...The Giant Pool of Money The individuals in the radio story fell prey to the confirmation bias/heuristic and availability bias/heuristic. The confirmation bias refers to “The tendency to search for or interpret information in a way that confirms Preconceptions”. The giant pool of money, which refers the subset of global savings allocated for fixed income securities, amounted to $70 trillion in 2006. In this case, the central banker held fed interest rate to a low level of 1%. The global army of investment managers, who managed the $70 trillion giant pool of money, wanted a low-risk high-return investment as the US treasury bonds didn’t look attractive at 1% interest. These investment managers invested in mortgage backed-securities (MBS) via big investment firms at Wall Street. Mike Francis, executive director at Morgan Stanley on the residential mortgage trading desk, sold financial instrument MBS to the global pool of money. To meet the high demands of global pool of money for MBS, Mike Francis needed to buy as many mortgages as possible to make MBS. Mike bought mortgages from mortgage banks and repacked them to MBS. People like Mike Francis were link to the global of money. Mike Garner, an employee at Silver State Mortgage, the largest private mortgage bank in Nevada, bought the individual mortgages and bundled 200 or 300 of them together, and then sold them up the chain to Wall Street investment banks, to guys like Mike Francis. The pool of money demand for these bundled...
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...The Giant Pool of Money Analysis The housing crisis that occurred less than a decade ago is a great example, and has become an extensively covered case study, of how dangerous certain biases and heuristics can become if left unchecked on a massive scale. Alex Blumberg and Adam Davidson, in collaboration with NPR News, put together a special program titled “The Giant Pool of Money,” where they explore just how the phenomenon occurred and the underlying factors that contributed through sound bites of those directly involved, affected, or simply aware of the situation as it unfolded. Based on descriptions of various biases and heuristics in Judgment in Managerial Decision Making (Bazerman, 2009), the two biases that prolonged and strengthened the housing crisis in a significant manner can be seen in the “Ease of recall” bias stemming from the “Availability Heuristic,” as well as the “Anchoring” bias coming from the “Confirmation Heuristic.” Bazerman and Moore define the “ease of recall” bias as one where “individuals judge events that are more easily recalled from memory, based on vividness or recency, to be more numerous than events of equal frequency whose instances are less easily recalled.” The housing market and real estate had been doing quite well since the “Dot-com” boom and bust had rattled markets in the late 1990’s. Housing prices were continually increasing, and “lots of people in the mortgage industry had this faith that housing prices in the US simply never go down...
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...Bankruptcy of a Retail Giant Blunders by former Chairman Charles Conaway and President Mark Schwartz led Kmart into bankruptcy. The retailer had to close 284 stores, including this one in Novi, and lay off 22,000 workers. They lived the good life of gated estates, a 47-foot yacht, corporate jets at their beck and call, and multiple pay hikes, perks, bonuses and loans. But even as Kmart Corp. struggled for survival, its chairman, Charles Conaway, and president, Mark Schwartz, wanted more, renegotiating employment contracts that would ultimately net them a combined $34 million in less than two years. Conaway and Schwartz, the leaders of the $37-billion-a-year retail giant that lost $3.9 billion in its past five quarters and laid off 22,000 workers this year, were the central figures in the company's demise. Their management blunders led Kmart into bankruptcy, and questions abound as to whether they hid the company's financial condition from its board of directors, employees and shareholders. But one thing is clear: As Kmart spiraled downward, Conaway and Schwartz grew richer. With Kmart mired in bankruptcy, the payouts to Conaway and Schwartz came under scrutiny in a federal criminal investigation of accounting practices. Federal investigators zeroed in on the personal finances and compensation deals struck by Conaway, Schwartz and other former Kmart executives in the months leading up to the company's Jan. 22 bankruptcy filing in Chicago. The Kmart investigation...
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...Derivative triggered the financial terror Jiho Jang Warren Buffett already said the derivatives “financial weapons of mass destruction.” It’s not surprising. The derivative products have triggered the most destructive financial crisis since the stock market crash in our history. The causes of financial crisis in the late 2000s are still controversial. Some assert that it is just the financial system, and regulation failure and the other insist that resulted from the financial engineering failures. The explosive growth in derivative contracts occurred after 1999 when the Glass-Steagall Act was repealed, which allowed banks to operate as brokerage. Glass-Steagall, adopted in 1933, separated brokerages and banks to ensure banks would no longer be involved in risky transactions. And credit rating agencies were slow to downgrade the credit rating of the securities. Because the rating agencies did not disclose the downgrades in time, many investors were misled to think that securities were still safe to invest in, and it accelerated the market crisis uncontrollably. The initial intention of derivatives was to defend against risk and protect against the losses and downside. However, derivatives were the most important tools to trigger the financial market collapse. Those tools usually used to take on more risk to maximize profits and returns rather than to defend against risk and to protect against the losses. All kinds of financial products are transferred to the...
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...Giant Pool of Money In this radio story about the events leading up to the subprime mortgage crisis, it’s clearly demonstrated that a few psychological biases and heuristics were present and played important roles in forming the crisis. The most critical ones I’ve identified are the confirmation bias and the social proof phenomenon in the development of the crisis. Confirmation Bias Mainly two types of confirmation bias were observed in the subprime crisis: the confirmation trap as well as anchoring heuristics. Anchoring caused the banks to miscalculate real risks of the mortgages and related MBS/CDO, while the confirmation trap caused most people in the industry to ignore potential risks and keep playing the dangerous game. Bazerman and Moore defined the anchoring heuristic as “Individuals make estimates for values based on an initial value (derived from past events…), and typically make insufficient adjustments from that anchor when establishing a final value.” And the Wall Street banks made exactly this mistake leading up to the mortgage crisis. When estimating the default rate for subprime mortgage products, Wall Street banks used historical data which indicated an average default rate of 2%, then extrapolated to estimate the absolute worst-case scenario to be at worst 10% to 12%. However, such anchoring is misleading because most of the data were years old were based on loans with strict income, asset and credit requirements. On the contrary, the subprime loans on which...
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...off them for 10 seconds and guaranteed, they'll be into some shit again: This bank is like the world's worst-behaved teenager, taking your car and running over kittens and fire hydrants on the way to Vegas for the weekend, maxing out your credit cards in the three days you spend at your aunt's funeral. They're out of control, yet they'll never do time or go out of business, because the government remains creepily committed to their survival, like overindulgent parents who refuse to believe their 40-year-old live-at-home son could possibly be responsible for those dead hookers in the backyard. It's been four years since the government, in the name of preventing a depression, saved this megabank from ruin by pumping $45 billion of taxpayer money into its arm. Since then, the Obama administration has looked the other way as the bank committed an astonishing variety of crimes – some elaborate and brilliant in their conception, some so crude that they'd be beneath your average street thug. Bank of America has systematically ripped off almost everyone with whom it has a significant business relationship, cheating investors, insurers, depositors, homeowners, shareholders, pensioners and taxpayers. It brought tens of thousands of Americans to foreclosure court using bogus, "robo-signed" evidence – a type of mass perjury that it helped pioneer. It hawked worthless mortgages to dozens of unions and state pension funds, draining...
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...Major League Baseball and the Player’s Union In one form or another Major League Baseball (MLB) has been around since 1869 (Wikipedia, 2012) and the Pittsburgh Pirates have been in existence since 1877 when they joined the National League (Wikipedia, 2012). It would be an understatement to say that the Pirates are a team rich in history. By contrast the Major League Baseball Players Association (MLBPA) has been around only since 1965 when they hired Marvin Miller to negotiate the collective bargaining agreement in 1968 (Major League Baseball Players Association, 2012). With a new collective bargaining agreement signed in 2011 this paper will review some of the issues that Major League Baseball and the Pittsburgh Pirates may encounter and how they can be overcome. Legal Problems and Solutions One major legal issue facing Major League Baseball and the Players Association today is the issue of performance enhancing drugs. This issue started to gain some traction in 1998 when Mark McGwire and Sammy Sosa were both attempting to break Roger Maris’ long-standing home run record of 61 home runs one season. In a 2010 interview with Bob Costas, McGwire finally admitted to taking steroids starting in 1993 (Kepner, 2010). McGwire stated that he even felt the need to apologize to the widow of Roger Maris, the man whose record McGwire broke “I felt that I needed to do that. They’ve been great supporters of mine. She was disappointed, and she has every right to be. I couldn’t tell her how...
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...MARKETING COURSE Articles Books & Chapters Cases Course Modules Online Courses Simulations 2012 MATERIALS Harvard Business Publishing serves the finest learning institutions worldwide with a comprehensive catalog of case studies, journal articles, books, and eLearning programs, including online courses and simulations. In addition to material from Harvard Business School and Harvard Business Review, we also offer course material from these renowned institutions and publications: Babson College Business Enterprise Trust Business Expert Press Business Horizons Magazine California Management Review Darden School of Business Design Management Institute HEC Montréal Centre for Case Studies Ivey School of Business International Institute for Management Development (IMD) IESE Business School INSEAD John F. Kennedy School of Government Kellogg School of Management Perseus Books Princeton University Press Rotman Magazine Stanford Graduate School of Business Sloan Management Review Social Enterprise Knowledge Network Thunderbird School of Global Management Tsinghua University University of Hong Kong Customer service is available 8 am to 6 pm ET, Monday through Friday. Phone: 1-800-545-7685 (1-617-783-7600 outside the U.S. and Canada) Tech support is available 8 am to 8 pm ET, Monday through Thursday, 8 am to 7 pm ET Friday. Phone: 1-800-810-8858 (1-617-783-7700 outside the U.S....
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...09-093 July 22, 2009 The Global Financial Crisis of 2008 – 2009: The Role of Greed, Fear and Oligarchs Cate Reavis Free enterprise is always the right answer. The problem with it is that it ignores the human element. It does not take into account the complexities of human behavior. 1 —Andrew Lo, Professor of Finance, MIT Sloan School of Management The problem in the financial sector today is not that a given firm might have enough market share to influence prices; it is that one firm or a small set of interconnected firms, by failing, can bring down the economy. 2 —Simon Johnson, Professor of Entrepreneurship, MIT Sloan School of Management, Former Chief Economist, IMF On October 9, 2007 the Dow Jones Industrial Average set a record by closing at 14,047. One year later, the Dow was just above 8,000, after dropping 21% in the first nine days of October 2008. Major stock markets in other countries had plunged alongside the Dow. Credit markets were nearing paralysis. Companies began to lay off workers in droves and were forced to put off capital investments. Individual consumers were being denied loans for mortgages and college tuitions. After the nine day U.S. stock market plunge, the head of the International Monetary Fund had some sobering words: “Intensifying solvency concerns about a number of the largest U.S.-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown.” 3 1 2 3 Interview with the case writer...
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...is always growing. It is most known for the University of Nebraska where college sports is always dominant, so that means when school is in session there are thousands of college kids ready to party and let loose from all their studying. To the west in Lincoln there is a new district that is growing steadily with new restaurants and bars. This is all within walking distance from the football stadium and the newly built arena where concerts and basketball games are played. In this area there is a city block that has two levels of bars and restaurants and an outdoor patio with a giant big screen television outside for everyone to watch major events. This place is called the rail yard since it was built right where the train station used to be many years ago. At the rail yard people have their choice of choosing a bar to enjoy, getting a drink outside and watch an exciting sporting event on the giant screen or do both. At the very top of the corner in the rail yard there is a bar called Vega. It was made to hold live music events and it has a full 360 degree bar outside where everyone can enjoy the views of either the rail yard or overlooking the new arena and football stadium in the distance....
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...Influence of consumer Behavior on business Starbucks Corporation, based on Seattle, is the world’s largest coffeehouse with 20891 stores in 62 countries. (Starbucks- Annual report, 2012). From the very beginning, till 1971, Starbucks has been relentlessly trying to satiate customers thirst for high quality coffee with the touch of friendliness in its environment. Starbucks mission statement “To inspire and nurture the human spirit- one person, one cup, and one neighborhood at a time” also shows its commitment towards total customer experience rather than only a material taste of the coffee (Starbucks 2013). Throughout this whole report I tried to find out influence of consumers behavior over the activities of Starbucks. As the normal process of expansion Starbucks has expanded towards the South Asian region. On the basis of this initiative I assumed Starbucks would go further and invest in Bangladesh. And tried to analyze consumers’ behavior of Bangladesh and show its macro and micro factors’ influences over Starbucks present marketing practices. Starbucks SWOT analysis “SWOT analysis pursues and integrated approach that includes key variables from company and environment. The objective is the confrontation of the company’s internal strengths and its weaknesses, as well as, company-external business opportunities and threats in order to generate possible strategic options.” (Bohm, 2009, p.1) The...
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...ORGANIZATION & CULTURE FINANCE & ACCOUNTING MARKETING MANAGING TECHNOLOGY MARKETING STRATEGY & COMPETITION HUMAN RESOURCES MARKETING ORGANIZATION & CULTURE MANAGING TECHNOLOGY FINANCE & ACCOUNTING ORGANIZATION & CULTURE MARKETING STRATEGY & COMPETITION HUMAN RESOURCES MANAGING TECHNOLOGY FINANCE & ACCOUNTING ORGANIZATION & CULTURE MARKETING STRATEGY & COMPETITION HUMAN RESOURCES MANAGING TECHNOLOGY MARKETING STRATEGY & Honing Your HUMAN RESOURCES ORGANIZATION & CULTURE FINANCE & ACCOUNTING HUMAN RESOURCES COMPETITIONCompetitive Edge Finance Function in a Global Corporation The H 108 Harvard Business Review | by Mihir A. Desai HISTORICALLY, the finance functions in large U.S. and European firms have focused on cost control, operating budgets, and internal auditing. But as corporations go global, a world of finance opens up within them, presenting new opportunities and challenges for CFOs. Rather than simply make aggregate capital-structure and dividend decisions, for example, they also have to wrestle with the capital structure and profit repatriation policies of their companies’ subsidiaries. Capital budgeting decisions and valuation must reflect not only divisional differences but also the complications introduced by currency, tax, and country risks. Incentive systems need to measure and reward managers operating in various economic and financial settings. The existence of what amounts to internal markets for capital gives global corporations a powerful mechanism...
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...Sukuk: General Review Challenges on Shariah-compliance & Accounting Implications Monsif MOUMNI Introduction The growth and popularity of the use of Islamic finance has been exceptional since the central bank of Bahrain issued the first sovereign sukuk in 2001. In fact, the size of the global Islamic finance market exceeds US$2 trillion. Although the sukuk market is still small compared to the conventional bond market, sukuk are considered as the most successful financial product among the Islamic financial institutions and also considered as one of the fastest industries in its growth in international financial landscape. Sukuk generally refers to Shariah-compliant bonds; the spread in a striking pace of sukuk in GCC1 and Muslim-majority countries in Asia has made from it a very important way for fund raising. Recently sukuk have also been attracting attention in non-Islamic countries in Europe, Asia, and Africa; for example in 2014, sovereign sukuk were issued by the United Kingdom, Hong Kong, Luxembourg, and South Africa (Lackmann, 2015). The main objective of this paper is to provide a panoramic picture describing the key elements characterizing sukuk from different perspectives combined. In this review we will first try to present the general context of sukuk i.e. the definition, types, and the basic structure of sukuk, and also to make a contrast of conventional bonds with sukuk to outline the main differences, and next we will discuss about controversy...
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...system. Also people in Sweden have strong purchasing power and consumption ability as they have long been high income group in the world. When a good deal presents, people will not hesitate to make a purchase. This stable purchasing power guarantees a potentially stable profit for Walmart. Sweden also has a large pool of highly educated and well trained work force, making it quite easy for Walmart to staff its operation. As for the mode of entry, we recommend choosing to establish a joint venture with local partners as Sweden is a fully liberalized economy that has removed obstacles preventing free flow of trade and investment. Mature investors and partners in Sweden can share similar modes of business operation, similar management style and similar accounting policies with this US retail giant. By making use of this legal form of association and partnership, Walmart can explore Swedish market without taking full risks and responsibilities and can gain new competitiveness through access to its partners’ financial resources, technical resources and other resources. By forming the mutual goals and objectives, all the participants and investors can work together to pool resources and to reduce the risk of failure. Global management skills Global managers and...
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...Can You Fight Poverty With a Five-Star Hotel? (Photo courtesy of Mövenpick Hotels & Resorts) by Cheryl Strauss Einhorn, Special to ProPublica, Jan. 2, 2013, 12 a.m. * 0 Comments * Republish * Email * Print Connect with Facebook to share articles you read on ProPublica. Learn more » * * * * 1 inShare This story was co-published with Foreign Policy. Accra is a city of choking red dust where almost no rain falls for three months at a time and clothes hung out on a line dry in 15 minutes. So the new five-star Mövenpick hotel affords a haven of sorts in Ghana’s crowded capital, with manicured lawns, amply watered vegetation, and uniformed waiters gliding poolside on roller skates to offer icy drinks to guests. A high concrete wall rings the grounds, keeping out the city’s overflowing poor who hawk goods in the street by day and the homeless who lie on the sidewalks by night. The Mövenpick, which opened in 2011, fits the model of a modern international luxury hotel, with 260 rooms, seven floors, and 13,500 square feet of retail space displaying $2,000 Italian handbags and other wares. But it is exceptional in at least one respect: It was financed by a combination of two very different entities: a multibillion-dollar investment company largely controlled by a Saudi prince, and the poverty-fighting World Bank. The investment company, Kingdom Holding Company, has a market value of $12 billion, and Forbes ranks its principal owner, Prince...
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