The Bankwatch

Tracking the consumer evolution of financial services

The value of patience | Haldane BofE

This is a remarkable paper from Andrew Haldane at the Bank of England.  There are lessons and direction here for everyone and it is not as dry as one might expect.  It is the more remarkable because it addresses human behavior and relates to economic context.  Not your typical Central Bank speech.  Lessons from Asia are being learned.

The most amazing for me is the HFT (high frequency trading) stat about Accenture in bold.

A few quotes to whet your appetite.

  • Take happiness. Studies have shown that happy people save more and spend less. Happy people also take longer to make decisions and expect a longer life. In short, they are patient.
  • Just as patience can self-generate, so too can impatience. And while patience generates self-improving cycles, its alter ego can create self-destructive cycles. Addiction is the classic self-destructive cycle. Drugs and alcohol chemically alter the balance of the double-self, increasing the value of instant gratification. This shortens time horizons, increasing further the value of instant gratification in a downward spiral. Unless arrested, this unfulfilling equilibrium becomes self-fulfilling.
  • John Maynard Keynes. He quipped: “markets can remain irrational for longer than you or I can remain solvent”.
  • By the time of the stock market crash in 1987, the average duration of US equity holdings had fallen to under 2 years. By the turn of the century, it had fallen below one year. By 2007, it was around 7 months. Impatience is mounting.
  • A decade ago, the execution interval for HFTs (high-frequency traders) was seconds. Advances in technology mean today’s HFTs operate in milli- or micro-seconds. Tomorrow’s may operate in nano-seconds.
  • HFT firms are believed to account for more than 70% of all trading volume in US equities
  • HFT is believed to account for between 5 and 10% of Asian equity volumes. This evolution of trading appears already to have had an effect on financial market dynamics. On 6 May 2010, the price of more than 200 securities fell by over 50% between 2.00pm and 2.45pm.32 At 2.47pm, Accenture shares traded for around 7 seconds at a price of 1 cent, a loss of market value close to 100%. No significant economic or political news was released during this period.
  • So disliking goods price inflation and liking asset price inflation suggests a potential time-inconsistency in preferences. It is leaving as a bequest for your children the mortgage but not the house.

Written by Colin Henderson

September 2, 2010 at 22:10

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