, 9, 19, 31, 212–15 and belonging, 25, 40–41, 49, 53–6, 67, 68, 98, 181, 182, 210–11, 212–13 and collapse of social democracy, 11, 14, 53–6, 58–61, 201, 210 and corporate behaviour, 95 in ethical world, 112, 113–15, 116 and expansion of post-war ‘clubs’, 117–18, 210 fairness and loyalty as supporting, 29, 31, 34 and the family, 97–8, 101, 102 and geographic divide, 125 heyday of the ethical state, 48–9, 68, 96, 196–7, 201 and ISIS, 42 Macron’s patriotism narrative, 67 nineteenth-century co-operatives, 8 rights matched to obligations, 44–5 and three types of narrative, 33, 34, 40–41 transformation of power into authority, 39, 41–2, 57–8 Refuge (Betts and Collier), 27 refugees, 14, 27, 115, 119–20, 213 regulation, 87–90 and globalization, 193–4 of labour market, 174 religion, 56–7, 62–3, 109, 156 religious fundamentalism, 6, 30, 36–7, 212, 213, 215 rent-seeking concept, 140–41, 150, 186, 187–8, 195 rescue, duty of, 40, 54, 119–21, 210, 213 as instrument for ethical imperialism, 117–18, 210 as not matched by rights, 44, 45, 117 and post-war settlement, 113, 115–16 restoring and augmenting autonomy, 121–2 and stressed young families, 163 term defined, 27, 112 value of care as underpinning, 29 retirement pensions, 179–80 rights ideology and corresponding obligations, 44–5 emergence in 1970s, 12–14 human rights lobby, 112, 118, 118* individualism as rampant in recent decades, 19, 214–15 and lawyers, 13–14, 45 Libertarian use of, 12–13, 14–15 natural rights concept, 12, 13 and New Right, 12–13, 14–15, 53 Rawls’ disadvantaged groups, 3–4, 13–14, 16, 50, 53, 112, 121, 203–4, 214 ‘rights of the child’ concept, 103–4 and Utilitarian atate, 12–14 see also individualism Romania, communist, 32, 36 Rotherham, ‘Grimm and Co’, 168–9 rule of law, 138–9, 186 Rwanda, 22 Salmond, Alex, 202 Sandel, Michael, 105 Sanders, Bernie, 9, 64, 202, 203 Sarkozy, Nicolas, 204 Schultz, Martin, 14 Schumpeter, Joseph, 21* Scotland, 58 Seligman, Martin, 108–9 sexual behaviour birth-control pill, 98–9, 102 and class divide, 99, 102, 155–6 concept of sin, 156 and HIV, 121 and stigma, 156–8 sexual orientation, 3, 45 Sheffield, 7, 8, 126, 128–9, 131, 151, 168, 192 shell companies, 193, 194 Shiller, Robert, 34 Sidgwick, Henry, 55 Signalling, Theory of, 41, 43, 53, 63, 95 Silicon Valley, 37–8, 62, 145, 152, 164 Singapore, 22, 147 Slovenia, 58 Smith, Adam, 14, 21, 21–2†, 174 and mutual benefit from exchange, 28 and pursuit of self- interest, 26–7, 40 on reason, 29 The Theory of Moral Sentiments (1759), 27, 28, 174 Wealth of Nations (1776), 26, 28, 174 Smith, Vernon, 28 social democracy ‘Butskellism’, 49* collapse of, 9, 11, 50, 51–6, 116–18, 201–2, 210 communitarian roots, 8–9, 11, 13, 14, 17, 48–9, 201 and group identities, 3–4, 13–14, 51–6 heyday of, 8–9, 15, 17, 47, 48–9, 68, 96, 196–7, 201, 210 and housing, 181–2 influence of Utilitarianism, 9, 10, 14, 16, 18, 49–50, 201, 203, 214 Libertarian challenge, 12–13, 14–15 New Right abandonment of, 14–15, 16, 26, 53 and Public Choice Theory, 15–16 replaced by social paternalism, 11–13, 49–50, 209–10 and rights ideology, 12–14 and secession movements, 58 shared identity harnessed by, 15, 196–7 unravelling of shared identity, 15, 50, 51–6, 57*, 58–61, 63, 215 and Utilitarianism, 214 social maternalism concept, 21, 154–5, 190 free pre-school education, 163–4 mentoring for children, 169–70, 208 support for stressed families, 20, 155, 157–60, 161–3, 208 social media, 27, 61, 87, 173, 207, 215 social paternalism backlash against, 11–13, 15–16 as cavalier about globalization, 20 and child-rearing/family, 105, 110, 154–5, 157, 158, 159, 160, 190, 209 replaces social democracy, 11–13, 49–50, 209–10 ‘rights of the child’ concept, 103–4 and Utilitarian vanguard, 9–10, 11–13, 15–16, 18, 66–7, 209 social services, 159 scrutiny role, 162 Solow, Robert, 141 Soros, George, 15* South Africa, 85 South Asia, 192 South Korea, 129, 130–31 South Sudan, 192 Soviet Union, 114, 115, 116, 203 Spain, 58, 160 specialization, 17–18, 36, 126–8, 130, 144–5, 192 Spence, Michael, 41, 53, 95 Sperber, Dan, 29 St Andrews University, 189 Stanford University, 145, 152 Starbucks, 193 the state, 19 ethical capacities of, 11, 20–21, 48–9 failures in 1930s, 47, 48 ideologies hostile to, 37–8 and pre-school education, 163–4 and prosperity, 37 public policy and job shocks, 177–8 public policy on the family, 21, 154–5, 157–70, 171–3, 177, 209 public-sector and co-ordination problem, 147–8 social maternalism policies, 21, 157, 190 Utilitarian takeover of public policy, 10–12, 13–14, 15–17, 18, 49–50, 113, 201 Stiglitz, Joseph, 56 Stoke-on-Trent, 129 Stonehenge, 64 Sudan, 8 Summers, Larry, 187 Sure Start programme, 164 Sutton, John, 151* Sweden, 178 Switzerland, 175, 206 Tanzania, 193 taxation and corporate globalization, 193, 194 of economic rents, 91–2, 187–8 ethics and efficiency, 132–43 on financial transactions, 187 generational differences in attitudes, 59 Henry George’s Theorem, 133–6, 141 heyday of the ethical state, 49 issues of desert, 132–3, 134–9 and the metropolis, 131, 132–43, 187, 207 and migration, 197 of natural monopolies, 91–2 ‘optimal’, 10 of private litigation in courts, 187–8 and reciprocity, 54, 55, 59 redesign of needed, 19 redistributive, 10, 11, 14, 49, 54, 55, 60, 197 of rents of agglomeration, 19, 132–44, 207 social maternalism policies, 21, 157 substantial decline in top rates, 55 tax havens, 62 Venables-Collier theory, 136–9 Teach First programme, 165–6 technical vocational education and training (TVET), 171–6 technological change, 4 robotics revolution, 178–9 and withering of spatial community, 61–2 see also digital networks telomeres, 155–6 Tepperman, Jonathan, The Fix, 22 Thatcher, Margaret, 15, 26 Thirty Years War, 56–7 Tirole, Jean, 177, 178 Toyota, 72–3, 74, 94, 172 trade unions, 173, 174, 176 Troubled Families Programme (TFP), 162 Trudeau, Pierre, 22 Trump, Donald, 5, 9, 63, 64, 86, 125, 136, 202, 204, 206, 215 Uber, 87 unemployment in 1930s, 47 and collapse of industry, 7, 103, 129, 192 impact on children, 160–61 older workers, 4, 103, 213 retraining schemes, 178 in USA, 160 young people, 4 Unilever, 70, 71 United Kingdom collapse of heavy industry, 7, 103, 129, 192 extreme politics in, 5 and falling life expectancy, 4 financial sector, 80, 83, 84–5 IMF bail-out (1976), 115 local banks in past, 146 northern England, 3, 7, 8, 84, 126, 128–9, 131, 151, 168, 192 shareholder control of firms, 76–7, 79, 80, 82–3 statistics on firms in, 37 universities in, 170, 172, 175* vocational education in, 172, 175† widening of geographic divide, 125 United Nations, 65, 112 ‘Club of 77’, 116 Security Council, 116 UNHCR, 115 United States breakdown of ethical family, 104–5 broken cities in, 129, 130 extreme politics in, 5, 63 and falling life expectancy, 4 financial sector, 83–4, 186 and global e-utilities, 89–90 growth in inequality since 1980, 125 heyday of the ethical state, 49 and knowledge industries, 192 labour market in, 176, 178 local banks in past, 146 oversight of firms in, 76 pessimism in, 5, 45–6 presidential election (2016), 5, 9, 203–4 Public Interest Companies, 93 public policy as predominantly national, 212 ‘rights of the child’ concept in, 103–4 Roosevelt’s New Deal, 47 statistics on firms in, 37 taxation in, 143–4, 144* unemployment in, 160 universities in, 170, 172, 173 weakening of NATO commitment, 117 universities in broken cities, 151–2 in EU countries, 170 expansion of, 99–100, 127 knowledge clusters at, 127, 151–2 low quality vocational courses, 172–3 in UK, 170, 172, 175* in US, 170, 172, 173 urban planning, post-war, 11–12 Utilitarianism, 19, 30, 49–50, 55, 108, 112, 121, 210–11 backlash against, 11–13, 201, 202 belonging as absent from discourse, 16, 59, 66–7, 210–11 care as key value, 12 and consumption, 10, 11, 16, 19–20, 209 equality as key value, 12, 13, 14, 15, 116, 132–3, 214 incorporated into economics, 10–11, 13–14, 16 influence on social democrats, 9, 10, 14, 16, 18, 49–50, 201, 203, 214 origins of, 9–10 paternalistic guardians, 9–10, 11–13, 66–7, 210 takeover of public policy, 10–12, 13–14, 15–17, 18, 49–50, 113, 201 and taxation, 10, 132*, 133 vanguard’s switch of identity salience, 52, 53, 59 Valls, Manuel, 204 Venables, Tony, 18, 136, 191* Venezuela, 120, 214 vested interests, 85–6, 135–6, 165, 166, 207 Volkswagen, 74–5 Walmart, 87 Warsi, Baroness Sayeeda, 65 Wedgwood, Josiah, 129 welfare state, 9, 48–9 unlinked from contributions, 14 well-being and happiness belonging and esteem, 16, 25, 27, 29, 31–3, 34, 42, 51–6, 97–8, 174 entitled individual vs family obligation, 108–9 and financial success, 26, 94 ‘ladder of life’, 25* poverty in Africa, 37 reciprocity as decisive for, 31 Westminster, Duke of, 136 white working class ‘elite’ attitudes to, 4, 5, 16 falling life expectancy, 4, 16 pessimism of, 5 William, Prince, 188–9 Williams, Bernard, 55* Wittgenstein, 62, 63 Wolf, Alison, 52–3, 155 World Bank, 115, 117, 118, 118*, 122 World Food Programme, 115 World Health Organization, 115 World Trade Organization (WTO), 116–17 Yugoslavia, 58 Zingales, Luigi, 178 Zuma, Jacob, 85 Copyright THE FUTURE OF CAPITALISM.

., 120–21 business zones, 150 ‘Butskellism’, 49* Cadbury, 77 Cameron, David, 205 Canada, 22 capitalism competition, 21, 25, 56, 85, 86 ‘creative destruction’ concept, 21 current failings of, 4–5, 17, 25, 42, 45–6, 48, 201, 212–13 and decline of social trust, 5, 45–6, 48, 55, 59, 69 as essential for prosperity, 4–5, 18, 20, 25, 201 and families, 37 first mover advantage, 148 and greed, 10, 19, 25–7, 28, 31, 42, 58, 69, 70†, 81, 95 and Marx’s alienation, 17–18 and oppositional identities, 56, 74 vested interests, 85, 86, 135–6, 207 see also firms Catalan secession movement, 58 causality, narrative of, 33, 34 CDC Group, 122, 149* Chaucer, Geoffrey, The Canterbury Tales, 129 Chicago, University of, 166 childhood adoption, 110–11 children in ‘care’, 104, 105, 110, 111, 157 children ‘reared by wolves’, 31–2 cognitive development, 105–6, 170, 175–6 fostering, 104, 105, 111 identity acquisition, 32 impact of parental unemployment, 160–61 learning of norms, 33, 35, 107–8 non-cognitive development, 105, 163, 169–70, 171–3, 174, 175–6 ‘rights of the child’ concept, 103–4 in single-parent families, 101, 102, 104–5, 155, 160 trusted mentors, 169–70 see also family China, 118–19, 149, 203 Chira, Susan, 52–3 Chirac, Jacques, 14, 120–21 Christian Democratic parties, 5, 14 Citigroup, 186 Clark, Gregory, The Son Also Rises, 106–8 Clarke, Ken, 206 class divide assortative mating among new elite, 99–100, 154, 188–9 author’s proposed policies, 19–20, 21, 183–4, 187–8, 190, 207–8 and breadth of social networks, 169 and Brexit vote, 5, 196 and cognitive development, 105–6 divergence dynamic, 7, 18, 48, 98–108, 154–61, 170–71, 172–80, 181–90 ‘elite’ attitudes to less-well educated, 4, 5, 12, 16, 53, 59, 60–61, 63 and family life, 20, 98, 99–106, 157–62 and fracture to skill-based identities, 3–5, 51–6, 78 and home ownership, 68, 181, 182–3 need for socially mixed schools, 164–5 and non-cognitive development, 105, 163, 169–70, 171–3, 174, 175–6 and parental hothousing, 100, 101, 105–6 post-school skills development, 170–76 pre-emptive support for stressed families, 20, 155, 157–60, 161–3, 208 and reading in pre-teens, 167–9 and recent populist insurgencies, 5 retirement insecurities, 179–80 and two-parent families, 155–6, 157 unravelling of shared identity, 15, 50, 51–6, 57*, 58–61, 63, 215 see also white working class climate change, 44, 67, 119 Clinton, Hillary, 5, 9, 203–4 coalition government, UK (2010–15), 206 cognitive behavioral therapy, 160 Cold War, 113, 114, 116 end of, 5–6, 115, 203 Colombia, 120 communism, 32, 36–7, 85–6 communitarian values care, 9, 11, 12, 16, 29, 31, 42, 116 fairness, 11, 12, 14, 16, 29, 31, 34, 43, 116, 132–3 hierarchy, 11, 12, 16, 38–9, 43, 99–100 left’s abandonment of, 16, 214* liberty, 11, 12, 16, 42 loyalty, 11, 12, 16, 29, 31, 34, 42–3, 116 new vanguard’s abandonment of, 9, 11–13, 14–15, 16, 17, 49–50, 113, 116–18, 121, 214 post-war settlement, 8–9, 49, 113–16, 122 and reciprocal obligations, 8–9, 11–12, 13, 14, 19, 33, 34, 40–41, 48–9, 201, 212–15 roots in nineteenth-century co-operatives, 8, 13, 14, 201 sanctity, 11, 16, 42–3 Smith and Hume, 21–2† values and reason, 29–30, 43–4 see also belonging, narrative of; obligation, narrative of; reciprocity; social democracy Companies Act, UK, 82 comparative advantage, 20, 120, 192, 194 Confederation of British Industry (CBI), 79 conservatism, 30, 36 Conservative Party, 14, 49, 205, 206 contraception, 98–9, 102 co-operative movement, 8, 13, 14, 201 Corbyn, Jeremy, 202, 204–5 Crosland, Anthony, The Future of Socialism, 17, 18, 19 Cuban Missile Crisis (1962), 114 debutante balls, 188 Denmark, 63, 178, 214* Descartes, Rene, 31 Detroit, 128, 129, 144 Deutsche Bank, 78, 185 development banks, 149–50 Development Corporations Act (1981), 150 Dickens, Charles, Bleak House, 108 digital networks detachment of narratives from place, 38, 61–2 economies of scale, 86–7 global e-utilities, 37, 38, 86–7, 89–90, 91 social media, 27, 61, 87, 173, 207, 215 value-based echo-chambers, 38, 61–2, 64–5, 212, 215 Draghi, Mario, 153 Dundee Project, 161–2 Dutch Antilles, 193 East Asia, 147, 192 eBay, 87 economic man, 10, 19, 25, 26–7, 31, 34–5, 196, 209, 210, 215 economic rent theory, 19, 91, 133–9, 140–44, 186–8, 192, 195, 207 education and collapse of social democracy, 50, 52, 53, 54, 55, 59, 63 and empathy, 12 and European identity, 57* expansion of universities, 99–100, 127 and growth of the middle class, 100 inequality in spending per pupil, 167 mis-ranking of cognitive and non-cognitive training, 174–6 need for socially mixed schools, 164–5 post-school skills development, 170–76 pre-school, 105–6, 163–4 quality of teaching, 165–6 reading in pre-teens, 167–9 and shocks to norms of ethical family, 98, 99–105 symbols of cognitive privilege, 175 teaching methods, 166–7 vocational education, 171–6 zero-sum aspects of success, 189 electoral systems, 206 Emerging Market economies, 129, 130–31 empires, age of, 113 The Enigma of Reason (Mercier and Sperber), 29 enlightened self-interest, 33, 40*, 97–8, 101, 109, 112, 113, 114, 117, 184, 213 Enron, 80 ethnicity, 3, 20, 56, 62, 64, 65, 211 Europe Christian Democrats in, 5, 14 class divides, 3, 4, 5, 125 decline in social trust, 45 and knowledge industries, 192 metropolitan-provincial divides, 3, 4, 125 and migration, 121, 197 and shared identity, 57–8, 64, 66, 125 social democracy in, 8–9, 49, 50 European Central Bank, 153 European Commission, 57 European Investment Bank, 149 European Union (EU, formerly EEC), 66, 67, 114, 115, 116, 117 Brexit vote (June 2016), 5, 125, 131, 196, 215 Eurozone crisis, 153 public policy as predominantly national, 212 universities in, 170 evolutionary theory, 31, 33†, 35–6, 66 externalities, 145–6 Facebook, 87 Fairbairn, Carolyn, 79 fake news, 33–4 family, 19 African norms, 110–11 benefits for single parents, 160 Clark’s ‘family culture’, 107–8 entitled individual vs family obligation, 99–103, 104–6, 108–9, 210 equality within, 39, 154 erosion of mutual obligations, 101–2, 210 identity acquisition, 32 ideologies hostile to, 36–7 impact of unemployment/poverty, 4, 7, 160–61 importance of, 36, 37 and increased longevity, 110, 161 in-kind support for parenting, 161 nuclear dynastic family, 102, 110, 154 one-parent families, 101, 102, 104–5, 155, 160 parental hothousing, 100, 101, 105–6 post-1945 ethical family, 97–8, 99–105, 108, 210 pressures on young parents, 159–60, 161–3 and public policy, 21, 154–5, 157–70, 171–3, 177, 209 and reciprocity, 97–8, 101, 102 shocks to post-1945 norms, 98–105 shrinking of extended family, 101–2, 109–10, 161 social maternalism concept, 154–5, 157–8, 190 two-parent families as preferable, 155–6, 157 see also childhood; marriage Farage, Nigel, 202 fascism, 6, 13*, 47, 113 Federalist papers, 82 feminism, 13, 99 Fillon, François, 204 financial crisis, global (2008–9), 4, 34, 71, 160 no bankers sent to gaol for, 95–6 financial sector, 77–9, 80–81, 83–5 asymmetric information, 88, 185 co-ordination role, 145–6 economies of scale, 87 localized past of, 84, 146 toxic rivalries in, 189 trading in financial assets, 78–9, 84, 184–5, 186, 187 Finland, 63 firms, 19, 21, 69 CEO pay, 77–8, 79, 80–81 competition, 21, 25, 56, 85, 86 control/accountability of, 75–81, 82–5 cultures of good corporate behaviour, 94–5 demutualization in UK, 83, 84 deteriorating behaviour of, 18, 69, 78, 80–81 economies of scale, 17–18, 37, 86–7, 88–91, 126–7, 144–5, 146–7 ethical, 70–71, 172, 209–10 and ethical citizens, 93–4, 95, 96 failure/bankruptcy of, 70, 71, 72, 74, 75–6 flattening of hierarchies in, 39 Friedman’s profit nostrum, 69–70, 71, 76, 78–9, 210 global e-utilities, 37, 38, 86–7, 89–90, 91 ideologies hostile to, 37, 81 low productivity-low cost business model, 173–4 ‘maximising of shareholder value’, 69–70, 76, 79, 82–3 ‘mutuals’, 83 need for bankslaughter crime, 95–6 new network features, 86–7 policing the public interest, 93–4 public dislike of, 69, 95–6 public interest representation on boards, 92–3 regulation of, 87–90, 174 reward linked to short-term performance, 77, 78–81 sense of purpose, 39–40, 41, 70–75, 80–81, 93–4, 96 shareholder control of, 76–7, 79, 80, 82–3 societal role of, 81–2, 92–3, 96, 209–10 utility services, 86, 89, 90 worker interests on boards, 83, 84–5 Fisher, Stephen, 196* Five Star, 125 Ford, 70, 71 France, 7, 63, 67, 114 écoles maternelles in, 164 labour market in, 176, 189 pensions policy, 180 presidential election (2017), 5, 9, 204 universities in, 170 working week reduced in, 189 Frederiksen, Mette, 214* Friedman, Milton, 15, 69–70, 71, 76 The Full Monty (film), 7, 129 G20 group, 118 G7 group, 118 G8 group, 194 Ganesh, Janan, 125 Geldof, Bob, 169 General Agreement on Tariffs and Trade (GATT), 114, 115, 116–17 General Motors (GM), 72, 73–4, 75, 86, 172 geographic divide, 3, 16, 18, 19, 215 author’s proposed policies, 19, 207 and Brexit vote, 125, 196 broken cities, 4, 7, 19, 48, 125, 129–30, 147–9 business zones, 150 co-ordination problem over new clusters, 145–50, 207 decline of provincial cities, 4, 7, 19, 48, 125, 129–30, 131, 144–5 economic forces driving, 126–30 and education spending, 167 first mover disadvantage, 148–9 ideological responses, 130–32 investment promotion agencies, 150–51 and local universities, 151–2 and metropolitan disdain, 125 need for political commitment, 153 as recent and reversible, 152–3 regenerating provincial cities, 19, 142, 144–50 and spending per school pupil, 167 widening of since 1980, 125 George, Henry, 133–6, 141 Germany 2017 election, 5, 205 local banks in, 146 Nazi era, 57 and oppositional identities, 56–7 oversight of firms in, 76 post-war industrial relations policy, 94–5 and post-war settlement, 114 re-emergence of far right, 5 rights of refugees in, 14 ‘social market economy’, 49 TVET in, 171–2, 174, 175 vereine (civil society groups), 181 worker interests on boards, 84–5 global divide, 7–8, 20, 59–60, 191–8, 208 globalization, 4, 18, 20, 126–7, 128, 129, 130–31, 191–8 Goldman Sachs, 70†, 83–4, 94 Google, 87 Great Depression (1930s), 114 Green, Sir Philip, 80 Grillo, Beppe, 202 ‘Grimm and Co’, Rotherham, 168–9 Gunning, Jan Willem, 165 Haidt, Jonathan, 11–12, 14, 16, 28, 29, 132–3 Haiti, 208 Halifax Building Society, 8, 84 Hamon, Benoît, 9, 204 Harvard-MIT, 7, 152 Hershey, 77 HIV sufferers in poor countries, 120–21 Hofer, Norbert, 202 Hollande, Francois, 9, 204 Hoover, 148 housing market, 181–4 buy-to-let, 182, 183, 184 and lawyers, 187 mortgages, 84, 176, 182, 183–4 proposed stock transfer from landlords to tenants, 184 Hume, David, 14, 21, 21–2†, 29 Huxley, Aldous, Brave New World (1932), 5 Iceland, 63 Identity Economics, 50–56, 65–7 ideologies based on hatred of ‘other’ part of society, 43, 56, 213, 214 ‘end of history’ triumphalism, 6, 43–4 hostile to families, 36–7 hostile to firms, 37, 81 hostile to the state, 37–8 and housing policy, 183 and migration, 198 New Right, 14–15, 26, 81, 129 norms of care and equality, 116, 132–3 polarization of politics, 38, 63, 202–5 pragmatic eschewal of, 17, 18, 21, 22, 29–30 and principle of reason, 9, 13, 14, 15, 21, 43 Rawlsian vanguard, 13–14, 30, 49–50, 53, 67, 112, 113, 201, 202, 203, 214 return of left-right confrontation, 5, 6, 81, 202–5 and rights, 12–14, 44, 112 seduction of, 6 and twentieth century’s catastrophes, 5–6, 22 views on an ethical world, 112 see also Marxism; rights ideology; Utilitarianism IFC (International Finance Corporation), 122 Imperial Chemical Industries (ICI), 69–70, 75 India, 118–19 individualism entitled individual vs family obligation, 99–103, 104–6, 108–9, 210 fulfilment through personal achievement, 28, 99, 100–101, 102, 103, 108–9, 213 New Right embrace of, 14–15, 53, 81, 214–15 as rampant in recent decades, 19, 214–15 reciprocity contrasted with, 44–5 and withering of spatial community, 61–2 industrial revolution, 8, 126 inequality and assortative mating among new elite, 99–100, 154, 188–9 and divergence dynamic, 7, 18, 48, 98–108, 154–61, 170–71, 172–80, 181–90 and financial sector, 185 and geographic divide, 3, 7–8, 20, 125 global divide, 7–8, 20, 59–60, 191–8, 208 persistence of, 106–8 Rawls’ disadvantaged groups, 3–4, 13–14, 16, 50, 53, 121, 203–4, 214 and revolt against social democracy, 15–16 rising levels of, 3–5, 106, 125, 181, 190 and Utilitarian calculus, 132 innovation, 185–6, 208 International Monetary Fund (IMF), 114, 117 international relations achievement of post-WW2 leaders, 113–16, 122 building of shared identity, 114–16 core concepts of ethical world, 112, 113–14 erosion of ethical world, 116–18 expansion of post-war ‘clubs’, 116–18, 210 new, multipurpose club needed, 118–19, 122 and patriotism narrative, 67 situation in 1945, 112–13, 122 investment promotion agencies, 150–51 Irish Investment Authority, 151 Islamist terrorism, 42, 212, 213 Italy, 4, 58, 160 James, William, 29* Janesville (US study), 178 Japan, 72–3, 94, 101, 149, 192 John Lewis Partnership, 83, 172 Johnson, Robert Wood, 39–40, 72 Johnson & Johnson, 39–40, 41, 72, 74*, 79 Jolie, Angelina, 112 JP Morgan, 71* Juppé, Alain, 204 Kagame, Paul, 22 Kay, John, 82*, 84, 211 Keynes, John Maynard, 115 General Theory (1936), 47 kindergartens, 163 Knausgård, Karl Ove, 173 knowledge revolution, 126, 127–8 Kranton, Rachel, 35, 50–51 Krueger, Anne, 141 Krugman, Paul, 47 labour market flexicurity concept, 178 function of, 176–7 and globalization, 192, 194–6 and immigration, 194, 195, 196 investment in skills, 176–7 job security, 176, 177 and low productivity-low cost business model, 173–4 minimum wage strategies, 147, 174, 176, 180 need for reductions in working hours, 189 need for renewed purpose in work, 190 regulation of, 174, 189 and robotics revolution, 178–9 role of state, 177–8, 189 see also unemployment Labour Party, 49, 206 Marxist take-over of, 9, 204–5 language, 31, 32, 33, 39–40, 54, 57 Larkin, Philip, 99, 156 lawyers, 13–14, 45 Buiter’s three types, 186 and shell companies, 193, 194 surfeit of, 186–7 taxation of private litigation proposal, 187–8 Le Pen, Marine, 5, 63, 125, 202, 204 leadership and belief systems, 41–2, 43, 95 building of shared identity, 39–42, 49, 68, 114–16 changing role of, 39 and flattening of hierarchies, 39 and ISIS, 42 political achievements in post-war period, 113–16, 122 and pragmatist philosophy, 22 and shared purpose in firms, 39–40, 41, 71–5 strategic use of morality, 39–40, 41 transformation of power into authority, 39, 41–2, 57 League of Nations, 116 Lee Kwan Yew, 22, 147 Lehman Brothers, 71*, 76 liberalism, 30 libertarianism, 12–13, 15 New Right failures, 16, 21 Silicon Valley, 37–8 lobbying, 85, 141 local government, 182, 183 London, 3, 125, 127–8, 165–6, 193 impact of Brexit on, 131, 196 migration to, 195–6 Macron, Emmanuel, 67, 204 Manchester terror attack (2017), 212, 213 market economy, 19, 20, 21, 25, 48 and collapse of clusters, 129–30, 144–5 failure over pensions, 180 failure over skill-formation, 173–4 mutual benefit from exchange, 28 market fundamentalists, 147, 150 marriage assortative mating, 35, 99–100, 154, 188–9 cohabitation prior to, 99, 100 as ‘commitment technology’, 109, 155–6 divorce rates, 98, 99, 100–101, 102, 103 and female oppression, 156 religious associations, 109, 156 and rent-seeking, 141 ‘shotgun weddings’, 103 and unemployment, 103 Marxism, 13*, 26, 30, 43, 47, 113, 203, 214 alienation concept, 17–18 and the family, 36–7 late capitalism concept, 6 takeover of Labour Party, 9, 204–5 and ‘useful idiots’, 205* view of the state, 37 Maxwell, Robert, 80 May, Theresa, 205 Mayer, Colin, 18, 70 media celebrities, 6, 112, 204 Mélenchon, Jean-Luc, 5, 202, 204 mental health, 157, 158–9, 162 Mercier, Hugo, 29 meritocratic elites, 3–4, 5, 12–17, 20 Rawlsian vanguard, 13–14, 30, 49–50, 53, 67, 112, 113, 201, 202, 203, 214 Utilitarian vanguard, 9–10, 11–13, 15–16, 18, 52, 53, 59, 66–7, 209 see also Utilitarianism WEIRD (Western, Educated, Industrial, Rich and Developed), 3–4, 12, 14, 16, 17, 20, 116, 121, 133, 214* and white working class, 5, 16 Merkel, Angela, 14, 205 metropolitan areas, 3, 4, 7, 16, 19, 48, 125 co-ordination problem over new clusters, 145–50, 207 economies of agglomeration, 18, 19, 129, 131, 133–44, 195, 196, 207 gains from public goods, 134–5, 138–9 migration to, 195–6 political responses to dominance of, 131–2 scale and specialization in, 126–8, 130, 144–5 and taxation, 131, 132–43, 187, 207 Middle East, 192 Middleton, Kate, 188–9 migration, 121, 194–8, 203 as driven by absolute advantage, 20, 194–5, 208–9 and housing market, 182, 183 Mill, John Stuart, 9–10 minimum wage strategies, 147, 174, 176, 180 Mitchell, Andrew, 188 Mitchell, Edson, 78 modernist architecture, 12 Monarch Airlines, 75 monopolies, natural, 86–7, 88 and asymmetric information, 88, 90 auctioning of rights, 88–9 taxation of, 91–2 utility services, 86, 89, 90 ‘moral hazard’, 179 morality and ethics deriving from values not reason, 27, 28–9, 42–3 and economic man, 10, 19, 25, 26–7, 31, 34–5 and empathy, 12, 27 evolution of ethical norms, 35–6 Haidt’s fundamental values, 11–12, 14, 16, 29, 42–3, 132–3 and market economy, 21, 25, 28, 48 and modern capitalism, 25–6 and new elites, 3–4, 20–21 Adam Smith’s theories, 26–8 use for strategic purposes, 39–40, 41 and Utilitarianism, 9–10, 11, 14, 16, 55, 66–7, 209, 214 motivated reasoning, 28–9, 36, 86, 144, 150, 167 Museveni, President, 121 narratives and childhood mentors, 169–70 and consistency, 41, 67, 81, 96 conveyed by language, 31, 33, 57 detachment from place by e-networks, 38, 61–2 and heyday of social democracy, 49 and identity formation, 32 mis-ranking of cognitive and non-cognitive training, 174–6 moral norms generated from, 33, 97–8 and purposive action, 33–4, 40–41, 42, 68 and schools, 165 of shared identity, 53–6, 81 use of by leaders, 39–42, 43, 49, 80–81 see also belonging, narrative of; obligation, narrative of; purposive action National Health Service (NHS), 49, 159 national identity and citizens-of-the-world agenda, 59–61, 63, 65 contempt of the educated for, 53, 59, 60–61, 63 and distinctive common culture, 37†, 63 established in childhood, 32 esteem from, 51–3 fracture to skill-based identities, 3–5, 51–6, 78 legacy of Second World War, 15, 16 methods of rebuilding, 64, 65–8, 211–15 and new nationalists, 62–3, 67, 203, 204, 205 patriotism narrative, 21, 63, 67, 215 place-based identity, 51–6, 65–8, 211–14, 215 and polarization of society, 54–5 and secession movements, 58 unravelling of shared identity, 15, 50, 51–6, 57*, 58–61, 63, 215 and value identity, 64–5 National Review, 16 nationalism, 34 based on ethnicity or religion, 62–3 capture of national identity notion by, 62, 67, 215 and narratives of hatred, 56, 57, 58–9 and oppositional identities, 56–7, 58–9, 62–3, 68, 215 traditional form of, 62 natural rights concept, 12, 13 Nestlé, 70, 71 Netherlands, 206 networked groups as arena for exchanging obligations, 28 and ‘common knowledge’, 32–3, 34, 54, 55, 66, 212 decline of civil society networks/ groups, 180–81 and early man, 31 evolution of ethical norms, 35–6 exclusion of disruptive narratives, 34 families as, 97–8 leadership’s use of narratives, 39–42, 49 narratives detached from place, 38, 61–2 value-based echo-chambers, 38, 61–2, 64–5, 212, 215 see also family; firms Neustadt, Richard, 39* New York City, 5, 125, 128, 143–4, 193 NGOs, 71, 118, 157–8 ‘niche construction’, 35*, 36* Nigeria, 58 Noble, Diana, 149* Norman, Jesse, 21–2† North Atlantic Treaty Organization (NATO), 114, 115, 116, 117 North Korea, 85 Northern League, Italy, 58 Norway, 63, 206, 208–9 Nozick, Robert, 14–15 obligation, narrative of, 11, 12–13, 16, 19, 29, 33 and collapse of social democracy, 53–6, 210 entitled individual vs family obligation, 99–103, 104–6, 108–9, 210 in ethical world, 112, 113–22 and expansion of post-war ‘clubs’, 117–18, 210 fairness and loyalty instilled by, 34 heyday of the ethical state, 48–9, 68, 196–7 and immigration, 196–7 and leadership, 39, 40–41, 49 ‘oughts’ and ‘wants’, 27, 28, 33, 43 and secession movements, 58 and Adam Smith, 27, 28 see also reciprocity; rescue, duty of oil industry, 192 Organization for Economic Co-operation and Development (OECD), 114–15, 125 Orwell, George, Nineteen Eighty-Four (1949), 5 Oxford university, 7, 70, 100 Paris, 5, 7, 125, 128, 174, 179 patriotism, 21, 63, 67, 215 Pause (NGO), 157–8 pension funds, 76–7, 79–81, 179–80, 185 Pew Research Center, 169 Pinker, Steven, 12* Plato, The Republic, 9, 11, 12, 15, 43 Playboy magazine, 99 political power and holders of economic rent, 135–6, 144 leadership selection systems in UK, 204–5, 206 minimum age for voting, 203 need to restore the centre, 205–7 polarization within polities, 38, 63, 202–5 polities as spatial, 38, 61–2, 65, 68, 211–13 and shared identity, 8, 57–61, 65, 114–16, 211–15 transformation into authority, 41–2, 57–8 trust in government, 4, 5, 48, 59, 210, 211–12 populism, political, 6, 22, 43, 58–9, 202 and geographic divide, 130–31 headless-heart, 30, 60, 112, 119, 121, 122 media celebrities, 6, 112, 204 pragmatism as opposed to, 30 and US presidential election (2016), 5, 203–4 pragmatist philosophy, 6, 9, 19, 21, 21–2†, 46, 201 author’s proposed policies, 19–20, 21, 207–15 limitations of, 30 and Macron in France, 204 and migration, 198 and post-war settlement, 113, 116, 122 and social democracy, 18, 201–2 successful leaders, 22 and taxation, 132, 207 and teaching methods, 166–7 values and reason, 29–30, 43–4 proportional representation, 206 protectionism, 113, 114, 130–31 psychology, social, 16, 54 co-ordination problems, 32–3 esteem’s trumping of money, 174 Haidt’s fundamental values, 11–12, 14, 16, 29, 42–3, 132–3 narratives, 31, 32, 33–4, 38, 39–42, 49, 53–6 norms, 33, 35–6, 39, 42–3, 44, 97–8, 107–8 ‘oughts’ and ‘wants’, 27, 28, 33, 43 personal achievement vs family obligation, 99–103, 104–6, 108–9, 210 ‘theory of mind’, 27, 55 Public Choice Theory, 15–16 public goods, 134–5, 138–9, 186, 202, 213 public ownership, 90 Puigdemont, Carles, 202 purposive action, 18, 21, 25, 26, 34, 40*, 53–4, 68, 112, 211–13 autonomy and responsibility, 38–9 and belonging narrative, 68, 98, 114, 211, 212, 213 in Bhutan, 37† decline in ethical purpose across society, 48 and heyday of social democracy, 47, 49, 114 and narratives, 33–4, 40–41, 42, 68 in workplace, 190 Putnam, Robert, 45–6, 106 Bowling Alone, 181 ‘quality circles’, 72–3 Rajan, Raghuram, 178 Rand, Ayn, 32 rational social woman, 31, 50–51, 196 Rawls, John, 13–14 Reagan, Ronald, 15, 26 Reback, Gary, 90 reciprocity, 9, 19, 31, 212–15 and belonging, 25, 40–41, 49, 53–6, 67, 68, 98, 181, 182, 210–11, 212–13 and collapse of social democracy, 11, 14, 53–6, 58–61, 201, 210 and corporate behaviour, 95 in ethical world, 112, 113–15, 116 and expansion of post-war ‘clubs’, 117–18, 210 fairness and loyalty as supporting, 29, 31, 34 and the family, 97–8, 101, 102 and geographic divide, 125 heyday of the ethical state, 48–9, 68, 96, 196–7, 201 and ISIS, 42 Macron’s patriotism narrative, 67 nineteenth-century co-operatives, 8 rights matched to obligations, 44–5 and three types of narrative, 33, 34, 40–41 transformation of power into authority, 39, 41–2, 57–8 Refuge (Betts and Collier), 27 refugees, 14, 27, 115, 119–20, 213 regulation, 87–90 and globalization, 193–4 of labour market, 174 religion, 56–7, 62–3, 109, 156 religious fundamentalism, 6, 30, 36–7, 212, 213, 215 rent-seeking concept, 140–41, 150, 186, 187–8, 195 rescue, duty of, 40, 54, 119–21, 210, 213 as instrument for ethical imperialism, 117–18, 210 as not matched by rights, 44, 45, 117 and post-war settlement, 113, 115–16 restoring and augmenting autonomy, 121–2 and stressed young families, 163 term defined, 27, 112 value of care as underpinning, 29 retirement pensions, 179–80 rights ideology and corresponding obligations, 44–5 emergence in 1970s, 12–14 human rights lobby, 112, 118, 118* individualism as rampant in recent decades, 19, 214–15 and lawyers, 13–14, 45 Libertarian use of, 12–13, 14–15 natural rights concept, 12, 13 and New Right, 12–13, 14–15, 53 Rawls’ disadvantaged groups, 3–4, 13–14, 16, 50, 53, 112, 121, 203–4, 214 ‘rights of the child’ concept, 103–4 and Utilitarian atate, 12–14 see also individualism Romania, communist, 32, 36 Rotherham, ‘Grimm and Co’, 168–9 rule of law, 138–9, 186 Rwanda, 22 Salmond, Alex, 202 Sandel, Michael, 105 Sanders, Bernie, 9, 64, 202, 203 Sarkozy, Nicolas, 204 Schultz, Martin, 14 Schumpeter, Joseph, 21* Scotland, 58 Seligman, Martin, 108–9 sexual behaviour birth-control pill, 98–9, 102 and class divide, 99, 102, 155–6 concept of sin, 156 and HIV, 121 and stigma, 156–8 sexual orientation, 3, 45 Sheffield, 7, 8, 126, 128–9, 131, 151, 168, 192 shell companies, 193, 194 Shiller, Robert, 34 Sidgwick, Henry, 55 Signalling, Theory of, 41, 43, 53, 63, 95 Silicon Valley, 37–8, 62, 145, 152, 164 Singapore, 22, 147 Slovenia, 58 Smith, Adam, 14, 21, 21–2†, 174 and mutual benefit from exchange, 28 and pursuit of self- interest, 26–7, 40 on reason, 29 The Theory of Moral Sentiments (1759), 27, 28, 174 Wealth of Nations (1776), 26, 28, 174 Smith, Vernon, 28 social democracy ‘Butskellism’, 49* collapse of, 9, 11, 50, 51–6, 116–18, 201–2, 210 communitarian roots, 8–9, 11, 13, 14, 17, 48–9, 201 and group identities, 3–4, 13–14, 51–6 heyday of, 8–9, 15, 17, 47, 48–9, 68, 96, 196–7, 201, 210 and housing, 181–2 influence of Utilitarianism, 9, 10, 14, 16, 18, 49–50, 201, 203, 214 Libertarian challenge, 12–13, 14–15 New Right abandonment of, 14–15, 16, 26, 53 and Public Choice Theory, 15–16 replaced by social paternalism, 11–13, 49–50, 209–10 and rights ideology, 12–14 and secession movements, 58 shared identity harnessed by, 15, 196–7 unravelling of shared identity, 15, 50, 51–6, 57*, 58–61, 63, 215 and Utilitarianism, 214 social maternalism concept, 21, 154–5, 190 free pre-school education, 163–4 mentoring for children, 169–70, 208 support for stressed families, 20, 155, 157–60, 161–3, 208 social media, 27, 61, 87, 173, 207, 215 social paternalism backlash against, 11–13, 15–16 as cavalier about globalization, 20 and child-rearing/family, 105, 110, 154–5, 157, 158, 159, 160, 190, 209 replaces social democracy, 11–13, 49–50, 209–10 ‘rights of the child’ concept, 103–4 and Utilitarian vanguard, 9–10, 11–13, 15–16, 18, 66–7, 209 social services, 159 scrutiny role, 162 Solow, Robert, 141 Soros, George, 15* South Africa, 85 South Asia, 192 South Korea, 129, 130–31 South Sudan, 192 Soviet Union, 114, 115, 116, 203 Spain, 58, 160 specialization, 17–18, 36, 126–8, 130, 144–5, 192 Spence, Michael, 41, 53, 95 Sperber, Dan, 29 St Andrews University, 189 Stanford University, 145, 152 Starbucks, 193 the state, 19 ethical capacities of, 11, 20–21, 48–9 failures in 1930s, 47, 48 ideologies hostile to, 37–8 and pre-school education, 163–4 and prosperity, 37 public policy and job shocks, 177–8 public policy on the family, 21, 154–5, 157–70, 171–3, 177, 209 public-sector and co-ordination problem, 147–8 social maternalism policies, 21, 157, 190 Utilitarian takeover of public policy, 10–12, 13–14, 15–17, 18, 49–50, 113, 201 Stiglitz, Joseph, 56 Stoke-on-Trent, 129 Stonehenge, 64 Sudan, 8 Summers, Larry, 187 Sure Start programme, 164 Sutton, John, 151* Sweden, 178 Switzerland, 175, 206 Tanzania, 193 taxation and corporate globalization, 193, 194 of economic rents, 91–2, 187–8 ethics and efficiency, 132–43 on financial transactions, 187 generational differences in attitudes, 59 Henry George’s Theorem, 133–6, 141 heyday of the ethical state, 49 issues of desert, 132–3, 134–9 and the metropolis, 131, 132–43, 187, 207 and migration, 197 of natural monopolies, 91–2 ‘optimal’, 10 of private litigation in courts, 187–8 and reciprocity, 54, 55, 59 redesign of needed, 19 redistributive, 10, 11, 14, 49, 54, 55, 60, 197 of rents of agglomeration, 19, 132–44, 207 social maternalism policies, 21, 157 substantial decline in top rates, 55 tax havens, 62 Venables-Collier theory, 136–9 Teach First programme, 165–6 technical vocational education and training (TVET), 171–6 technological change, 4 robotics revolution, 178–9 and withering of spatial community, 61–2 see also digital networks telomeres, 155–6 Tepperman, Jonathan, The Fix, 22 Thatcher, Margaret, 15, 26 Thirty Years War, 56–7 Tirole, Jean, 177, 178 Toyota, 72–3, 74, 94, 172 trade unions, 173, 174, 176 Troubled Families Programme (TFP), 162 Trudeau, Pierre, 22 Trump, Donald, 5, 9, 63, 64, 86, 125, 136, 202, 204, 206, 215 Uber, 87 unemployment in 1930s, 47 and collapse of industry, 7, 103, 129, 192 impact on children, 160–61 older workers, 4, 103, 213 retraining schemes, 178 in USA, 160 young people, 4 Unilever, 70, 71 United Kingdom collapse of heavy industry, 7, 103, 129, 192 extreme politics in, 5 and falling life expectancy, 4 financial sector, 80, 83, 84–5 IMF bail-out (1976), 115 local banks in past, 146 northern England, 3, 7, 8, 84, 126, 128–9, 131, 151, 168, 192 shareholder control of firms, 76–7, 79, 80, 82–3 statistics on firms in, 37 universities in, 170, 172, 175* vocational education in, 172, 175† widening of geographic divide, 125 United Nations, 65, 112 ‘Club of 77’, 116 Security Council, 116 UNHCR, 115 United States breakdown of ethical family, 104–5 broken cities in, 129, 130 extreme politics in, 5, 63 and falling life expectancy, 4 financial sector, 83–4, 186 and global e-utilities, 89–90 growth in inequality since 1980, 125 heyday of the ethical state, 49 and knowledge industries, 192 labour market in, 176, 178 local banks in past, 146 oversight of firms in, 76 pessimism in, 5, 45–6 presidential election (2016), 5, 9, 203–4 Public Interest Companies, 93 public policy as predominantly national, 212 ‘rights of the child’ concept in, 103–4 Roosevelt’s New Deal, 47 statistics on firms in, 37 taxation in, 143–4, 144* unemployment in, 160 universities in, 170, 172, 173 weakening of NATO commitment, 117 universities in broken cities, 151–2 in EU countries, 170 expansion of, 99–100, 127 knowledge clusters at, 127, 151–2 low quality vocational courses, 172–3 in UK, 170, 172, 175* in US, 170, 172, 173 urban planning, post-war, 11–12 Utilitarianism, 19, 30, 49–50, 55, 108, 112, 121, 210–11 backlash against, 11–13, 201, 202 belonging as absent from discourse, 16, 59, 66–7, 210–11 care as key value, 12 and consumption, 10, 11, 16, 19–20, 209 equality as key value, 12, 13, 14, 15, 116, 132–3, 214 incorporated into economics, 10–11, 13–14, 16 influence on social democrats, 9, 10, 14, 16, 18, 49–50, 201, 203, 214 origins of, 9–10 paternalistic guardians, 9–10, 11–13, 66–7, 210 takeover of public policy, 10–12, 13–14, 15–17, 18, 49–50, 113, 201 and taxation, 10, 132*, 133 vanguard’s switch of identity salience, 52, 53, 59 Valls, Manuel, 204 Venables, Tony, 18, 136, 191* Venezuela, 120, 214 vested interests, 85–6, 135–6, 165, 166, 207 Volkswagen, 74–5 Walmart, 87 Warsi, Baroness Sayeeda, 65 Wedgwood, Josiah, 129 welfare state, 9, 48–9 unlinked from contributions, 14 well-being and happiness belonging and esteem, 16, 25, 27, 29, 31–3, 34, 42, 51–6, 97–8, 174 entitled individual vs family obligation, 108–9 and financial success, 26, 94 ‘ladder of life’, 25* poverty in Africa, 37 reciprocity as decisive for, 31 Westminster, Duke of, 136 white working class ‘elite’ attitudes to, 4, 5, 16 falling life expectancy, 4, 16 pessimism of, 5 William, Prince, 188–9 Williams, Bernard, 55* Wittgenstein, 62, 63 Wolf, Alison, 52–3, 155 World Bank, 115, 117, 118, 118*, 122 World Food Programme, 115 World Health Organization, 115 World Trade Organization (WTO), 116–17 Yugoslavia, 58 Zingales, Luigi, 178 Zuma, Jacob, 85 Copyright THE FUTURE OF CAPITALISM.


pages: 444 words: 84,486

Radicalized by Cory Doctorow

activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Bernie Sanders, call centre, crowdsourcing, cryptocurrency, Edward Snowden, Flash crash, G4S, high net worth, information asymmetry, license plate recognition, obamacare, old-boy network, six sigma, TaskRabbit

The fact was the world just didn’t need all those people anymore, and the market had revealed that fact, squeezing them into tinier, more uncomfortable places. He wouldn’t tolerate it if he was in their shoes. He’d be the first one to build a guillotine, and because he was Martin, it would be an awesome guillotine, so absolutely badass and overengineered, with a turbocharger and a self-sharpening blade. Because that was Martin, all the way. It’s why Fort Doom was the incredible place it was. It was all about information asymmetries. Markets corrected them. If knowing a secret could make a stupid, unworthy person rich, then sooner or later, smart, superior people would find that secret out and clear out the misallocated wealth of all those dimbulbs. Markets were awesome at this. Back when everyone lived in shithole mud-street villages, the superior people had no choice but to breed with whoever was in the vicinity.

Back when everyone lived in shithole mud-street villages, the superior people had no choice but to breed with whoever was in the vicinity. Even a one-in-ten-million, six-sigma genius would end up hitched for life to some cow-eyed milkmaid, diluting the incredible genes he’d been handed by nature’s Powerball lotto. But little by little, humans got smarter, as the geniuses found smarter milkmaids, until they could build markets and then the information systems that markets thrived on, and then the information asymmetry started to collapse, slowly at first, then all at once, like a cliff that had been undermined by the inexorable tide of millions of human actions harnessed to the common goal of improving the species and its dominion over the earth. Once the information about where the best people were hanging out became public knowledge, then anyone who fluked into good genes and a high sigma knew exactly where they belonged.


pages: 306 words: 85,836

When to Rob a Bank: ...And 131 More Warped Suggestions and Well-Intended Rants by Steven D. Levitt, Stephen J. Dubner

Affordable Care Act / Obamacare, Airbus A320, airport security, augmented reality, barriers to entry, Bernie Madoff, Black Swan, Broken windows theory, Captain Sullenberger Hudson, creative destruction, Daniel Kahneman / Amos Tversky, deliberate practice, feminist movement, food miles, George Akerlof, global pandemic, information asymmetry, invisible hand, loss aversion, mental accounting, Netflix Prize, obamacare, oil shale / tar sands, Pareto efficiency, peak oil, pre–internet, price anchoring, price discrimination, principal–agent problem, profit maximization, Richard Thaler, Sam Peltzman, security theater, Ted Kaczynski, the built environment, The Chicago School, the High Line, Thorstein Veblen, transaction costs, US Airways Flight 1549

I was skeptical at first. Why on earth, I asked Wolf, would anyone pay $100 extra—probably every month—to fill a prescription at Walgreens instead of Costco? His answer: if a retiree is used to filling his prescriptions at Walgreens, that’s where he fills his prescriptions, and he assumes that the price of a generic drug (or, perhaps, any drug) is pretty much the same at any pharmacy. Talk about information asymmetry; talk about price discrimination! I had meant to write about this, and had collected a few relevant links: a TV news report in Houston about Wolf’s discovery; an extensive price comparison compiled by a TV news reporter in Detroit; a Consumer Reports survey; and a research report on the subject from Senator Dianne Feinstein. But I had forgotten all about this issue until I read a comprehensive Wall Street Journal article that does a good job of measuring the difference in prices between chains.

So that’s what it’s called: “ongoing price analysis.” I’ll have to remember that the next time my kids catch me trying to buy a two-dollar toy when I’d promised one for twenty. The New-Car Mating Dance (SDL) My car is ten years old, so I went out to buy a new one this weekend. In Freakonomics and SuperFreakonomics, we write a lot about how the Internet has changed markets in which there are information asymmetries. Buying a new car gave me the chance to see firsthand these forces at work in the new car market. I was not disappointed. I already knew what kind of car I wanted. Within fifteen minutes and at no cost, using sites like TrueCar and Edmunds, I not only had a good idea of a fair price to pay for the car, but also was able to notify some local car dealerships that I was interested in quotes.


pages: 304 words: 80,965

What They Do With Your Money: How the Financial System Fails Us, and How to Fix It by Stephen Davis, Jon Lukomnik, David Pitt-Watson

activist fund / activist shareholder / activist investor, Admiral Zheng, banking crisis, Basel III, Bernie Madoff, Black Swan, buy and hold, centralized clearinghouse, clean water, computerized trading, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crowdsourcing, David Brooks, Dissolution of the Soviet Union, diversification, diversified portfolio, en.wikipedia.org, financial innovation, financial intermediation, fixed income, Flash crash, income inequality, index fund, information asymmetry, invisible hand, Kenneth Arrow, Kickstarter, light touch regulation, London Whale, Long Term Capital Management, moral hazard, Myron Scholes, Northern Rock, passive investing, performance metric, Ponzi scheme, post-work, principal–agent problem, rent-seeking, Ronald Coase, shareholder value, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, Steve Jobs, the market place, The Wealth of Nations by Adam Smith, transaction costs, Upton Sinclair, value at risk, WikiLeaks

The IEX is backed by mutual fund companies and other longer-term investors, and the hope is that it will attract enough investors frustrated with the advantages given to high-frequency traders to provide adequate liquidity.65 It may or may not work, but the basic idea, to find a venue where longer-term investors can be treated fairly, will no doubt be a driving force in other innovations. REGULATE HIGH-FREQUENCY TRADERS APPROPRIATELY Some academics make a strong case that when a high-frequency trader can get information before the general market, it functions as something of a “market maker,” a legal term that carries with it a requirement to not take advantage of that information asymmetry. Recent work has suggested that math and physics can create a standard for who is a market maker, thereby ensuring a fair trading system for all.66 USE COLLECTIVE ACTION TO ALLOW MONEY MANAGERS TO FOCUS ON BENEFITS FOR ALL As we have seen, citizen investors benefit when asset managers address big systemic issues, even if no individual asset manager gains a competitive advantage. There have been recent efforts to encourage institutional shareholders to be better owners.

Stephen Davis, Jon Lukomnik, and David Pitt-Watson, “Active Shareowner Stewardship: A New Paradigm for Capitalism,” Rotman International Journal of Pension Management 2, no. 2 (Fall 2009), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1493279. 23. The industry’s argument against applying fiduciary standards to brokers are two-fold. The first argument is that they are just selling financial products. But that ignores the information asymmetry between brokers and their clients. The second is that the added cost of complying with a fiduciary standard in a litigious society such as the United States will mean that some brokers will refuse to provide advice. That may well be true, but the question is, what type of advice is now being provided, and what will be provided in the future? An overall reduction in advice, but where none of the advice is conflicted and all benefits the client, may be a preferred outcome. 24.


pages: 322 words: 87,181

Straight Talk on Trade: Ideas for a Sane World Economy by Dani Rodrik

3D printing, airline deregulation, Asian financial crisis, bank run, barriers to entry, Berlin Wall, Bernie Sanders, blue-collar work, Bretton Woods, BRICs, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, central bank independence, centre right, collective bargaining, conceptual framework, continuous integration, corporate governance, corporate social responsibility, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Donald Trump, endogenous growth, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, financial deregulation, financial innovation, financial intermediation, financial repression, floating exchange rates, full employment, future of work, George Akerlof, global value chain, income inequality, inflation targeting, information asymmetry, investor state dispute settlement, invisible hand, Jean Tirole, Kenneth Rogoff, low skilled workers, manufacturing employment, market clearing, market fundamentalism, meta analysis, meta-analysis, moral hazard, Nelson Mandela, new economy, offshore financial centre, open borders, open economy, Pareto efficiency, postindustrial economy, price stability, pushing on a string, race to the bottom, randomized controlled trial, regulatory arbitrage, rent control, rent-seeking, Richard Thaler, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, Sam Peltzman, Silicon Valley, special economic zone, spectrum auction, Steven Pinker, The Rise and Fall of American Growth, the scientific method, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, total factor productivity, trade liberalization, transaction costs, unorthodox policies, Washington Consensus, World Values Survey, zero-sum game, éminence grise

What, for example, is the link between China’s decision to accumulate large amounts of foreign reserves and a mortgage lender in California taking excessive risks? It is impossible to decipher such interrelationships without relying on elements from behavioral economics, agency theory, information economics, and international economics. The academic literature is chock-full of models of financial bubbles, asymmetric information, incentive distortions, self-fulfilling crises, and systemic risk. Pretty much everything needed to explain the crisis and its aftermath was in the research journals! But in the years leading up to the crisis, many economists downplayed these models’ lessons in favor of models of efficient and self-correcting markets, which resulted in inadequate government oversight over financial markets.

The Friedmanite perspective greatly underestimates the institutional prerequisites of markets. Let the government simply enforce property rights and contracts, and—presto!—markets can work their magic. In fact, the kind of markets that modern economies need are not self-creating, self-regulating, self-stabilizing, or self-legitimizing. Governments must invest in transport and communication networks; counteract asymmetric information, externalities, and unequal bargaining power; moderate financial panics and recessions; and respond to popular demands for safety nets and social insurance. Markets are the essence of a market economy in the same sense that lemons are the essence of lemonade. Pure lemon juice is barely drinkable. To make good lemonade, you need to mix it with water and sugar. Of course, if you put too much water in the mix, you ruin the lemonade, just as too much government meddling can make markets dysfunctional.

Two kinds of mischief may then follow. First, there are errors of omission—cases in which blind spots in the consensus prevent economists from being able to see troubles looming ahead. A prominent example was the failure of economists to grasp the dangerous confluence of circumstances that produced the global financial crisis. As I argued earlier, the oversight was not due to the lack of models of bubbles, asymmetric information, distorted incentives, or bank runs. It was due to the fact that such models were neglected in favor of models that stressed efficient markets. Then there are the errors of commission—cases in which economists’ fixation on one particular model of the world makes them complicit in the administration of policies whose failure could have been predicted ahead of time. Economists’ advocacy of neoliberal “Washington Consensus” policies and of financial globalization falls into this category.


pages: 559 words: 155,372

Chaos Monkeys: Obscene Fortune and Random Failure in Silicon Valley by Antonio Garcia Martinez

Airbnb, airport security, always be closing, Amazon Web Services, Burning Man, Celtic Tiger, centralized clearinghouse, cognitive dissonance, collective bargaining, corporate governance, Credit Default Swap, crowdsourcing, death of newspapers, disruptive innovation, drone strike, El Camino Real, Elon Musk, Emanuel Derman, financial independence, global supply chain, Goldman Sachs: Vampire Squid, hive mind, income inequality, information asymmetry, interest rate swap, intermodal, Jeff Bezos, Kickstarter, Malcom McLean invented shipping containers, Marc Andreessen, Mark Zuckerberg, Maui Hawaii, means of production, Menlo Park, minimum viable product, MITM: man-in-the-middle, move fast and break things, move fast and break things, Network effects, orbital mechanics / astrodynamics, Paul Graham, performance metric, Peter Thiel, Ponzi scheme, pre–internet, Ralph Waldo Emerson, random walk, Ruby on Rails, Sam Altman, Sand Hill Road, Scientific racism, second-price auction, self-driving car, Silicon Valley, Silicon Valley startup, Skype, Snapchat, social graph, social web, Socratic dialogue, source of truth, Steve Jobs, telemarketer, undersea cable, urban renewal, Y Combinator, zero-sum game, éminence grise

When it came to monetization, Facebook had no interest in real innovation. It liked its faxes. Like any large company, Facebook would always aim to create monopoly pricing power and maintain information asymmetry, rather than drive true innovation. If Facebook played with the outside world, it always played with loaded dice. Recall the depths of the credit crash at Goldman back in 2008. Goldman could have pushed for the obvious technical step of trading credit derivatives on exchanges, which would have resulted in greater volume and greater transparency, and taken the regulatory heat off. But would Goldman cede its information asymmetry in the form of the trading flows that it, and only it, saw? Would it cede the ability to more or less arbitrarily set prices for credit risk, alongside a tightly knit network of brokers, effectively manipulating the market to its own benefit, rather than offering an open one?

The question was raised in 2008 as the financial world burned. The internal chatter on the desk was that the government would exploit the crisis to regulate our Wild West market. Goldman (briefly) considered taking the initiative and self-regulating into exchange-traded markets instead. It decided against doing so, with reasoning I’d see again at Facebook: an incumbent in a market dominated by a few, with total information asymmetry, and the ability to make prices on the market rather than just take them, has little incentive to increase transparency. The bid-ask spread—that is, Goldman’s difference in price when buying or selling the same thing—was huge on credit derivatives. Goldman made fortunes simply passing a piece of paper from its left hand to its right, from seller of risk to buyer of it. While trading on exchanges might have increased the overall volume of trade and hence profits, the openness would have eroded Goldman’s privileged view of the credit markets, and opened it to upstart competition, not to mention financial scrutiny.


pages: 261 words: 103,244

Economists and the Powerful by Norbert Haring, Norbert H. Ring, Niall Douglas

"Robert Solow", accounting loophole / creative accounting, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, bank run, barriers to entry, Basel III, Bernie Madoff, British Empire, buy and hold, central bank independence, collective bargaining, commodity trading advisor, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, diversified portfolio, financial deregulation, George Akerlof, illegal immigration, income inequality, inflation targeting, information asymmetry, Jean Tirole, job satisfaction, Joseph Schumpeter, Kenneth Arrow, knowledge worker, law of one price, light touch regulation, Long Term Capital Management, low skilled workers, mandatory minimum, market bubble, market clearing, market fundamentalism, means of production, minimum wage unemployment, moral hazard, new economy, obamacare, old-boy network, open economy, Pareto efficiency, Paul Samuelson, pension reform, Ponzi scheme, price stability, principal–agent problem, profit maximization, purchasing power parity, Renaissance Technologies, rolodex, Sergey Aleynikov, shareholder value, short selling, Steve Jobs, The Chicago School, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, ultimatum game, union organizing, Vilfredo Pareto, working-age population, World Values Survey

All these types of power, which were important in bringing about the global financial crisis, are defined away by standard assumptions of most mainstream economic models. These models feature perfect competition, efficient financial markets, full information and eternal equilibrium. People are modeled as being perfectly substitutable for one another, which stands in stark contrast to the championing of the individual that has long been a mainstay of mainstream economics. In particular, defining away imperfect and asymmetric information – and not talking about it – goes a long way in tacitly taking power out of economics. Power has been made taboo and thus acquired a negative connotation. However, most firms and corporations would not function without it. Without functioning corporations, there would be no basis for the high wages that they pay. Thus the exercise of power can be good for society (Bowles and Gintis 2008).

If the union negotiates with individual employers, this can take care of the signaling problem. If they negotiate with an employer organization over standards for the whole industry, this will also take care of the adverse selection problem for companies who are willing to satisfy union demands. The downside of collective negotiations is, of course, that individual preference differences around the average cannot be taken into account. Failure to deal adequately with the issue of asymmetric information might well explain why Americans have so much less vacation time and longer workweeks than Europeans. The US labor market is much closer to the neoclassical ideal of free contract. In most of Europe there are long minimum vacation times and extensive restrictions on the length of the workweek imposed by governments or unions. There are no indications that voters or union members are dissatisfied with this state of affairs.

Stanford Magazine, March/April. http:// www.stanfordalumni.org/news/magazine/2009/marapr/features/born.html (accessed March 28, 2012). Schmitz, James A. Jr. 2005. “What Determines Productivity? Lessons from the Dramatic Recovery of the U.S. and Canadian Iron Ore Industries Following Their Early 1980s Crisis.” Journal of Political Economy 113: 582–625. Schmitz, Patrick. 2004. “Job Protection Laws and Agency Problems under Asymmetric Information.” European Economic Review 48: 1027–46. Schularick, Moritz and Alan M. Taylor. 2009. “Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870–2008.” NBER Working Paper 15512. Schumpeter, Joseph. 1943/2003. Capitalism, Socialism and Democracy. London: George Allen and Unwin. Screpanti, Ernesto and Stefano Zamagni. 1993. An Outline of the History of Economic Thought.


pages: 305 words: 98,072

How to Own the World: A Plain English Guide to Thinking Globally and Investing Wisely by Andrew Craig

Airbnb, Albert Einstein, asset allocation, Berlin Wall, bitcoin, Black Swan, bonus culture, BRICs, business cycle, collaborative consumption, diversification, endowment effect, eurozone crisis, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, index fund, information asymmetry, joint-stock company, Joseph Schumpeter, Long Term Capital Management, low cost airline, mortgage debt, negative equity, Northern Rock, offshore financial centre, oil shale / tar sands, oil shock, passive income, pensions crisis, quantitative easing, road to serfdom, Robert Shiller, Robert Shiller, Silicon Valley, smart cities, stocks for the long run, the new new thing, The Wealth of Nations by Adam Smith, Yogi Berra, Zipcar

As with many of the topics we will cover in this book, there has been a great deal written about the EMH and we don’t want to waste time going into any great level of detail. I would simply hope to strengthen my contention that it is entirely possible for you to be a “professional sprinter” among investors by giving you a couple of brief examples. Hopefully, these will make sense to you whether you have a financial background or not. Asymmetric information The main reason that the EMH doesn’t work in reality (and why you can hope to make great returns on your money) has to do with human nature and the existence of what is called “asymmetric information”. The key point here is that people involved in markets demonstrably do not have perfect information about the things they are investing in, as the EMH would have you believe. Some people have far more information than others – that is to say, information is “asymmetric”. As I have already said, many people who are investing have almost no idea what they are doing.

EXAMPLE 2: THE SUB-PRIME CRISIS The sub-prime crisis shows us how asymmetric information can lead to one group of people making a killing and another group losing their shirts. Probably the bestselling book about the sub-prime crisis – and well worth a read – is The Big Short by Michael Lewis. It tells the story of a group of smart investors whose detailed research gave them better information about certain financial products (mortgage-backed securities) in the sub-prime market. Their research told them that these products were completely the wrong price. As a result they were able to make thousands of per cent on their money in less than a year –in some cases making literally billions of dollars betting against these financial assets. This is another glaring example of market inefficiency and asymmetric information, and of the EMH simply not holding true.


pages: 411 words: 108,119

The Irrational Economist: Making Decisions in a Dangerous World by Erwann Michel-Kerjan, Paul Slovic

"Robert Solow", Andrei Shleifer, availability heuristic, bank run, Black Swan, business cycle, Cass Sunstein, clean water, cognitive dissonance, collateralized debt obligation, complexity theory, conceptual framework, corporate social responsibility, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-subsidies, Daniel Kahneman / Amos Tversky, endowment effect, experimental economics, financial innovation, Fractional reserve banking, George Akerlof, hindsight bias, incomplete markets, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, iterative process, Kenneth Arrow, Loma Prieta earthquake, London Interbank Offered Rate, market bubble, market clearing, money market fund, moral hazard, mortgage debt, Pareto efficiency, Paul Samuelson, placebo effect, price discrimination, price stability, RAND corporation, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, source of truth, statistical model, stochastic process, The Wealth of Nations by Adam Smith, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, ultimatum game, University of East Anglia, urban planning, Vilfredo Pareto

A firm will fail to repay a bond or will pay a dividend when the input prices are high relative to the output prices. That the contingent contracts in the real world depend in major part on variables endogenous to the economic system has been especially emphasized by Mordecai Kurz (1974 and 1996, among other papers). LIMITED INFORMATION OF ECONOMIC AGENTS Probably the most important innovation in economic theory in the last fifty years has been the emphasis on what has been called asymmetric information. The term information is properly and appropriately used in the sense given by mathematical statistics or communication theory: an observation on one random variable that changes the probability distribution of some random variables relevant to decision making. It is clear and reasonable that different individuals have access to different information; they have varying life experiences and varying opportunities to make observations.

Hence, if there are enough markets for contingent contracts depending on economic events (standard securities or those derived from them, such as options), one could infer what the value of insurance policies on states of nature would be. But this inference would depend on knowing the entire system of general equilibrium relations, and this knowledge is not available to individual agents. The more standard problems raised by asymmetric information are also relevant here. A contingent market can exist only if the contingency can be verified by all parties, and this condition will frequently not hold. This is probably the most basic reason why the full set of markets called for in the theory of general equilibrium under uncertainty does not exist. INFORMATION AS A COMMODITY The last set of remarks has put increasing importance on the role of information in modulating the organization of the economy and, in particular, the types of securities (contingent contracts) that are possible and the terms on which they are exchanged.

As a result, a risky investment that is socially unprofitable (a negative expected value or a positive expected value insufficient to compensate for the market-determined risk level) may be privately rational for the decision maker, because the latter will not bear all the negative consequences he or she imposed on others.5 This incentive problem is intrinsic to the nature of modern capitalism. It is built into the concept of limited liability. Obviously, one aim of this policy is to increase the ability to take risks. The only question is whether, in a world of imperfect and asymmetric information, it does not lead to excessive risk-bearing. These are problems that need to be addressed. RECOMMENDED READING Arrow, K. J. (1953). “Le role des valeurs boursières pour la repartition la meilleure des risques.” In Économetrie, Colloques Internationaux du Centre National de la Recherche Scientifique, Vol. 11, pp. 41-47. Arrow, K. J. (1963). “Uncertainty and the Welfare Economics of Medical Care.”


pages: 385 words: 111,807