Blog

Only showing posts tagged with 'Banking' Show all blog posts

How we think, and how we think we think, and what does it have to do with financial regulation?

by YPU Admin on April 20, 2017, Comments. Tags: Banking, Behavioural Economics, Humanities, Law, PhD, Policy, Research, and UoM

Introduction

My name is Elena and I’m a second year PhD student at the University of Manchester School of Law. I research the ways in which the ideas of how people think and make decisions impact regulation of banks and banks’ handling of risk. This is an important matter because banks have a significant place in the economies of most countries, and their behaviour is key to the economic and financial welfare of society.


How I got here

I completed a 4-year law degree in Russia, after which I decided to continue my education in the UK. After a law conversion course (GDL) I enrolled on an International Business and Commercial Law Masters programme at the University of Manchester. I was particularly attracted to the financial regulation module because of the enormous impact financial services have on society – the crisis of 2008 being a stark example. One of the lectures included a small bit about behavioural economics – a study of how our psychological traits influence our purchasing, investing, and other economic decisions. I thought that that was a fascinating topic – and after reading more about it, decided to do a PhD on it even though I had never considered becoming a researcher before.

In Depth

To make any (not necessarily economic) decisions, our brain needs to process large amounts of information in a short amount of time. Processing all of it in a comprehensive manner would require a lot of mental effort. Considering the amount of decisions we make on a daily basis, if every one of them required a lot of time and effort we would not be able to function normally. To rectify that, our brain developed thought patterns that help us to process information quicker. One of those thought patterns is called ‘availability heuristic’. When thinking about a certain topic or the probability of an event happening, our mind immediately refers to the most prominent belief or a vivid piece of information in our memory. This can cause a mistake in judgement. For example, people start worrying about a possible earthquake a lot more if they recently saw an earthquake report in the media. Another example is people estimating the crime rate in the area a lot higher after seeing a murder report on TV. And these are just a couple of examples – there are many thought patterns, or heuristics, that make our decision-making easier but also make us make mistakes along the way.

For a large part of the 20th century, the common academic opinion was that people tend to be rational, process all available information in a comprehensive way, and only make the most beneficial decisions for themselves. This approach became popular with governments as well, particularly in the US and the UK. This view resulted in designing policies and regulations that were aimed at those perfectly rational individuals. When confronted with human irrationality, government regulations and policies failed because people did not act as they were expected to. This was a part of the reason for the 2008 crisis.

Now that academic and government circles have largely accepted inherent human irrationality, policies can be adjusted to reflect the reality of human behaviour. In some areas – for example, consumer protection – there is a lot of progress. But others, such as financial regulation, require a lot of modification to reflect the true nature of human decision-making. My research aims to make regulation of banks more effective by designing a behavioural framework of board-level financial decision-making that can be used as a policy foundation.

Going Further

I enjoy my research because I find learning about how humans make decisions, and how the way our brain works influences the law, fascinating. Here are some interesting websites where you can learn more about this area:

https://www.behavioraleconomics.com/introduction-to-be/ - a comprehensive introduction to behavioural economics, including the primary research in the field.

https://hbr.org/2009/07/the-end-of-rational-economics - a Harvard Business Review article explaining the role of the presumption of rationality played in economics.

https://www.ft.com/content/9d7d31a4-aea8-11e3-aaa6-00144feab7de - a Financial Times article on applications of behavioural insights in public policy.

http://www.behaviouralinsights.co.uk - Behavioural Insights Team’s website. It’s a social purpose company partly owned by the UK government that is dedicated to devising ways to apply the insights of behavioural science to public policy.

http://nudges.org - a blog about choice architecture.

 

Money Money Money: How do banks do it?

by YPU Admin on March 31, 2016, Comments. Tags: Banking, finance, Humanities, Law, Money, PhD, Research, and UoM

Introduction

Hi, my name is Max and I am a PhD student at the University of Manchester School of Law. I have been a university student for the past 6 years now and I have really enjoyed my experience. University provides you with the opportunity of learning new things, meeting new people, experiencing a new environment, and finding what it is you want to do in life. For me, particularly the last question has always been difficult: it took me a long time to realise what I wanted to do in life, but pursuing a masters degree after my undergraduate degree gave me an idea. I decided to do research in financial services regulation. I will give you an idea of what this entails. It’s all about money.



In Depth

Financial services significantly affect all members of society. You all use money to pay for different things, such as clothes, shoes, sweets, books etc. If it wasn’t for the financial services industry, money wouldn’t be readily available in the form that we use it today. Let me give you an example:

I imagine that some of you have bank accounts in which you can place your money. You can save money in your bank account and later withdraw it if you decide to spend it. This is referred to as a ‘deposit’, as you deposit your money in your bank account. Your bank can then use this money to create loans to give out to different people. A loan is simply an agreement between a bank and an individual or a company. The bank gives the individual a sum of money and the individual agrees to pay the money back over a certain period of time. For the bank to benefit from this transaction, the individual is required to pay an additional sum of money over the time period. It is up to the individual to decide what to do with the money they receive. They can spend it on clothes, shoes, sweets, books, or something substantially bigger like a car or a house. This bank, therefore, made money readily available to the individual. The money that you deposited is also still available to you. You can withdraw it at any time. All banks put together make up the financial services industry. They are an important part of the money available to us. They significantly influence how money is readily available to all members of society.


This seems like a good thing doesn’t it? Sadly, however, this system comes with its problems. Consider this: what if the individual is unable to repay their loan within the time period agreed upon? What if the bank gives out so many loans that there is no money left for you to withdraw when you want to? How does the bank decide who is suitable to receive a loan? Does the bank use any other means to finance its loans? All of these questions are addressed in financial services regulation. Research in this area essentially tries to make the financial services industry reliable and stable so that money is as readily available as described above. Many of the issues get very complex. It can be very difficult for researchers to keep up with everything that happens in the financial services industry. This is precisely why I believe this to be an interesting research area. New developments arise constantly that require addressing. Different researchers come up with different ways of addressing these issues. I have found myself able to add my own thoughts to this interesting area. It is a very rewarding experience.

Going further

Here is a YouTube link to an interesting explanation of banking – https://www.youtube.com/watch?v=CqD3hnjZBTM