Behavioral finance FAQ / Glossary (Over-reliance)
This is a separate page of the N-O section of the Glossary
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Over-reliance on analysts, experts, advisors
See my ex knol.on this topic
+ see obedience, guru, goal
Over-reliance on management objectives and norms
See goal, behavioral corporate
management, numeracy bias,
Businesses and other institutions rely largely on "MBO-management by
objectives" and "MIS-management information systems".They can be defined as systems in which:
* personal (or team) objectives and norms are decided
* results are compared with those stated goals
Pros and cons
MBO has become a standard of management as it is highly useful to boost
performance and also to prepare, support and follow actions plans.
On the other hand those normative tools can have perverse effects,
By resting on too reductive goals, and on straightjacket norms and
practices (sometimes obsolete) that reduce the latitudes for initiatives,
innovation and adaptation
By generalizing staff control (carrot and stick) and bringing
stress that can stifle the staff morale
By inciting to cheat on the results (cooking the stats).
By privileging short term and quantitative results instead of long term
and qualitative ones
Over-reliance on numbers, models
See numeracy bias,
Over-reliance on rules, regulation
See behavioral public
A sinister precedent
The temptation, after a crisis like the subprime crisis, is to create new and
A paradox as one of the causes of the crisis was ...a regulation.
The "capital adequacy ratio" for banks gave them the incentive
to transfer loans, and above all dubious loans, from inside to
outside their balance sheet.
A conjurer trick, the card that was in the right hand is now under the left
They were repackaged, we could say disguised , as "structured
financial securities (what is called securitization), sweetened with some
derivatives, and sold ...to other banks usually.
This opened the door to subprime loans, miraculously transformed, through
a deceptive mixing process that turned hashed rotten chicken into pheasant
pâté, into apparently safe investment that allowed to meet artificially the
solvency criteria so as not to deteriorate the banks' balance sheets.
A mountain of them was created, until people understood that their
value was dubious and they became illiquid.
Then the crisis broke out!
How to avoid such crises in the future?
- By regulating those financial instruments?
- By raising the capital adequacy rules?
Btw, it is what has been done ("Basel III")...
...to give more incentive to circumvent them?
Who can really think that regulating the cause of a
past anomaly will avoid the next one, that can be fully
When one reason of the crisis was the loophole
created by a regulation?
A moral hazard (see that phrase) all financial authorities
were blind to (or supporting it)?
The fact is that regulations come most of the time too late, once the
harm done is discovered.
Or, when regulations try to anticipate it, the anticipation might be wrong.
What to do?
The solution can only be to prevent such blindness more than regulating
It means to have:
General transparency, safety and ethical principles.
The more general, the better!
Smarter independent watchdogs who anticipate what new
forms the nest biases would take, what new excesses (in prices,
returns, volumes, financial leverage...) are building up.
OK, but what kind of watchdogs? Let us look closer:
Those supervisors should not be just bureaucrats
are happy to see that the rules are apparently not broken
or understand and lament the biased game, but lack power
They should be recruited among high level professionals, with
experience of the game, able to see what is going on in the
restaurant kitchen and to anticipate and understand what other
professionals are inventing to distort the system.
They should be very well paid, because of their competence,
and also to stay "incorruptible".
They should have full access and full authority on all
financial areas, as real Caesars.
Their scope should be global, as finance is a
Why not a World Financial Authority, and/or a World Financial
Even more crucial, they should take a monk-like commitment
never to be influenced by the general mood and the belief
that markets always know better even when they enter extreme
behaviors, contrarily to what the "efficient market hypothesis"
(see that phrase) instilled in many weak (and greedy) minds.
In fact they would be "behavior observers", not only number
A related bias
Overreliance on management objectives and norms
(see the specific glossary article)
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