The financial crisis has taught us several lessons. While there is a change in consumer behaviour, experts feel that governments should tighten regulations. Drazen Prelic, a neuro-economist at the Massachussets Institute of Technology (MIT) in US, spoke to HT on the sidelines of the recently-concluded Hindustan Times Leadership Summit. He said competitive pressure and lack of ownership leads to financial frauds. Excerpts:
What do you think leads to corporate or financial frauds among individuals?
They seem to be a result of competitive pressures. If a company is taking higher risk and making higher returns then as a manager of another company it is very difficult for you ... you have to copy. This is the biggest issue in the financial sector. The other is that market operators play with people's money and don't have their own exposure, and that creates a situation where they take high risk. If you win, it's okay, but if you lose it is people's money, not yours.
What is the solution?
The government has to step in, because it is a collective problem and it should establish rules so that the incentives of copying are not there. There should be regulation to separate banking from investment banking. In the banking system risks of common man are guaranteed by the government and the institutions feel if it is guaranteed they can take higher risk in investment banking. So regulators should keep both separate. Banking should become the boring business it used to be.
Amidst high consumerism how do see the spending behaviour of individuals changing?
In the US, there has been a sustained movement towards the use of debit cards from the credit cards. This is something that the industry did not expect and I think it is not the best practice as there should be a right mix in their use... credit cards have their own advantages.
Why this shift?
The reason is budgeting and control and it is a reaction to past experiences. This is a slow process and takes several years. If people purchase with credit cards they are left with a baggage. Also, the anxiety of payment to be made subdues the excitement of purchase.
How do you see the behaviour of individuals at the bourses?
There is evidence that experienced trading professionals have lower physiological response to market movements and volatility. Inexperienced traders react far more strongly as their emotions are engaged. For the experienced ones it becomes more of an algorithm and they have reduced volatility of their emotions to such movements.
What are the factors to which market players react most?
The most that they react to is the decision of a government or the authorities that may have an impact on their investments as it may have a contagion effect.
How do you view women as players in the stock markets?
Women have an advantage in reasoning and are more conversant with broader aspects whereas men are more focussed on specific things. A trader's job is an extremely focussed job and men are good at it.
Women are good with the overall macro picture and going forward it is expected that jobs that will require such skills are likely to rise in the new generation.