Behavioural Consequences – The UK Bond Market Rigging Scandal

Health Warning: The UK Bond Market rigging issue is all behaviourally driven. We express a personal opinion in this post and do not endorse or condone breaking any jurisdiction’s sovereign laws.

We would like to contribute a very short thought piece on this issue. Our premise basically goes like this and is grounded in behavioural theory:

2012 Behaviour Matrix copy
2012 Behaviour Matrix copy (Photo credit: Robin Hutton)

Take away any sensible incentive (by over regulating the market participants) and you create the disincentive for cheating behaviour to manifest. Simple.

It is a natural competitive behaviour to ‘cheat’ or try to cheat a system that becomes ‘badly’ designed, as in the case of the highly over regulated bond market and an environment of very low yields.

We find is amazing that the popular press only tend to focus on one side of the equation and distort the real issue and underlying drivers that lead tot cheating behaviour.

Illustration for Cheating Français : Illustrat...
Illustration for Cheating Français : Illustration d’une antisèche Español: Ilustración de una chuleta Deutsch: Illustration zum Schummeln (Photo credit: Wikipedia)

The rule of law should be the overriding guiding principle and helping to design markets and market participant behaviours based on properly incentivised interactions is part of any regulatory system. In the recent past, we have forgotten to bear this in mind…

…and then we act surprised when market actors (participants) misbehave?

theMarketSoul ©2013

Related articles

Are we all ‘Process Junkies?’

Our previous post on Transaction Cost Economics made us pause and think for a moment.

English: A design process.
English: A design process. (Photo credit: Wikipedia)

Why are we so fixated by process, yet so bad at the design aspect of the process?

By this question we mean the following:

Process design is focussed on capturing the greatest number of transactions or interactions and to efficiently and effectively ‘process’ them.

Yet all processes have EXCEPTIONS. If so, why are we so bad at designing Process Exception mechanisms?

Pareto efficiency is fine and there always has to be a cost benefit analysis of the value added in every process, but we miss or frustrate too many users by not moving beyond the confines of the cost-benefit, by just leaving the ‘Exceptioners‘ dangling, frustrated and bemused.  If the old adage holds true that one negative word of mouth feedback is the equivalent of 10 positive comments, then that 10% exception item begins to be of major concern.  Even at a lower tolerance threshold of say 5% exceptions and negative experiences, the risk and cost associated with negative customer / client feedback seems worth the effort to pay a bit more attention to managing the DESIGN and process loops to effectively deal with the exceptions.  We’ll leave efficiency at the front door for the moment…

theMarketSoul ©2013

Transaction Cost Economics is ruining everything!!!

…or is it regulation and process not taking into consideration Transaction Cost Economics?

This post is really a little rant.

We just tried to contact a well known global financial services institution in London in order to enquire about the opening of a corporate bank account.

We have a few why questions and cannot figure out if it regulatory or process driven.

1. Why can’t we get the correct number to call off the web site?
2. When we get through to someone and identify the product/service we require, why are we given the incorrect follow up number to call?
3. Once we get through the automated call processing system, why can’t the customer services representative do a simple thing for us, by transferring us to a supervisor or competent person with authority to speak to?
4. Why are the customer services representatives so wedded to a pre-prepared script.
5. Why have the management consultants who designed these systems not taken into consideration the basics of Transaction Cost Economics(TCE)?

…we think the rant should end there; but more on TCE to follow in future posts.

theMarketSoul (c)2013

Hiatus over!

Yes, we apologise further lack of service and posts on the forum over the last 13 months.

XXX
(Photo credit: Frank Kehren)

Today, we can declare the the hiatus is over and that regular(ly) services will be restored.

Hence, to kick-off, we will focus on recent discussions with ‘causal economists’ we have reached out to.

The key message is this:

Forget the Kondratiev wave, we are back in a Kuznets swing, with a clearly defined down tick in the cycle.

There ride will inevitably not be smooth, they never are, with significant volatility in between. However, the Kuznets swing has as an average a run time structure of 15 – 25 years.  [Out of interest, the last Kuznets swing lasted 21 years, depending on whether your started counting from “Big Bang“]

Are we prepared for it?

Yes and No might be the correct answer.

No, because we just don’t have the data for it currently.

Yes, possibly, because the effects of a digitised economy is the new unknown. This points us back to our own ‘philosophy‘ page on this site.

More in depth analysis and discussion on the new cycle will follow soon.

theMarketSoul ©2013 

An Insight into Cloud Computing

It strikes us that managing IT Service delivery maturity is a bit like the ‘Clouds’ before the major storm.

Everyone is rushing around battening down the hatches, because the frameworks and tools are so rigid and require protecting; rather than having ‘modular’ solutions available that are both flexible enough to withstand the battering of the storm; yet can be re-instated very quickly and efficiently, should the storm have managed to ‘flatten’ the landscape.

We will begin to explore some of the Cloud Computing economic and philosophical issues in a series of new articles to follow.

theMarketSoul ©2011

Corporate Culture

This question posed in a discussion forum made us pause and think:

“Bosses think their firms are caring and “values-driven.” Their minions disagree. I think it’s hard from top-down, policy-driven firms to switch to values-driven because even the values are enforced top-down and bosses who have never listened carefully to their employees don’t suddenly start to do so – thus, they never know if their values have caught on or not. What do you think?”

Firstly we need to define Values – We will use it in this post in its economic sense, such as Economic Value Added, meaning that both value creation, return and risk evaluation is as such is ‘built into the value based system’.

Most corporate managers / leaders would probably understand values in terms of two different contexts:

  1. Values as guiding principles, morals, a ‘code to live by’, etc., shaping behaviours and norms
  2. Value in terms of the standard Du Pont analysisReturn on Investment (ROI) calculation methodology.

The third (and probably not last) way of viewing the values question is the economic value added approach, capturing:

  1. Economic Profit (including risk)
  2. Guiding principles and behaviours – the bottom up doing the right thing all the time view

Turning to values as a guiding principle, these are the ‘feel-good’ words and phrases we stick on corporate office walls, the intra- and internet “connecting” people inside and outside the organisation to the “emotional-side” and binding them together.

This is the way we believe the Value question has been posed.

Here we have the problem of the ‘generals in the tents’ versus the ‘generals in the trenches’ scenario.

The generals in the tents believe what their eyes and ears are telling tell.  “People look and sound happy, so they MUST be happy”.

The generals in the trenches believe what they ‘feel’ and experience everyday in their leadership roles amongst the ‘troops’ and employees they serve with are the real true values of the organisation.

This is where a disconnect manifests itself.  The two types do not see eye to eye or understand each other.  Charts, reports, statements, observations, facts separate the general in the tents from the raw emotions, feelings, qualitative experiences and ‘Values’ of the general in the trenches.

When they meet to talk, the language and behaviours each other uses and displays are different.  They don’t understand each other and each side leaves the conversation with a sense of an ‘unaccomplished mission’ and frustration.

To conclude and draw this ‘Values’ post together:

Right from the off, there is potentially a misunderstanding as to what is exactly meant by Values.  The corporate leadership may think, warm ‘fuzziness’ or hard numbers and return on investment, yet the employees and middle management layer think, “squeeze some more, but keep on smiling, here they go talking about values again and all I want is some certainty and job security…”

Finally, there has to be the recognition that culture and culture creation in organisations is not easy.  (We are not even talking cultural change here yet).

If it was, then it would obviously not be a problem.  There are many more factors and dynamics at play, so hopefully your question sets off an interesting discussion.

theMarketSoul ©2011