Capital budgeting Essay

A – Capital budgeting is an analysis of potential additions to fixed assets, it is part of the long term decisions taken by the top management and involve large expenditures. The capital budgeting is very important to firm’s future. The difference between capital budgeting and individual’s investment decisions are in the estimation of cash flows, risk, and determination of the appropriate discount. B – The difference between interdependent and mutually exclusive projects is that the independent project’s cash flows are not affected by the acceptance of the other, although the mutually exclusive can be adversely impacted by the acceptance of the other. the difference between normal and no normal cash flow stream projects occurs in the signs since for the normal cash flows if the cost ( negative CF) followed by a series of positive cash flows will lead to one change of sign. On the other hand the non-normal project cash flows have two or more changes of sign C – 1 NPV: is the sum of all cash inflows and outflows of a project C – 2 – The rationale behind the NPV method is that it is equal to PV of inflows minus the cost which is the net gain in wealth. If the projects are mutually exclusive we will choose the project with the highest NPV and here in our case we will choose project S since it has a greater NPV compared to project S (19.98>18.79). If the projects are independent we will choose both. C – 3 The NPV will change if the WACC change; if the WACC increases the NPV will decrease on the other hand if the WACC decreases the NPV will increase. D – 1 Internal rate of return (IRR) is the discount rate that forces PV inflows equal to cost, and the NPV = 0. IRR using excel for project L: IRR 18.13% For project S: IRR 23.6% D – 2 A project IRR is the same as a bond’s YTM. The YTM on the bond would be  the IRR of the â€Å"bond† project. D – 3 If IRR > WACC, the project’s return exceeds its costs and there is some return left over to boost stockholders returns. If IRR > WACC, the project is accepted and if IRR < WACC, the project is reject. If projects are independent, we accept both of them, as both IRR > WACC. If projects are mutually exclusive, we accept the one with the highest IRR. D – 4 IRR do not depend on the WACC, so if the WACC changes, the IRR for both projects will remain the same. E – 1 Excel=NPV(rate,CF1:CFn) + CF 0 WACC NPV L NPV S 0% $50.00 $40.00 5% $33.05 $29.29 10% $18.78 $19.98 15% $6.67 $11.83 20% ($3.70) $4.63 Cross over rate is equal to 8.7%. CF Differences 0 -60 10 60 IRR = 8.7% E – 2 For independent projects, both IRR and NPV will lead to the same decision. If projects are mutually exclusive, there is a conflict between the IRR and the NPV. Since we said that NPV is the best method to use in case of conflict, project L will be selected based on this method. F – 1 The slope of the NPV profile depends entirely on the timing of the cash flows; long-term projects have excessive NPV profiles than short-term projects. We conclude that NPV profiles can cross in two situations, first when mutually exclusive projects differ in size: the smaller project frees up funds at t = 0 for investment. The higher the opportunity cost, the more valuable these funds, so a high WACC favors small projects, and second when the projects cash flows differ in terms of the timing pattern of their cash flows: the project with faster payback provides more CF in early years for reinvestment. If WACC is high, early CF especially good, NPVs > NPV L (projects studied in class). F – 2 The reinvestment rate assumptions: -NPV method assumes Cfs are reinvested at the WACC. -IRR method assumes CFs are reinvested at the IRR. -Assuming Cfs are reinvested at the opportunity cost of capital is more realistic, so NPV method is the best. NPV method should be used to choose between mutually exclusive projects. -Perhaps a hybrid of the IRR that assumes cost of capital reinvestment is needed. F – 3 Some projects will result in different IRR and NPV. The NPV will be selected to decide if the project is going to be accepted or not. We do not use the IRR first because it does not take into account changing discount rates, so it is j not adequate for longer-term projects with discount rates that are will probably vary. Second, the IRR ineffective is a project with a non-normal cash flow streams (mixture of positive and negative cash flows). G – 1 MIRR assumes reinvestment at the opportunity cost =WACC. MIRR also avoids the multiple IRR problem. G – 2 MIRR does not always lead to the same decision as NPV when mutually exclusive projects are being considered. In particular, small projects often have a higher MIRR, but a lower NPV, than larger projects. Thus, MIRR is not a perfect substitute for NPV, and NPV remains the single best decision rule. H – 1 Payback period is the number of years required to recover a project’s cost, or â€Å"how long does it take to get our money back?† H – 2 The payback period tells us when the project will break even in a cash flow sense. With a required payback of 2 years, Project S is acceptable, but Project L is not. Whether the two projects are independent or mutually exclusive makes no difference in this case. H – 3 Discounted payback is similar to payback except that discounted rather than raw cash flows are used. H – 4 Discounted payback still fails to consider cash flows after the payback period and it gives us no specific decision rule for acceptance. However, payback is not generally used as the primary decision tool. Rather, it is used as a rough measure of a project’s liquidity and riskiness. I – 1 2 3 CF -800000 5000000 -5000000 WACC 0,1 To find NPV we used excel: Excel: =NPV(rate,CF1:CFn)+CFO NPV (386 776,86 DT) Excel: =IRR(CF0:CFn,Rate) IRR 25% Excel: =MIRR(CF0:CFN,Rate) MIRR 5,6% 7

Rapport created in Chicago speech by Barack Obama Essay

In this study I will be analysing the speech of Barack Obama in two different contexts. The first speech is his victory speech in Chicago on the 4th November 2008. The second is his campaigning speech in Iowa. These speeches depict Obama in both a formal and less formal situation. It is important that we realise that his strategies have changed. Barack Obama creates rapport with the audience during his victory acceptance speech in many ways. He creates an immediate bond with the audience as he begins his speech by saying, â€Å"Hello Chicago!† He then pauses for a minute in order for the citizens of America to welcome him as the USA’s president. Then he addresses the people who had not voted for him because they thought he was not capable of leading America and then thanking the thousands of voters that gave him his victory. The effective line â€Å"tonight is your answer†, uses personal pronouns to engage the audience and involve them in his success. Obama thanks his â€Å"partner†, this shows the close friendship between himself and his colleagues before thanking his own family. This shows the gratefulness towards the Americans for making him president. The president begins to talk about his own life, â€Å"the love of my life†, allowing the citizens into his own world. This shows him as being very humble and creates rapport as it shows that there were lots of people behind his own success and in order for America to be a success, the citizens will be there for her. In the victory speech, Obama refers to situations that allow a connection between himself and the audience as he uses phrases such as â€Å"on the train home† proving that he too is an ordinary man like the rest of them. However he also refers the patriotic past of the United States of America. Barack Obama often uses powerful visual imagery and metaphors in his victory speech. Earlier on he uses contrast and personal pronouns to rely on him. â€Å"We are not enemies but friends†. This allows the American population to feel involved and make them feel as if they do have a say in the way the country is run. He also talks of Ann Nixon Cooper who at the point that this speech was told was 106 years old. Like himself, she was a black woman who saw the changes in the running of USA, making it personal. He also talks about many famous women and men who had changed history for example, â€Å"a man {who} touched down on the moon†, â€Å"a preacher from Atlanta†. It is evident that he wishes to be remembered throughout history not only as America’s first black president but as someone who made â€Å"America †¦ change†. This short sentence emphasises the fact that he would be a great president. An antithesis is used to show that he can make a difference, â€Å"the heartache and the hope†, although this is contrast and alliteration, the soft sounds of the â€Å"h† sanctions the words to roll on the tongue to put their confidence in their new president. The constant repetition of the phrase â€Å"Yes we can†, creates rapport with the audience as it goes through their mind that the president on the stage will unite everyone and change everything for the better. The citizens then begin to chant along with Barack Obama. It is evident that the citizens have trusted the man to improve the quality of life in America. Obama attended this speech with formal attire, a black suit and a red tie to represent as he has transcended in politics, he no longer represents just the Democratic party but everyone so he has chosen to wear a patriotic colour that symbolises the whole of USA. It also shows him to be a powerful and bold man. His hair is short, clean shaven and perfect yet it looks natural allowing the population to see him more seriously. In the background there are waving American flags, a patriotic sign there is also a stage separating him from the population proving that he is more powerful and has to look down at them, priority. Barack Obama did not slouch in this speech, he did not lean against the podium however he does stand straight to look more focused and makes many hand gestures although they are restricted when he is trying to put a point across as well as having a clenched fist when he wants to look serious and emphasise a point that he has made seeming confident. An interesting point is that during this speech Obama does not hesitate at all as if he has had faith in him winning therefore he has practised it many times in order to ensure that it was perfect. However it was not the same in his campaigning speech in Iowa closer to the time of the election. We know this because he is extremely exhausted and tired. Here there is a small audience in the gym who are trying to decide who to vote for in the coming election (2008).He makes this speech to persuade them to vote for him. Although the president (a senator at this point) wears a suit with a red tie he seems to be more uncomfortable as he is shown to be scratching his face and unbuttoning his shirt as it may have been slightly putrid in there as it is a gym. He turns around often as he is in an uncomfortable position, he is in the centre of a circle where it is difficult for him to make eye contact with the audience. Obama tries to create rapport with the audience as he takes the opportunity to make a joke however when no one laughs he accredits it to his wife, Michelle Obama. He hesitates and makes lots of pauses often. The reason for this may be that he had forgotten what he was meant to say, he had not rehearsed anything or that he was tired. Barack Obama does create rapport by using an anecdote to allow the audience to enter his personal life, â€Å"we were still living in a condo. â€Å"It was a little bit too small for the kids† showing that he does understand the lives of many American citizens. He realises that the audience in the gym are middle aged, adults with a young child. As he addresses the fact that he did not know how there were going to get money â€Å"for college for the girls† as well as â€Å"save for †¦ retirement†. This proves that he has done his research and knows his audience well as he talks about their concerns. Obama does not show himself to have confidence and faith in himself as he says, â€Å"I think that if you trust me then I think I’ll deliver for you.† He appears very colloquial as he has abbreviated the words ‘I will’ to â€Å"I’ll†. It is not effective as he tells the spectators that he â€Å"think[‘s]† that he will be a good president.

Teaching Students with Diverse Abilities

Teaching students whose first language is not English is often a challenging task. This essay will focus on a few effective teaching and learning strategies for teaching business studies to second-language learners (ESL learners) in the context of the mainstream classroom. Studies reveal that the negative effects of wrong beliefs about learning are significant (Sawir 2005). However, it has also been suggested that it is possible to intervene in relation to beliefs about learning (Sawir 2005). Hence a clear understanding of belief issues is of paramount importance for teachers. Care should be taken to give speaking and listening skills the appropriate status and these should be backed by comprehensive practical programs (Sawir 2005). Having oral presentations and listening tasks as part of the business studies assessment program can help develop these skills. Krashen and Terrel (1983) suggest using language to transmit messages rather than teaching it explicitly for conscious learning. They use the expression the ‘natural approach’ and claim it is based on the theory that language acquisition occurs when students receive clear instructions in acquiring language proficiency (Webster and Hasari 2009). Therefore, the business studies teacher can introduce new words and concepts within the subject content thereby improving student vocabulary. Four key strategies were considered by the majority of teachers in a study by Facella et al. (2005) as being effective in teaching second-language learners. These included gestures and visual cues; repetition and opportunities for practicing skills; use of objects, real props and hands on materials; and multi-sensory approaches. Thus, giving students real life business case studies to discuss and evaluate is an effective strategy. Taking students out to real businesses and letting them see first-hand how a business operates can also be useful. Rice et al. (2004) argue that the use of visuals and demonstrations are often the primary source of information for ESL learners and suggests the use of outcome-based objectives against which students can assess their own progress. They also advocate the modulation of lesson objectives to each student’s level of language acquisition. The belief is that repeating demonstrations and instructions facilitate student learning. Hence, teachers should endeavour to demonstrate procedures, provide illustrations and diagrams before students commence research projects, as opposed to providing students with only written instructions. In addition, when forming groups, members should ideally be bilingual, strong in commerce and business studies and be willing to work with limited-English proficient students (Sutman et al. 1993). Sheltered instruction is another effective strategy for teaching second-language students. It refers to a research-based instructional framework that provides clear and accessible content and academic language to ESL learners (Hansen-Thomas 2008). Features of sheltered instruction include use of cooperative learning activities with appropriately designed heterogeneous grouping of students, a focus on academic language as well as key content vocabulary, careful use of the student's first language as a tool to provide comprehensibility, use of hands-on activities using authentic materials, demonstrations, and modeling and explicit teaching and implementation of learning strategies (Hansen-Thomas 2008). Sheltered classes can be team-taught by an ESL teacher and a content-area teacher or taught by a content-area specialist trained in sheltered instruction. ESL mentoring is another effective strategy to help teachers of second-language students. It is â€Å"a means of fostering stronger connections among the teaching staff, leading to a more positive and cohesive learning environment for students† (Brewster and Railsback 2001). One of the goals of the ESL mentor is to assist the teacher in learning how the school identifies ESL students. Furthermore, a teacher needs to know some basic background information such as where the student is from, how long the student has been in the country and the student's stage of language development. The guidance of an ESL mentor can help a teacher understand his/her ESL students quickly and prevent possible problems later in the year (Mittica 2003). The ESL mentor can also provide training on accommodations and alternate forms of assessment. The ESL mentor can assist the teacher to set achievable goals for ESL students at the beginning of the semester. In teaching ESL students, success is not always measured on a report card. Therefore, teachers have to be guided to observe his/her ESL students closely by focusing on issues such as the progress demonstrated by the student over time and by observing to see if the student is more comfortable participating in class and asking questions (Mittica 2003). Above all, ESL mentors can provide a â€Å"vision of students as capable individuals for whom limited English proficiency does not signify a lack of academic skills and does not represent an incurable situation† (Walqui, 1999 in Mittica, 2003). ESL mentors can guide mainstream teachers in discovering his/her students' strengths and to celebrate multicultural education (Mittica 2003). By fully involving mainstream classroom teachers in the education of ESL students, these students will be more likely to achieve success a nd adjust to their lives in a new country (Mittica 2003). (ii)  Teachers need to work in partnership with parents and the wider community to help educate students from culturally and linguistically diverse backgrounds. This essay will discuss some strategies for developing such partnerships. Several researchers have documented the challenges associated with school, family, and community partnerships. Rubin and Abrego (2004) suggests that parents are not involved with their children's learning because of cultural and communication barriers, confusion with education jargon, feelings of inferiority, inhibition, inadequacy, or failure, lack of understanding of the school system, staff's lack of appreciation of the student's culture or language and parents' previous negative experiences or feelings toward schools. Other researchers who examined the success factors in school-parents-community relationship found an open and trusting communication between teachers and parents as critical (Obeidat and Al-Hassan 2009). Parents and schools should communicate regularly and clearly about information important to student success (NCPIE). This can be accomplished through newsletters, handbooks, parent-teacher conferences, open houses, as well as home visits, and email. Translations should be made available, if needed, to ensure non-English speaking parents are fully informed. Researchers believe that personal contact whether by telephone or in person is usually the best way to promote two-way communication (NCPIE). Schools can also form partnerships with community and faith-based organizations to engage families from diverse cultural backgrounds who often do not feel comfortable in school (NCPIE). Conferences, meetings and informal get-togethers can take place outside the school building, such as at a faith-based or community center. Once again Interpreters should be provided as needed. Attitude is another potential success factor for developing partnerships with parents. A survey of more than 400 parents of high school students in the USA revealed that their attitudes toward their children's schools were positively influenced by the efforts the school made to promote partnerships with them (Obeidat & Al-Hassan 2009). Parents are more likely to come to the school if school personnel encourage them to be volunteers and participate in decision making (Sanders et al. 1999). School factors, specifically those that are relational in nature, have a significant impact on parents' involvement. When school staff engage in a caring and trusting relationship with parents and view parents as partners in the education of their children it enhance parents' desire to be involved and influence how they participate in their children's educational development. Schools should create an environment that welcomes participation (NCPIE). Signs that greet families warmly at the school door, the central office, and the classroom should be in the languages spoken by the community. A school-based family resource center providing information, links to social services, and opportunities for informal meetings with staff and other families also contributes to a family-friendly atmosphere (NCPIE). Schools should also provide professional development opportunities for teachers and other staff in the cultural and community values and practices that are common to their students and their families (NCPIE). Strengthening the school-family partnership with professional development for all school staff as well as parents and other family members is an essential investment that can help foster lasting partnerships with parents and the community at large (NCPIE). In their 1997 study, Hoover-Dempsey and Sandler identified two key factors influencing parental involvement. They were an inviting climate at school, which refers to the frequency that schools actually invite parents to be involved in their children's schools and parents' perceptions of being welcome at school. Epstein (1995) identified six general types of activities that can help parents, schools, and communities come together to support children's education: parenting, communicating, volunteering, learning at home, decision making, and collaborating with the community. Epstein (1995) says that partnership programs should draw on each of these elements and that programs should take into account the unique character of the local community and the needs of its students and families. Martin et al. (1999) in their studies identified key characteristics of effective partnerships between schools, parents and the community these included; inclusiveness, recognizing social as well as academic goals, raising expectations through education achievement, involving local people in decision-making and democratic participation and active citizenship. Hence, schools need to focus on developing these areas to grow positive relationships. The use of service learning can be a useful strategy for this purpose. Serve learning is more than just community service. It involves a blending of service activities with the academic curriculum in order to address real community needs while students learn through active engagement (Lynass 2005). The service needs to be closely linked to the curriculum as possible with an emphasis on students applying the skills they are learning (Lynass 2005). Service learning will benefit students, teachers and the community concurrently. It allows teachers and students to connect with and benefit their surrounding communities while integrating this learning back into their curriculum (Lynass 2005). In conclusion, it is essential for schools to develop strong relationships with parents and the community to successfully educate students from culturally and linguistically diverse backgrounds. This essay has identified a few strategies to develop such partnerships.

Movie comment Review Example | Topics and Well Written Essays - 500 words - 2

Comment - Movie Review Example According to (UTAH ) â€Å" On December 7, 1941. The traumatic mass movement of the Japanese from the West Coast began. Under the infamous Executive Order 9066, the army was empowered to oversee the "enemy alien problem." During this period, the Americans were fighting hard against the Japanese residing in the Pacific ,the Americans had a notion that most of the Japanese were spies and could turn out be a big threat to the nation .(Book mice)claims that â€Å"Although prejudice and discrimination played major roles in the internment, economics and jealousy did also, as many Californians were jealous of the economic success that the Japanese-American farmers and store owners enjoyed† This make it clear that during the Japanese internment period the Americans had a mixed feeling of war threat, national insecurity, jealousy and prejudice running through their head. Answer to question two The movie â€Å"snow falling on cedars† has explicit sex scenes and violence related to Japanese internment. According to (Renteln,618-648) â€Å"In particular, through consideration of various historical documents I argue that a deeply rooted fear of sexual congress between the races consciously or unconsciously motivated some of the actions which led to the internment of 120,000 Japanese Americans†.

Limited Foreign Exchange Exposure Through Hedging Research Paper

Limited Foreign Exchange Exposure Through Hedging - Research Paper Example The research paper discusses different kinds of hedging instruments employed by firms all over the world. The risk of the exchange rate is raised from the assets and liabilities or transactions dominated in foreign currencies or existing. The hedging activities of all firms are not alike and they may vary based on the core business of firms and kinds of their foreign exchange risk. The paper described the kinds of Hedging instruments including Natural Hedging and Foreign Exchange Derivatives. In order to evaluate hedging practices in Australia, data of up to March 2005 has been used apart from hedging surveys for Australia. The previous surveys show that the banking sector of Australia has always been well-protected from currency fluctuations. In the period following the floating of the Australian dollar, Australian banks had very little exposure to exchange rate risk because of the restrictions of regulations on international transactions. After the removal of these restrictions, banks have been financing their domestic assets through short term liabilities abroad. In order to limit their net exposures, the banks used to match foreign currency liabilities to their assets. For further eliminating the residual risk exposure, Australian banks have been using derivatives. The current market risk guidelines ask the Australian authorized deposit-taking banks to dete rmine their foreign currency exposure daily. The evaluation of adaptations of non-financial firms to exchange rate fluctuations show that these firms have been facing difficulties because of poor or little experience. In 1986, borrowers made 3000 foreign currency loans dominated in Swiss francs and they incurred huge losses when Swiss francs appreciated by 50% against the Australian dollar.

Career aspiration Essay Example | Topics and Well Written Essays - 750 words

Career aspiration - Essay Example My interest is in aviation engineering. Aviation engineers end up airport executives and professional pilots although this branch is also related to airspace development, designing the airport, navigation technologies, and so on. Airspace development is related to planning and designing the airspace. And it is extremely important that it is done in a proper manner in order that military operations are not affected and also so for the easy navigation of commercial airlines. Then there is airport design, which is again important due to several reasons, one being that the design needs to be in accordance with global environmental standards. Aviation engineers in the manufacturing field are generally paid between $17,500 and $54,500 (AvScholars). Their responsibility is toward production; ranging from developing and selecting manufacturing ways to overseeing everyday tasks taking place on the factory floor. They have to intensely research regarding designing, projecting, production and maintenance technologies and functions of various kinds of vehicles that move in sky or space. Also, there is a requirement of manufacturing better aircrafts – lighter and faster, those that comply with the environmental rules and those that do not make too much sound. All this comes under the work of aviation engineers as they are responsible for the design and manufacture of aircrafts. They have to decide which production system will prove to be better for manufacturing in terms of cost. They have to conduct experiments that help in determining the performance properties of the air vehicle that has been designed and this is done through analytical skills. A person definitely needs a proper engineering degree to pursue aviation engineering for which purpose it is extremely necessary that there are highly qualified institutions that cater to the interested people. An undergraduate education in this field is of four years and the graduating students receive a

Reflective Case Study on the Assessment and Evaluation of Secondary Essay

Reflective Case Study on the Assessment and Evaluation of Secondary Mathematics - Essay Example An evaluation refers to an intermittent process of gathering data and then analyzing it in such a way that the resulting information can be used to determine whether an individual is effectively carrying out planned objectives. Through evaluation, we will be able to anticipate results of a student's progress. On the other hand, assessment is the process of detailing knowledge, skills, attitudes and beliefs which, in turn, is often used in the educational context. I may consider that both of these techniques are the first steps in getting your child the assistance he needs to learn and develop in school. In accordance to this, a series of educational assessments carried out on children attending schools in England, Wales and Northern Ireland that follows the National Curriculum was made, called as National Curriculum Assessments. The exam-based assessments (National Curriculum Tests) are often referred to as SATs (Standard, or Statutory, Assessment Tests), which was their title when they were being developed in the 1990s. One of the subjects that were given importance is the secondary mathematics. I personally believe that there has never been a greater need to be mathematically literate but for those who comprehend mathematics, there are important enhanced opportunities and options that will open doors to dynamic futures. In the National Curriculum, schools are ensure... It is a flexible framework given to teachers by Government, so that all school children are taught in a way that is balanced and manageable, but stretching enough to challenge them and meet their diverse needs. The National Curriculum is prearranged into blocks of years called 'key stages'. I am about to examine key stage 3 and key stage 4 performance in Mathematics. Here is an example individual pupil profile of a student in key stage 3. *Important Note: A pupil's score is only an estimate of true ability as performance on any one occasion can be affected by a number of factors such as mood, illness, external distractions etc. Here are the results of last year's (2005) National Curriculum Test Scores in Mathematics. These tables show the percentage of year 9 pupils achieving each level nationally in 2005 Assessment Data The following can are some available assessment tests that can be used. The Basic Yellis Test, which has been in use since 1992, as a measure of developed abilities providing a fair baseline from which GCSE predictions and value-added scores can be generated, also helps in assessing the pupil's performance with regards to the curriculum. Their compulsory math section has been designed with an emphasis on measuring fluency and speed as well as numerical ability. One of their most efficient ways of collecting mathematical information is the use of constructed answers rather than just multiple choice questions. According to them, the Math score is an excellent predictor of later academic achievement. Another quick way of assessment is GOAL or Goal plc (Global Online Assessment for Learning) established to provide an innovative

Economics Essay Example | Topics and Well Written Essays - 2500 words - 3

Economics - Essay Example Some of the other factors as determinants of demand have been introduced in the theory of demand recently. The traditional theory of demand starts with the examination of the behaviour of the consumer since the market demand is assumed to be the summation of the demands of the individual consumers. Thus, the demand for a given commodity is the horizontal summation of the demands of the individual consumers. In other words the quantity demanded in the market at each price is the sum of the individual demands of all consumers at that price. The responsiveness of the demand in relation to the price or income of the consumer is referred as the elasticity of demand. There are as many elasticities of demand as its determinants. The most important of these elasticities are (a) the price Elasticity, (b) the income elasticity, and (c) the cross elasticity. The concept of elasticity of demand is important in that it s being used by the economists to explain the consumer behaviour in different market conditions. With this background this paper illustrates the importance of different kinds of elasticities of demand and the ways in which they are helpful to the economists to report on the consumer behaivour... The laws of demand and supply are an important part of in the study of economics. They help the economists to measure the relative changes in the demand due to changes in prices with the concept of elasticity of demand. (Pink Monkey) The price elasticity is a measure of the responsiveness of demand to changes in the commodity’s own price. Depending on the magnitude of the changes in demand it can be termed as either point elasticity or arc elasticity of demand. If the changes in the prices are very small, the point elasticity of demand is used as the measure of responsiveness of demand. If the changes in the prices are large then arc elasticity of demand is used as the relevant measure of responsiveness. The laws of demand and supply form the basic

Criminal Justice System in the USA Assignment Example | Topics and Well Written Essays - 1000 words

Criminal Justice System in the USA - Assignment Example As the paper outlines, this is obviously the wrong direction that the prison system is taking and represents an unethical way in which the offenders are being treated. Although the conditions in these prisons meet federal and local standards, the overall issue of human rights and equality is fundamentally flawed due to the fact that the people who are being locked away are not viewed with respect to how they should be punished or reformed; rather, they are only viewed with respect to the overall level of profitability that can be extracted from the state, regional, or federal government for their tenure in the penal system. The following analysis will discuss this to some length and highlight the unethical nature as well as some prescriptions for change that could be instituted in order to have a positive impact on the current criminal justice system. The ethical issue that exists is the fact that the prisons and penal institutions within the United States are supposed to be interest ed only in punishing and rehabilitating the criminal. Instead, what is taking place throughout the country is a situation in which the prison complex itself is making a massive amount of money based upon the individuals that it incarcerates. As one might expect, this means that there will be little if any focus upon seeking to rehabilitate the criminal; instead, the focus is upon only trying to expand the size of the prisons so that a further and further level of profitability is made.  As such, the primary ethical/moral issue that one must consider relates to the issue that has evolved from what this author will deem â€Å"incarceration for profit†. Although few individuals in the United States are aware of this practice, the fact of the matter is that it has grown from an isolated incidence to a multi-million dollar a year industry. The central issue can be explained as a system whereby overburdened municipalities cannot immediately afford the massive expense that is call ed for in order to build a new penitentiary system. As a way to bridge this gap while making a substantial profit, private firms enter into the equation and offer the municipality a joint venture which is oftentimes hard to resist. These firms offer to front the necessary capital to build the facility as well as staff it with private contracting security firms. The catch then comes as the municipality agrees to an extended lease of the facility. Although at face value this may seem an ingenious way for a private firm to work to alleviate the strains that a municipality may have with relation to prison overcrowding, it is however slightly more sinister than one would at first presume. Due to the fact that a private firm now has the stake in the criminal justice system, a system that arguably the state and the state alone should have prevued over, the interests of rehabilitation and reform are placed as secondary to overall profit (Brickner et al. 11). Such a situation is counter to t he very foundations of what the criminal justice system is supposed to provide to society.  In this way, incarceration has become the primary focus of policymakers and local leaders whereas the needs of those incarcerated as well as the secondary objectives of rehabilitation and reform are all but forgotten in a drive to provide more â€Å"bed space† for existing and incoming offenders.   This issue has been compounded by a host of policy decisions; some of these are beyond the scope of this individual analysis.   However, two of the complicating factors will be discussed at greater length within this analysis.

A Life That Almost Happened Lab Report Example | Topics and Well Written Essays - 1250 words

A Life That Almost Happened - Lab Report Example It listed jobs in food service, supermarket cashier, but the mere fact that he had a resume at all is evidence that he had set goals and ambitions. It tells the story of potential- the story of a life that almost happened. After graduating from North High School in 1999, Alfonso moved out of his mother's house in the government project where he grew up, instead, he went to work, driving a delivery truck for Albuquerque Tortilla. Even then he wanted to be more than a delivery boy. For a while, Alfonso had considered going into the Marine Corps, but decided instead to go to college once he paid off his truck. In the meantime, he moved in with his sister, Miriam Celaya, and her two children. On Saturday afternoon, March 10th 2001 Alfonso had gone to his friend Rafael Espinoza's house at 31st Avenue and Washington Street. Rafa was 20 then with three kids, twins on the way, a wife and a girlfriend on the side. He said that he's not a bad guy and that he's stayed away from gangs and drugs. But Alfonso's family isn't convinced, either, so on that Saturday Alfonso has to go to Rafa's house, because Miriam doesn't approve of the friendship and doesn't want Rafa in her home. Late that afternoon, Alfonso and another friend, Narvel Murrieta, headed towards Rafa's house in Alfonso's white pickup. Narvel had arrived in Phoenix less than two weeks ago from a small ranching community called Pantanito, in Magdalena, Sonora, where Alfonso's family also has a home. Alfonso has offered to show Narvel around, and help Narvel get acquainted with life in Phoenix. They arrived at Rafa's small gray house around 4:30. Then the three men talked outside for a while about their plans for the evening. Narvel has never been out in Phoenix, and wants Alfonso to show him around. Today was also Rafa's girlfriend's 21st birthday. The trio makes tentative plans to meet up later in the evening to celebrate. Then they headed to the nearby house of Rafa's cousin, where Rafa plays the accordion, while the cousin gives Alfonso a guitar lesson. Then Alfonso and Narvel leave for their house while Rafa called his girlfriend Estrella, to make plans to celebrate her birthday. While at the same time, not far from Rafa's house, 18-year-old Jesus Maris pumps gas at the Texaco, a black man selling jewelry, a watch, some bracelets, chains and a semi-automatic handgun approached him. The man wanted $100 for the gun, but Jesus talked him down to $40. He hoped to sell the gun for $100 himself and make some money. Jesus heads home around 6 p.m. and gets ready to go out for the evening. Jesus would later tell investigators, that the purchase of the gun was more a product of chance and opportunity than anything else. As dinnertime approached at the Celaya house, the family sent Noel Caudillo, one of the brothers to get hamburgers from Carl's Jr. hamburgers. After dinner, Narvel and Alfonso left together, and didn't tell the family where they're headed. It was the last time Alfonso's mother would see her youngest son alive. Around the same time, Jesus Maris, Omar Mendez and his brother Antonio had just finished drinking a couple of beers at Omar's apartment in Mesa. They headed to a party. There, they met up with another friend and had a few more drinks. About a half-hour later, the four cruise toward Phoenix in a Chevy pickup. While Alfonso and Narvel, Estrella and her two friends, and Rafa's 15-year-old sister all arrived at Rafa's house. They got into two cars, heading out for an evening at the Mexican

Grate Expectations Essay Example for Free

Grate Expectations Essay Dickens creates an atmosphere setting in order to engage the interest of the reader at the beginning of the novel. Dickens used to serialise his novels. The story opens in an impressive way when he introduces us to pip in the graveyard because most of his familys bodies are burred there. This makes the reader feel scared, frightened and we start to emphasise with pip at the beginning of the novel because we now feel sorry for him because his parents are dead. Owing to this parents death he lives with his older sister Ms Joe Gargery and his brother in law Joe Gargery the blacksmith, pip sister is really mean to pip and his brother in law treats pip like his younger son. In the 19th century, infant mortality rates were higher. The infant mortality rate is the number of children per year out of every thousand alive that die before they reach the age of one or more specifically, under the age of five. This made us aware at the beginning of chapter 1 when Pip described the graves of his brothers. This might surprise the modern reader but Dickens did not comment on it because such death of very young children in his day was very common. The tension is increased in the novel as there is an escaped convict who will soon meet Pip, which is emphasised by the emotions on Pips face, held tighter to the tombstone on which he had put me; party, to keep myself upon it; partly, to keep my self from crying this shows Pips emotion. When we continued to read, we will get to know that Pip went to the graveyard because of his parents and five brothers. Also before the conversation between the convict and Pip, Dickens continued to describe the scenery negatively, talking of the low leaden line to describe the river. This brings feelings heaviness and being trapped. The wind was rushing finishes a third paragraph, with yet another idea of bleak weather, making Pip hear things and scaring him. This makes the reader more frightened for Pip and also the way he described the weather makes the reader know that it wasnt close to the end of the day and also danger was lurking about. Pip continues to describe the two black things that seemed to be standing upright and he talks about a gibbet where they hang people. The above-mentioned talk of graveyards plus the gibbet makes the audience know everything seem very sad and also both are associated with death. The audience gets further engaged because again we start to feel sympathy for the boy who seems so helpless and needy. On the other hand, the novel Great Expectations is actually being told by Pip himself, both as a child, and as an adult looking back at when he was younger. This is very effective and successful language by Dickens, as it gives us an adult opinion and perspective of a childs life. At this point, the audience will know that the narrator dickens is a mature on, because he talks about his childish conclusions of his family by looking at the inscription on their gravestones and how his young tongue could only make out the name Pip from his full name. From the inscription, I drew a childish conclusion that my mother was dotted and ill. Also in the story, Pip described himself in third person like he was looking back on a distant memory. The readers too start to reminisce about their past and if they are older they can identify with the language used by the older Pip. How Charles Dickens describes the bundle of shivers made Pip seem very small, vulnerable and easily exposed to attack. The convict made a very dramatic entrance into the story. This is because we hear the man before we see him. Also his entrance was much as a shock to the reader as to Pip. This creates tension because it shows that the convict has discovered that Pip is hiding in the graveyard very near him. The man started talking to Pip with an angry voice by saying, keep still you little devil or I will cut your throat, dialect of Magwitch. The way and manner the man talked to Pip frightened him. The conversation between Pip and the convict was very short and choppy. The man introduces a lot of commands into his conversation. One typical example of his command in their conversation was when he said, Keep quiet. This shows the audience that something was going to happen to Pip. Also, the reader now begins to form ideas about the convict. We now see him as heartless, a no good person and extremely evil to speak to a child in the manner. In the novel, the convict turned Pip upside down and gnawed bread from his pocket like a lion on its prey. When the convict turned Pip upside down, the young Pip saw the world in a new way. Here Dickens uses humour to engage the reader. The situation is humours because of the revelation of how children can respond differently to adults in a negative situation. Also, when the convict wanted to eat Pips cheeks, the older Pip looked back and admits impartially that; he did have fat cheeks as a child. This also shows the audience Pip was a humorous person who uses things he can identify with to make comparison. This also tells us that the convict was extremely fat and huge or just hungry. Dickens gives the audience a very detailed and precise description of what the man looks like, he looks scruffy to pip but dickens doesnt describe him as scruffy, he was having dishevelled broken shoes, he was with no hat, he was having a rag tied around his head, he was soaked in water, covered in mud and he was with a manacle on one leg. A manacle is an old English word for handcuff or a long big metal chain. The manacle on one of his legs will also let the audience know that he was a prisoner. Also the fact that he was with no hat shows the audience that he has no respect according to the 19th century manners.

Simple pendulum experiment Essay Example for Free

Simple pendulum experiment Essay A string measured to be over 1 meter, so as when its length was being adjusted there was enough string to pull on from between the wooden blocks, was tied to a bob. The end of the string was then placed between two wooden blocks and adjusted so that the length of the pendulum was 1 meter. The wood blocks were then placed in the clamp and the grip was tightened. The pendulum suspension was made sure to be friction-free so that the wood blocks could provide a point of suspension for the string. The angle at which the pendulum is drawn out to should be small. The smaller the angle, the closer the harmonic motion it will behave because the restoring force is acting tangent to the arc the pendulum moves through instead of being outside of it. The time taken for 20 oscillations with the length of the pendulum being 1 meter was recorded but was also repeated for accuracy. The two times were averaged and the result was divided by 20 so as to find the time for one oscillation which was then squared. The length of the pendulum was decreased by 0. 1 m each time. The pendulum should swing freely without hitting anything. A table was drawn to record the results and from this a graph was plot. Results: Table showing the time taken for 20 oscillations for each length. Time for 20 oscillations l/m t1/s t2/s AverageGradient = g g= gradient   g = 0. 24ms-2   39. 48 = 9. 79 ms-2 Conclusion: Using a simple pendulum, the acceleration due to gravity was concluded to be 9. 79 ms-2.

Combines Michael Porters Generic Competitive Strategies Marketing Essay

Combines Michael Porters Generic Competitive Strategies Marketing Essay IKEA achieves competitive advantage under the cost leadership strategy by producing at the lowest possible cost. Wherever possible, under this strategy IKEA will reduce costs at every stage of the value chain and either charge lower prices or charge competitive prices resulting in relatively high profit margins. IKEA cuts costs constantly and is always asking its makers to seek the least costly suppliers. IKEA also, seeks to offer prices much cheaper and target very wider audience. Therefore, to be able to achieve required margins. Differentiation Strategy: In the differentiation strategy, IKEA look for competitive advantage by offering products that are perceived to be different and better than competitors products by customers due to its unique characteristics, e.g. quality of the products. Focus Strategy: The focus strategy has two variants i.e. Cost Focus and Differentiation Focus. This is where IKEA focuses on a narrow segment of the market. This is where IKEA focuses on a narrow segment of the market and applies a Differentiation strategy. IKEAs Hybrid Strategy: IKEA uses a combination of these strategies in achieving its vision which is Its business idea The part of the cost leadership strategy that IKEA adopts is that part aimed at producing at the lowest possible cost, so they can charge as low a price as possible to maintain their competitive advantage. For the differentiation strategy, IKEA focuses on quality designs. However, the IKEA does not do this, so they could charge a premium price. They do it to promote their brand. The differentiation focus strategy is also used in some segments of the market. For example, they produce customized plastic mats to commemorate the year of the rooster in China. Functional level strategy defines different functions within the business unit, such as sales, accounting or production, which contribute towards the success of the business level strategy. This contribution will differ from function to function, but the overall aim will be to support the overall strategy. If the strategy is to be a cost leader, then production will be integral in achieving cost advantages. Therefore, Functional strategy refers to the strategy of individual departments linked to achievement of business goals. For example, a Marketing department of a firm may have promotional or pricing strategy, while a finance department will have a credit control policy. Similarly, IKEA has functional strategies aimed at achieving its vision and business ideas. For example, under the Marketing function, IKEA increased its distribution channels by opening 19 new retail outlets in 2006. This is to support its business growth strategy. In the US, by the end of 2010 the number of IKEA outlets is expected to be 50, in comparison to 25 in 2006. To support its hybrid strategy, IKEA is determined to ensure that This policy applies to the research and development and well as the purchasing functions of the company. The customer perception of IKEA is that the company offers quality products at affordable prices. Going shopping at IKEAs is treated more like an event to be looked forward to by the customers, rather than a task which needs to be completed. The following quotes demonstrate how IKEA is seen by many people: If it wasnt for IKEA, most people would have no access to affordable contemporary design. IKEA makes me free to become what I want to be. Half my house is from IKEA and the nearest store is six hours away. Every time, its trendy for less money. IKEA is addressing the needs of most customers. Customers buying behaviour usually demonstrate price sensitivity, with the average shopper constantly looking for bargains or discounts. On the other hand, these same customers would look for a higher quality product over what they perceive a lower quality product where both cost the same almost always. IKEA is perceived as providing to the needs of the modern and cool as well as those with aspirations for the finer things in life. There appears to be a strong bond as parents are generally comfortable leaving their children in the shops playroom while they go about shopping, which create a trust. As it mentioned above, the IKEA strategy is a hybrid strategy, which incorporates elements of cost leadership, differentiation and differentiation focus strategies. IKEA brand is very strong, most competitors do not possess the strengths that IKEA does and, which are important in achieving a hybrid strategy. Consequently, IKEA is able to attract good quality of customers and even better is able to duplicate its quality and price ranges globally. It also has economies of scale and a strong research and development team constantly looking at innovative ways to meet its business objectives. Therefore, for the strategy to be imitated, the distinctive competencies of competitors must be strong, they must have the resource to deal with any potential price wars, and they must also have the capabilities to react to changing external environment. The main threats of IKEA come from its external environment. IKEAs threats can be measured with PESTEL, Porters Five Forces and SWOT analysis. Political, relates to the influence of government legislation and regulations on a business. Economic, how economic factors like interest rates, inflation and exchange rates affect businesses Social, refers to social trends and includes things like change in consumer taste and fashion and demographical changes Technological, level of automation and the rate of technological advancement and the impact on businesses Environmental, relates to how businesses are impacted by environmental factors such as global climate change Legal, health and safety laws Porters five forces, is a tool used to analyse how competitive pressure impact on businesses, i.e. the extent of competitive rivalry, barriers to entry, buyer power, supplier power and the availability of substitutes. SWOT, summarises the key issues from the business environment and the strategy capability of an organisation that most likely to impact on the strategy development. In IKEAs case, the main potential threats come from three of these factors, i.e. Economic, Social and Competition. In terms of economic factors, the global recession has significantly reduced business growth as customers have less disposable income and are consequently spending less. With limited income, consumers prefer to spend only on necessities mainly, and saving. Many governments affected by the recession have been putting stimulus packages in place partly to encourage consumer spending. As far as the social threat is concerned, due to a collapse of the housing and mortgage market which started the downward spiral into global recession, the amount of first time buyers, who are mainly IKEA customers, has considerably reduced. From a competitive point of view, there is the threat the extent of competitive rivalry will put at risk IKEAs strategy. For instance, it has to compete with major competitors Target Corporation and Kmart in US, Fly in France and Nitori Co. in Japan. Furthermore, increasingly buyer power will increase as competition increases demanding review of price or even design. This could potentially hurt the IKEA brand. IKEA must constantly analyse its internal and external environment to determine what the business is at for any given point in time and to identify what needs to be done going forward. For the internal analysis, IKEA must analyse its resources and capabilities with a view of making improvements as appropriate. They must always seek to ensure that their resources and capabilities are superior to those of their competitors to reduce the threat of imitation, which would eliminate their competitive advantage. In terms of the resources, they could look at the following with a view of identifying strengths and weaknesses: Finance what is the state of the business in terms of profit and loss, cash flow and the balance sheet position? Marketing they must continue to revaluate their marketing strategy. for example: Are the products priced adequately? Is the roll out of new stores meeting growth targets? Promotion how successful have the gift initiatives activities been? Product how environmentally friendly and are they to meet with any challenges? Operations IKEA could review the strengths and weaknesses of their machines, method of operations and materials used to produce furniture. Management as the founder is an old man now, this is a significant area that needs looking at. Is the management in place currently skilled enough to achieve objectives? Staff assess their motivation, their training needs and contribution to the success of the company, for example. An external audit should then be performed by analysing PESTEL SWOT is to determine the opportunities and threats facing IKEA from the external environment. Subsequently, IKEA should then be in a position to determine how it can use its key strengths, minimize weaknesses, take advantage of opportunities and triumph over threats to achieve a competitive advantage through its hybrid strategy. The greatest challenges facing IKEA can be outlined below: Entry into new markets and segments in US and Japan Environmental challenges Culture and Values As we know, IKEA over the last few years expanding in Japan and US markets. These are two countries where it has recorded failure in the past. For instance, in the US, according to them they did not listen to the needs of the customers and employed a hybrid strategy. With time, they realized that the Americans needed larger sized products which they subsequently corrected. In Japan, they miscalculated thinking the Japanese were interested in low price products when their interest was in quality. It would be interesting to see how they fare in the next 10 years for these reasons, especially with the high level of competition from Target Corp. and Nitori Co. IKEA is committed to meet environmental challenges. Another big challenge is internal in nature. The owner and founder Ingvar Kamprad instilled a lot of the values that is currently being pursued today. A lot of the top brass are committed to his philosophies. With the passage of time however, the culture of IKEA which has delivered such great success will decrease. In the next 10 years, it is important that whoever is driving the business operates in line with its core values, as the brand is one of its discriminating strengths. This brand was built on the back of the core values and business idea. Any threat to that may mean a threat to the entire business as a whole.

Beowulf :: Epic of Beowulf Essays

BEOWULF AS A CHRIST-LIKE FIGURE The epic poem, Beowulf, recounts the tale of a man named Beowulf who sacrifices his own safety to save the Danes from two evil dragons. Then, years later, Beowulf risks his life yet again to save his own people from a dragon. Throughout the story, Beowulf is presented as a Christ-like figure. This is manifested in the events that take place, the way that Beowulf speaks about himself, and the way the people treat him. The first way Beowulf's likeness to Christ is revealed, is through the events that take place. After Beowulf tells Hrothgar that he will fight Grendel, there is a celebration. During the celebration, Welthow, the queen "raised a flowing cup" (615) and poured "a portion from the jeweled cup/ For each" (621-622). When she got to Beowulf, she "thanked God for answering her prayers" (625). This event is strikingly similar to the Last Supper when Jesus passed around a cup of wine and gave thanks to God. Then, the crucifixion is portrayed when Beowulf fights Grendel's mother. During the stuggle, other monsters come to watch and beat at "His mail shirt, stabbing with tusks and teeth/ As they followed along" (1510-1511). Similarly, when Jesus was crucified, crowds drew near laughing at him, hurling insults, and spitting on him. Finally, Beowulf is said to have "Gone to a glorious death" (3037) and his soul "Left his flesh, flew to glory" (2820). This is similar to the resurrection of Jesus. All of these events clearly parallel the events of Jesus' day. What Beowulf says also shows his similarity to Christ. Beowulf says "I already knew that all/ My purpose was this: to win the good will/ Of your people" (633-635). Jesus also knew that it was his mission to come down to earth to save his people from their sins. Later, Beowulf says: . . . No one else could do What I mean to, here, no man but me Could hope to defeat this monster. No one Could try . . . (2532- 2535) Likewise, Jesus was the only man who could do his job. Thus, no man could defeat evil without the help of God. Many of Beowulf's statements are true to what Jesus said and felt. One other way Beowulf is linked to Christ is through the way the people act towards him and speak of him.

Good Use - The Customer is Always Right Essay -- Teaching Writing Educ

Good Use - The Customer is Always Right Does "I respectfully submit my resignation," convey the same meaning as, "I quit?" Certainly the tone of voice is different, but do these two phrases say the same thing? Which one is correct? In answering these questions we are making decisions about what constitutes good use in writing techniques. According to Orwell's Advice for Writing, one should, "Never use a long word where a short one will do." Following this line of thinking one would logically conclude that "I quit," a phrase of only five characters in length, is by far the better choice when comparing it to the thirty-two character alternative, "I respectfully submit my resignation." However, there may just be a bit more to proper usage in writing than choosing between longer and shorter words/phrases of the same meaning. In fact, the most important aspect of usage may just be the audience for which the writing is intended. (in other words, it's not the size that counts, it's whose using it!) For example, J. D. Thomas point s out that in technical writing, "Efficient communication depends upon a 'middle' range..." or writing that will be utilized by people with varied educational/technical backgrounds. Technicians use jargon that may not be understood by an otherwise well educated person. Therefore, if a technician wants to write a paper explaining some revolutionary way of manufacturing to a potential investor, she's going to have to adjust her writing to suit her audience so as to successfully convey her message. However, the same paper would have to be amended to include specific, object-oriented terminology if it were targeted towards the technician's peers. Another important aspect of good usage, according to T. Cliffo... ... audience is the determining factor of good use. The two phrases mentioned earlier, "I quit," and "I respectfully submit my resignation," illustrate the power the audience has in writing. Without knowing for whom the phrases are intended, the author can't make a decision between the two. "I quit," is short and to the point, but who is the writer talking to? Will the abrupt nature of the phrase cause tension or will the audience simply ignore it as insignificant babble? If it's an employer that she is expecting a good reference from, perhaps, "I respectfully submit my resignation," is the way to go. On the other hand, if shock value is the intent of the writer, an entire realm of discontinued-employment phrases may become appropriate. Metaphorically speaking, the audience is the customer in the department store of writing styles, and the customer is always right.

mafia Essay -- essays research papers

Their guns terrorized the streets of New York. They were murderous, brutal thugs that killed with no feelings of remorse. They were bank-robbers, drug dealers, casino owners, hit men and pimps. They were the Mafia of the 1920's and 1930's. These degenerates played an important role in American history, they were more than just bank-robbers and gunslingers, and they were men that affected all facets of society. They were celebrities, some of the most recognized men in America. Their evil deeds made the front page of every newspaper. They were some of the richest men in America, but most of all; they were the scapegoats for America's problems. They were hated by many, respected by few and feared by all. In times of poverty and despair, they were looked upon as the "problem", which needed to be "fixed". The fear they imposed on America gave Americans something to unite over and fight against together. Sometimes, a person is most courageous when they are most fearful. They made America "roar" in the twenties and they took "the wrath" of thirties. They were some of America's most dangerous men and some of its most famous as well. In order to obtain an objective view towards the Mafia, one must know a little about its history. The Mafia was first started in the ninth century, in Sicily. At this time, Arab forces were occupying Sicily. The natives were being oppressed, so they took refuge in the surrounding hills and formed a secret society to protect against the foreign invaders. This secret society was named Mafia, after the Arabic word for refuge. The society's intentions were to create a sense of family, based on ancestry and Sicilian heritage. During the 1700's, Mafia leaders began to force their way to the head positions in the Sicilian government and used government funds for their own private endeavours. In the early 1900's, when Mussolini and the Fascists came to power, he vowed to rid the country of all the Mafia. Keeping this in mind, and the fact that there was money to be made through extortion, prostitution, gambling and bootlegging in the United States, many Mafioso's decided to come west to America. Charles "Lucky" Luciano, the eventual organizer of the New York Mafia, was born in Sicily in 1897, and came to New York. Luciano climbed the "criminal ladder" and by 1935, he was known ... ...titution was so profitable, because it offered the most easily marketable and vendible product in the world; sex. The Mafia used the prostitutes as tools to make more business. They placed their "girls" throughout their clubs, so they could lure some high roller in the back for a drink or two. They worked the bars, and listened to lonely middle class men who needed a shoulder to cry on. They were on the streets mingling with the crowd, looking for their next perverted customer. The bosses often used prostitutes to "sweeten" deal between rival leaders or crooked politicians. They were as dangerous as the trained killers were, because they possessed something more powerful than guns. They were just as ruthless as the men that put holes in people's heads; they only came in a nicer package. The Mafia men of the 1920's and 1930's were some of the most influential men in American history. They robbed banks, killed people, stole, cheated, lied and corrupted an already corrupt country. They were not role models, and they did not aspire to be. They were businessmen, men who had only two objectives, money and power. They saw a need for something and they produced it.

Hooded Americanism: The First Century of the Ku Klux Klan Essay

In â€Å"Hooded Americanism,† David M. Chalmers narrates the olden times of the Ku Klux Klan in every single one of its personifications from right away following the Civil War to the belatedly 1970s. Mr. Chalmers moreover talks about the Klan’s expansion and accomplishments in all of the states throughout its strongest era in the 1920s to 1930s. Mr. Chalmers furthermore discusses in great detail the tumultuous 1960s and how the Klan lends a hand unintentionally to produce the Civil Rights legislation for which it struggled so toughly against the opposition. Comprehensively investigated and finely written, â€Å"Hooded Americanism† is based on facts and peeps into the life of a contentious association and into the survival of the men and women who made it achievable. Summary of the Book: In the book â€Å"Hooded Americanism†, according to the author, David M. Chalmers, â€Å"it is not possible under American law to forbid the existence of an organization such as the Klan. Only the overt deeds of individuals, not organizations and opinions, are punishable† (David Mark Chalmers, 391). In other expressions it is practically not possible to pin the activities of a company on one human being. In result, the group gets away with monstrous and dreadful actions of violent behavior and no one is penalized for it. They have extended an effectual and successful approach and it is one of terrorization. All the way through the past, the Ku Klux Klan has instilled terror in others compelling them to give the impression to be substandard and defenseless. Not including the capability to threaten civilization, the Klan may perhaps still subsist, but it would obtain no authority above others. David Chalmers’ Hooded Americanism is in spite of everything, a standard history of the Ku Klux Klan. His 1981 modified version traced the indistinguishable territory all the way through its fourth period, peaking with the late-1970s resurrection directed by new leaders like David Duke and manifested by the assassinators of five anti-Klan protesters at a 1979 war of words in Greensboro, North Carolina â€Å"Greensboro† readdresses here. Greensboro, North Carolina is a municipality in the U. S. state of North Carolina. Subsequently Klan relationships previously again forced, even though hard-core Klansmen soldiered into the new millennium by setting of connections crossways the chauvinistic Right, counterfeiting associations with Christian distinctiveness supporters, armed force combatants Nordic paganists, and neo-Nazi demagogues. Thesis of the book:  In spite of the civil rights modifications being approved greater than 40 years ago, racial discrimination persists to continue living to a great extent in America. A good example of this is the book â€Å"Hooded Americanism†. This book is based on the southern-based group known as the Ku Klux Klan. Instantaneously subsequent to the Civil War, this group moved towards the Modernization Period. The Ku Klux Klan (KKK) is one of America’s oldest and mainly one of the most apprehended groups. Determined by the vision of a world with simply one master ethnic group, the KKK frequently makes use of violent behavior, aggression and tactics exceeding the law to encourage their cause: white domination. Believe it or not, the innovative components intended for the KKK, were supposed to be an entertaining communal association that would be occupied of meaningless excitement and enjoyment despite the fact that in later years the KKK grew to be identified for their violent behavior and brutality in opposition to inhabitants outside the white nation and public who connected with them. With the times gone by that image Americans have of the KKK is hard to accept as true that it was on track for the reason that a small number of inhabitants wanting to have some childlike enjoyment, not because they were determined to establish a procession of hostility on anybody outside the white ethnic group. The Klan was extremely mysterious; all of the components were protected from individuals meaningful in their real characteristics (if that was their desire). Because of this confidentiality they obtained the alternate substitute name of â€Å"The Invisible Empire†. Even though slavery was brought to a conclusion, racial discrimination was not. The KKK was decived by the U. S. Government when it established and started being familiar with African-Americans as more than simply slaves. The KKK started their remonstration by execution, tar and feathering, thrashing, pounding and assassinating African-Americans in the South. The Klan doesn’t make use of the similar strategies as they did years and years ago. At that instant the KKK grasps nonviolent complaints in front of civil rights organization structures, the White House, and so on. For the reason that of their further diplomatic and more knowledgeable sounding loom, the Klan gets further encouraging awareness from brainless southerners. Subsequent to the removal of the U. S. Government hordes from the South in the late 1800’s, the Klan accomplished its objective. Numerous of the groups separated. Following the turn of the century, it started happening another time. This instant the objective was a lot superior, emancipation of America from all non-white, Christian Americans. This is the Ku Klux Klan we are familiar with at the moment. The Klan hasn’t been as authoritative from the time when they began, but for the past 50 years it has had a lot of reincarnation and plunges. All the way through the history, the KKK has tried to put a stop to the correspondence of America. They will maintain to do well by pleading with further inexperienced and unqualified Americans to stick together with them. It is correct that racial discrimination still continues to exist in the United States, but there will at all times be men and women of every color and shade struggling in opposition to group similar to the KKK. Provided that there are dissimilarities linking people on this earth, there will forever be revulsion. And the KKK will be there to nourish on this abhorrence and take advantage of it in each and every way probable. They might be noiseless for numerous years, but you can calculate on the reality that they are there. They are â€Å"The Invisible Empire† and will for eternity be the dark and mysterious side to American History. The book goes in length into the Klan’s spreading out into numerous nations and documents their accomplishments/collapses and the universal communal response of the group of people the Klan was entering. The novelist despite the fact that appeared to have a pro-Klan prejudice, and this is sensed just by the title and the understanding of the within jacket. He infrequently spots out the tribulations of the Klan’s philosophy (throughout his utilization of expressions, particularly exclusion of such words as â€Å"racist† and â€Å"bigot†, which a lot of Klan associates gave the impression to symbolize), and glamorizes the Klan’s analyses on white preeminence as a standard, contemporary inspection of white Christians (a little exceptionally distant from the reality). It glamorizes Klan violent behavior and intimidation of aggression, and in more than a small number of places it blames those adjacent to the Klan as unpatriotic Americans, or unappreciative colonizers or minorities. Mr. Chalmers furthermore highlights community brutality not in favor of Klan action as the actual erroneous and wickedness, something I believe is a usual response to these ‘pseudo-Christian revolutionary law enforcers’ who wish for time (and America) to stand still and static for them. A number of areas furthermore intimate towards the writer’s support for the Klan’s principles. The foremost Klan was established in 1865 by veterans of the co-conspirator defense force. Its rationale was to reinstate white incomparability in the consequences of the American Civil War. The Klan opposed Reconstruction by threatening â€Å"carpetbaggers†, â€Å"troublemakers† and freedmen. The KKK promptly accepted aggressive techniques. The increase in assassinations finally resulted in a counterattack between Southern leaders who observed the Klan’s immoderation as an explanation for centralized troops to prolong occupation. The association refused from 1868 to 1870 and was shattered by President Ulysses S. Grant’s route and enforcement of the Civil Rights Act of 1871. In 1915, the following Klan was established. It developed quickly in a different period of postwar social apprehensions. After World War I, a lot of Americans managed with successful development rates in main metropolis, where plentiful influence of refugees from southern and Eastern Europe and the Great Migration of Southern blacks and whites were being captivated. Subsequent to World War I, labor anxiety increased as veterans attempted to reenter the work energy. In response to these new groups of migrants and refugees, the second KKK urged racial discrimination, anti-Catholicism, anti-Communism, nativism, and anti-Semitism. Conclusion: Mr. Chalmers creates exceptional use of modern newspaper descriptions and perspectives to cover the Klan and its reputation in a specified group of people. What I found particularly fascinating was the Klan’s demographics. Mr. Chalmers acquaints with investigation that disproves long-held confidences that the Klan was for all time strongest in the South; in actual fact the Klan, at times, lined the authorized administrations of the Midwest. Mr. Chalmers furthermore talks about how different state governments and councils struggled with the Klan or sided with them. Yet again, I was astonished at how numerous administrations in reality attempted to restrain the enlargement of the Klan in their states throughout anti-mask commandments and other legislation. Mr. Chalmers has printed an outstanding history that includes in huge detail the 100 years subsequent to the Civil War. I look forward to that he is at an effort on modernizing this essential work.

Traders- Risk, Decisions and Management

70+ DVD’s FOR SALE & EXCHANGE www. traders-software. com www. forex-warez. com www. trading-software-collection. com www. tradestation-download-free. com Contacts [email  protected] com [email  protected] ru Skype: andreybbrv TRADERS This page intentionally left blank TRADERS Risks, Decisions, and Management in Financial Markets Mark Fenton-O’Creevy Nigel Nicholson Emma Soane Paul Willman 1 Great Clarendon Street, Oxford ox2 6dp Oxford University Press is a department of the University of Oxford.It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide in Oxford New York Auckland Cape Town Dar es Salaam Hong Kong Karachi Kuala Lumpur Madrid Melbourne Mexico City Nairobi New Delhi Shanghai Taipei Toronto With offices in Argentina Austria Brazil Chile Czech Republic France Greece Guatemala Hungary Italy Japan South Korea Poland Portugal Singapore Switzerland Thailand Turkey Ukraine Vietnam Oxford is a r egistered trade mark of Oxford University Press in the UK and in certain other countries Published in the United States by Oxford University Press Inc. New York  © Oxford University Press 2005 The moral rights of the author have been asserted Database right Oxford University Press (maker) First published 2005 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, or under terms agreed with the appropriate reprographics rights organization.Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above. You must not circulate this book in any other binding or cover and you must impose this same condition on any acquirer. British Library Cataloguing in Publication Data Data available Library of Congress Catalo ging in Publication Data Data available ISBN 0–19–926948–3 3 5 7 9 10 8 6 4 2 Typeset by Newgen Imaging Systems (P) Ltd. , Chennai, India Printed in Great Britain on acid-free paper by Biddles Ltd. King’s Lynn, Norfolk Acknowledgements We gratefully acknowledge the help of the investment banks which cooperated in this research and provided ? nancial support, and the Economic and Social Research Council which provided funding as part of the Risk and Human Behaviour Programme (grant number L211252056). We are especially grateful to the traders and managers who gave us their time and shared their understanding. This page intentionally left blank Contents List of Figures List of Tables viii ix 1INTRODUCTION Traders, Markets, and Social Science 1 10 2 THE GROWTH OF FINANCIAL MARKETS AND THE ROLE OF TRADERS 3 ECONOMIC, PSYCHOLOGICAL, AND SOCIAL EXPLANATIONS OF MARKET BEHAVIOUR 4 TRADERS AND THEIR THEORIES 5 A FRAMEWORK FOR UNDERSTANDING TRADER PSYCHOLOGY 6 RISK TAKERS Pro? ling Traders 28 51 74 110 145 178 197 212 221 237 7 8 9 10 BECOMING A TRADER MANAGING TRADERS CONCLUSIONS APPENDIX The Study References Index List of Figures 2. 1 2. 2 2. 3 3. 1 3. 2 4. 1 4. 2 5. 1 5. 2 6. 1 6. 2 6. 3 6. 4Post-war UK equity market growth Post-war US equity market growth Global growth in OTC derivatives Expected utility theory Prospect theory The relationship between risk and return Idealized trader risk pro? les RAT Screenshot Distribution of traders’ illusion of control scores A model of individual risk behaviour Comparisons of personality scores by occupational group Risk propensity, risks taken—now and past Comparisons of risk propensity scores by occupational group 7. 1 Career mobility to date 7. 2 Likelihood of a career change in the next 5 years 8. Introducing incentive and monitoring effects to prospect theory description of risk behaviour 14 15 16 40 41 55 63 104 106 117 132 136 138 174 175 194 List of Tables 6. 1 Risk taking index 6. 2 Personality facets—signi? cant differences between occupational groups 6. 3 Relationships between RTI and Big Five personality factors 6. 4 Relationships between RTI and Big Five personality subscales 6. 5 Regression on total remuneration 8. 1 Controls and incentives associated with framing effects—empirical ? ndings 10. A1 Investment bank sample pro? le 10.A2 Personality and risk propensity sample pro? le 10. A3 Frequencies of self-ratings of performance 131 133 138 140 143 193 214 215 218 This page intentionally left blank Chapter 1 INTRODUCTION Traders, Markets, and Social Science I grew up in a small town in Florida and none of this stuff really exists like stocks and bonds and things like that. No one I ever knew growing up did this sort of thing and to me it all seems like a fantasy world sometimes and it’s very abstract. You know, I explain to my mother what I do and I can’t, you can’t put it into words, it just doesn’t make any sense. You can read also Portfolio Management QuizzesI am so removed from the daily life of the average person that I think at some point this has got to come to an end. Whether I really believe that or not I don’t know but in my head I kind of think this is all fantasy land and one day I’m going to wake up and I’m going to say I had the most amazing dream, I’ve been working on some place called Wall Street, that paid me lots of money and I just sat around and looked at computers all day and put these pieces together and everything worked out and it was all a lot of fun. So in my mind that’s kind of what I think.Derivatives Trader, ? rm B We live in a world that is shaped by ? nancial markets and we are all profoundly affected by their operation. Our employment prospects, Introduction our ? nancial security, our pensions, the stability of political systems and nature of the society we live in are all greatly in? uenced by the operation of these markets. Th e role and importance of international ?nancial markets and the traders who inhabit them has grown dramatically in the past few decades. The level of ? nancial ? ows in these markets can rise to quite staggering levels.For example, in the day before the setting of entry exchange rates to the Euro, trades in currencies entering the Euro totalled about ten times World gross domestic product (GDP). At any one time, outstanding derivatives contracts have a total value of around four times World GDP. Professional traders ? gure prominently in media accounts of the workings of ? nancial markets and the economy. Television news bulletins on the economy or stock market frequently include interviews with senior traders, or footage of a trading ? oor. Stories about ‘rogue’ traders are big news.The decisions of individual traders are often seen as having the potential to move markets and affect national economies. Yet, the role of the professional trader is largely absent from mai nstream ? nancial economic accounts of markets. Professional traders, we argue, inhabit a borderland in markets where some of the orthodox assumptions of ef? cient, instantaneously adjusting prices break-down. They are often well placed to exploit market imperfections, by virtue of lower transaction costs, access to privileged information, critical mass, or proprietary knowledge and models.However, at the same time, they work in a fast-moving landscape of noise, rumour, unreliable information, and uncertainty. Thus, it is often dif? cult to tell whether an opportunity is real or illusory. This is a book about professional traders in this noisy borderland: what they do, the kind of people they are, how they perceive the world they inhabit, how they make decisions and take risks. This is also a book about how traders are managed and the institutions they inhabit: ? rms, markets, cultures, and theories of how the world works. Our approach to writing this book is explicitly interdiscipl inary.We draw on psychology, sociology, and economics in order to illuminate the work of traders and their world. Our focus is traders and the ? rms they work in. It is not the purpose of this book to mount an extensive critique of the dominant rational–economic account of ? nancial markets, nor 2 Introduction is ‘markets’ our central focus. We are concerned principally with understanding the world of the professional trader. However, we do believe our work is relevant to an understanding of ? nancial markets. First, in order to understand the role and work of the trader, it is important to understand that the neoclassical paradigm of ef? ient markets and rational pricing breaks down at the margins and that professional traders both bene? t from and contribute to this departure from orthodox ? nancial economic theory. Second, the ef? cient markets paradigm rests on the assumption that in the absence of uniformly rational investors, there is a suf? cient group of rational investors who are able to drive out pricing anomalies through arbitrage. 1 Professional traders in investment banks seem good candidates to play this role. Hence, the evidence that we present on the ways in which traders can deviate signi? antly from rational– economic norms of behaviour may be fruitful in helping to explain market phenomena. 1. 1 Our Work and How It Informs the Book This book is based on a study of traders in ? nancial instruments in four large investment banks operating in the City of London. Over the course of 1997 and 1998, we carried out interviews with 118 traders and trader managers in four large City of London investment banks and collected qualitative and quantitative data on their roles, behaviour, performance, and psychological pro? les. We carried out followup interviews in 2002. We use detailed quotations from the interviews throughout the book. Where we use these quotes they are presented verbatim. We had three main concerns. First, we came to the study with a strong interest in decisionmaking and risk. While all business is concerned to some extent with risk, investment banks and ? nancial traders are almost unique in the extent to which their work is founded on the management of risk and the extent to which they must make decisions about risk. Second, in the vast literature on ? nancial markets relatively little attention has been paid to the role of ? ance professionals in these markets and we wanted to redress this. 3 Introduction Third, we observed that the large literature on markets and the (somewhat slimmer) literature on traders are marked by very different approaches and paradigms in three branches of the social sciences: economics, sociology, and cognitive and social psychology. We wanted to bring together the insights of these different disciplines. Throughout the book we draw both on the data we gathered in this study and on the insights of prior research and literature in ? nancial economics, psychol ogy, and the sociology of markets.We turn now to those literatures. 1. 2 Traders in the Social Science Literature Neoclassical Financial Economics Financial economics is a relatively young discipline. The origins of modern (neoclassical) ? nancial economics are often located in the early 1950s in the work by Markowitz (1952) on portfolio theory. During this period, ? nance moved from a concern with describing the activities of actors in ? nancial markets to the construction of parsimonious models of markets founded on assumptions of rational investor behaviour. The central organizing idea of neoclassical ? nancial economics is the ef? ient markets hypothesis, which holds that price changes are essentially a random walk. All new information relevant to prices is incorporated into prices instantaneously (Fama, 1970). This central proposition and much of the theory which springs from it is founded on the idea that any asset which is not ‘rationally priced’ provides opportu nities for pro? t, which will be instantly taken up and cause prices to converge to the ‘rational’ level (i. e. arbitrage). This assumption is both illustrated and lampooned in the ? nance joke about two ef? cient market theorists who pass a $50 bill lying in the street.They leave it untouched and congratulate each other on realizing that if it presented an opportunity for pro? t someone else would have picked it up already. Even the strongest proponents of the ef? cient markets hypothesis do not claim that it represents a good description of the behaviour of individuals in markets. Rather it is claimed to be a good enough description, which should be judged on its predictions rather than its assumptions. 4 Introduction Fama (1970), who set out an early comprehensive account of the ef? cient markets paradigm, has more recently suggested that: Like all models, market ef? iency (the hypothesis that prices fully re? ect available information) is a faulty description of pri ce formation. Following the standard scienti? c rule, however, market ef? ciency can only be replaced by a better speci? c model of price formation, itself potentially rejectable by empirical tests. (Fama, 1998: 284) The ? nance professional is largely absent from orthodox ? nancial economic accounts of markets. The assumption of ef? cient markets, with no privileged information held by any investor, leaves little room for an account of how professional investors might make better than market returns.However, more recently, there has been an increasing interest within ? nancial economics in explaining empirically observed departures from the predictions of the ef? cient markets hypothesis and rational–economic pricing theories. Many of these fall in the emerging ? eld of behavioural ? nance. What has allowed consideration of the role different types of investor might play in markets is the growing recognition that perfectly ef? cient markets are not an automatic consequence o f the existence of arbitragers: an idea that has been captured eloquently by Lee (2001: 284).I submit that moving from the mechanics of arbitrage to the [ef? cient markets hypothesis] involves an enormous leap of faith. It is akin to believing that the ocean is ? at, simply because we have observed the forces of gravity at work on a glass of water. No one questions the effect of gravity, or the fact that water is always seeking its own level. But it is a stretch to infer from this observation that oceans should look like millponds on a still summer night. If oceans were ? at, how do we explain predictable patterns, such as tides and currents? How can we account for the existence of waves, and of surfers?More to the point, if we are in the business of training surfers, does it make sense to begin by assuming that waves, in theory, do not exist? A more measured, and more descriptive, statement is that the ocean is constantly trying to become ? at. In reality, market prices are buffete d by a continuous ? ow of information, or rumours and innuendos disguised as information. Individuals reacting to these signals, or pseudo-signals, cannot fully calibrate the extent to which their own signal is already 5 Introduction re? ected in price. Prices move as they trade on the basis of their imperfect informational endowments.Eventually, through trial and error, the aggregation process is completed and prices adjust to fully reveal the impact of a particular signal. But by that time, many new signals have arrived, causing new turbulence. As a result, the ocean is in a constant state of restlessness. The market is in a continuous state of adjustment. Lee argues that the relationship between inef? cient pricing and arbitragers may be like predator–prey dynamics. In equilibrium there must be both predator and prey. Similarly, in equilibrium there will be both arbitragers and arbitrage opportunities in the market place.There is another important way in which ? nancial ma rkets are widely accepted as departing from the ef? cient markets paradigm. Investors trade much more often than the theory suggests they should. More recent ? nancial economics accounts often distinguish two types of investors: ‘noise traders’ and ‘smart traders’ (a recent example is Daniel, Hirshleifer, and Teoh, 2002). Noise trading is trading on the basis of information that is either irrelevant to price or has already been discounted by the market. ‘Smart’ traders are those who act rationally, trading only on the basis of genuinely new and relevant information.This distinction is sometimes taken to map on to the difference between naive investors and trained professional investors (e. g. Ross, 1999; Shapira and Venezia, 2001). Behavioural Finance There has been increasing interest within the ? eld of ? nancial economics in using what is known about persistent biases in human cognition to explain departures of market behaviour from the pred ictions of ef? cient markets theory. Collectively known as behavioural ? nance, these models and empirical studies generally seek to explain market behaviour that departs from the predictions of orthodox ? ancial economics by reference to systematic cognitive bias among investors or important subgroups of investors. 3 Behavioural ? nance draws heavily on work from behavioural decision-making, a branch of psychology concerned with modelling human decision-making processes. While, in the main, this literature does not distinguish between professional traders and other investors, there have been 6 Introduction some attempts to compare the susceptibility to biases of ? nance professionals to that of the wider population.For example, Shapira and Venezia (2001) found professional brokers less susceptible than independent investors to one common bias, the disposition effect (a bias towards selling stocks more readily to realize gains than to realize losses), although they were not immune t o the bias. In an experimental study Anderson and Sunder (1995) compared the behaviour of laboratory markets populated by experienced commodity and stock traders with the behaviour of markets populated by MBA student traders. They found the amount of trading experience to be an important determinant of how well market outcomes approximated (ef? ient market) equilibrium predictions. Student traders’ markets exhibited departures from rational prices founded in common cognitive biases while bias levels in markets with experienced traders were substantially lower. However, as we explore in Chapter 5, our own research offers evidence that professional traders are just as susceptible as other groups to some forms of bias, with important consequences for their behaviour and performance. Sociology of Markets Sociologists interested in markets have paid rather more attention to the role of professionals than have ? ancial economists. Unlike ? nancial economists who take markets to be naturally occurring, sociologists tend to stress the ‘social embeddedness’ of markets and the ways in which they are sustained as social institutions through active intervention and regulation. One important strand of work is concerned with the social networks that operate within markets and in particular the ways in which professionals within markets act through these social networks and exercise informal sanctions over participants departing from accepted norms of behaviour (e. g.Baker, 1984a; Abola? a, 1996). Research by ? nancial economists also demonstrates the signi? cant effect the detailed structure and organisation of markets4 can have on the ? ow of information, liquidity, and prices (e. g. Amihud, Mendelson, and Lauterback, 1997; Lipson, 2003). Others have been concerned with the nature and consequences of ? nancial economic theory. Traders, from this perspective, do not simply inhabit markets; they enact them. That is, the beliefs they hold 7 Introduction ab out the nature of markets affect those markets in non-trivial ways.MacKenzie (2002), for example, describes how the adoption of the Black–Scholes equation for option pricing by traders did not simply enable more effective pricing of options, but helped to bring about conditions that better ? tted the assumptions on which it was based. The close empirical ? t between the predictions of the equation and options prices was bought about, at least in part, by the use of the equation to identify arbitrage opportunities. The empirical ? t has deteriorated subsequently as beliefs have changed to incorporate, inter alia, changed beliefs about the likelihood of market crashes.We pick up this theme of the re? exive relationship between beliefs and markets in Chapter 4. 1. 3 Overview of Book Chapters 2 and 3 set the context for our study and exploration of the role of traders. Chapter 2, ‘The Growth of Financial Markets and The Role of Traders’, considers the growth of inter national ? nancial markets in a historical context and outlines the role investment banks and professional traders have come to play. In Chapter 3, ‘Economic, Psychological, and Social Explanations of Market Behaviour’, we take a more detailed look at differing economic, psychological, and social explanations of market behaviour.Chapter 4, ‘Traders and Their Theories’, considers the nature of traders’ knowledge and the interplay between their subscriptions to theories of the ‘way the world works’ founded in neoclassical ? nancial economics and their more particularist and idiosyncratic theories of ‘how to work the world’. Chapter 5, ‘A Framework for Understanding Trader Psychology’, starts by outlining a psychological model of the trader founded in a selfregulation framework. It draws on the qualitative and quantitative evidence that we have about trader decision-making and bias. It challenges the ? ancial econo mics dichotomy between rational and non-rational and explains the different rationalities that arise as a consequence of internal goal states. We also present evidence on the vulnerability of traders to control illusions and the consequences for their performance. 8 Introduction Chapter 6, ‘Risk Takers: Pro? ling Traders’ presents a new model of risk taking that shows how trader behaviour emerges from a web of circumstantial and individual causes. The remainder of the chapter explores these individual differences in greater depth, especially how personality impacts different kinds of risk taking and decision-making.The chapter explores what kinds of people traders are, focusing particularly on personality and risk propensity, but also drawing on what we know about their demographics and background. Chapter 7, ‘Becoming a Trader’, uses a career transitions framework and a model of social learning to frame trader development and entry into a community of trad ing practice. We examine the ways in which they both learn and construct knowledge about the process of trading. In Chapter 8, ‘Managing Traders’, we explore the ways in which traders are monitored and managed within investment banks.We highlight the fact that traders are often not ‘managed’ at all, so much as monitored. Our concluding chapter (Chapter 9) draws together the implications of our ? ndings for traders, their management and regulation, and for further research. Notes 1. Arbitrage: purchasing currencies, securities, or commodities in one market for resale in others in order to pro? t from price differences. The effect of arbitrage is to act as a mechanism to bring about convergence of prices in different locations and markets or between equivalent securities. . A more detailed account of the sample and methods is given in the appendix. 3. We give a more detailed treatment of behavioural ? nance arguments in Chapter 3. 4. Often referred to as the institutional microstructure. 9 Chapter 2 THE GROWTH OF FINANCIAL MARKETS AND THE ROLE OF TRADERS Hardly a day passes without newspapers and television carrying a story about ? nancial markets and their impact on our lives. Even a casual perusal of these news stories makes it apparent that the activities of ? ancial institutions and markets have come to play a central role in our economic well-being and security: whether through their direct impact on individual investments and pensions or through their pervasive impact on the level of economic activity within nations and across the globe. The last decade of the twentieth century was marked by a series of international ? nancial crises. These underlined both the interdependence of national economies and ? nancial markets and the global scope of those markets. Financial crises in Latin America, the Asian Tiger economies, and Russia highlighted the speed at which capital can ? e Growth of Financial Markets countries in which investors have lost con? dence and the impotence of national governments to control such out? ows. The impact around the world of these crises on economies and ? nancial institutions demonstrated the highly interconnected nature of ? nancial markets. In the same period a number of ? nancial institutions suffered very signi? cant ? nancial losses as a consequence of the actions of single traders. One of the best publicized of these was Nick Leeson’s role in bringing about the collapse of Barings Brothers, in 1995.The collapse of Barings caused Alan Greenspan of the US Federal Reserve to comment that It is probably fair to say that the very ef? ciency of global ? nancial markets, engendered by the rapid proliferation of ? nancial products, also has the capability of transmitting mistakes at a far faster pace throughout the ? nancial system in ways that were unknown a generation ago . . . Certainly, the recent Barings Brothers episode shows that large losses can be created quite ef? cien tly. Today’s technology enables single individuals to initiate massive transactions with very rapid execution.Clearly, not only has the productivity of global ? nance increased markedly, but so, obviously, has the ability to generate losses at a previously inconceivable rate. Moreover, increasing global ? nancial ef? ciency, by creating the mechanisms for mistakes to ricochet throughout the global ? nancial system, has patently increased the potential for systemic risk. (Greenspan, 1995) While the behaviour of individual traders has at times seriously damaged the ? rms they work for, individual ? nancial institutions have also shown the capacity to endanger the stability and operation of ? nancial markets around the world.In 1998, the collapse of Long Term Capital Management, a hedge fund holding positions in ? nancial derivatives with a notional value of $1,250 billion seriously endangered the stability of the world’s ? nancial systems. How could a single trader bring down a bank? How could a single hedge fund threaten the stability of the world’s ? nancial systems? The answer lies in the way in which ‘derivatives’ allow for the multiplication of market risks (and returns). The very features that make derivatives1 so useful as a tool for managing risk provide for the possibility of massively increasing risks.In this chapter, we argue that the role of ? nancial markets, in both world and national economies, has increased dramatically. 11 Growth of Financial Markets The potential, and sometimes actual, impact of individual traders on ? rms, markets, and economies is enormous. In the following chapters we show that ? nancial markets are neither as rational nor as natural as ? nancial economists paint them and that we need to bring a wider range of social science theory to bear on understanding traders, their ? rms, and the markets they operate in.As we show below, the current globalization of ? nancial markets is not new but sim ply the latest of several cycles of international ? nancial integration over two millennia. In particular, the recent growth in international ? nancial markets could be seen as a return to levels of international ? nancial integration seen at the end of the nineteenth century and interrupted by a period, which included two world wars and the Great Depression. However, the depth and scale of these markets does seem to be different this time and the emergence of new forms of ? ancial instruments, derivatives, capable of massively multiplying possible risks and returns has led to a qualitative difference in the potential impact of individual actions on institutions, markets, and economies. 2. 1 A Brief History of Financial Markets International ? nancial markets are not a purely modern phenomenon. Basic forms of ? nancial exchange can be found throughout recorded history and international ? nancial systems are known to have existed two millennia ago. Historical evidence suggests that t here have been a series of cycles of international ? nancial integration (Lothian, 2002).In the three centuries following the collapse of the Roman Empire, currencies were very unstable and constantly debased. However, in the fourth-century AD, the Emperor Constantine introduced a stable gold coinage, the bezant (also known as the nomisa or solidus). This became widely used throughout the Mediterranean region. It was produced in Byzantium till the thirteenth century and kept more or less the same gold content through till the eleventh century. Until the introduction of the dinar in the Muslim world in the seventh century, it had no competitors as an international medium of exchange.While records are patchy, it is clear that the existence of a stable medium of international 12 Growth of Financial Markets exchange during the period between the fourth and eleventh centuries allowed quite sophisticated ? nancial transactions to take place (Lopez, 1986; Lothian, 2002). The thirteenth cen tury was another period of growth in international trade, both within Europe and between Europe and other parts of the world. Much of this was organized around regular international trade fairs (most notably at Champagne and Brie).This period was marked by the growth of an extensive and sophisticated banking system and by the development of ? nancial instruments such as bills of exchange (which acted jointly as a credit and foreign exchange transaction). It is clear from the records of the dominant northern Italian banks of the time that not only were there quite sophisticated foreign exchange markets, but also that arbitrage was a common activity (Lothian, 2002). During the fourteenth century the importance of these trade fairs and the Italian banks declined. By the ? fteenth century, Amsterdam was the more important centre of ? ancial activity. The sixteenth century saw the development, in Amsterdam, of negotiable ? nancial instruments such as discounting commercial paper and, by the seventeenth century, the development of perpetual bonds, futures contracts, selling short, and other such ? nancial instruments and techniques that would be easily recognized in modern ? nancial markets (Homer and Sylla, 1996; Lothian, 2002). By the start of the eighteenth century, the Amsterdam Exchange, the centre of Dutch trading, had become a world market in which a wide range of commodities and securities were traded.During this period, London took on increasing importance as a centre for international ? nancial trade. With the establishment of the Bank of England and the London Stock Exchange and the intervention of the Napoleonic wars, London came to eclipse Amsterdam as a ? nancial centre by the start of the nineteenth century. The nineteenth century saw a marked expansion of international trade and further development of ? nancial markets. The growth of the US economy drove much of this expansion. The New York Stock Exchange was established in 1817 and by the end of 188 6 it hit its ? st day on which more than a million shares were traded. By the late 1920s New York had overtaken London as a world ? nancial centre. However, the early twentieth century, a period that included two world wars and the Great Depression, saw the collapse of international 13 Growth of Financial Markets trade and the rise of national regulation and controls on international ? ows of capital, which effectively unwound the integration of international ? nancial markets. Rajan and Zingales (2003) show that on a range of indicators of ? nancial development including stock market capitalization as a proportion of GDP, world ? ancial markets did not regain their pre-war (1913) levels until the late 1980s. The second half of the twentieth century once again saw a very substantial increase in international ? nancial integration. As we have seen, there is historical evidence that the current period of globalization of ? nancial markets is not a new phenomenon. Rather there have bee n cycles of high international integration of markets interspersed with periods of low integration throughout the last two millennia. However, it is also clear that with each new cycle the nature and depth of those markets has been changing. Changes in the sophistication of ? ancial instruments and technologies, and changes in communications and information technologies have all been important factors in? uencing the scale and complexity of ? nancial markets. The period since the 1970s has seen a very substantial increase in the size of ? nancial markets. Figure 2. 12 shows the increase in annual 2500 Value of annual turnover (? billion) 2000 30 1500 25 20 1000 15 10 5 0 1965 0 1970 1975 1980 1985 Year 1990 1995 2000 40 Number of bargains (million) 35 Value Reported trades 500 Fig. 2. 1 Post-war UK equity market growth—UK equity turnover 1965–2002 Source: London Stock Exchange. 4 Growth of Financial Markets Value of annual turnover ($ billion) 12000 10000 8000 6000 400 0 2000 0 1967 Value Reported trades 600 500 400 300 200 100 0 2002 Number of bargains (million) 1972 1977 1982 1987 Year 1992 1997 Fig. 2. 2 Post-war US equity market growth—New York Stock Exchange equity turnover 1967–2002 Source: New York Stock Exchange. value of shares traded on the London Stock Exchange between 1965 and 2002. Figure 2. 2 shows the change in annual number of shares traded on the New York Stock Exchange between 1960 and 2002 and the annual value of shares traded from 1985.Both markets show exponential growth over the period, but the real story over the last decade is the growth in derivatives trading. By 2002, outstanding over-the-counter derivatives3 (OTC) contracts had a notional value of $128 trillion, around four times greater than total world GDP. Figure 2. 3 shows the growth in number of active contracts between 1992 and 2002. Much of the recent concern about systemic risks in markets has centred on the role of derivatives. All ? nancial invest ments carry risk. However, there is a difference of degree with derivative trading.They involve contracts which are contingent on the price of underlying assets and because of the way in which trades are regulated, derivatives4 enable investors to speculate on the price of an asset while only depositing a small proportion of the underlying asset price (margin requirements) (Zhang, 1995). In other words, the ? nancial risk borne in an options trade may be many times the money actually deposited to make the trade. Financial ? rms which do not have sophisticated control mechanisms to manage their exposure to derivatives risk may 15 Growth of Financial Markets 000 Gross market value ($ billion) Gross market value 6000 5000 4000 3000 2000 1000 0 92 93 94 95 96 97 98 99 00 01 19 19 19 19 19 19 19 19 20 20 20 02 160 000 Notional amounts 120 000 100 000 80 000 60 000 40 000 20 000 0 Notional amounts ($ billion) 140 000 Fig. 2. 3 Global growth in OTC derivatives—global value of outsta nding contracts Source: 2000–2, Bank for International Settlements; 1994–9, Swaps Monitor publications Inc. unwittingly ? nd themselves exposed to potential losses greater than the total ? rm assets. Such risks can emerge very rapidly in the course of trading and require analysis of the whole ? m’s current portfolio of trading assets in real time to identify potential overexposure to market risk. Of course, the leveraging effect of derivatives does not only affect market risk but also ampli? es risk in the other categories. For example, since derivatives typically have greater volatility than the underlying asset, even a short period in which a ? rm is unable to trade (say due to computer failure) could result in signi? cant risk exposure. The complexity of some derivatives may mean that managers are ill-equipped to understand the trades dealers are engaging in, increasing behavioural risk (Chorafas, 1995: 16).In evidence given to the US House of Representatives , George Soros, a highly successful ? nancial speculator, said of derivative instruments: There are many of them, and some of them are so esoteric, that the risks involved may not be properly understood by even the most sophisticated of investors. Some of these instruments appear to be 16 Growth of Financial Markets speci? cally designed to enable institutional investors to take gambles which they would otherwise not be permitted to take. For example, some bond funds have invested in synthetic bond issues that carry a 10 or 20-fold multiple of the risk within de? ed limits. And some other instruments offer exceptional returns because they carry the seeds of a total wipe out. (Soros, 1995: 312) 2. 2 The Role of Investment Banks in Financial Markets To understand the role of modern investment banks it is necessary to understand how world ? nancial markets have come to be dominated by an American model of ? nance. Much as Byzantium, Lombardy, Amsterdam, and London have been the dominan t centres of ? nancial innovation and power in previous eras, US ? nancial markets and institutions are today.The central feature of the US model that emerged in the post-war years was the decline of relationship banking and the increasing commoditization of ? nancial products and services. The roots of this system lie in the unintended consequences of anti-trust and banking legislation passed in the United States during the 1930s. The segregation of commercial and investment banking in the United States laid the foundation for the development of a strong investmentbanking sector. The fragmentation of the banking industry, imposed by legislation, created conditions in which ? ancial transactions were more readily managed through markets than within large banks. The elimination of ? xed commissions for broking ? nancial instruments in 1975 provided a further impetus for competition. More and more, ? rms seeking to raise ? nance looked to impersonal markets rather than relationships w ith banking institutions. Progressively more transparent and liquid markets in both corporate debt and equity and the corresponding increased competition in these markets served as a signi? cant stimulus to ? nancial innovation.As these markets developed it became apparent to market participants and to the government that effective market operation could only be maintained through active intervention and regulation. A series of waves of external and self-regulation, often in response to market crises, led to the development of regulations and supervisory arrangements designed to contain insider manipulation of markets and ensure free 17 Growth of Financial Markets ? ow of information. On the demand side, the expansion of institutional investment (insurance, pensions, and mutual funds) stimulated and was stimulated by the growth of these ? ancial markets. The slower growth of ? nancial markets and institutions in other parts of the world meant that, as other countries began to follow the United States in opening up competition, US ? nancial institutions were well placed to play a major role. In the wake of the major changes in market regulation in 1986, the long-established London merchant banks were swept away by the US-based investment banks and non-US owned European investment banks have increasingly adopted US approaches. The principal competitive advantage of American ? rms lay in their expertise in managing risk (Steinherr, 2000: 49).Investment banks manage risk in four main ways: they absorb risk for clients, they act as intermediaries for the diversi? cation of risk, they advise on the management of risk and they engage in proprietary trading—taking risk on their own account in the pursuit of returns (Casserley, 1991). Absorbing Risk Investment banks absorb risk for clients in a number of different ways. For example, when they act on behalf of a client they absorb credit risk (the risk the client will default on payment for the transaction and th ey are unable to unwind the transaction at a favourable price).They underwrite issues of securities (e. g. commercial paper5 to cover shortterm ? nancing needs), guaranteeing to buy from the client at a ? xed price should the security fail to achieve its expected price in the open market. They also play an important risk absorption role in trading markets. In some of these the bank will act as a market-maker,6 providing liquidity in a particular ? nancial instrument. The bank ? xes prices at which it will buy or sell a ? nancial instrument and stands ready to buy or sell at those prices even if there is no party to pass the transaction on to immediately.In return for the spread between these prices the bank absorbs the risk of the market moving against them. Risk Intermediation In other cases the bank will act as an intermediary for the diversi? cation of clients’ risk. This may be by acting as an intermediary in trading 18 Growth of Financial Markets markets or by putting to gether complex OTC deals that rely on aggregating (or disaggregating) ? nancial instruments provided by third parties. The banks bene? t from this intermediation work in two principal ways. First, they charge commission and second, they have access via their customers to information about order ? ws in the markets in which they operate. Such ? ow information provides opportunities to exploit temporary market imperfections and pro? t through trading on their own account. Risk Advice The risk advice role overlays risk absorption and risk intermediation. For example, the bank may play an important advisory role related to underwriting activities or in putting together a complex OTC deal. The role of the bank in providing risk advice to clients rests not just on technical skills and experience in managing risk, but also in a (sometimes) greater overview of the markets in which they operate.An important issue here is the tension between the bank’s desire to make pro? ts on its own account and to earn a return through providing effective advice and services to customers. This tension is re? ected to some extent in tensions which emerge in most banks between trading and sales desks. As we will see later in the book, banks vary in the priority they give to serving customer needs versus seeking opportunities for returns through trading on their own account. 7 Proprietary Trading In providing services to customers, investment banks build up information on order ? ws, they develop expertise in valuing particular securities or in economic fundamentals in particular sectors or countries, they build proprietary models of price behaviour and they build up data on historic behaviour of prices and relationships between them. This can place them in a better position to judge risks and returns than other market participants and opens up the possibility of earning good returns on their own account. This activity typically takes two forms: short-term (often intra-day) trade s designed to exploit knowledge of temporary price ? ctuations linked to ? ows of orders in the market and longerterm trades, often based on arbitrage (exploiting pricing inconsistencies between different securities, markets, or time periods). 19 Growth of Financial Markets 2. 3 The Role Played by Traders The work of traders can be divided into three broad categories: trading on behalf of customers, market-making, and proprietary trading. 8 Traders acting on behalf of customers take the least risk on behalf of the bank, while proprietary trading potentially involves the greatest risk.However, in practice, the three spheres of activity often overlap. For example, a trading desk acting on behalf of clients may also have authority to take intra-day positions to bene? t from short-term price movements in the markets they operate in. Alternatively, in some circumstances, while not strictly acting as a market-maker, they may stand ready to create liquidity for important clients by buying or selling to those clients when they cannot ? nd a counterparty for their trades. As one senior trader told us: We are paid to be on the wrong side of the market for our customers.If we have an institution that pays us thirty million dollars a year in commissions, we will, on occasion at their request, be a buyer for them when there are only sellers on the market or be a seller for them when there are only buyers. When they’re in a more normal market environment where there is plenty of liquidity and good two-way ? ow, they don’t necessarily need our capital. In fact they prefer not to use our capital because all that does then is create another buyer or another seller in the market with them.But when the market is heavily tilted in one direction than the other, even the market’s selling off, there are much more sellers than buyers or a very strong market where there are much more buyers than sellers. That’s when they need us to step in and serve as that intermediary to facilitate the execution of their order. 9 Alternatively, a trading desk operating as a market-maker may combine this with some proprietary trading. One trader described the activity of his desk: We have a P&L [pro? t and loss], budget of about $20m a year through plain vanilla market making with customers.However, we make about half the money in proprietary trading using the ? ow and information from customers—putting it on our book instead of putting it back into the market. For the ? rst half of this year we were number one for turnover in our niche with between 10% and 15% of the market. The 20 Growth of Financial Markets more that number increases, the better information we would have for proprietary trading, but we would probably start losing money from the market making function because prices would have to be so keen, so there is a balance.Equally, traders mostly engaged in proprietary trading will seek opportunities to generate customer business: I d o proprietary business and I’m supposed to be doing proprietary but I interface with the ? ow desk so I would be looking at customer business trying to generate customer business. My slant is proprietary but I’m always trying to emphasise customer business using my positions. 2. 4 How do Traders Make Pro? ts? If, in ef? cient markets, price changes are essentially a random walk and all new information relevant to prices is incorporated into prices instantaneously (Fama, 1970), then how do traders make money? The ? st answer is that they charge commission for their intermediation and advisory role. By aggregating customer orders they can reduce transaction costs. However, as we will explore in Chapter 3, in practice, markets are not completely ef? cient and information asymmetries exist. Traders essentially earn economic rents10 by exploiting information advantages. These may come from a number of sources, including information on asset ? ows within markets (e. g. from having a large customer base); privileged information on the economic basis for an asset price; proprietary databases allowing more accurate calculation of probabilities (e. . historical asset volatility for pricing options); models of the relationship between prices and economic fundamentals; models for extracting the information inherent in historical price changes of an asset and other related assets; and effective understanding of the ‘sentiment’ and likely behaviour of other market actors. All of these information advantages are potentially short-lived. The very act of trading may reveal information to other parties. Others may emulate models. Others may access the same sources of information.New information may wipe out the utility of earlier information. At the same time markets are in practice very ‘noisy’. That is to say, there is a lot of trading going on that is not based on information 21 Growth of Financial Markets genuinely relevant to the und erlying value of an asset. Black (1986) noted in his presidential address to the American Finance Association that Traders can never be sure that they are trading on information rather than noise. What if the information they have is already re? ected in prices? Trading on that kind of information will be just like trading on noise.Traders can only earn above market returns, on average, over time, if they are genuinely trading on new and relevant information. However, on any individual trade it will be dif? cult to tell whether a positive outcome is the result of trading on information or of essentially unpredictable market movements (as a result of noise trading in the market, changes in sentiment, or new unexpected events). Similarly, for any individual trade it is dif? cult to determine whether a negative outcome is the result of trading on noise rather than information or the result of unforeseeable market movements.So it will often be the case that trading outcomes are not cont ingent on the trader’s strategy or information. Further, it will often be dif? cult to determine once an outcome is achieved whether the outcome was indeed contingent on a trader’s information and skill. While trading is a skilful activity, many trading outcomes are not contingent on skill. At the same time traders are highly motivated to establish causal relationships between information they hold and prices, since a signi? cant source of rent for any trader is the capacity to establish contingent relationships before others observe them.This problem of determining the links between behaviour and outcome for traders is one we will return to repeatedly in the book. While the detail of different trading strategies is not our principal focus, we describe some common trading approaches to set the stage for our later discussions. In order for traders to achieve better than average market returns, it is not suf? cient that markets are imperfect; it is also necessary they ha ve some competitive advantage relative to others who seek to exploit those imperfections.Within this fast-moving and uncertain world, traders adopt a variety of strategies to exploit the information and expertise to which they have access. These can be divided into four main categories: insider strategies, technical strategies, fundamental strategies, and ? ow strategies. 22 Growth of Financial Markets Insider Strategies Insider strategies involve achieving advantage by exploiting privileged access to information (Casserley, 1991). Of course, some such strategies are illegal. It is, for example, illegal to exploit privileged access to advanced knowledge of company earnings news or potential takeovers.However, most of these strategies are concerned with perfectly legitimate attempts to build an information advantage over rivals. The extent to which it is possible to achieve such information advantages varies signi? cantly from market to market. For example, in relatively undeveloped markets such as the ‘emerging markets’ there may be frequent and persistent information asymmetries. In these circumstances, traders who are able to establish good personal networks may build an advantage, which enables them to anticipate price movements. However, in mainstream equities markets, the speed and ef? iency of information dissemination may make such advantages dif? cult to achieve. Insider strategies can improve a trader’s ability to anticipate market movements. However, as we noted earlier, it is often dif? cult or impossible for a trader to determine whether they have a genuine information advantage or whether their information is simply noise, already discounted by the market. Technical Strategies If markets are perfectly ef? cient, then historic prices contain no information that can be used to infer future price movements. However, many traders claim to do just that.They seek to exploit market imperfections through the analysis of past price info rmation. One form of technical trade concerns using patterns in price data to identify likely turning points in price trends (charting). Traders seek to identify trends early, buy into those trends and exit before the trend breaks. Many traders consider these patterns and trends in market prices to be driven by underlying investor sentiment. While there is some evidence that supports the existence of exploitable patterns in market prices (e. g. Kwon and Kish, 2002), many ? ancial economists are sceptical of their existence. Fama (1970) dismissed technical analysis as a futile undertaking on the grounds that historical prices have no predictive validity. However, more recent arguments against technical 23 Growth of Financial Markets trading strategies take a weaker position: that while there is some predictability in market movements, exploiting these does not, on average, make returns in excess of transaction costs (e. g. Allen and Karjalainen, 1999). A second important technical st rategy requires the analysis of historical price relationships between different ? ancial instruments. Traders scan markets looking for discrepancies in pricing relative to these relationships on the assumption that they will move back to the historical pattern. Often the gains on technical trades will be small and over short time periods, thus these trades often depend on an ability to identify opportunities rapidly and frequently. This allows the trader to make large numbers of such trades each making a small pro? t. To bene? t from such trading strategies requires the ability to trade at low transaction costs, frequently, with considerable IT support.Many traders use technical strategies to supplement other approaches. For example, a trader having established a trade on the basis of customer ? ow information may use technical information on trend behaviour to determine the precise point at which to take pro? ts or cut losses. Others, while fundamentally sceptical about strategies relying on historical trend data, assume prices will be driven to some extent by investors using such models. For example, one trader told us: A lot of traders are chartists and a lot of people here don’t like you looking at charts, they don’t believe in them.However, I look at a chart if I am putting on a large position, or looking for something to trade because if there are people out there who use charts as a model to trade, this will affect how things trade in the markets whether I believe in it or not. Fundamental Strategies Technical strategies are purely concerned with anticipating trends and pay no attention to the underlying economic basis for evaluation of the security being traded. By contrast, fundamental strategies are concerned with the fundamental relationship between economic value of the underlying asset and market price.Traders following these strategies essentially seek to use expertise and information in the accurate valuation of securities, on the assumption that market values will 24 Growth of Financial Markets converge to theoretical values. To the extent that traders can establish an advantage in valuation of securities, they may be able to earn pro? ts from identifying securities that are undervalued or overvalued by the market. One highly successful trader told us: I tend to take positions that depend a lot on central bank decisions e. g. nterest rates, so depend on macro economic position of the country, the judgement about how the Bank of England is going to behave and how the market is going to proceed. I try to put myself in Eddie George’s11 feet and try to understand. We have been building a model of Bank of England reactions to economic events. I have lunches with people who decide our interest rates and try to understand how they think . . . It all comes down to focus and completely immersing myself in an area. However, as with insider strategies it can be genuinely dif? cult for a trader to understand whe ther they have a genuine advantage in valuation.Further, as we will see in Chapter 3, trading on valuation advantage depends on the market converging to a value in a time scale over which you can ? nance a trade. Flow Strategies This strategy predicts prices as a function of demand and supply for securities in the market. Particularly for securities in which there is not much liquidity,12 large trades can shift prices signi? cantly. Where a bank has a large customer base in a particular niche, this can give them access to valuable market information, in particular, information on trading ? ows.These kinds of advantage are more readily achieved in OTC markets, which lack the transparency of trades organized through exchanges. However, in any given market niche, there will be a very limited number of ? rms that can capture suf? cient order ? ow information to give them a genuine advantage. Feldman and Stephenson (1988) studied the use of ? ow information in the US treasury bonds marke t. They suggest that through the use of informal information trading with customers, a ? rm with a 3–4 per cent share in trading may have a good sense of what is going on in 30 per cent or more of the market.However, they also show that medium sized players in these markets are often unable to exploit their customer relationships effectively. They argue that large players systematically 25 Growth of Financial Markets shut medium sized players out of information networks while providing good market information to smaller players who they mostly relate to as customers rather than competitors. As we have seen, ? nancial markets have a long history and have been through multiple cycles of global ? nancial integration over the last two millennia, but their development into domains of such immense complexity and global in? ence has occurred only within the last 50 years. The volume of trading and of traders has no historical precedent, nor has the complexity and variety of the inst ruments traded. Within this context, the activities of traders within investment banks are important not just to their customers, but also at the level of national and international economies. Naturally, these phenomena have attracted the attention of academics and commentators, from a variety of disciplines, who have, as we shall show in the next chapter, different and sometimes competing explanations of what in? uences and explains behaviour within global ? ancial markets. Notes 1. Derivatives are ? nancial products, which depend on or derive from other assets. 2. Values in all ? gures are nominal (non-in? ation-adjusted). 3. OTC derivatives are not traded in an exchange but are contracted directly between the two contracting parties. 4. Exchange requirements generally only require traders selling options to deposit a proportion of the potential claim. Further, speculation using derivatives is often highly leveraged (funded through borrowed funds). 5. Market traded short-term corp orate debt. 6. Market-makers stand ready to buy or sell an asset or class of assets.Typically a market-maker quotes a buy (bid) and sell (offer) price to a client before the client declares whether they wish to buy or sell. The spread between bid and offer both provides a return and some protection against market movements in the time taken for the marketmaker to readjust their holdings after a trade. 7. There are also important differences between the United States and the United Kingdom in how this tension is regulated. UK banks face fewer constraints on the relationship between customer business and proprietary trading. 26 Growth of Financial Markets 8. The types of ? ancial instruments dealt in by traders cut across these categories. Some traders specialize by a particular type of instrument (e. g. equities or bonds in a particular sector), others deal in a range of instruments related to a particular geographical region or sector. 9. See also Abola? a (1996) for a description o f such market stabilizing behaviour by market-makers. 10. Returns in excess of the market risk premium. 11. Eddie George was Governor of the Bank of England at the time of interview. 12. Liquidity: the availability of parties willing to buy or sell a security at any given time. 27 Chapter 3ECONOMIC, PSYCHOLOGICAL, AND SOCIAL EXPLANATIONS OF MARKET BEHAVIOUR For at least forty years psychologists have amassed evidence that economic man is very unlike a real man and that reason—for now, de? ned by the principles that underlie expected utility theory, Bayesian learning and rational expectations—is not an adequate basis for a descriptive theory of decision making. De Bondt, 1998 I am in fundamental disagreement with the prevailing wisdom. The generally accepted theory is that ? nancial markets tend towards equilibrium and, on the whole, discount the future correctly. I operate using a different theory, according to which ? ancial markets Market Behaviour cannot possibly di scount the future correctly because they do not merely discount the future; they help to shape it. Soros, 1995: 111 If we are to understand traders, we have to ? rst understand the markets they inhabit. Neoclassical economics has been extraordinarily successful in explaining most market behaviour in the aggregate. However, it has two principal weaknesses for our purposes. The ? rst concerns what it does not address and the second concerns some important failures at the margins. Neoclassical ? nancial economics treats markets as a given, or naturally arising.Investor preferences and risk appetites are treated as external to the model but predictably ordered and distributed. Markets are modelled as adjusting instantaneously with little attention to the detail of how such adjustments come about. While neoclassical ? nancial economic models effectively explain a great deal of market behaviour, there are some important failures at the margins. There is a wide range of anomalies which are dif? cult to explain within this paradigm. If markets instantaneously adjust and are perfectly ef? cient, then the only role for professional traders is as intermediaries who cannot earn above market returns, but ssentially earn commission as intermediaries. There is nothing to be earned by arbitrage activities or speculation. Indeed, it is not even clear within neoclassical accounts of markets that there is a role for intermediation. However, if we assume markets to be only nearly perfect and ‘sticky’, the trader’s role as someone with privileged expertise, tacit knowledge, and access to private information (within limits) makes more sense. Here, traders are the oil in the market machine; they are on