The power of self-fulfilling stories in financial markets

26 02 2010

Soros, the new Citizen Kane? (Credits: mindfully.org)

On December 2009, the euro traded at $1.51. Today, it trades at $1.35. What can explain this 11% downfall in little bit more than 2 months? An avid reader of the Wall Street Journal or the Financial Times will eloquently explain that it just reflects the faster recovery of the US economy out of the crisis vs. Europe, amplified by fears that Greece may default on its sovereign debt. End of story? Not so fast. A closer look will reveal the perfect case study for the power of self-fulfilling stories in financial markets.

Deeply ingrained in our collective subconscious is the fear that we are getting manipulated by higher forces. Not so long ago, people questioned the power of mass media and how Rupert Murdoch or Silvio Berlusconi could bend reality with their editorial lines rather than reporting it. I will argue that hedge fund managers and other leading investment bankers have become the new Citizen Kane, shaping reality with powerful storytelling. Financial markets have slowly but surely built a very advanced language that now allow them to communicate and broadcast complex stories. Puts, call, credit-default swaps and other derivatives constitute the building blocks of their vocabulary. Traders have become the journalists that put those words together, following the editorial line dictated by their fund manager. The assets under management, the equivalent of circulation, provide more or less clout to the fund editorial line. Read the rest of this entry »

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The predicted extinction of the Homo Economicus

19 02 2010

Source: hugsandi.is

Amongst fear of biodiversity loss, one species is slowly but surely facing extinction – the Homo Economicus. According to Wikipedia, the Homo Economicus “is the concept in some economic theories of humans as rational and broadly self-interested actors who have the ability to make judgments towards their subjectively defined ends.”

Yes, human beings are capable of rational and utilitarian thinking but this is only the tip of the iceberg. Neuroscience has made tremendous progresses on how our rational and irrational selves interact but there is still a long way to go. For a curious reader, I recommend the book “How we decide” from Jonah Lehrer. In this book, Lehrer provides plethora of scientific nitbits that will challenge your beliefs about the human brain. For instance, we are all victims of a phenomenon called “anchoring” or how your short-term memory strongly influences your most “rational” decisions. A group of economists led by Dan Ariely asked MIT students to enter an auction and bid on several random items ranging from a cordless keyboard to a bottle of wine. Before bidding for each object, students had to write down the last two digits of their Social Security Number and decide whether they were willing to pay that numerical amount for the item. Then, they were asked to place their final bid for the object. It turned out that students with a higher-ending Social Security Number made an average bid 4 times greater than the ones with a lower-ending Social Security Number. While their Social Security Number was irrelevant to bid for a cordless keyboard, their brain kept the information in their short-term memory, which anchored their next decision. Read the rest of this entry »





Corporate diplomacy – Forget geopolitics, think ecopolitics

12 02 2010

Source: nexus404.com

In 2009, Exxon Mobil and Wal Mart revenues surpassed Sweden’s GDP – the 22nd wealthiest country in terms of GDP. Companies like Google publicly challenged China in a human rights debate more powerfully than any developed country had ever dared to. With the economic clout of a develop country and a time horizon set on quarterly earnings, large corporations turned century-old diplomatic protocols upside down like a bull in a china shop. As I see it, large corporations’ government affairs will soon start to look like a Foreign Affairs Ministry with a clear diplomatic agenda to uphold.

When you start to think about it, it is already the case. Corporations in America leverage lobbying to shape the political environment the same way a diplomatic mission would do in a foreign country. Building on the analogy, the World Economic Forum at Davos is the equivalent of the UN where traditional diplomats come to negotiate with their corporate counterparts. If this is already happening, quid novi sub sole? Well, I expect corporations to become bolder in setting and communicating their diplomatic agenda. By doing so, they will redefine the power map – shifting international relations from geopolitics to ecopolitics.

One may then argue that economics are already driving foreign relations. Diplomacy and companies’ interests tend to go hand in hand. Watch a presidential plane from a Western country land in China and we will see a clique of CEOs mixing with the usual diplomatic aides. The line gets blurred between old-fashioned diplomats and global business leaders. Though now, there is still an implicit deference to the old system with the business world trying to piggy-back on the old diplomatic channels to support their interest. This is where I see a branching point: will corporations still defer to diplomatic channels to make them case or will they develop their own, running the risk of clashing with the traditional diplomatic world? Read the rest of this entry »





A new model for technology innovation: “Search and Development”

7 02 2010

Source: today.ucf.edu

Cleantech is on its way to potentially become the next transformative wave of innovation. As often, anticipating what the future will hold is about understanding how the past unraveled. Indeed, there is much to learn both in terms of investors’ mental models and potential analogies from past waves like the Internet and Biotech.

The emergence of Information technologies marked the triumph of the VC-backed model. The business and mainstream media helped build the myth of the geeky tech entrepreneur and the all-powerful venture capitalist. The lesson we all learned was that an idea could quickly move from concept to a reality – potentially unleashing millions of dollars while doing so. Of course in the process, numerous shaky business plans were funded; people saw value where there was just wind. Yet, tech entrepreneur/VC tandem survived the bubble and still embodies in our subconscious the perfect combination to generate technology innovation.

As a consequence, people still believe that this is the model to go for the next technology innovation. That is why, you see cleantech entrepreneurs and VC striving to walk the cleantech “revolution” along the same path i.e. funding, IPO, etc. However, savvy investors and business pundits raise some valid concerns as to the validity of the analogy. The beauty of the IT revolution was, and still is, that the development costs to reach scale are very limited. On the contrary, most of the cleantech requires longer development lead time and thus funding up to 10 times what was necessary for the proof of concept in the IT world. How many firms can realistically raise 100 million of dollars through the VC world to develop a conclusive prototype? The analogy falls short and begs for another point of reference. Read the rest of this entry »





Car Wars: The return of the Electric Vehicle

2 02 2010

Better Place Car (Renault) - Source: socialearth.org

While covering the 2010 EDTA Conference in Washington on electric vehicles for Clean Horizon Consulting, I learned that the first cars were actually electric vehicles. It is only under Thomas Edison’s advice that Ford chose to develop a model around a combustion engine. Edison knew that in terms of energy storage, it is hard to be more efficient than fossil fuels. Then, the technology struck back in the aftermath of the 1973 and 1979 oil crises. This eventually led to some product developments – for those who remember the infamous GM EV1. At that time, electric vehicles with its multiple drawbacks (range constraints, time to charge, lack of infrastructure, etc.) could not threaten the more flexible and established technology that was the combustion engine. Can the story be any different this time?

During the conference, even the most adamant electric vehicle (EV) evangelist knew that mass adoption of EVs will come down to one thing only: customer experience. Early adoption is never an issue especially for a technology that can appeal to both geeks and environmentalists. The real trick though is to secure mass adoption. This is actually where the technology failed in the past. You have to provide the average consumer with at least an on-par experience compared to what she is used to getting with her current car. This is all the more challenging that a seamless customer experience requires the emergence of an ecosystem linking a nebula of actors. If you wake-up at 7AM to get to this important meeting and your car is not  charged up, who should you call? The car manufacturer? the utility? the charging station manufacturer? All of them? For those of you who tried to get a Google Nexus while conserving your current T-Mobile account, you know that seamless interactions between companies’ customer services rarely self-emerge.

While the industry is still fighting to define standards, a self-emerging ecosystem seems like an utopia. As a consequence, EV will struggle through the next decade, slowly grabbing market share but growing slower than some could have expected. However, we should be aware of two important wild cards: Better Place and Smith. Read the rest of this entry »