I attended MGSM’s A-List event ‘Swearing off the Bubbly: Can We Avoid the Perils of Mismeasured Success?’ - a lecture by Emeritus Professor Sid Winter. Alumni and staff of MGSM were the audience who had come to listen to Prof. Winter’s analysis. This was a great lecture and a summary follows:
It is a slight digression from our personal development series but I hope readers of this blog would understand.
Swearing off the Bubbly: Can We Avoid the Perils of Mismeasured Success?
Asset prices are based upon the stream of income to be received from them in future. But it is based upon a subjective assessment of future and therefore asset prices are collectively, subjectively, socially constructed phenomena and represent our social agreement of the world’s reality, a shared perception of the future. if people collectively change their mind, the values will change too.
In the context of global financial crisis (GFC), only valuations changed and formed an asset prices bubble in a wave of enthusiasm and it can be traced to two fundamental problems:
- Uncertainty of future: Prof Winter also discussed how many economists dispute the presence of uncertainty, rather only events that have probability attached transmuting uncertainty into risk and referred to gambling and insurance problems. In any case, there are things going around the world that we are not aware of, that may dramatically reshape the world.
- Cognitive deficit: The agency problem kicked in when the good old role of mortgage lender run by banks traditionally was split into five different roles (such as morgage broker, originator, securitiser and so on) and cognitive deficit of perceiving the future problems as a result of this restructure of industry was not recognised.
He also discussed the concepts of
- bubble psychology whereby the new source of wealth beconmes a self-sustaining psychological mechanism; and
- bubble politics that makes it a hard proposition to stand up against a successful bubble so much so that any critics or people who may warn of over-heating are ‘put in their place’.
The general tendencies in human beings are to be biased in decision making and to place too high an opinion of their own expertise.
Prof Winter concluded with the remarks that climate change problem is going to be a formidable one and doubted our ability to solve it with the twin behavioral and decision-making problems that he aforementioned.
He was not optimistic about the news of recovery gaining ground and mentioned that with peopel having lost to the extent of $20 trillion, it would not be easy getting them to loosen their purse-strings soon.
My conclusion
Prof Winter provided a few highly remarkable points to us especially the fact that even as we learn and solve valuation problems as part of our finance and MBA courses, we rely on structural methods whereas valuations are in essence social constructs. Secondly, he connected the basics of economics with the GFC in a succint, precise way.
A great lecture. If you were not part of the audience, I hope I gave a good feel of it.
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