Dux Nest

Investing in the weather is a lot more common than you may think. In fact some investments a based entirely on the weather, such as weather derivatives. This article however discusses the impact of our feelings on our decisions in an area of study known as behavioural finance.

Behavioural finance focuses on decision-making under uncertainty, and demonstrates that human decisions systematically depart from those predicted by the rational decision-making assumption of traditional economics. (Tony Naughton.  (2002). The winner is…behavioural finance? Journal of Financial Services Marketing, 7(2), 110-111.)

So how much does a sunny day impact on our behaviour?

Will the market rise just because the weather is nice?

Does Seasonal Affective Disorder (SAD) really have an impact on investor behaviour? If so, could you make money by simply investing in the theory that market to rise from winter to summer?

A good deal of recent research is concerned with costly irrational financial behavior. Investor overconfidence, myopia, the irrational hesitancy to realize losses, or other unusual behaviors may affect the outcomes of financial decisions. It is further possible that these irrationalities are not sufficiently predictable by more rational traders, so that the behaviors do not lead to arbitrage opportunities that would keep market prices efficient. The inability to arbitrage away irrational outcomes would obviously be a major concern for financial markets.

While the research is concerned mostly with the interrelationship between trade outcomes and price movement, increasing attention is being paid to the relation between physiological phenomena, such as the weather, and their effect on stock market returns. The underlying premise of this parallel line of investigation is that in the short run stock returns may be related to predictable changes in an investor’s psychological status, and that this investor’s psychological status may be predictable by observing exogenous variables such as the weather.

In other words, this physiological evidence comes in addition to the growing evidence of unexplained retail investor irrationality. Hirshleifer and Shumway find that if transaction costs are sufficiently low, a relatively clear morning can lead to profitable afternoon stock trading.

Research has also investigated various other exogenous factors that may drive investor behavior. These factors include an unusual cast of characters, such as the lunar cycle, the switch to daylight-savings time, seasonal affective disorder (SAD), and even geomagnetic storms.

These findings are being taken a lot more seriously than other work that relates stock returns to such factors as whether the National Football Conference team wins the Super Bowl. (Piman Limpaphayom,  Peter R Locke,  Pattarake Sarajoti. (2005). BUTTON UP YOUR OVERCOAT! TRADING AGAINST THE WIND. Corporate Finance Review, 10(3), 12-18.) Findings support the theory that floor traders exhibit trading behavior that appears related to their local weather. For example, traders, who are often modeled as market makers, are more likely to buy on relatively calm days, suggesting a weather induced bias in their quoting behavior: quotes decline on poor weather days.

In addition, the effective bid-ask spread is smaller on calmer days, also suggesting improved attention on calm days. More importantly, weather may influence the bottom line for futures floor traders.  Results show that daily floor trader income varies with both cloud cover and wind strength. (Piman Limpaphayom,  Peter R Locke,  Pattarake Sarajoti. (2005). BUTTON UP YOUR OVERCOAT! TRADING AGAINST THE WIND. Corporate Finance Review, 10(3), 12-18.)

The findings extend the literature showing that financial decision makers are affected in a very real way by weather. Obviously, with sunshine, geomagnetism, and wind showing effects on securities prices, studies find exogenous factors affecting trader behavior. Additional external factors may cause seemingly irrational shifts in investors’ mood and hence affect securities price movements. Some effects (e.g., lunar, solar, geomagnetic) are global, these may affect the global price of risk. However, if some effects are local and only affect some traders, then any temporary or localized effect need not be troubling. Nonetheless, traders may wish to be informed as to their potential for weather-induced biases. (Piman Limpaphayom,  Peter R Locke,  Pattarake Sarajoti. (2005). BUTTON UP YOUR OVERCOAT! TRADING AGAINST THE WIND. Corporate Finance Review, 10(3), 12-18.)

The middle truth is that there is a constant interplay between the fundamentals of an investment and the psychology of the investors who own it. Sometimes the psychological effects will take over (the herding that led to the tech bubble), but then the fundamentals periodically reassert themselves (the bust). (Jeff Sanford.  (2004, May). Think you’re a smart investor? Canadian Business, 77(11), 75. )

In determining investor behaviour it is important to consider… is the sun shining where it matters? Taking a tip from the real estate agents… location location location.

Tags: Behaviour, Behavioural Finance, Economics, Investment, Uncertainty, Weather.

In this current economic slowdown, is it better to migrate or stay put?

During time of economic turmoil and recession the idea of packing our bags and moving to a country with a more stable employment market is certainly desirable but is it feasible? This article seeks to examine the concept of flight or fight in the credit crunch.

Skill shortages exist when employers are unable to fill or have considerable difficulty in filling vacancies for an occupation, or specialised skill needs within that occupation, at current levels of remuneration and conditions of employment, and reasonably accessible location.

Skill gaps occur where existing employees do not have the required qualifications, experience and/or specialised skills to meet the firm’s skill needs for an occupation. Workers may not be adequately trained or qualified to perform tasks, or may not have upskilled to emerging skill requirements.

A market economy is a very dynamic thing. Firms and their jobs are constantly being born, expanding, contracting and dying. Due to the global financial crisis, the economy has become front page news.

Many skills take years to acquire (especially professional and technical skills) and are quite specific to a particular type of work. For example, a music teacher cannot readily become an accountant; a chef cannot readily become an electricity linesperson. It is inconceivable in such an environment that there will be a continuous precise match between the types of skills that are required and the types of skills that the workforce has to offer.

When there are sizeable levels of unemployment, under-employment and non-employment, much of this inevitable imbalance is hidden from the notice of firms. With a few exceptions, they find that when they advertise a job, they have a number of people with the relevant skills who apply - sometimes a large number. They are then able to look for additional qualities, such as precise relevant experience, desirable personal qualities, evidence of enthusiasm and commitment to the firm. From the employers’ perspective, the skills system therefore seems to be working quite well. However, the consequences of the imbalance are borne by workers, who cannot find employment that uses the skills that they have laboured (and paid) to acquire. More skilled people can usually find work ahead of less skilled people (since the former can generally do the latter’s work, but not vice versa): the metal fitters and machinists can become truck drivers or cleaners. But there are many cases when the jobs they get do not make use of their formal qualifications or less formal skills. It is recognised that some component of people working below their skills is voluntary, in that people value aspects of jobs such as geographical convenience, suitability of hours, quality of the workplace. But to the extent that it is not voluntary, these mismatches are costly to the individual and to the economy. The value of this loss is rarely calculated, or even noticed. Sue Richardson.  (2009). What is a Skill Shortage? Australian Bulletin of Labour, 35(1), 326-354.

Thomas Friedman’s metaphor of a flat earth is in most ways true-information, money, and sometimes people moving easily from place to place. But much of the movement on the flat earth is between mountain tops-clusters of innovation where creative people and institutions reinforce each other. Mark Regets.  (2008). Evolving Markets: Adapting to the New High-Skilled Migration. Harvard International Review, 30(3), 62-66.

Why People Migrate

International migration is usually a carefully considered individual or family decision. The major reasons to migrate to another country can be grouped into two categories: economic and noneconomic. The factors that encourage a migrant to actually move fall into three categories: demand-pull, supply-push, and networks. An economic migrant may be encouraged to move by employer recruitment of guest workers, or demand pull reasons. Migrants crossing borders for noneconomic reasons may be moving to escape unemployment or persecution, or supply-push factors. Philip Martin and Gottfried Zürcher, “Managing Migration: The Global Challenge” Population Bulletin 63, no.1 (2008).

This article examines those that are moving for economic reasons.

Job Sprawl

When economies were roaring, there were mostly winners. Heady growth created labor shortages in many places that were eased by foreign manpower. stumbling economies witness an exodus. Most of the world’s migrants go abroad because there are few job prospects in their home countries.

The economic crisis is forcing many to return, and poverty awaits them back in the villages. Governments are also scrambling to employ displaced returnees.

The return of overseas workers can be good news for countries as a whole. In the past, highly educated Indians often sought choice jobs in New York City or London, but now, with Western economies in shambles, they are returning in ever greater numbers. Not all countries, however, are so welcoming. Economists fret that the global crisis is causing a rise in protectionism against the international movement of people, just as it is with trade and investment. With unemployment soaring everywhere, politicians are trying to preserve jobs for their own nationals by slapping restrictions on imported labor. (2009, April). On the Road Again. Time International, 173(16), 16.

For Britain the exodus could be painful. Poles worked on Terminal 5 at Heathrow Airport and manpower will be required for the next great infrastructure project: the 2012 Olympic park in east London. “The challenge in the next few years will be to attract enough migrant workers with the right skills who can drive economic growth in the UK,” warns Jill Rutter of the left-leaning Institute for Public Policy Research think tank.

Britain has dipped into a recession this year. The construction sector is under pressure as the housing market softly implodes. That means fewer day jobs for Poles, but also a possible backlash against immigrants.

Poland is enjoying growth of more than 5 percent, and jobs are easier to come by. Workers are sought to help prepare the country to host its first major postcommunist event, the 2012 European football championships. “Poland has become a good place to live,” says Treczynski. Mark Rice-Oxley.  (2008, September 10). Polish newcomers say goodbye as hard times hit Britain. The Christian Science Monitor,p. 4.

In the long run, however, the recession will not put an end to migration. Foreign workers have become integral to the workings of the global economy. People with special skills and those willing to work for less will always be in demand–and they’ll continue to be willing to follow the money. Dilip Ratha, an economist and specialist on migration at the World Bank in Washington, says workers face more hurdles in moving about the world–such as immigration laws and visa restrictions–than do trade goods and dollars, and as a result, the number of people abroad is actually lower than what the global economy is able to absorb. He expects the total population of migrants to expand in 2009, albeit at a slower pace. “While workers are coming home, there are those that are still leaving, and leaving in big numbers,” says Carmelita Dimzon, administrator of the Overseas Workers Welfare Administration in Manila. Michael Schuman.  (2009, April). On the Road Again. Time International, 173(16), 16.

Mitchell Moss, a professor of urban policy and planning at New York University’s Wagner Graduate School of Public Service suggests a different approach. He says government and business should work together to come up with solutions to efficiently get urban residents to the areas where the new jobs are springing up. Laura Petrecca.  (2009, April 6). Workers follow jobs to suburbs :Companies shift from downtowns for lower costs. USA TODAY,p. B.4.

Tags: Credit Crunch, Economics, Employment, Global Financial Crisis, Immigrants, Labour, Migration, Recession, Skills, Workforce.

What can be done? The following are solutions suggested by the academics:

1. Income Distribution and Economics - ‘Economic progress will partly depend on the casting off of obsolescent modes of distribution-obsolescent in the sense of limiting the use of society’s accumulated knowledge and productive power to improve lives. James Peach has written that “[pjoverty occurs, not because of resource constraints or a lack of technical knowledge, but because institutional (distributional) arrangements have not been adjusted to the productive potential of the modern society” (1994, 170).’ Christopher Brown.  (2005). Is There an Institutional Theory of Distribution? Journal of Economic Issues, 39(4), 915-931.
2. New Mental Judgment and Decision Making Processes - ‘Pathways distill, organize, and present the assembled information in a way that allows people in communities to understand not only what they might do, but why they should do it, what it will take to do it well, and what contextual forces, which may either enhance or constrain the effectiveness, they are likely to encounter.’ Lisbeth B Schorr,  Patricia Auspos. (2003). USABLE INFORMATION ABOUT WHAT WORKS: BUILDING A BROADER AND DEEPER KNOWLEDGE BASE. Journal of Policy Analysis and Management, 22(4), 669-676.
3. Going Wireless - ‘Wireless industries have a potential to improve lives, change the world for the better and create a great deal of wealth. However, many obstacles stand in the way of this result. Businesses will face challenges in the areas of creation of technology, the adoption of the same by consumers, business considerations, global and local legal issues and consumer fears and resistance to the constant change around us. These obstacles can be overcome by understanding them and addressing them systematically. Businesses must be aware of the challenges in order to effectively plan the future and responsibly take in investment capital to drive the wireless industries. If these steps are taken with an eye on lessons-learned more will be learned about the networked economy and wonderful and exciting times will await those in the wireless industries and any business that benefits from new technologies.’   Michael Leventhal.  (2002). The golden age of wireless. Intellectual Property & Technology Law Journal, 14(1), 1-6.
4. Education and Training - Knowledge is power. The pen is mightier than the sword and so fourth. ‘Out of a different practice and skilling (Ingold 2000) in daily life, arose a worldview that made them capable of action, of filing lawsuits against multinational corporations and of dreaming of utopias of a radically different agriculture that corresponds to the ecology of the prairies.’ Birgit Müller.  (2008). Still Feeding the World? The Political Ecology of Canadian Prairie Farmers. Anthropologica, 50(2), 389-407.
5. Women - ‘Gender ideology and gender roles discourage and inhibit women from optimizing their human capital in activities that would yield optimal returns. Meanwhile, women’s contributions at home generally are not reciprocated by men. Many women express their frustration with this situation; men are generally less inclined to see women’s roles outside of the home as proper or even feasible nor are they willing to contribute more at home to support female entrepreneurship. For policy makers, perhaps the most important lesson is not to use microcredit as a substitute for other programs that empower women. Microcredit is just one of many initiatives that can challenge unfair gender norms. Governments should complement microcredit programs by funding other initiatives to promote gender awareness and fairness.’ Dwight Haase.  (2007). Closing the Gender Gap. ESR Review, 9(2), 4-9.
6. Information Sharing - ‘There is still an urgent need for national statistical offices, academics and public and private bodies to collaborate to measure real progress. The question at hand is not just what a shared information set means and should contain, but how to change culture and policies worldwide.’ Enrico Giovannini.  (2007). Why measuring progress matters. Organisation for Economic Cooperation and Development. The OECD Observer,(262), 22-23. ‘Technology should facilitate dissemination of knowledge and not hinder it and that scarcity of resources should never come in the way of accessing information that is likely to lead to better healthcare and a better life.’ S Bavdekar,  N Gogtay,  D Muzumdar,  P Vaideeswar,  V Salvi,  M Sarkar. (2007). Journal of Postgraduate Medicine: The path ahead. Journal of Postgraduate Medicine, 53(3), 153-153.
7. Participation in Democracy - ‘We associate the term democracy with orderly elections, stability of government, universal secret suffrage, the federal system and even with certain legal sanctions for the protection of private property and individual economic enterprise which are part of the Anglo-American systems. Many of us of course, realize that democracy is more than this. From Jefferson on our leaders of democratic thought have pointed out the spiritual strivings and the social aspirations which constitute its essence, particularly the aspirations for a better and freer social order. They have seen that democracy is a complex of all these strivings intimately associated with powerful dynamic elements arising from the conquest of a new continent and from the industrial and technological revolutions of the past century and a half. Inevitably these economic changes broadened the basis of political participation in the nation-state as they opened up opportunities for ampler economic and cultural life to larger masses of people affected by these historical processes. A good deal of what we recognize as democracy in the modern world is just this broadening of the basis of political structure.’ Harold E Davis.  (2007). Democracy in Latin America. World Affairs, 170(1), 45-49.

Tags: Better, Decision Making, Democracy, Distribution, Economics, Education, Improve, Income, Judgment, Life, Mental, Training, Wireless, Women.