In my previous blog I described how, if we are not careful, randomly-occurring reference points manage to hijack our decision-making. The case concerned a would-be stock market investor who wondered whether one could still buy the German DAX even though it trades at a new record high. He was obviously desirous to buy, but my introduction of a new, wholly irrelevant reference point (the index level at the start of the year) was enough to undermine this bullishness; it was even enough to provoke a desire to sellstocks!
It is typically when stocks markets are at record highs that investment strategists on financial television are asked the question: “Can investors still get in?” Of course, those who have accepted the invitation to appear are often those who are already long; those who missed the move, or who are short, tend to have busier calendars when the TV networks call. So these sound-bites are not necessarily objective, or even representative of the average strategist’s opinion.
Companies are trying to cut costs everywhere these days, even if this means delivering a worse service. This, at least was my impression on a recent vacation to Tel Aviv. Formerly, Lufthansa would use much larger aircraft on this route. These days, it uses the same aircraft on a four-hour international flight as it does on a domestic German inter-city flight.
I’ve gotten into something of a pickle with this latest trading position. Just a few weeks ago is seemed that all the operational and economic stars were aligned to send this stock into the stratosphere, but things did not work out like they were supposed to. It is not a complete disaster, but there were numerous little ‘misses’ on the way. So, although the broader equity market is reaching a 52-week high, my stock is closer to its 52-week low, and I am losing money.
I couldn’t help but smirk when Robert H. Frank made this bold prediction: in 100 years’ time, economists will predominantly regard Charles Darwin as their spiritual father. Today, economists would probably point to a figure such as Adam Smith. So for Frank, an economist himself, to predict such a striking switch in allegiances is quite audacious.
On the same day I read the investment bank JPMorgan & Co. was in discussions with regulators to bring an end to criminal and civil charges by paying an $11 billion penalty, I also discovered the US Federal Reserve had begun investigating claims that some traders were privy to the information ahead of the official release time and had exploited it the milliseconds before it went public.
I’ve done a fair bit of battle with the bulge in my time. I’ve deployed all kinds of diet plans; done a few sorties armed with yoghurt and powder; and gone over the top with WeightWatchers, Low.Carb and Low-Fat. There were times when I made great progress. But if I added up all the kilos I initially lost in these programs, my weight would be zero by now. But here I still am, so nothing lasted.
How tiny indiscretions can grow into large sins, without provoking any feelings of culpability or shame, is the subject of my final article on corporate cultural change and behavioural ethics. The gradual erosion of moral standards often begins with a very small act, like taking a pen home from the office. It continues with a padded travel expense claim and then an incomplete income tax declaration. From there, insurance fraud is just a short step away. And if that doesn’t weigh too heavily on one’s moral self-perception, why beat oneself up over the occasional ‘bonus’ of an escort girl, or an evening of dwarf-throwing? It is not as if it is illegal or anything.
After the questionable ac, it is a simple matter to justify and relativize it: the loss of a pen will not blow a hole in the company’s balance sheet; a little extra from the expenses claim is merely compensation for all of that unpaid overtime; and isn’t it the duty of all right-minded citizens to hold back some taxes from a wasteful and corrupt government? No, one does not have to be a bad or dishonest person to engage in unethical behaviour, one simply needs a good enough reason to deviate from the wider social norms. Sometimes the prevalence of a less demanding company or group norm can absolve individuals of any feelings of deviancy altogether.
One does not need to be schizophrenic to be able to hold apparently contradictory attitudes to ethical behaviour. This is because we do not evaluate ‘good’ or ‘bad’ in absolute terms, but in relative terms. This means that people perceive ethical standards in relation to a reference point: we are honourable if we are better than others, and vice versa. It also means that depending on the reference point in any given situation, the absolute morality of a given individual can vary widely. The same person who gives generously to support a charitable initiative in a developing country could also cheat on her taxes. The same father who treats his children with respect and understanding at home could still dismiss coldly a subordinate back in the office.
This perception of morality is also subject to diminishing marginal returns on the positive as well as on the negative side. It is the first act of shoplifting that weighs the most heavily on the conscience; each subsequent act burdens our self-image to a lesser degree. Similarly, the sense of a satisfaction that comes from helping out at the soup kitchen for the homeless shrinks with each act of selflessness. Whether good or bad, repeated behaviour ultimately becomes the new personal norm.
Ethics become the subject of discussion primarily when losses occur, i.e., when somebody’s behaviour is shown to be below the standard desired by the social norm. However to avoid such situations it is important to recognise that the simple presence of rules and regulations is not sufficient to ensure compliance. We must also recognise that there is no absolute morality and no absolutely ethical people. Situational factors, like local reference points and norms, as well as the simple passage of time, have the power to corrupt us all.
After my wife and I saw a TV report on this year’s La Biennale, we got Venice fever. It was so fascinating that even before the emission was over our minds were made up: we had to go back. All the memories of our previous trip came flooding back – Giardini della Biennale, the old Arsenale shipyards – like it was yesterday. But would a trip to the Venetian Lagoon be possible at such short notice – right in the middle of the summer holiday season?
It makes intuitive sense that the way people feel about something should dictate the way they behave—that our preferences and convictions are faithfully reflected in the choices we actually make. Although this seems a reasonable assumption, recent research in psychology and behavioral finance suggests otherwise.
Wretched dishwasher: it stopped running just minutes before the end of the program, leaving the plates in a damp, cold mist. It is always a grim moment when one realises that a call to the repairman is unavoidable. While Siemens’ 24-hour hotline is a nice feature in cases like these, I couldn’t help but wonder what good it was when all it could offer was a repair appointment one week later.
Even without a New Year’s resolution my visits to the sports studio are three times per week these days. ‘Don’t you get bored pounding that wretched Cross-Trainer week-in, week-out,’ I am sometimes asked. Mercifully, there are TV screens on the wall in front of the machines; they provide a welcome distraction, but the training can still be very tedious. What’s more, I cannot resist looking at the clock to see how much longer I have sweat before I can finally get off.
I shop quite often at my local hard-discounter, Penny. It is not just because the store is literally round the corner, but because one can genuinely get good value for money. The recent bonus-points promotion has not escaped my attention either; the store is offering a variety of kitchen knives, not for the manufacturer’s recommended price of €33.99 or €39.99 each, but for just €2.99. Of course, one must bring a few bonus points to the sum – 45 to be exact – and these must first be collected at a rate of one for five euros spent in the store.
A class reunion is a very peculiar event. I have often wondered what it is about these anniversary get-togethers – 10, 20 or 25 years after leaving school – that makes them so appealing. Naturally, there is a certain thrill about the prospect of seeing an old buddy from one’s childhood again. But not all of those present are former friends. Not only classmates are reunited at these events, but human reference points.
My latest business trip took me to a renowned five-star hotel. At check-in I discovered my travel agent, American Express, had left me a dining coupon for use in the hotel restaurant. The amount, €85, surpassed my expectations for such promotions. Even in a hotel in this category, I thought to myself, one could pay for an entire meal with such a gift. So what was the catch? Of course, Amex wanted to galvanise client fidelity, but this still seemed like an expensive way to do it.
Sometimes even children can teach us a thing or two about behavioural economics. At least, I received an unexpected (and unwanted) lesson just a couple of weeks ago during a discussion about Christmas wish-lists.
“Paula got an iPad for her birthday, can I have one too?” my nine-year daughter asked me. Her friend Paula was born on the exactly the same day as my child, but she can just about read and her writing leaves much to be desired.
Occupy Wall Street’s (OWS) idea of using charitable donations to buy up distressed consumer debt, and then simply forgiving it, sounds very appealing. I am very much in favour of pardoning debt that everyone knows can never be repaid. This allows overly-indebted people to get on with their lives, hopefully in a more productive way. One of those ways, OWS hopes, is eventually to make their own financial contribution to the project, thereby ‘paying it forward’. The impact of a test project was impressive: according to one of the organisers, OWS was able to buy $14,000 of distressed debt with an investment of just $500.
It is obvious why people seem to enjoy seeing a hero fall: it is all about changing the reference point. For example, when a beacon of morality – a sporting hero, an outspoken priest, a clean-cut politician, a decorated general – is dragged into the mire of sleaze and shame, it lowers the bar for our own patchy integrity. Without having to do anything, we are instantly able to see ourselves as more honest. Quite why anyone would like to see someone’s tainted image redeemed is perhaps counter-intuitive, but we like that too.
Yesterday’s post concerned the documentary recently broadcast by Franco-German TV network ARTE: ‘Goldman Sachs – one Bank Rules the World’. In reality, one could easily have replaced the name Goldman with that of any number of institutions or associations, from Harvard University to the Freemasons, but I am not fond of conspiracy theories.
The Franco-German TV network ARTE ran a documentary at the weekend with the ominous-sounding title ‘Goldman Sachs – one Bank Rules the World’. I was totally absorbed while watching, and a little shocked that such a high-brow TV network could portray an investment bank in such a damning fashion. The documentary’s producers sought to generate fear and loathing as it showed Goldman alumni – former employees – occupying leading positions in politics, government, business and regulation in the US and the EU.
“What are they going to force us to do next – eat broccoli?” raged one American TV commentator about the healthcare reform known as Obamacare. He considered it an impingement on his personal liberty to be obliged by law to buy health insurance. The decision by the US Supreme Court last Thursday to uphold the plan as constitutional has obviously ignited a wave a discontent across many parts of the country, not least in the campaign headquarters of Republican presidential candidate, Mitt Romney. He has already promised to repeal the law if he is elected in order to give the American people their freedom back.
Third, second, third – this has been the series of achievements of the German national football team in major tournaments of recent years. It starts with the World Cup in 2006, followed by the European Championships in 2008 and then the World Cup again in 2010. Now, after a blazing trail in the group stages and a convincing performance against Greece in the quarter-finals, Germany is poised to battle for a place in the finals this week in the European Championship in Poland and the Ukraine. The yearning for a title win is palpable.
I have had many and varied experiences with the major hotel chains and their individual establishments. Some have been good, but most have been a let-down. So I tend to aim high when choosing a hotel in the hope of avoiding the worst. That was my thinking when I reserved a room at the five-star Ritz-Carlton in Berlin; my belief was that one couldn’t go too far wrong with that.
I took an unsettling call from lady at American Express the other day. Apparently because I had been a card member for such a long time, she wondered whether I would like to have a second card for my wife. It was only after I bluntly refused that she came to what I now suspect to have been the real reason for the call. She expressed how uncomfortable it was for her to broach this subject, but American Express had tasked her to propose insurance security specifically for life events that are neglected by other insurers because they are unable or unwilling to discuss sensitive issues. Her voice adopted a solemn, gravelly timbre: “No, Mr Goldberg,” she choked, “this is not a comfortable subject, but one that must be discussed.” I braced myself.
It seems the infant Pirate Party in Germany is emerging as a political influence to be reckoned with. Last week it managed to count its 25,000th registered members – that’s half the number of members as the Green Party, the youngest among the established parties. For the behaviourally-trained eye, however, the party’s rise is not surprising.
I can easily understand why someone would buy a lottery ticket in the slim hope of getting rich in a single coup. Even though the expected return from this investment is negative, so no economically- rational person should do it, millions of people take the plunge every week. The reason is because the very low probability of hitting the jackpot is likely to be perceived as greater than it really is. In addition, the thing one buys with a lottery ticket, above all else, is the right to dream.
India surprised me. I was fascinated by the beautiful landscapes, and sometimes the helpfulness shown to me at some of the places I stayed on my trip went far beyond my expectations. On the other hand, I loathed seeing the stinking piles of waste everywhere. Plastic bottles seemed to have been tossed everywhere and the smouldering dumps at the outskirts of town polluted the air. But I nevertheless became accustomed to it: “This too is India,” I said to myself.
About two weeks ago, an article in the Wall Street Journal aroused market interest by suggesting a new variant of quantitative easing – a sterilised QE3, if you will. Yesterday we learned of the error in that thinking, at least according to renowned interest rate hawk and president of the Dallas Fed, Richard Fisher. Although currently not a voting member in the FOMC rotation, Mr Fisher isn’t supporting any further easing programs. In contrast, the NY Fed’s William Dudley recently insisted that, although the U.S. economy has somewhat stabilised, a self-sustaining recovery is still far off.
The subject of yesterday’s blog post prompted more discussion and opinion in our office than actually made it into words. Debates about morality have a tendency to do that. If anything, the news that the Swiss central bank president, Philipp Hildebrand, had stepped down as a result of a currency trading scandal, further polarised opinions. As the post concluded, each person has their own personal moral benchmark – an idiosyncratic reference point – so the perception of any moral deviation will therefore be different depending on who observes it.
A personal shopping advisor – now that is what I call luxury. No need to battle with the masses in the busy boutiques and department stores. Instead, a personal shopping advisor identifies the most stylish, exclusive, and typically the most expensive items from the collection for the store’s most demanding guests and presents in a private showroom, preferably over a flute of rosé champagne.