Wednesday, 25 June 2014

Markets and Regulation

A couple of thoughts have been echoing around in my tired old noggin that I thought I'd share for comment.

Behavioural Economics

As you may or may not know the Financial Catastrophe Authority has taken to its heart 'behavioural economics'.  They have elected to use the insights from Behavioural Economics to guide their policymaking.  They use it to justify more and more interventions.  Now, as I understand it the basic thrust of Behavioural Economics is that people are irrational and do irrational things.  Fair enough, and probably true.  But things I think are rational you may not.  And if Behavioural Economics holds then it is self evident that the FCA apparatchiks (who are presumably human) are just as subject to making irrational decisions as everyone else.  And since such central planning style regulation and interventions has historically always failed, would seem to confirm it.  In other words the FCA is barking up the wrong fish and financial services would be better served if it would just shut itself down.

Efficient Market Hypothesis (EFH)

EFH is in many ways a thought experiment, but by observation it does seem to have a lot of merit. Essentially what EFH proves, or at least explains, is that stock picking by fund managers is generally fruitless and cannot reliably ever produce superior returns or even returns that match market returns.  That is 'picking winners' does not work.  Such picking winners behaviour is very similar to the FCA's interventions that try to 'pick winners' in financial services, in the sense of prescribing by way of very detailed rules exactly how all financial services businesses should trade.  The FCA is 'centrally planning' the financial services industry.  As the EFH holds it can also be applied to the FCA and informs us that such 'picking winners'behaviour by the FCA is doomed to failure.



FrankC said...

"BH" ?
"FS" ?
You may know what you mean, but this bear of little brain has no effing idea.

Lola said...

@FrankC - ooops. Wrote that when I was knackered. But no excuse. Corrected now.

Bayard said...

The purpose of the FCA is to show that "something is being done" about problems in the financial industry, so it can't do nothing and it can't not exist. That said , it could do less, but that would be against Parkinson's Law.