Back to Basics: The Future of Banking and Finance Discussed at the 2009 World Economic Forum in Davos, Switzerland

This is the first time I've paid close attention to the events at the annual meeting of the World Economic Forum, held in Davos, Switzerland. The World Economic Forum is an independent, international non-profit organization. The motto of the organization is "entrepreneurship in the global public interest".

If you are interested in learning about the topics discussed during the panel discussions at the annual meeting of the World Economic Forum, a good place to visit is the Events section of the forum's website. The 2009 Annual Meeting section has a list of panel discussion topics, each linking to summaries of the key points that were debated and discussed.

(For deeper exploration of the themes and topics of the annual meeting, I've provided links to video clips, webcasts, podcasts, and social media located at the end of this post.)

Here is the short view:

Davos: More Questions than Answers 1/30/09
"Alan Murray, deputy managing editor for The Wall Street Journal, says this year's World Economic Forum took on a different tone from years past. On preventing another financial crisis, he says there were more questions than answers."



Excerpts from Wall Street Journal Article: Signs of the Future of Banking and Finance Emerge 1/31/09 CARRICK MOLLENKAMP, JOELLEN PERRY and ALESSANDRA GALLONI

"Davos, known in the past as a celebration of profits, this year was more of a cold outpost where attendees, including regulators, bankers, and hedge-fund managers, have been sorting through a raft of back-to-basics strategies for the world's financial system."

"In the end, what we want is a financial industry and banking-sector industry where you have more capital, less debt, more rules and much stronger supervision," said Italian central-bank governor Mario Draghi. He said markets largely remain frozen and that the only thing that would attract investors -- many of which actually serve as lenders because they invest in debt -- is an assurance of safety and transparency.....Among the new rules of the game for banks are likely to be simpler models that rely less on off-balance-sheet vehicles and borrowed funds to drive profits. There also likely to be fewer opportunities for banks to offload risk to third parties -- such as American International Group Inc. -- that then end up unable to insure themselves against losses or exposures to loans."

Angela Merkel, Chancellor of Germany, at the World Economic Forum
Photo from WSJ via AP

World Economic Forum in Davos participants enact life in a refugee camp for a day:




RELATED

PRESS RELEASES FROM THE WORLD ECONOMIC FORUM

World Economic Forum Annual Meeting Quotes
1/28/09
1/29/09
1/30/09
1/31/09

2009 World Economic Forum Social Media Links
2009 World Economic Forum YouTube Channel
2009 World Economic Forum Podcasts, Webcasts and Videos
2009 World Economic Forum Interviews

INVESTOPEDIA (Links to a financial dictionary for those of us who have trouble with understanding the financial alphabet soup.)

Death And Taxes Interactive Graphic, from Wall Stats

Here's the embedded version of Wall Stats' Death And Taxes 2009

Gordon Gekko, Wall Street, and Behavioral Finance

1987 was not a very good year for the U.S. economy. The "Go-Go '80's were fueled by a touch of greed. Nothing explains this better than the following clip of Gordon Gekko, a fictional corporate raider played by Michael Douglas in the movie Wall Street. Gekko firmly believed that greed is good. Ironically, the events in the movie forshadow the scandals that have been played out on Wall Street and corporate America over the past 21 years. Below is a quote from Gekko's speech, and the corresponding video clip I found on YouTube.

"The point is, ladies and gentlemen, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms: greed for life, for money, for love, knowledge, has marked the upward surge of mankind". - Gordon Gekko (Memorable Quotes from Wall Street)




(I will take down this video if I'm notified that it violates someone's copyright.)

Humans are complex creatures. It would be challenging to create a behavioral finance application that could account for and predict various psychological and sociological scenarios. What would represent a constant? What characteristics, traits, behaviors, and inclinations would play as variables?

Here are a few:
Perhaps "greed" is an important human factor that should be incorporated into this affective/behavioral/financial applications. There are quite a few more:

"herd mentality", "politics", "power", "control", "need for constant adrenaline rush", "sins of omission", "sins of commission", "consumer confidence", "illusion of stability", "cluelessness", and of course, "truthiness".

I don't intend this to be a joke. In real life, this would be a serious endeavor. I am not sure that Wall Street quants would try to figure ways to quantify the concept of truthiness.

Behavioral Finance Resources

Behavioral Finance: Benefiting from Irrational Investors
(Julia Hanna, Harvard Business School)
"Behavioral finance replaces the traditional and idealized idea of rational decision makers with real and imperfect people who have social, cognitive, and emotional biases. The resulting inefficiencies in the capital markets can create opportunities for investment managers and firms."

Behavioral Finance: A Review and Synthesis pdf
(Avanidhar Subrahmanyam, 2006)

The Behavioral Finance Hoax pdf
(Richard Michaud)

Detailed presentation, includes theories and formulas:
A Survey of Behavioral Finance
(Nicholas Barberis, Richard Thaler, presented by Ryan Samson, CalTech)

Behavioral Finance at JP Morgan
(Malcolm P. Baker, Aldo Sesia Jr. 2007, Harvard Business Publishing)