Knowing and Making

Goldman Sachs this week invested in Facebook at the - some say ridiculous - price of $50 billion. Let's imagine for a moment that the price does not reflect the company's fundamentals. Could it still be rational for Goldman to have done this? We certainly don't associate that particular bank with being taken in by market euphoria. Certainly they will make money by providing services to Facebook and other investors [FT, may require subscription]. But they could probably have got the same deal at a lower valuation if they really wanted to. This article  in the New York Times suggests they don't really care if the value's too high, because they will make their money back by exploiting small investors anyway. But they may well care. Indeed, there's a reason they might prefer to pay too much for their stake: it will influence future investors to pay more for the shares. We see in many product markets that the customers don't have any clear idea of the ...

The panel discussion at the Geary Institute was excellent. It was introduced by Liam Delaney who gave a 15-minute overview of behavioural economics, focused particularly around policy and commitment devices. As a good Dubliner, he used Ulysses as his example, tying himself to the mast to sail past the Sirens without losing himself to temptation. Liam pointed out that Ulysses tied his own body to the mast, without relying on the Greek government of the time to stop him getting into trouble. Nobody pointed out that in modern times, the need for self-discipline seems to be the other way around. This was followed by a few minutes each from Colm Harmon , Gerard O'Neill , Pete Lunn and me. Colm's focus is on policy and he suggested using the experimental techniques of behavioural economics to provide more accurate and interesting data. Gerard has a commercial view, as to some extent does Pete - though Pete's work is at ESRI, the Irish economic research institute, and he has...

In the East End of Glasgow, as you head from the Tollbooth towards Celtic Park, you'll come across a curiosity out of the 19th century. The Barras is a huge flea market - the biggest in Europe - where everything from second-hand clothes and books to discount electronics and records of doubtful provenance are sold. And the people selling them are some of the most effective salespeople in the country. Let's wait by the stall of a chap called Glasgow Harry (why he's called Glasgow Harry when he works in Glasgow is another story). We're among forty or fifty people waiting expectantly for the show to start. Harry pulls out a radio cassette player (this was quite a few years ago) and starts the pitch. "Now who wants one of these wee stoaters?" [You'll have to imagine the Glaswegian accent] "Latest Japanese technology, double cassette deck, AM/FM, lasts about forty hours on the battery." Elucidation of many more features follows. And now the key...

I'm starting a series on how to use the principles of behavioural economics in the real world of business. It will be structured around a series of individual cognitive biases, and for each bias I will outline: Examples and stories to demonstrate how it works The cognitive theory of why it works A toolkit showing how to implement it in practice First up, this weekend, will be anchoring . Come back tomorrow to see some examples of this from our clients and other companies. And if you'd like to be featured in this series - and in a forthcoming book on the same subject - please email me to share your stories of cognitive bias or behavioural economics in the business world. If you are writing about a specific business, please mention whether you're happy for their name to be used in this blog and/or in the book.

The BBC has reported that the chief executive of RBS, Stephen Hester, is about to be offered a new pay deal by the board . If one thing is predictable in life, it's the howls of outrage that will accompany the headline figure: £9.6 million. But the real figure is not £9.6 million - it's £1.2 million. Still a big salary, but on nothing like the same scale. The biggest chunk of the rest will be payable only if the share price of the bank hits 70p - double its current level and 40% up from the 50p at which the government originally invested - meaning that the taxpayer will have made an £8 billion profit on its RBS investment. So why is it being presented as a £9.6 million deal? Of course this might just be the BBC's spin. Perhaps they put together all the figures themselves and picked the highest figure, a natural thing for any reporter to do. But in fact it may be the bank who has decided to lead on this figure. If so, why would they do that? Surely they have an interest in k...

One of my themes in the last few weeks has been the credibility of UK fiscal policy and how it can be rescued now that the rules of the last ten years have been clearly broken. If your husband has an affair, before you believe his assurances of renewed fidelity, he needs to give you a good reason to think it will be different next time. If this is his second or third sin (after those drunken incidents in the 1970s and early 90s) he needs to be extra convincing. Alistair Darling is in the same position. So how will today's announcements go down? Will anyone believe them? There are five criteria it has to meet to be credible. The first step is that it must have content - there needs to be something concrete to actually believe. Something simple that nobody can forget. "I will never see that woman again" is a good one, and "We will reduce borrowing every year and eliminate it by 2015" comes in a reasonable second place. Marks: 4/5 The second is to make it plausible...