1. Theoretical
Proposal
In a limited and certain period of time where stock market or bond market is
in presence of one or more of the following situations:
·
lack of state
bonds market capitalization,
·
general lack
of cash and liquidity in private or public system (ie state, banking, or
corporate liquidity),
·
under the
presence of certain specific risky situations such as demarketing from state
bond investment in advantage of private investments or disinvestment from state
bond stock, especially for lack of trusting and high financial performances of other
(mainly private) shares investments,
some state or issuer of government bonds (so we mean
both private or public issuer) could use some financial means and marketing
means connected with behavioral economic to attract more investors to its
offers (in form of bonds), better then to let market and investor “flow” toward
other competitive bonds or shares issued by other issuer public or private,
following the basics of market theory.
We suggest that a State could issue bonds with a reasonably higher
financial performance (in percentage) than the performance of equivalent bonds
issued by other Countries, in order to:
1.
offer a lower
perception of risk (Kahnemann, Tversky, 1979; 1981),
2.
offer a more
competitive product of investment (Krugman, 2006),
3.
stimulate
demand accordingly to main kynesians economical laws (Kahnemann, Tversky, 1979;
1981; Kahnemann, Slovic, Tversky, 1982; Kahneman, Krueger, Schkade, Schwarz,
Stone, 2006),
4.
offer a better
and higher financial performance in a certain and equal range of time than a
more competitive investment product (such as other bonds, of private or state
issuing).
Statement is that any single merchant of goods (as well as issuer of bonds)
could offer an higher value (such as discounts or various promotions as well as
a better financial performance of a bond) increasing the value of a good or
issued bond making it more competitive and attractive for market, stimulating
demand of a certain good offered or bond issued and “playing a spread” with
another good as well as another bond, to obtain a better position of values of
his offered goods (Zaltaman, 2003; Ries and Trout, 1981).
2. Actual
Context
In the latest (but not last, we believe) financial crisis hitting globally
in 2011-2012 and more in depth the EUROZONE and still persisting, has been
noticed a gradual but quick and constant increase of the spread played between
main and reference bonds (issued by leading euro economy, Germany) and other
euro nations (France, Italy and Spain as main economies of the area). The
spread played between bonds had such movement:
Mainly during 2011-2012 the situation of uncertain, lack of liquidity for
investments, risk of state default played a bonds’ spread considered generally
too wide between ones issued by Germany and others issued by other economies of
the same area and tied to the euro.
Assuming that majority of people tend to prefer to make a earn, than to
avoid a loss (financial theory of expected income), then the only way to follow
such line is to offer any superior advantage that is significantly superior
than the perception of a possible loss (Kahnemann’s “sunk cost” theory).
But, accordingly with financial behavior, such micro-economical theory can
be indeed systematically violated and people would not prefer to invest in a
better earn than a lower and safer one (in the present case, to invest in
german low-profit bund then –for example- Italian high-profit bot).
We believe that representing to some person the fact that a missed earn is
a loss, they could violate any sort of “survival instinct” and behave in an
irrational way (Ariely, 2008; Kahnemann, Tversky, 1979, 1981).
Playing the spread could be both a marketing tool and a behavioral tool to
influence the financial behavioral rules in a certain moment.
3. Supporting Literature
Mainly, we refer to two
kind of studies: macroeconomic studies, resumed under Krugmann, 2006, where it
is stated that
In such common mathematical function and economical case, as the demand
decreases as the price increases and the growing availability can be expected
that the 2 functions are brought together in a point at which the report is
true and there is a balanced market. Therefore, the function is stated for a
condition of equilibrium. Moreover it is stated that there is the possibility
to use some marketing-financial means to compete against other price-based
competitors (in this case, other public issuers of bonds), like the common case
of different governments or states issuing bonds, actually in a situation of
risk and lack of market capitalization (2011-2012 crisis).
The second topic is microeconomy, where since the latest years of the
70ies, where conducted innovative researches mainly by Kahnemann and Tversky (1979,
1981), then followed by other authors, like Slovic (1982) and others (1986) and
finally published in form of divulgation by Ariely (2008), who stated that in
case of uncertainty people could systematically violate the basic human
decision-making principles of rationality.
We would tie the financial behavior in a certain time of crisis or
uncertainty to such theory where it is stated that people are usually believed
to prefer a higher profit than a low risk action (micro-economical classical
theory), but it is empirically proved that in a certain context they could see
a “missed earning” like a “loss of money (sunk
cost)”.
4. Practical
proofs
Such vision helps us to understand how people could make a sort of
irrational action in opposition to the popularly and academically accepted micro-economic
theories (behavior of the agents are rational decision-making always to maximize utility).
It seems easier for financial players to renounce a discount, better then
accept an higher price even if final difference between starting and final
price is the same.
In the present context, we can assume that for investors it is easier to
accept a higher interest (reducing cost later
of investment) than to accept a “discount of interest rate motivated by a
higher reliability of the issuer of a bond”, beeing seen like a higher
price to pay for the same product.
In fact placing bund by german issuer resulted in being more problematic
than Italians due to an obvious higher profit, claimed as a factor of weakness
or consequential to a lower trustfulness in Italian economy, whilst it could
(and must) be used as a tool to attract investors in any case of lack of
liquidity.
We do not argue that interest rate (moreover, spread), increases
accordingly with trustfulness in a specific issuer of bonds, we suggest the
possibility to use such spread as a tool of attraction and better positioning
in the mind of buyers, so a marketing tool able to modify the perception of values
and transforming a non-investment in a sunk cost, as stated by Kahnemann.
5.
Conclusions
Under the point of view of maximization of profit, it is possible to use
the level of rate of interest to “play actively
the spread” vs other similar investment products, just like a marketing tool or
market means of attraction of “buyers” (or investors).
As well, under the point of view of minimalization of risks (irrational
financial behavior), we could say that the only way to “push people to buy” (in a strict marketing promotional meaning) a
more risky investment product, such as a govern bond with a lower rating, is to
play the spread of interest rate, forcing perception of value like a sunk cost,
id est to make perceivable by people
that a missed investment or higher rate of interest is like or worse than a
loss of money.
Now, we remark that it is possible and sensed to use rules of economic
behavior connected with perception of risk and perception of value to favorite
the found rising when the stock market of bonds registers a decrease or lack of
founds.
In the lastest period issuers noticed that most of investors prefers to
limitate and contain risks better than to rationalize investing in profiteable
bonds.
We noticed indeed that Countries like Italy (or even USA) registered a good
result in placing their bonds, more than “placement” (another marketing term)
operated, for example, by France and Germany, Countries with better financial perfomances
and a consequential lower rate of interest.
If the spread level is logically consequential (bond must offer a better
profit if they offer lower warranties), it should also be artificially and
speculatively used to increase the found rising in case or recession.
The reason why we believe that Kahnemann’s theory can be applied to such
field is that an issued bond with a reasonably higher performance (such as
Italians versus Germans) where rised on the bonds market with easyness better
then law performancing bonds with evident lack of risk, proving that for
investors a lower interest is equivalent to a loss or sunk cost.
Literature:
D.Ariely (2008), “Previdibilmente irrazionale – le forze
nascoste che influenzano le nostre decisioni”,
Rizzoli, Bologna
R.Duncan Luce, H.Raiffa (1957): “Games and Decisions”, Wiley, New York
R.Gibbons (1992), “Game Theory for Applied
Economists”, Princeton University Press
D. Kahneman – A.Tversky (1979), “Prospect Theory: An
Analysis of Decision Under Risk”, Econometria, 47(2), 263-291
D. Kahneman – P. Slovic - A.Tversky (1982), “Judgment
under Uncertainty. Heuristics and Biases”, New York: Cambridge University
Press.
D. Kahneman – A.Tversky (1981), “Variants of
uncertainty” Cognition, Volume 11, Issue 2, March 1982, 143-157
D.Kahneman, A.Krueger, D.Schkade, N.Schwarz, A.Stone
(2006), “Would you be happier if you were richer: A focusing illusion”, Science
312 (CEPS Working Paper No. 125)
P.Krugman (2006), “International Economics: Theory and Policy” (with M.
Obstfeld), Addison Wesley, 7th Edition
A.Ries, J.Trout
(1981), “Positioning, The battle for your mind”, Warner Books - McGraw-Hill
Inc., New York
H.Tajfel
(1999), Gruppi Umani e Categorie Sociali, Bologna: Il Mulino
J.Trout, S.Rivkin (1996), “The
New Positioning: The latest on the worlds #1 business strategy”, McGraw Hill,
New York
G.Zaltaman (2003), “How custumer think: Essential insights into the mind of
the market” Harward Business School Press, Boston 2003