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mercoledì 30 maggio 2012


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.

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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
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