Fixing The Losers Game
Design Thinking Applied to The World of Finance
"The Market for Lemons" and Investment Management Services
George Akerlof was awarded the 2001 Nobel Prize in Economics for a profound idea captured in his 1970 article "The Market for 'Lemons' : Quality Uncertainty and the Market Mechanism," in which he showed that the classic "value-for-money" outcome attached to market competition requires informational symmetry between buyers and sellers. If sellers know more about what they are selling than buyers know what they are buying, the sellers will be able to extract too high a price from the buyers for too little value. Although Akerlof chose the used-car "lemons" market to make his point, he could just as well have chosen the market for investment management services, - it would be hard to conceive of a market with greater informational asymmetry between buyers and sellers. If asymmetrical information is the underlying problem in the market for investment management services, then simply removing the informational asymmetry must be the solution. Can we create a demand side in that market that understands the realities of financial markets, security pricing, and the economics and motivations of security issuers as well as the supply side does? This question is essentially about institutional design. So, more specifically, can we create knowledgeable investment institutions with both the requisite knowledge of finance and economics and a legal requirement to use that knowledge solely in the best financial interests of their clients? Put more succinctly, can we create knowledgeable investment institutions with clear fiduciary responsibilities to their stakeholders/beneficiaries?
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StreetSmarts
Using Evolutionary Theory to Predict Economic Recovery
There are a lot of economic models that show the global recovery will be slow, but two scientists have come up with a novel explanation: evolution.
In a new paper, Michael Deem, the John W. Cox Professor in Biochemical and Genetic Engineering and professor of physics and astronomy, say that applying evolutionary theory to world trade shows the global economy will take longer to recover.
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StreetSmarts...Thinking Emergently
We often try to understand problems by taking apart and studying their constituent parts. But emergent problems can'y be understood this way. Emergent systems are ones in which many elements interact. The pattern of interaction then produces a new element that is greater than the sum of the parts, which then exercises a top-down influence on the constituent elements.
Culture is an energent system. A group of people establishes a pattern of interaction. And once that culture exists, it influences how the individuals in it behave. An economy is an emergent system. So is political polarization, rising health care costs and a bad marriage.
Emergent systems are bottom-up and top-down simultaneously. They have to be studied differently, as wholes and as nested networks of relationships. We still try to address problems like poverty and islamic extremism by trying to tease out individual causes. We might make more headway if we thought emergently.
