Saturday, July 14, 2012

On default positions

Dan Ariely comments on how the normalization of cheating can produce a cascading effect:
The consequences of this sort of cheating are even more severe when the network of contagion is larger. We see this when we look at Greece, where masses of people have been cheating a little bit everywhere, and it’s all added up. What this shows is just how contagious dishonesty can be. When we see somebody else cheat, especially if they’re part of our own, internal group, all of a sudden we figure out that it’s more acceptable to act this way. It’s not that the probability of our getting caught has changed – it’s that we’ve changed our mindset, convincing ourselves that the act itself is actually OK. At some point, you just think, “This is the way things are done,” and you go with the flow.

One woman from Greece recently told me that she was selling her apartment and she was considering whether to sell it legally (and pay taxes) or illegally (without paying taxes). She quickly realized that she had bought it illegally, and that she would lose money if she turned around and sold it legally – not to mention that, in her mind, she would be the only person in Greece paying taxes on real-estate property.

When everyone around you is cheating the system, what’s your motivation to be the one not playing along? 
And on what's surely an entirely unrelated note, Andrew Hepburn reports on how prize fixing may be par for the course in the financial sector:
Barclays attempted to manipulate LIBOR both to give a false impression of the bank’s health and also to benefit its trading positions. It did not do so alone: traders coordinated their activities with other banks to ensure successful manipulations. For example, let’s say Barclays had accumulated bets that interest rates would rise. Submitting artificially high estimates of how much it cost the bank to borrow funds would tend to push the published LIBOR rate higher, thus benefitting its trading positions. To do so, however, it would need to collude with other banks, because the highest and lowest submissions are automatically excluded in the calculation of LIBOR.
...
The truth is, though, that price-fixers are less likely to be caught or punished severely in the financial industry.

Admittedly, authorities across the developed world have become quite adept at spotting and cracking down on manipulation and cartel behaviour in a number of other areas. In the U.S., for example, anti-trust laws provide significant civil and criminal penalties for those found guilty of cartel behaviour—and there have been some notable enforcement actions. The same goes for the European Union. As recently as 2010, the European Commission fined 11 airlines almost $1 billion for fixing the price of air cargo.

Yet with the exception of stocks, regulators have made comparatively little headway in combating market manipulation in the world of finance. The U.S. Commodities Futures Trading Commission, for example, has only successfully prosecuted one case of market manipulation in its entire history (though there have been some cases of–mostly modest–settlements along the way). This, in turn, has contributed to various shenanigans mushrooming across the industry.
And to make matters worse, there's Corporate Knights' analysis as to how Canada's corporate sector treats its legal obligation to pay taxes:
All wasn’t good news. The average percentage of defined benefit pension plans that are funded is down again this year, as is the average percentage of statutory taxes that was paid.

“It’s not surprising,” said Michael Yow, lead analyst with CK Capital, this magazine's sister research division. “Companies are looking for ways to keep cash during more trying economic times, so they’re looking for any possibility to take advantage of any and all tax loopholes.”
All of which would seem to make for about the most unlikely scenario for yet another anti-regulation push telling the public to just trust whatever the corporate sector deems acceptable. And yet, here we are.

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