Wednesday, February 22, 2012

Freakonomics and the Stock Market

To Pay or Not To Pay
Paying for bagels (or not) can help us understand the extent of white collar crime.  That is what Steven Levitt tells us in his book Freakonomics.  I'll let you read the book for the details, but I will say he arrives at this conclusion from an honour-pay bagel business which has existed in the U.S. over a number of years.  Personally, I find the idea intriguing, but also encouraging.

Same Old Same Old
Despite the ever-accelerating pace of change in modern society, changes in how people tend to behave come very slowly - like, barely, if at all.  Maslow's hierarchy of needs is as valid now as it was when he published it, and has applied throughout history.  There have been, and always will be those who cheat other people - within certain historical norms.  We just keep inventing new ways of doing it.

By The Numbers
That said, let's talk about Levitt's analysis.  On the basis of the bagel business he wrote about, we can put some numbers to the way in which people are inclined to behave.  First, the data suggests that smaller businesses are more trustworthy than larger ones.  The reason given is because people are better known in smaller groups - it's harder to cheat because it is harder to cover one's tracks - there are only so many people to blame.  Second, the experience of the business owner (Paul Feldman) was that executives, as a whole, were less honest than other groups.  In Paul's opinion, the executives felt more of a sense of entitlement, and therefore less need to pay for their bagels.  Who knew?!?

Well Meaning, and Meaning Well
The biggest take-away, in my opinion is that, overall, the payment rate of Feldman's thousands of customers was between 80 and 90 percent.  The reason I find this encouraging is what it should tell us about the stock market, and particularly about stock market advisors.  We have all heard about Bernie Madoff, and illicit bank behaviour and questionable lending schemes, but this data would suggest most people can be trusted to do the right thing.  Still, we need to be aware of the fact that one or two people out of every ten we give our money to might be cheating us.  That is the reason we need to keep informed and monitor those acting on our behalf.  The good news is 80 to 90 percent of people saying they want to help, actually mean it, and will try to (not to be confused with those who have, or don't have the ability to).

Decent Is As Decent Does
True, the perpetrators of the recent financial fiasco have not properly been held to account.  True, thanks to the overwhelming and unregulated power of derivatives in the financial system, we are all a whole bunch poorer.  True, it will take years to adjust to the current reality.  Still, in our society, today, the intent of the vast majority of regular folks, is to do right by others and to lead a decent and honest life.  Knowing this certainly influences my outlook on our ability, working together, to transcend the current uncertainties.

What do you think?  Are most people honest?  Do you trust them (with your money)?

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