Unbanked But Not Unwise

Tribal Finance

Lisa Servon has written a clever, accessible and pin-point clear piece of ethnographic research. It looks at how an underserved and underappreciated tribe, without access to regular financial services, has developed ways and means of coping in their absence. It's also a damning indictment of the organizations that claim to offer them these services.

The tribe, of course, is middle class America, and the organizations are the banks that fail to serve them.

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The End of Finance, As We Know It

Disintermediate and Die

Over the past twenty years or so we’ve seen a remarkable change in the way a lot of business is conducted.  Publishing, an industry which had run on business models largely invented in the Middle Ages, has been completely revolutionized (see: Book Value).  Other industries have had their economics completely upturned by the interconnectivity of the internet, cheap, distributed processing power and the power of peer review.

Yet this hasn’t impacted the financial industry in anything like the way it might have.  Sure, the introduction of low commission internet share dealing has undermined many old school brokerages, but that’s replaced one set of problems with another.  Now, though, the race is on to disintermediate the middle men: the financial industry is on the cusp of a revolution, and most of the intended victims haven’t got a clue that they’re already an endangered species.

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Tâtonnement: Groping for Stock Equilibrium

Old Saws, New Rocks

One of the oldest saws in the book of economics is the idea of supply and demand; it even pre-dates Adam Smith, with a legacy stretching back to Muslim thinkers of the eleventh century. If people demand the Pet Rock as the next must-have toy but supply is limited then prices of Pet Rocks will go up. If some enterprising rock counterfeiter then floods the market with a supply of good-enough fakes then the demand is likely to fall, and price with it.

This iron rule of economics is actually a bit less rigid than you might think. In fact, it’s rather too wibbly-wobbly to describe it as a rule at all. But at the margins it more or less works which means it’s rather curious that it’s rarely cited as a reason for long-term changes in stock prices. It stands to reason, though, that if lots of people decide they want to buy shares just as companies start to withdraw them from the market that prices should go down. Or does it?

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Finance: Where The Law Of One Price Doesn’t Apply

Differentiating Financial Products

Even the smartest amongst us can be fooled by the pricing structures of relatively simple financial products. In any normal industry we would expect the law of one price would be prominent – in efficient markets all identical goods must have only one price.

Now whether or not the market for financial services is efficient or not is a moot point but the industry’s ability to create a vast swathe of differentiated products could almost have been designed to prevent the law of one price from operating. With the documentation for even simple financial products running into several pages of hieroglyphics in a convoluted and slightly sinister attempt to promote “clarity” the chances of anyone actually recognising that any two products are identical is minimal. In such a situation efficiency is a pipe dream.

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