Knowing and Making

Any of these links could have made a blog posting of its own, but instead why not help yourself to a high-density nutritious snack selection of random commentary? During the first lecture of Paul Krugman's London visit last month he commented that the economy might be "stabilising". The stockmarket leapt a hundred points (giving rise to much hilarity on the second and third evenings). This perceptive writer points out a similar occasion in 1929 when someone "of no great note" called Roger Babson made a comment that the market was due to crash. At which point it duly crashed - for the next twenty-five years. Now a little later in the Robbins lectures Paul Krugman reviewed a history of not the 1929 but the 1873 depression - and how the economy recovered from that, in the absence of the modern era's gifts of Keynesian stimulus and World War II. Nothing to do with the earlier comments...except for one little thing... An interesting behavioural marketing tactic ...

Robert Peston has an approving discussion of Hector Sants' comments about irrationality in financial markets. Sants says that "Markets have shown not to be rational" but (at least in Peston's quotes) does not distinguish between the agency problem, and the phenomena of behavioural irrationality at the individual level. It's an important distinction. The agency problem is amenable to more conventional solutions: aligning the interests of shareholders and employees through share schemes, some types of options, long-term performance based bonuses. These problems and the simple solutions are well known and have been discussed in the management literature for decades. This is obviously not enough. Perhaps the focus of investors slipped a bit in recent years (Peston discusses the inclination of shareholders to sell rather than reform the companies they invest in). Alternatively the effectiveness of some solutions might have diminished as employees learned to game the s...