FSR Forum 14-01

14th Volume November 2011 issue #1

Behavioral Finance Interview J. van den Bosch

An insight in the practices of the Authority Financial Markets

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Column M.J. van den Assem PhD and D. van Dolder

News update

‘Golden Balls’

Developments in the world of Finance & Accounting

p40

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Ondernemers helpen groeien met jouw cijfermatig inzicht?

Financieel talent Sta jij aan het begin van een carrière als accountant of fiscalist? Dan is het goed om jezelf af te vragen waar jouw financieel inzicht het best tot zijn recht komt. Bij Baker Tilly Berk controleer je niet alleen het verleden, maar adviseer je ook over de toekomst van een bedrijf. Baker Tilly Berk combineert een landelijke aanwezigheid en een internationaal netwerk met kleinschalige kantoren dichtbij onze klanten. Die jij al snel persoonlijk kunt adviseren. Je werkt bijvoorbeeld mee aan de uitbreiding van een transportonderneming, de fusie van twee bedrijven of een audit in de publieke sector.

Om ondernemers te helpen groeien zoeken we medewerkers die zelf ook ondernemend zijn en zich continu willen ontwikkelen. Denk jij dat de rol van adviseur bij jou past? Dan hebben we voor jou ook een goed advies: werkenbijbakertillyberk.nl.

www.werkenbijbakertillyberk.nl

ACCOUNTANTS EN BELASTINGADVISEURS

fsrforum • volume 14 • issue #1

Behavioral Finance

Preface

Dear readers, This is the first edition of the fourteenth year of the FSR Forum. In the last edition my fellow board members and I have already presented ourselves. As in previous years our goal is to narrow the gap between theory and practice in the dynamic financial world. The FSR Forum plays an important role in realizing this goal. By providing scientific articles, company presentations and interviews with experienced business people we help our members to further develop their academic career.

The theme of this edition is Behavioral Finance. Behavioral finance draws its inspiration from the behavioral heuristics approach pioneered by Kahneman and Tversky (1979). These two authors, and many others, have devised several experiments which have shown that economic agents do not behave as described by the rational agent paradigm. Agents are influenced by past behavior and they follow heuristics. The financial crisis is the prime example of agents not being rational. By combining the psychological factors behind decision making with finance the proponents of behavioral finance try to eliminate the shortcomings of the rational choice theory. This FSR Forum will provide you with an insight into this relatively new theory.

As in previous years each edition will include three scientific articles. The first article of this edition is from one of the professors at the Erasmus School of Economics: Nico van der Sar. This article will provide you with a good explanation as well as an overview of the research conducted in the field of behavioral finance.

The second article is from Dimitrios Kourtidis, Željko Ševic´ and Prodromos Chatzoglou. These researchers attempt to group investors into different segments based on their psychological biases and personality traits. Based on these groups the effect is examined whether these biases and traits drive their investment behavior.

The last article, written by Marc Lavoie and Gauthier Daigle, investigates the impact of exchange rate expectations on an open-economy stock-flow consistent model, and in particular it will investigate the impact of speculative behavior.

As mentioned before, an important part of the FSR Forum is the interview with an experienced businessman. For this edition we interviewed Jeroen van den Bosch. Mister van den Bosch joined the pension’s supervisions of the Authority Financial Markets in September 2010. The AFM provides financial services and strives to increase the transparency and efficiency of the financial markets. In his interview Jeroen van den Bosch gives an insight of the practices of the AFM as well as an explanation of the new pension regulations.

I am very delighted to tell you that mister Groeneveld PhD RA RV has again decided to devote his time five times a year on his column in the FSR Forum. In this edition mister Groeneveld discusses the cultural differences between the North and South of Europe and how these differences should be reflected on the economic policies of the European Union.

2 • Preface

Besides Professor Nico van der Sar, assistant professor at the Erasmus School of Economics Martijn van der Assem and Dennie den Dolder have also contributed to the realization of this edition. In the column ‘Big Peanuts’ they discuss their study into the choices of 574 finalists of the show ‘Golden Balls’. This show provides an excellent opportunity to study cooperative behavior. As a result of the fixed rules and circumstances, the show resembles the behavioral experiments in psychology and economics.

Apart from the usual items of the FSR Forum also two new items will be introduced this edition.

The first new item is a “News update”. In this item you will be kept up to date about the developments in the financial market and about new accounting regulations. As a part of the update about the financial market we have created a portfolio on September 19th. This randomly created portfolio consists of 15 stocks traded on the AEX, AMX or AScX index in Amsterdam. We have selected random funds out of a fund pool consisting of traded stocks on the AEX, AMX and AScX for 15 times where overlap was allowed. What we will do in every issue of our magazine is to see how our portfolio has developed compared to the AEX, AMX and AScX. Since this issue is about behavioral finance, one could argue that we are interested to see if randomness can outperform the benchmark.

The second new item is a column of a member of the FSR who participated in an FSR event or organized an event. By participating in the event he or she arranged an internship or received a job offer. Fouad Mehadi will be the first to share his story. When Fouad participated in the Investment Banking Masterclass he came in contact with Barclays Capital, which have led to a summer internship at the Rates Sales department.

In the remainder of this FSR Forum the FSR committees will introduce themselves and will give a short description of the events they are going to organize. You will find activity reports of our Kickoff days, the International Banking Cycle and our social drinks later on in this edition.

On behalf of the FSR Alumni Association Joris Kil will conclude with a letter to our readers. I would like to encourage all former active FSR members to become a member of this association, as the Alumni Association will organize several activities that you do not want to miss out on!

Finally I would like to thank Kim de Vries, my predecessor, and Jeroen van Oerle from the editorial committee for their help preparing this edition. I am fully confident that Jeroen’s help will be of great value this year, as he has editorial experience at a former department of het Financiële Dagblad.

I hope you will enjoy reading this FSR Forum and that it will enrich your knowledge about the topic behavioral finance!

Sincerely, Anne van Driesum Editor in Chief FSR Forum FSR board 2011-2012

Preface • 3

fsrforum • volume 14 • issue #1

Behavioral Finance

Table of contents

Behavioral finance: How matters stand Nico L. van der Sar

This article examines the current state of various aspects of behavioral finance, without ­attempting to be all-inclusive. The article begins with a definition of the topic behavioral finance, after which the author provides you with a synthesis of the behavioral finance literature. 6

Investors’ trading activity: A behavioural perspective and empirical results Dimitrios Kourtidis, Željko Ševic´, Prodromos Chatzoglou

This study attempts to group investors (individuals and professionals) into different segments based on their psychological biases and personality traits and, then, to examine whether, and how, these biases and traits drive their investment behaviour. The behavioural finance literature suggests four main factors that influence investment behaviour: overconfidence, risk tolerance, self-monitoring and social influence.

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A behavioural finance model of exchange rate expectations within a stock-flow consistent framework Marc Lavoie and Gauthier Daigle

The paper combines behavioural finance to a stock-flow consistent model of a two-country economy in the portfolio tradition, with imperfect asset substitutability. ‘Conventionalists’ and ‘chartists’ set their expectations of changes in exchange rates based on some assessed fundamental value and past trends, respectively. We find that exchange rate expectations have a significant effect on exchange rate movements and trade account balances during the traverse and in steady states. A flexible exchange rate regime will continue to provide stabilizing properties, as long as the proportion of chartist actors relative to other agents is not overly large.

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Colofon FSR FORUM appears five times a year and is an edition of the Financial Study Association Rotterdam KvK Rotterdam no: V 40346422 VAT no: NL 805159125 B01 ISSN no: 1389-0913 14th volume, number 1, circulation 1300 copies

4 • Table of contents

Editor in chief Anne van Driesum Editorial department Jeroen van Oerle Editorial advisory Dr. M. B. J. Schauten Dr. W. F. C. Verschoor Drs. R. Van der Wal RA

With the cooperation of Drs. J. G. Groeneveld RA RV Jeroen van den Bosch Nico L. van der Sar Dimitrios Kourtidis, Željko Ševic´ Prodromos Chatzoglou Marc Lavoie Gauthier Daigle M. van den Assem D. van Dolder

Editorial address Editiorial office FSR Forum, Erasmus Universiteit Rotterdam Room H14-06 Postbus 1738, 3000 DR Rotterdam Tel. 010 408 1830 E-mail: forum@fsr.nu

Interview Jeroen van den Bosch

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Authority Financial Markets Column Joost Groeneveld PhD

Baker Tilly Berk www.werkenbijbakertillyberk.nl BDO www.werkenbijbdo.nl KPMG www.gaaan.nu Grand Thornton www.carrierebijgt.nl Post NL www.werkenbijpostnl.nl NIBC www.careeratnibc.com Ernst & Young www.ey.nl/carriere

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‘Nominale waarde is geen waarde’ Column professor

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‘Big Peanuts’ Martijn J. van den Assem Dennie van Dolder

FSR News Word of the Chairman

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News update

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FSR former board member

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FSR member

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Introduction committees

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Activity reports

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FSR Alumni Association

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FSR Activity Calendar

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Company Presentations PWC www.werkenbijpwc.nl KPMG www.gaaan.nu

Subscription EUR Students through membership FSR; costs e 5,00.

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Table of contents • 5

fsrforum • volume 14 • issue #1

Behavioral finance: How matters stand

Nico L. van der Sar

6 • Behavioral finance: How matters stand

Introduction This article examines the current state of various aspects of behavioral finance, without attempting to be all-inclusive.

It is not so long ago that people were completely ignored in finance. The traditional approach starts from rational ‘agents’ with the universal property of optimal decision making. And in case some agents act less than fully rational, they will be pushed of the market immediately by arbitrageurs and equilibrium will be restored. But in reality things look different, see, e.g., Shleifer and Vishny (1997, I:10) and De Long, Shleifer, Summers, and Waldmann (1990). The amounts of money at stake are enormous, prices may be driven away from fundamental values for some time, and the unpredictability of irrational traders in itself may be risky. By contrast, resources available to arbitrageurs are limited in terms of quantity and time, and they them­selves may be risk averse and impatient to consume. Given that violations of the ra­tional choice model are often systematic some way or the other, anomalous observations can be expected on an aggregate level. In short, the human factor is of importance for the analysis of financial markets. This is not to say that behavioral finance should be considered as a separate field in finance that focuses exclusively on departures from rational choice behavior. Although many studies on curious and not (yet) explained phenomena are indeed categorized as behavioral finance, it has moved beyond being the pricing puzzles’ last resort, where a formal explora­tion and testable implications are missing since ‘psychology’ was mistakenly consid­ered not to be the finance scholar’s business.

Behavioral finance represents an alternative way of looking at financial markets, characterized by what may be called a new null hypothesis that accommodates devi­ating behavior.

Correspondingly, the manner of conducting research differs from the standard finance approach on several dimensions.

These include the following:

Behavioral finance represents an alternative way of looking at financial markets.

1. Most behavioral studies have an empirical component in common, put an empha­sis on the descriptive value and claim no normative significance.

2. Behavioral choice models often show a high predictive value, but criticism is that they lack robustness.

3. It is not uncommon that the method of reasoning is inductive in nature. Observed regularities in anomalous behavior at an individual level of financial decision making are typically used to construct a behavioral model for a higher aggregate, i.e. working one’s way up from the particular to a (more) general rule. This con­trasts with the standard finance approach which aims at deriving theorems with a broad reach and usually starts from a specific set of assumptions.

4. A central position is taken by financial decision making as well as financial mar­kets, whereas the standard finance approach is greatly concerned with the devel­opment of equilibrium theories and the pricing of risk, that is, the market.

5. The focus is not only on the outcomes but also on the generating process. Theo­retical as well as empirical results from other behavioral sciences, such as psychology and decision theories that are more process-orientated, may therefore be of use and consistency should be focused on.

My perspective is somewhat more traditional, though I accept the increasing prominence of behavioral finance and recognize its potential as an alternative approach. The standard finance approach deserves attention also because within financial economists there is no general consensus on the presence and importance of behavioral finance. Some writers plea for not abandoning market effciency at all. According to Fama (1998, I:26) and those who think with him, realized returns, on average, can be justified by the risk incurred (the risk view) and abnormal returns are chance events. In case significant outcomes are reported, it is most likely no more than a bad-model error. Their story is that risk adjustments are incorrect, estimation procedures need improvement and/ or the data are not representative (the statistical view). Replication results and robustness checks supposedly throw doubt on ob­served anomalies and behavioral modeling is said, at best, to be still in its infancy.

Behavioral finance as an alternative approach In the past 40 years or more, normative choice theories have been tested on their validity as a decision criterion for observed individual behavior but again and again the underlying assumptions as well as the predictive value appear to be descriptively false. For instance, the two principles that are central to rational choice behavior, namely, internal consistency and self-interest always at all levels, do not recur in practice or only partially, and competitive forces show up ineffective in bringing prices back to fundamental values.

Research in this context led to behavioral economics. Herbert Simon played a pioneering role. Both from a theoretical and an empirical point of view his work has also been of the greatest importance to the development of behavioral finance.

Satisficing criteria and the impact of cog­nitive limitations on decision making (bounded rationality, e.g., Simon, 1955) were brought to the attention repeatedly. As a result, human choice behavior should be interpreted as a series of decisions, which are not fully integrated and are made on the basis of simplified procedures or heuristics (see, e.g., Tversky & Kahneman, 1974, I:2). In the late 1960s and early 1970s research on shortcomings of the rational choice model extended to investment decision making on financial markets (e.g., Slo­vic, 1972, I:1; Slovic, Fleissner, & Bauman, 1972). Noteworthy is the plea of Slovic for experimental studies of risk-taking behavior as a means of testing hypotheses concerning the perception of risk and the willingness to take risks. In addition, Slovic touches on a number of topics related to man’s limitations as a processor of infor­mation and the relevancy to investment analysis. They include conservatism where people show a reluctance to update probability estimates fully (Edwards, 1968, I:4), and some judgmental biases which lead people to overweight information. The last feature is

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Behavioral finance: How matters stand • 7

fsrforum • volume 14 • issue #1

related to the issue of overreaction, prominent in De Bondt and Thaler (1985, 1987, I:12).

The point differentiating the work of De Bondt and Thaler from many others at the time is their formalization of a behavioral principle to verify empirically whether the winner–loser effect is a predictable market anomaly. Drawing upon the work of Tversky and Kahneman (1974, I:2, 1982, I:3) and Kahneman and Tversky (1982) on judgment by heuristics (representativeness in particular) and resulting cognitive biases of individual decision makers, they suggest that there is an overreaction in the extremes (by boundedly rational investors who, in violation of Bayes’ rule, apply the representativeness heuristic), which becomes apparent on the stock market dur­ing the period the mis-pricing gets corrected. Thus, we see that H1 is not being left beyond the scope of examination as just the alternative hypothesis of market ineff­ciency. Instead it gets a behavioral content which in effect fills the bill. A quality of De Bondt and Thaler’s research is their matching of earnings movements to the ob­served return performance. Noticing that earnings of winning and losing firms show reversal patterns, they argue that if investors focus on the recent past above all (myo­pic forecasting behavior) and fail to recognize the tendency towards mean reversion then stock prices will show mean reversion as well. Thus De Bondt and Thaler suc­ceed in finding support for the behavioral view even where there is no identifiable news event. A point worth noting is the possible applicability of the behavioral prin­ciple represented by the overreaction effect in many other contexts. One example to which De Bondt and Thaler refer, is Shiller’s (1979, II:16) result that movements in long-term interest rates tend to be in a direction opposite to that predicted by the expectations models.

But in view of the mixed test results presented by Campbell and Schiller (1991, II:17) and Froot (1989, II:18) (who uses survey data on interest rate expectations) on the expectations hypothesis, this issue is not settled yet.

Another example from De Bondt and Thaler is the observation (e.g., Basu, 1983) that, on a risk-adjusted basis (i.e. beta at that time), stocks with very high earnings-­to-price ratios outperform stocks with very low ratios. According to the behavioral view these stocks are temporarily undervalued because of excessive pessimism after a series of bad outcomes.

The empirical evidence provided later by Lakonishok et al.

(1994, I:13) on the profitability of value strategies is broader in the sense that they use a variety of expected future growth performance measures (value ratios), such as price to earnings, price to cash flow and market to book, and past growth perfor­mance measures, such as past growth in sales, earnings and cash flow, to identify undervalued value stocks. The idea is that prices of stocks with a very low score on a future and/ or past growth performance measure are too low since investors na­ively extrapolate and fail to impose mean reversion on growth forecasts in the tails (in this context it is not a surprise that Lakonishok, Shleifer and Vishny also refer to Kahneman & Tversky, 1982). As a direct test of extrapolation actual future growth rates are compared to past growth rates and to expected growth rates as implied by the value ratios. Lakonishok, Shleifer and Vishny argue that the market expected firms with rates of growth of value firms to continue in this manner for many years, whereas actually they revert rather quickly to normal levels, taking just a couple of years. As a result, the persistence of lower growth rates seems to have

8 • Behavioral finance: How matters stand

been grossly overestimated. For that matter, the overreaction hypothesis is contested by Fama and French (1993, 1995, 1996, I:19), not only from a risk perspective but also for the reason that the high distress returns premium is not a temporary one- or two-year phenomenon but persists for at least three years after the mean reversion of earnings growth becomes apparent to the market. Their empirical evi­dence on value ratios in the five years after portfolio formation suggests that the market is not fooled by the weak past earnings growth. La Porta, Lakonishok, Shleifer, and Vishny (1997) support the idea that erroneous expectations account for the superior performance of value stocks. They provide evidence of systemati­ cally more positive (quarterly) earnings surprises for value stocks in the five years after portfolio formation, which is consistent with the observed superior returns pat­tern and with a market that is slow in realizing that earnings growth rates for value stocks are higher than initially expected.

Lakonishok, Shleifer and Vishny suggest various possible explanations for the long-lived returns differential (= value premium) between out-of-favor value stocks and popular ‘glamour’/growth stocks (at the other side of the spectrum).

First, inves­tors may simply have a preference for investing in good companies, expecting them to generate good returns and/or as a tactic of ‘prudent’ decision making to avoid the responsibility of a bad outcome: the market is to blame, that is the regret potential of buying stocks of good companies is low and the choice is easy to justify, e.g., to cli­ents and superiors (the fallacy of good stocks being stocks of good companies can be attributed to representativeness, see, e.g., Shefrin & Statman, 1995, I:21; Solt & Statman, 1989, I:20). Another factor may be that few people can afford to wait three to five years for a value or a contrary strategy to pay off, the more so as the stocks in question are considered rather unconventional.

An altogether different approach is to use survey data on the expectations of investors. The issue can be later stock prices and returns as well as future earnings and growth rates. If psychology matters in the aggregate of a stock market because many investors systematically make probability judgments in violation of Bayes’ rule, something might be learnt from studying forecasts and forecast revisions of individual investors. Such an approach may be called direct in view of the focus being on one of the inputs of investment decision making, namely, expectations. Much of the literature mentioned previously has concentrated on market outcomes and implicit expectations – that is, as they are revealed conditional on an equilibrium trade-off between risk and return.

In that context it is only natural to leave some room for the risk view, as it is still possible that another asset-pricing model can do the job at the cost of the (alternative) expectational errors hypothesis in a manner of speaking. This is illustrated by Fama’s (1998, I:26) comment on the price momen­tum puzzle of Jegadeesh and Titman (1993, I:14), viz. that it is still rather new and further tests are in order. For that matter, price momentum refers to the apparent continuation of returns over an intermediate horizon of three to 12 months subse­quent to this same time period in the past (see also Fama & French, 1996, I:19; Jeg­adeesh & Titman, 2001).

However, this is not to say that behavioral explanations of return predictability are suspect; rather, evidence is mounting, but certainly some caution should be exercised. The direct method of using survey data is not hampered by this

joint-hypothesis problem, but makes it possible to provide direct evidence on whether expectations of individual investors are consistent with observed stock re­turns.

Based on non-expert forecasts of stock prices De Bondt (1993, II:2) finds that re­cent trends are expected to continue, which suggests a reliance on representativeness. De Bondt and Thaler (1990) document that earnings forecasts of financial analysts appear to be systematically too extreme and De Bondt (1992, II:4) presents empirical evidence showing that there is an inverse relationship between analysts’ predictions of earnings growth and later returns. To a certain degree similar are the results of La Porta (1996, II:5), who argues that over-the-top analysts’ forecasts for growth rates are consistent with the findings of Lakonishok et al. (1994, I:15). However, Amir and Ganzach (1998, II:7) make it clear that there are also cases, e.g., earnings forecast revisions, wherein analysts show a tendency towards under-reaction.

Womack (1996, II:8) finds that stock price reactions to analysts’ recommendation changes ap­pear to be significant but incomplete, i.e. the market under-reacts. In addition, there are other event studies which point to under-reaction of the market and it is still unclear whether the price momentum effect of Jegadeesh and Titman (1993, I:14) falls under underreaction or over-reaction (cf. Jegadeesh & Titman, 2001).

Though matters seem to be complicated, behavioral psychologists have not sat still. Some puzzling aspects of the winner–loser effect (De Bondt & Thaler, 1985, 1987, I:12) induced Andreassen (1990, II:3) to do two stock market simulation exper­iments and reason about encoding time-series data as price levels or as price changes and anchoring-andadjustment models in relation to salience effects and to perceived similarity. Of interest now are the particular circumstances in which people are dri­ven by representativeness on the one hand, which leads to overly extreme predic­tions, i.e. overreaction, and by anchoring and adjustment on the other, which leads to excessively conservative predictions, i.e. under-reaction. Czaczkes and Gan­zach (1996, II:6) suggest conditions that characterize the strength of these heuristics in judgmental forecasting. For instance, people are predisposed to favor representa­tiveness in situations where predictor and outcome are compatible or when the rep­resentation involves levels/size, whereas anchoring and adjustment predominates in situations where there is a salient/natural anchor or when the representation is in terms of changes/deviation. The work of Amir and Ganzach (1998, II:7) on analysts’ earnings

forecasts is in the same field. They emphasize the dependency of whether representativeness or anchoring and adjustment dominates prediction on the salience of the anchor. Shefrin (2001, II: Introduction), conjectures that the suggestions of Czaczkes and Ganzach might be relevant to the postannouncement drift found in event studies. Further research in this area should tell.

Several models that produce both a stock return reversal and a continuation of returns conditional on the circumstances have been developed on the basis of behavioral foundations.

They postulate non-standard behavior driven by irrational expectations. In a model how beliefs are formed, Barberis et al. (1998, I:16) assume a representative irrational investor and an underlying regime-switching process in the spirit of Griffin and Tversky (1992, I:5). One regime is associated with investors using the representativeness heuristic and the other one with conservatism. The model of Daniel et al.

(1998, I:17) assumes rational uninformed investors and informed inves­tors who are subject to overconfidence (with respect to the validity of their private information signals) and biased self-attribution (in the sense that confirming public information increases their confidence in their own ability in a biased manner, and disconfirming new public signals cause confidence to fall only modestly, if at all). In this setting, corporate news events can lead to a post-announcement stock price trend in the same direction as the immediate, but incomplete response. Hong and Stein (1999, I:18) assume two types of boundedly rational investors, namely, new­ swatchers and momentum traders, who interact. The driving force of their model is gradually diffusing news about future fundamentals, which in combination with simple trend chasing pushes prices to their fundamentals and reduces under-reaction, up to a point, or results in overshooting after which prices eventually revert to their fundamentals.

A limitation of these models is that general equilibrium issues are left aside. In his survey article on asset pricing Campbell (2000, p. 1556) states: ‘If the models are sup­posed to apply to individual assets, then the misevaluations they produce are diver­sifiable and so can easily be arbitraged away by rational investors. If, on the other hand, the models apply to the market as a whole, then it is important to consider the implications for consumption.’ Although the supposedly special force of the arbi­trage argument is disputable (cee. Introduction to this paper), there certainly is a need for extending the (partial) analysis to include all component parts and

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account for their interrelationships, say a behavioral theory of the equilibrium trade-off between re­turn and perceived risk (cf. also De Bondt & Thaler, 1995). More rigorous is the crit­ical assessment of Fama (1998, I:26), who puts it as follows (p. 291): ‘My view is that any new model should be judged (as above) on how it explains the big picture. The question should be: Does the new model produce rejectable predictions that cap­ture the menu of anomalies better than market effciency?

For existing behavioral models, my answer to this question (perhaps predictably) is an emphatic no.’ The carefully balanced and more specific appraisal of Shefrin (2001, I: Introduction) and his comments on Fama’s view are not discussed here, but are well-recommended reading.

The search to explain pricing puzzles and asset pricing, if necessary, not only led to a change of focus from financial markets to individual investors (through which the question of how results on individual decision makers aggregate to a market-level story, seemingly gained relevance). It also called attention to preferences and under­lying assumptions (next to expectations as we discussed in the foregoing). To alter standard assumptions about preferences and modify the form of the investor’s utility function, can be considered an alternative route to rationalize deviating choice behavior anyhow. But in addition, from a descriptive point of view there is ample evidence of preferences-related deficiencies of the standard approach.

One example of a non-standard utility function emanates from Markowitz (1952, III:1). It is a monotonically increasing function of wealth with three inflection points, meaning that certain segments can be associated with risk-seeking behavior.

The middle inflection point serves as a point of reference representing the individual deci­sion maker’s so-called customary wealth that, after windfall gains or losses, tempo­rarily, is not the same as present wealth. Another example which relates to the equity premium puzzle among other intertemporal finance issues, is the embedding of habit formation/persistence in consumption-based asset-pricing models, i.e. the time-sepa­ rability assumption is relaxed. Constantinides (1990) assumes consumption in excess of an individually determined non-constant ‘subsistence’ or accustomed level of con­sumption (i.e. consumption is taken relative to internal habit) to be decisive of the level of utility derived. For that matter, Constantinides is on the same track as Ben­artzi and Thaler (1995, III:21) in stressing the asymmetry between gains and losses (see later in this section). In the external habit formation model of Campbell and Cochrane (1999), the consumption ‘standard’ is set by aggregate consumption rather than the individual’s past consumption. Thus a ‘catching up with the Joneses’ effect (Abel, 1990) may be operative.

One more example is the S-shaped utility function of wealth, estimated by Antonides and Van der Sar (1990) for investment clubs. The shape and location appear to vary, in the crosssection, with the amount of invested wealth among other club-specific characteristics. This suggests the existence of a ref­erence point that is determined (partly) by the amount of wealth invested at the start of the decision period (throughout which it remains fixed). Then, in a way, this is similar to Markowitz’s concept of customary wealth and Constantinides’ specifica­tion of internal habit in dependence on the individual’s own past consumption.

In itself, there is nothing fundamentally wrong with the existence of a reference point or different reference points. In

10 • Behavioral finance: How matters stand

many real-world situations people appear to differ in their conception of the same decision problem. The effect of ­so-called differ­ences in framing has been observed in, e.g., shareholders–managers relations where the same objective states being evaluated from different reference points leads to agency costs borne by the shareholders. Similarly, alternative frames may be perti­nent to investors and their financial advisors/portfolio managers. But, in a multi-per­iod context matters become complicated if it concerns one and the same decision maker whose reference level changes every now and again in dependence of things that have gone before. As for this, an interesting question is how long it takes the investor to reset the reference level or adapt habit (see later in this section).

Prospect theory (Kahneman & Tversky, 1979, III:3; see also Tversky & Kahne­ man, 1981, 1986, III:4) is a descriptive

Investors time the

realization of gains differently from the realization of losses. theory of human decision making that dis­penses the idea of expected utility maximization altogether, but more adequately accounts for cognitive processes that underlie preference behavior in many cases. As one of its distinguishing features, prospect theory has a value function defined on gains and losses relative to a reference point, rather than absolute levels of total wealth. The reference point is determined by the adopted frame, which refers to the conception of the decision problem and is controlled by the manner of presentation as well as by norms, habits, and personal characteristics.

Two essential properties of the value function are that (i) it is S shaped (the marginal value of wealth changes decreases with size: diminishing sensitivity), convex below the reference point (people are risk seeking in the domain of losses) and concave above it (people are risk averse in the domain of gains), and (ii) it is asymmetric, steeper below the reference point than above it (people’s sensitivity to wealth losses is higher than to wealth gains: loss aversion). The dependence of preferences on frames emerges, e.g., in the investors’ tendency to favor cash dividends above capital gains, though according to standard theory they are perfect substitutes.

Shefrin and Statman (1984) indicate that the re­ceipt of cash dividends (realized gains) induces a shift of the reference point, whereas capital gains (paper gains) are not assimilated. As a consequence the impact of sub­sequent incremental capital gains diminishes since they are associated with positions further on in the concave portion of the S-shaped value function. In another article Shefrin and Statman (1985) suggest that investors time the realization of gains dif­ferently from the realization of losses. In their view investors exhibit a disposition to sell winners too early and ride losers too long because among other reasons inves­tors show risk aversion over the region of gains (relative to an unaltered reference point usually being the purchase price) and risk

proneness over the region of losses. Studies by Odean (1998, III:13, 1999, III:14), Heisler (1994, III:15), Weber and Ca­merer (1998, III:16) and Heath et al. (1999, III:17) also provide empirical evidence about the occurrence of the disposition effect and demonstrate that what a security has done may be more important for the choice to sell or to hold than what it is likely to do.

Another inconsistency with the rational choice model is the common practice of treating each event separately (narrow framing), rather than considering their com­ bined effect (adopting a broad frame). Investors often use an implicit system of men­tal accounting (Thaler, 1980, 1999, III:7; Tversky & Kahneman, 1981) which involves the assignment of activities to separate accounts, ignoring possible interac­tion which may lead to, e.g., not fully utilizing opportunities to diversify.

This may also serve to explain the existence of multiple reference points that are sticky.

The way that component parts are combined (aggregation rules) matters not only in the cross-section but also in the time series. The intertemporal aspect of aggrega­tion refers to the amount of time people commit themselves to stay with their invest­ments. Benartzi and Thaler (1995, III:21) use the term evaluation period to describe the length of time over which an investor aggregates returns, or put in other words the frequency with which he resets his reference point. It is argued that this charac­teristic of investors relates to their willingness to take risks and, as such, to the equity premium puzzle. Their explanation for the enigma that the observed difference be­tween the rate of return on common stocks and the return on government securities is too large to be justified by a standard equilibrium asset-pricing model, is based on a combination of loss aversion and (intertemporal) mental accounting which they call myopic loss aversion.

Using Tversky and Kahneman’s (1992) loss aversion parameter estimates, which indicate that the sensitivity to losses is about twice as great as to gains, they find that the observed equity premium (of roughly 6% per year) is consistent with an evaluation period of 13 months. With respect to the inter­ pretation Thaler (1999, III:7, p. 20) contends: ‘This outcome implies that if the most prominent evaluation period for investors is once a year, the equity premium puzzle is ‘solved’.’ And indeed all sorts of activities, arrangements and reports that are important to investors have an annual basis.

However, it should be emphasized that the value function is a purely descriptive device of individual decision making under risk without a linkage to the processing of market equilibrium outcomes. This is rec­ognized by Benartzi and Thaler who properly note that investors may employ differ­ent (combinations of) evaluation periods, and carefully balanced state that myopic loss aversion deserves consideration as a possible solution to the equity premium puzzle.

In a review that compares experimental studies on expected utility theory, several generalized utility theories and prospect theory, Camerer (1992) shows that expected utility theory (as a descriptive theory) is outperformed if gambles involve small prob­abilities and/or large payoffs (which are not exceptions in real-life investment choice situations), and that all the presented evidence may be interpreted as most favorable to prospect theory. In another, more extensive review, with implications for econom­ics in mind, Camerer (1995) judges positively on the progress that has been made. He also notices that experimental markets (e.g., Smith et al., 1988,

II:23) can be designed to evaluate individual choice theories simultaneously with market implications.

Despite these findings, psychology-based asset-pricing theory is still at an early stage (cf. Hirshleifer, 2001, who also mentions some possible directions for future re­search). The aggregation issue, which is fundamental in finance, certainly needs more study theoretically as well as in the field. Related questions that have to be explored further are: can pricing puzzles and anomalies observed in aggregate data (the mar­ket) be explained by behavioral models of individual choice?; and, how much irratio­nality on an individual level does it take to generate observed deviations in market equilibrium outcomes?; or in a sense the other way round, can markets be effcient when certain traders commit errors? According to Shefrin (2001, I: Introduction), financial economists are in the midst of a paradigm shift from neoclassical-based modeling to one that (also) includes behavioral principles. Articles that focus on the way imperfectly rational investors make decisions, their interactions with error-free traders on financial markets, and the process that determines security prices have rapidly become mainstream.

Shefrin and Statman (1994, I:5) pioneered the development of a behavioral-based theory of asset pricing. They present an aggregation theorem and infer that when one of the corresponding conditions fails to hold, prices deviate from fundamental values and equilibrium premia are determined by a mix of fundamental risk and additional risk introduced by sentiment. Two of the essential features of their framework are that next to a behavioral mean–variance effciency theory it also provides a behav­ioral theory for the term structure of interest rates and option pricing, which are in­terlinked, and a wide variety of cognitive errors can be accommodated.

Lastly, Shefrin and Statman (2000, III:6) construct a (positive) behavioral portfolio theory (BPT) on the foundation of prospect theory and Lopes’ (1987, III:5) SP/A theory which can be regarded as an extension of the safety-first portfolio model (cf. Roy, 1952, III:2). They conclude (p. 154) that ‘the road from BPT will lead to an equilib­ rium asset-pricing model, extending Shefrin and Statman (1994), just as the road from mean–variance portfolio theory led to the CAPM.’

Concluding remarks Behavioral finance has passed the critical level of acceptance for some time now.

Significant progress has been made with respect to the modeling of human behavior in financial decision making and financial markets, but at the same time I think that much still needs to be done to settle some major issues.

Notes For the reference list see the full article ‘Behavioral finance: how matters stand’ by Nico van der Sar (2004).

Behavioral finance: How matters stand • 11

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fsrforum • volume 14 • issue #1

Investors’ trading activity: A behavioural perspective and empirical results Dimitrios Kourtidisa, , Željko Ševic´ a , Prodromos Chatzogloub a Glasgow Caledonian University, Business School, Glasgow, UK b Democritus University of Thrace, Department of Production and Management Engineering, Xanthi, Greece

14 • Investors’ trading activity: A behavioural perspective and empirical results

1 Introduction: Traditional finance theories such as Efficient Market Theory (Fama, 1965a,b) and Modern Portfolio Theory (Markowitz, 1952) support the hypotheses of rational investors and efficient markets. However, it is obvious that there are irrational investors in the market, making random transactions that cannot adequately be explained by traditional finance theories (Chang, 2008).

Many scholars, such as Kahneman and Tversky (1979), believe that the study of psychology and other social science theories can shed considerable light on the efficiency of financial markets, as well as explain many stock market anomalies, market bubbles and crashes. Thus, a relatively new theory, called behavioural finance, has emerged in an attempt to understand the human psychological biases that are related to the financial markets. In contrast to traditional finance, which examines how people should behave in order to maximize their wealth, behavioural finance investigates how people actually behave in a financial setting (Nofsinger, 2005a). The behavioural finance literature has developed a number of behavioural concepts that explain investment behaviour. This paper reviews some of the most significant and reliably measurable concepts to classify investors into profiles and, then, to compare their personal characteristics and their trading behaviour.

The behavioural characteristics (concepts) that have been selected for classifying investors into profiles are: overconfidence (OV), risk tolerance (RT), self-monitoring (SM) and social influence (SI). Thus, this paper examines whether the different psychological and personal characteristics lead to differences in investment behaviour and trading performance among the group of investors with different profiles. This framework will, hopefully, help investors understand how biases and traits affect their investment decisions. The paper is organized as follows: first, the paper discusses selected psychological biases and personality traits that are involved in behavioural finance.

Then, a brief description of the methodology design is presented and finally the results of the cluster analysis are presented.

2 Literature review Although the relevant literature suggests that there are many factors affecting people’s behaviour, the emphasis there was to explore the most important psychological biases and personality traits affecting investment behaviour. These are overconfidence, risk tolerance, self-monitoring and social influence. An analytic discussion follows in the next sections and an attempt is made to link them with investment behaviour.

2.1. Overconfidence Overconfidence causes investors to be too certain about their own abilities and not to weight the opinion of others sufficiently. Furthermore, overconfident investors underreact to new information, or overweight the value of information, but they also hold unrealistic beliefs about how high their returns will be (Barber and Odean, 2000). Chen et al. (2004) examined brokerage accounts in China and reported that individual investors exhibit overconfidence.

In spite of the fact that some studies have found no difference in overconfidence between men and women (Lundeberg et

al., 2000; Deaves et al., 2003; Biais et al., 2005), the majority of the literature suggests that men are apparently more predisposed to overconfidence than women (Lundeberg et al., 1994; Barber and Odean, 2001a).

Additionally, Dow and Gorton (1997) have found that trading volume increases when individuals and insiders are overconfident. Moreover, Gervais and Odean (2001) have found that overconfident investors trade too aggressively and this increases the expected trading volume.

Research has shown that overconfidence leads not only to increased trading activity but also to increased probabilities of taking wrong decisions (e.g. buying the wrong stocks).

Similarly, Fenton O’Creevy et al. (2003) and Philip (2007) have documented that overconfidence has a negative impact on trading performance. On the other hand, De Long et al.

(1990) and Wang (2001) support that overconfident investors earn higher returns than less confident investors.

Last, the trend of using online brokerage accounts is making investors more overconfident than ever before. Barber and Odean (2001b) have provided evidence that investors, after going online, tend to trade more actively and their performance drops. On the other hand, Choi et al. (2002) have investigated the performance of online investors and found no significant difference in the performance of Web traders and phone traders.

2.2. Risk tolerance Financial risk tolerance, defined as “the maximum amount of uncertainty that someone is willing to accept when making a financial decision, reaches into almost every part of economic and social life” (Grable, 2000, 625).

Schooley and Worden (2003) have found that “Gen Xers” (defined as being born in 1964-1980) generally have a low propensity for risk taking. Hira et al. (2007) have found that higher age decreases risk tolerance, while higher income increases risk tolerance. Cicchetti and Dubin (1994) and Grable et al. (2004) have also found that people with high incomes have higher risk tolerance than people with lower incomes. Roszkowski (1998) and Hartog et al. (2002) assume that single, rather than married, individuals tend to be more risk tolerant. Similarly, Yao and Hanna (2005) have documented that risk tolerance is higher for single males, followed by married males, then unmarried females and then married females.

Additionally, the level of formal education is found to influence risk tolerance. Grable and Lytton (1998) and Sung and Hanna (1996) suggest that greater levels of attained education are associated with increased risk tolerance.

2.3. Social influence A concept that also explains behavioural dispositions is social influence. Social attitude has played an important role in these attempts to predict and explain human behaviour (Campbell, 1963; Sherman and Fazio, 1983; Ajzen, 1988).

This research supports that social influence has an impact on investors’ trading behaviour. Individual investors discuss with, and are affected by (to an extent), their family members,

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Investors’ trading activity: A behavioural perspective and empirical results • 15

fsrforum • volume 14 • issue #1

neighbors, colleagues and friends, as far as their investment decisions are concerned (Nofsinger, 2005b). In addition, investors in financial markets imitate each other. This phenomenon is referred to as herding (Hirshleifer and Teoh, 2003).

3. Methodology

collecting information about their portfolio value, stock volume, stock returns, profitable transactions and frequency of stock transactions. Additionally, ten questions focus on information about people’s investing behaviour, such as types of stocks held and sources of investment information.

Moreover, twelve demographic and socioeconomic items are

This study attempts to group investors (individuals and professionals) into different segments based on their psychological biases and personality traits and, then, to examine whether, and how, these biases and traits drive their investment behaviour. The selected factors that classify investors into profiles through cluster analysis are the following: overconfidence, risk tolerance, self-monitoring and social influence.

included in this section. All the necessary statistical tests have been performed to verify construct validity and to confirm the reliability and validity of the research instrument.

The Cronbach alpha statistic has been used to determine the degree of consistency among the measurements of each construct. The final constructs and their internal reliability are shown in Table 1.

3.1. Questionnaire design

3.2. Sample description

A structured questionnaire was constructed and used as the main survey instrument. First of all, an extensive pretesting with professional and individual investors took place in an attempt to improve the format of the questions. The questionnaire was delivered to the research subjects face to face, to allow the researcher to discuss with the participants the main aims of the research and provide them with all the necessary explanations in order to eliminate possible mistakes in the understanding and completion of the questionnaires. The questionnaire includes seventy-two questions that collect information about investment behaviour, while it is divided into two sections. The first section is based on the four main constructs. Overconfidence is measured by seven items (five point Likert scale) that have been adapted from Wood and Zaichkowsky (2004). Furthermore, the thirteen items (multiple choices) measuring risk tolerance have been adapted from Grable and Lytton (1999). Six items (five-point Likert scale) measuring social influence and eighteen items measuring self-monitoring have been adapted from Ajzen (1991) and Biais et al. (2005), respectively. The second section includes questions about participants’ stock transactions (in their private portfolios). There are six questions included,

The questionnaires were distributed to individuals who make stock transactions and had at least two transactions in 2007 on the ASE (Athens Stock Exchange), as well as professional investors (including portfolio analysts as well as stockbrokers) who work in various investment companies all over the country (in order to achieve the maximum geographical distribution).

A total of 200 professional investors from 80 investment companies and 400 individual investors were contacted face to face. The individual investors who positively responded (through face-to-face contact) totaled 263, while 83 professional investors successfully responded to the questionnaire.

Therefore, the response rate for the face-to-face distribution was 66% for individuals and 42% for professional investors.

Additionally, 67 questionnaires (including a prepaid stamped envelope) were distributed by mail to 42 investment companies (phone contact had previously confirmed their willingness to answer the questionnaire) in all over the country. In a few weeks, 18 of them were returned completed. Therefore, the response rate on questionnaires via mail was 26.8%.

The total number of questionnaires returned was 373. How-

Table 1: Questionnaire design.

Construct

Supporting literature

Items

KMO

Cronb.alpha

Overconfidence

Wood and Zaichkowsky (2004)

7

0.817

0.801

Risk tolerance

Grable and Lytton (1999)

13

0.744

0.671

Self-monitoring

Biais et al. (2005) and Snyder and Gangestad (1986)

18

0.754

0.447

Social influence

Ajzen (2002)

6

0.781

0.802

Volume

Some of them have been adapted from Wood and Zaichkowsky (2004)

2

0.5

0.465

Frequency

and Keller and Siergist (2006)

2

0.5

0.571

2

0.5

0.741

Stock transactions

Performance

16 • Investors’ trading activity: A behavioural perspective and empirical results

A total of 200 professional investors from 80 investment companies and 400 individual investors were contacted face to face.

Table 2: Psychological biases and personality traits.

Average

High profile (HP)

Moderate profile (MP)

Low profile (LP)

n = 345

n = 118

n = 115

n = 112

F

Mean

St.D.

Mean

St.D.

Mean

St.D.

Mean

Overconfidence

24.00

5.12

27.42

4.14

24.87

3.83

19.52

St.D. 3.83

Risk tolerance

27.73

4.83

31.61

4.00

26.03

3.86

25.39

3.94

87.97

Self-monitoring

10.32

2.44

11.52

2.84

10.85

1.52

8.52

1.57

52.83

Social influence

13.16

4.14

16.05

3.31

12.02

3.97

11.28

3.38

102.37

119.68

Table 3: Significance between psychological biases and personality traits.

Overconfidence

HP-MP

HP-LP

MP-LP

0.000*

0.000*

0.000*

Risk tolerance

0.000*

0.000*

0.223

Self-monitoring

0.002*

0.000*

0.000*

Social influence

0.000*

0.000*

0.066*

*Significant differences at p < 0.005.

ever, 28 questionnaires (individuals) were omitted since some questions had been left unanswered. Thus, the total number of valid questionnaires was 345. Of these, 235 questionnaires were completed by individuals and 110 questionnaires were completed by professionals.

4. Results This study used K-means cluster analysis because this method is appropriate (unlike hierarchical clustering) for large data sets (n > 250). Due to the fact that some variables were measured on different scales, they were standardized to assume equal impact on the computation of the distances between cases. A range (2-5) of clusters was tested and the greatest distinctiveness (with the appropriate significance) among the groups was provided by a 3-cluster solution. The results suggest that 3 significant subgroups exist within the investor sample, each with different psychological and personality characteristics (Table 2).

In addition, an ANOVA test has shown a statistically significant difference (p < 0.05) between the clusters for all the constructs (Table 3). Interpreting the results of this table, each investor segment identified could be labelled as follows: high profile investors, moderate profile investors and low profile investors. High profile investors are those who have the following characteristics as far as the four main constructs examined are concerned: high degrees of overconfidence, risk tolerance, self-monitoring and social influence.

Moderate profile investors are those who score moderately on overconfidence, risk tolerance, self-monitoring and social influence, whereas low profile investors are those who have a low degree of overconfidence, risk tolerance, self-monitoring

and social influence. To validate the distinctiveness of the clusters, independent sample t-tests were conducted on the mean ratings of each of the four constructs between clusters (Table 3). The results indicate the existence of statistically significant differences between each cluster (except for the risk tolerance of low and moderate profile investors). We also ran cross tabulations between clusters for several demographic and trading characteristics. A detailed discussion of the findings from these analyses is provided in the next sections.

4.1. Profile analysis 4.1.1. High profile investors The majority (83%) of the respondents were men, which does not differ much between profiles (Table 4). High profile investors are mainly young respondents with 68% of them being less than 45 years old (relatively younger than the investors in the other groups), having a higher educational level (42% of them hold a Master degree) and having a significantly (Table 5) higher income level (34% of them earn more than 50,000 euros annually) than investors in the other 2 profiles. Additionally, the high profile includes significantly more professionals than any of the other 2 groups.

The primary characteristic of this group is the high score on all the psychological biases and traits compared with the scores of the same traits of the other 2 groups of investors (Table 2). Thus, high profile investors have significantly higher overconfidence (mean 27.42) than investors in any other group. This is expected due to the large amount of ­professionals included in this profile. Kourtidis et al. (2011) have found that that professionals score higher on psycho-

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Investors’ trading activity: A behavioural perspective and empirical results • 17

fsrforum • volume 14 • issue #1

High overconfidence is associated with high risk tolerance and overconfident investors underestimate risk taking.

Table 4: Demographic and socioeconomic profile of clusters.

Average

HP

MP

LP

n = 345

n = 118

n = 115

n = 112

Gender Male

83%

86%

86%

77%

Female

17%

14%

14%

23%

Age 25-35

29%

34%

26%

27%

36-45

32%

34%

33%

30%

46-55

24%

23%

22%

26%

56-65

12%

7%

14%

15%

>65

3%

2%

5%

2%

Educational level High-school

27%

19%

30%

34%

University

48%

39%

54%

50%

Master

25%

42%

16%

16%

Income level <15,000

9%

7%

12%

10%

15,000-30,000

41%

37%

39%

46%

30,000-50,000

28%

22%

26%

36%

50,000-100,000

19%

28%

21%

8%

>100,000

3%

6%

2%

0%

Type Individual

68%

42%

77%

88%

Professional

32%

58%

23%

12%

Table 5: Significance between demographic and socioeconomic profile of clusters.

Gender

HP-MP

HP-LP

MP-LP

0.938

0.059*

0.072*

Age

0.032*

0.057*

0.774

Educational level

0.010*

0.000*

0.056*

Income level

0.041*

0.000*

0.115*

Type

0.000*

0.000*

0.032*

Average

HP

MP

LP

n = 345

n = 118

n = 115

n = 112

this profile) are correlated with high risk tolerance. More specifically, Hira et al. (2007) have found that both low age and high income increase risk tolerance. Similarly, Cicchetti and Dubin (1994) and Grable et al. (2004) have found that people with a high income level have higher risk tolerance than people with lower incomes. Moreover, Grable and Lytton (1998) suggest that greater levels of attained education are associated with increased risk tolerance. High risk tolerance can also be explained by the large number of professionals included in this profile. There are studies that show a positive relation between risk taking and experience (Hong et al., 2000; Lamont, 2002).

Also, there is evidence in the literature suggesting that high overconfidence is associated with high risk tolerance and, more specifically, some research studies conclude that overconfident investors underestimate risk taking (Barber and Odean, 2001a; Wang, 2001; Chuang and Lee, 2006). Additionally, a statistically significant positive relationship has been found between overconfidence and risky assets, which is similar to other studies (Benos, 1998; Odean, 1998; Wang, 2001). Moreover, self-monitoring (mean 11.52) and social influence (mean 16.05) are significantly higher in the high profile investors’ group compared with investors from the other two groups.

*Significant differences at p < 0.005.

4.1.2. Moderate profile investors

Table 6: Basic trading pattern of clusters.

Portfolio value

Mean

Mean

Mean

Mean

69.411

111.136

62.211

32.845

Stock volume

8.916

13.542

6.599

6.421

Stock returns

14.08

20.86

11.30

9.81

Profitable stock transactions

55.77

60.25

54.33

52.53

logical biases and personality traits (overconfidence, risk tolerance, social influence, and self-monitoring) compared to the individual investors. As Chen et al. (2004) have found, experienced investors are more prone to overreact due to behavioural biases. Furthermore, Griffin and Tversky (1992) have documented evidence that experts are more overconfident than non-experts.

Moderate profile investors are significantly older (41% of them are above 45 years old) and have a significantly lower educational level (only 16% hold a Master degree) and lower income (only 23% earn more than 50,000 euros annually) than high profile investors (Table 4). However, there is no statistically significant difference between moderate and low profile investors (as far as age, education and income level are concerned). This group has a moderate profile, as far as the psychological biases and personality traits are concerned, which means that their levels of overconfidence (mean 24.87), risk tolerance (mean 26.03), self-monitoring (mean 10.85) and social influence (12.02) range between the high and low profile investors’ level of means (Table 2).

4.1.3. Low profile investors In addition, these investors also have higher risk tolerance (mean 31.61) than investors in any other group. This can be explained by the fact that low age, high income and high educational level (which characterize investors who belong to

18 • Investors’ trading activity: A behavioural perspective and empirical results

The group of low profile investors includes a significantly lower percentage of men than the high profile investors. Further, they are significantly older (43% of them are above 45 years old) and have a significantly lower educational level

(only 16% hold a Master degree) and a significantly lower income than the investors included in the high profile group.

In addition, this group of investors mainly consists of individual investors (88%) in contrast to the high profile investors’ group where 58% are professionals. The major characteristic of this group of investors is the low score on all the psychological biases and traits, which characterizes investors who are included in this group. Low profile investors have a low score on overconfidence (mean 19.52), which may be due to their small investment experience. Glaser and Weber (2005) have found that individuals’ degree of overconfidence is significantly lower than the respective degree of professionals.

Furthermore, Griffin and Tversky (1992) have found that non-experts are less overconfident than experts.

4.2. Trading behaviour Table 6 presents the trading characteristics of the 3 profiles.

In detail, the respondents reported that their average port­ folio value is about 70,000 euros while each stock transaction is about 9000 euros. Regarding their stock performance, they claim that their average stock return is about 14%, while their profitable stock transactions are about 56% of the total number of transactions.

Moreover, the respondents were asked to describe their portfolio allocation (Table 6). The results have shown that, on average, 55% of their portfolio is invested in stocks, 24% in saving accounts and the remaining 21% in mutual funds, bonds and other investment products. It is interesting to see that these people mainly invest in ASE 20 (blue chips), 53% of their stock portfolio, while the remaining 47% is invested in stocks of firms with medium or small capitalisation.

Another finding worth mentioning is that 42% of the respondents admitted that they insist on buying some specific stocks despite their consistently bad performance. It is not surprising, therefore, that it is found that the majority (61%) of investors do not have a clear investment policy when they buy stocks. Only 20% of the participants follow a stop loss policy, 17% prefer a max profit policy and 16% adopt a target price policy.

In addition, the respondents were asked to define the major factor that significantly influences their investment decisions. They reported that the most important factors are the negative climate in the Athens Stock Exchange (21%), the

stock prospects (15%) and various personal/psychological reasons (10%). Additionally, the respondents were asked to define the information sources they use during their decision-making process. The findings reveal that newspapers, TV news, and fundamental and technical analyses are the most important information sources (Table 8). As it is probably expected, investors with different profiles differ as far as their attitude towards stock trading is concerned. Table 8 summarizes the findings for the three before indicated groups in detail.

5. Summary and conclusions Based on the evidence provided by the literature it becomes apparent that investors’ stock trading behaviour (including stock performance, stock volume and stock frequency) is affected by personality traits and psychological biases overconfidence, risk tolerance, self-monitoring, social influence).

However, it should be stressed that each of these psychological biases affect in a different way each of the three dimensions of trading behaviour examined in this study.

The main concern, therefore, is that one should look at the relationships between trading behaviour dimensions and the various psychological biases at an one-to-one basis in order to be able to come up with a meaningful conclusion concerning the overall effect at these biases on trading behaviour.

In this study, cluster analysis identified three investor profiles, the low, moderate and high investor profiles, with each one of them exhibiting different trading behaviour. The results of the analysis show that the higher the investors’ profile, the higher the performance of these investors on stock trading. Unfortunately, one may assume that the characteristics of high profile investors lead to a winning strategy in stock markets. In this research, high profile investors are those scoring high levels on the psychological biases and personality traits examined. Specifically, they are overconfident and risk-tolerant investors with, also, a high degree of social influence and self-monitoring, who have better performance than investors from other profiles. Thus, these investors own high-value portfolios, trade high volumes of stocks and make transactions more frequently compared with investors from the other profiles. Therefore, high trading frequency and high stock volume do not negatively affect investment performance but may lead, under specific conditions, to a better performance. Also, high risk taking and high overconfidence seem to influence stock returns positively (high profile investors’

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High scores on psychological biases and personality traits are associated with high scores on aspects of trading behaviour.

Table 8: Other trading characteristic of clusters.

Average

HP

MP

LP

n = 345

n = 118

n = 115

n = 112

Investment experience <5 years

17%

10%

17%

24%

5-10 years

34%

20%

36%

46%

>10 years

49%

70%

47%

30%

Check stock prices Daily

62%

86%

61%

37%

Weekly

17%

7%

21%

25%

Fortnightly

2%

1%

2%

3%

Monthly

10%

5%

8%

17%

Quarterly

9%

1%

8%

18%

Frequency of stock transact.

Daily

12%

21%

10%

4%

Weekly

8%

11%

8%

5%

Fortnightly

7%

12%

8%

2%

Monthly

18%

25%

15%

14%

Quarterly

14%

15%

17%

11%

Semi-annually

41%

16%

42%

64%

Investment horizon Long term

56%

48%

62%

58%

Medium term

31%

37%

29%

26%

Short term

13%

15%

9%

16%

Portfolio allocation Saving accounts

24%

26%

24%

24%

Mutual funds

12%

10%

10%

17%

Bonds

6%

4%

7%

6%

Stocks

55%

55%

56%

52%

Other investments

3%

5%

3%

1%

54%

52%

57%

51%

Stock indexes ASE 20 ASE 40

22%

24%

18%

24%

ASE 80

12%

13%

13%

10%

Other

12%

11%

12%

15%

Insistence in stocks with bad performance

42%

46%

52%

30%

Investment policy* Stop loss

20%

19%

18%

23%

Max profit

17%

19%

23%

10%

Target price

16%

25%

17%

4%

Wait and see

61%

60%

53%

70%

Investment information* TV news

37%

40%

37%

36%

Newspaper

40%

42%

33%

44%

Balance sheet

34%

54%

39%

14%

Fundamental analysis and technical analysis 36%

64%

38%

14%

Financial announcements

34%

42%

39%

24%

Internet

28%

40%

28%

18%

Financial analysts

19%

19%

19%

20%

Friends

12%

6%

9%

20%

Relatives

4%

1%

4%

8%

Roumors

12%

9%

11%

15%

Investment decision making Athens Stock Exchange

30%

28%

30%

35%

Stock prospects

19%

15%

32%

15%

Personal/psychological reasons

18%

24%

4%

12%

Returns

14%

15%

13%

15%

International stock exchanges

10%

13%

13%

6%

Liquidity

9%

5%

8%

17%

* The respondents can choose more than one answer.

results). Furthermore, high profile investors, among other sources of investment information, emphasise the information provided by fundamental and technical analyses and, generally, financial statements. Some other characteristics of investors in this profile are the target price investment policy they adopt and their large investment experience.

High profile investors’ trading behaviour may be explained by the large proportion of professional investors (Shapira and Venezia, 2001; Sharma, 2006) who are included in this group, but also by their high degree of overconfidence, risk tolerance and self-monitoring (Wang, 2001; Biais et al., 2005; Dorn and Huberman, 2005; Durand et al., 2008; Grinblatt and Keloharju, 2009). On the other hand, low profile investors underperform in stock markets, trade rarely and their major characteristics, compared with the investors in other groups, are their low scores on psychological biases, personality traits and investment experience. Additionally, moderate profile investors’ level of psychological biases, personality traits and trading performance is somewhere between the high profile and low profile levels.

This is an exploratory study to be used as a starting point for the understanding of the characteristics (overconfidence, risk tolerance, social influence, self-monitoring) of investors (including both individuals and professionals) and their trading behaviour. The results show that high scores on psychological biases and personality traits (thus overconfidence, risk tolerance, social influence and self-monitoring) are associated with high scores on aspects of trading behaviour such as trading performance, trading frequency and trading volume. This study may provide investment advisors with a framework to understand clients’ attitude and thus allow advisors to give better advice to their clients depending on each client’s profile. Finally, this study also offers insights into investors, as they can understand the trading behaviour of each investor’s profile and compare it with their own investment characteristics, their trading behaviour and their performance. Ultimately, it will provide a framework that will help investors understand how biases and traits affect investment decisions and thus they may be able to become aware of and overcome them.

Notes For the reference list see the full article ‘Investors’ trading activity: A behavioural perspective and empirical results’ of Dimitrios Kourtidis, Željko Ševic´ , Prodromos Chatzoglou.

20 • Investors’ trading activity: A behavioural perspective and empirical results

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A behavioural finance model of exchange rate expectations within a stockflow consistent framework Marc Lavoie and Gauthier Daigle1 University of Ottawa

1. Introduction

2. A stock-flow consistent framework

Since the collapse of the Bretton Woods system in the early 1970s, economists have produced a vast pool of theories and models devoted to explaining exchange rate fluctuations.

However, these models have been shown to perform very poorly in out-of-sample empirical studies (Cheung et al., 2005). This suggests that they are either invalid or at the very least incomplete. Furthermore, as is the case with most areas of economic research, foreign exchange markets have been modelled as stand-alone processes rather than being modelled as part of a complete, self-contained, economic system. This limits the policy relevance of these models and often relegates them to being simple forecasting tools.

Instead we will introduce expectations of future exchange rate movements in the Godley and Lavoie (2007) stock-flow consistent flexible exchange rate model by adding elements of behavioural finance a promising approach to modelling exchange rates. The single most important contribution made by behavioural finance is the development of an alternative to the rational agent paradigm, rational expectations and the market efficiency hypothesis.

The stock-flow consistent framework used in this paper is informed by the belief that economic models ought to be comprehensive and fully coherent. To do this, stock-flow consistent models are constructed from a series of transaction flow and balance sheet matrices, as well as a revaluation matrix. The transaction flow matrices describe national income and product accounts as well as the value of the changes in stock variables between the beginning and end of a given period. For each sector they involve the equivalent of a budget constraint. The balance sheet matrices measure the levels of all stock variables at a given point in time. The revaluation matrix tracks capital gains. The relationships between these matrices are described by a series of equations and accounting identities that ensure that the model is fully consistent, thus imposing a kind of discipline to the researcher.

The model used in the rest of this paper is presented in chapter 12 of Godley and Lavoie (2007). We shall say more however about portfolio choice and the equations that describe international trade, starting now with the portfolio equations.

First it should be pointed out that the Godley and Lavoie (2007) model already has exchange rate expectations built into its structure. It was decided, however, as a preliminary step, to set all expectations about exchange rate changes to 0.

This is tantamount to assuming that expectations about the probability of appreciation and of depreciation are balanced, which means that the expectation of the future change in the exchange rate is 0. This assumption will serve as a base case for the experiments that will follow in later sections. The balance

Godley and Lavoie (2007, p. 489) have claimed that flexible exchange rates in their model turn out to stabilize external disequilibria ‘as long as speculative capital markets are not taken into consideration’. The present paper investigates the impact of exchange rate expectations on an open-economy stock-flow consistent model, and in particular it will investigate the impact of speculative behaviour.

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sheet of the two economies appearing in the model is shown here in table 1. All assets in a given economy are denominated in the domestic currency. Both central banks issue money and hold bills issued by their own governments (and), and both central banks are presumed to hold gold (or£ and or$) as foreign exchange reserves, but only the UK central bank holds foreign currency in the form of securities issued by the foreign government. Because the model contains three assets and two countries (branded as the USA and the UK), there are six equations governing how households or their representatives choose to allocate their wealth between the different asset types, namely domestic bills, foreign bills and domestic currency. The first three equations define the behaviour of economic agents (households) located in the UK (with the £ sign), while the last three equations concern households located in the USA (with the $ sign):

B££d stands for the demand for UK bills in the UK, B$£d is the demand for US bills in the UK, H£d is the demand for UK currency; all these demands for assets are denominated in the UK currency, i.e. in the currency where the asset is held, which explains why the exchange rate does not enter in the portfolio equations; B$$d is the demand for US bills in the USA, B£$d is the demand for UK bills in the USA, H$d is the demand for US currency, this time all expressed in the US currency; V£ is wealth in the UK, V$ is wealth in the USA, r£ is the interest rate in the UK, r$ is the interest rate in the USA and dxre$ and dxre£ stand for the expectations of the market regarding future changes in the US and UK currencies, respectively, expressed in percentage terms.

22 • A behavioural finance model of exchange rate expectations within a stock-flow consistent framework

Equations (1) and (2) describe explicitly the behaviour of UK households, while equation (3) insures, as is usual in such a theoretical framework, that the lambda parameters respect Tobin’s adding-up conditions, so that the shares of the assets held in the UK sum to one whatever change occurs to the variables. Equation (6) fulfils the same role in the case of the USA. As said earlier, both dxre$ and dxre£ are set to 0 in Godley and Lavoie (2007) and in our base case. We now move on to explain how aspects of behavioural finance can be appended to the model.

3. Chartists and conventionalists In order to model the way in which agents form expectations on future exchange rate movements, we slightly modify the simple model presented in De Grauwe and Grimaldi (2006, ch. 2). They define two types of economic agents that use simple forecasting rules to form expectations about exchange rate movements, which they call the fundamentalists and the chartists. Agents of the first type—the fundamentalists— always trade in a manner that will put pressure on the exchange rate to go back to some exogenously defined fundamental rate. Because we do not really believe that it is possible for traders to identify a fundamental value of the exchange rate even if there exists one when exchange rate expectations are neutralized, we will instead call this first group the conventionalists, because we shall assume that they stick to some exogenously given convention of the long-run exchange rate value, in the belief that the short-run expected exchange rate will tend to move towards this value. Conventionalist trader expectations are therefore defined as

where dxr£,fe,t is the conventionalist trader’s expected change in the dollar per pound exchange rate at time t, ψ is a parameter that can be interpreted as a proxy for the expected speed

of convergence towards the long-run value of the exchange rate, xr£t-1 is the dollar per pound exchange rate at time t -1 and xr£* is the exogenously determined expected value of the exchange rate in the long run (what De Grauwe and Grimaldi call the fundamental rate/conventional value).

Traders of the second type—the chartists—always expect the latest change in the exchange rate to be repeated in the next period. This behaviour is related to an anchoring heuristic, often identified and described in experimental economics. In finance, this anchoring heuristic ‘leads people to predict that short-term trends in the market will continue and to underrate the prospects of a major reversal’ (Cassidy, 2009, p. 196).

These traders can be interpreted as being trend-following speculators who continuously push the price up after an initial price increase and continuously push the price down after an initial price decrease. This being said, the chartist exchange rate expectations are assumed to be formed by the following equation:

where dxr£,ce,t is the chartist trader’s expected change in the dollar per pound exchange rate at time t, ß is a parameter governing the magnitude of the autoregressive process and is the change in the dollar per pound exchange rate at time t -1.

Market expectations about future exchange rate movements are simply a weighted average of both types of traders who make up the speculative segment of the foreign exchange market. We thus get the following equation for market expectations of future exchange rate movements:

where dxr£e,t is the market’s expected change in the dollar per pound exchange rate at time t,wc is the proportion of chartists in the speculative segment of the foreign exchange market and is the proportion of conventionalists in the speculative segment of the foreign exchange market.

The first thing to notice in the equation above is that chartists and conventionalists will not necessarily expect the currency to move in opposite directions. If the exchange rate is moving upwards but is still below the conventional rate, both types of traders will expect the exchange rate to increase.

However, if the exchange rate is moving upwards and is already above the fundamental rate, whether or not the market expectation of future exchange rate movements is positive or negative will depend on the size of the last upward

move and on the distance of the exchange rate from the fundamental value, for a given set of ß, ψ, wc and wf parameters.

As the exchange rate moves further and further away from its conventional value, the magnitude of the conventionalist’s expectation increases relative to that of the market as a whole until the movement in the exchange rate reverses.

Because adding exchange rate fluctuation expectations to the six equations describing wealth allocation decisions creates more of a tendency to shift bill demands from one country to another, some of the parameters in the portfolio equations of Godley and Lavoie (2007) had to be modified in order to get convergence in our simulations.

These changes make speculators less responsive to changes in returns abroad and therefore much less likely to shift their bill holdings wildly. The changes give the model additional stability properties when speculator expectations are modelled, without taking too much away from the realism of the model.

4. Further relevant features of the stock-flow consistent model Before we move on to the simulations, a few relevant features of the stock-flow consistent model are worth discussing.

First it should be noted that the dollar per pound exchange rate is determined by the supply and demand for US bills abroad:

where xr£ is the dollar per pound exchange rate, B$£s is the supply of US bills to the UK and B$£d is the demand for US bills in the UK. Because our simulations will involve a modification of the propensity to import, it may be worth checking the equations that govern trade flows in the Godley and Lavoie (2007) model. Exports and imports are determined in the standard manner, being dependent on relative prices and on foreign and domestic income, respectively:

and

where x£ are UK exports, im£ are UK imports, P$m are US import prices, are UK import prices, P$y are US domestic

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prices, P£y are UK domestic prices, while y$ and y£ are US and UK output. The parameters are price and income elasticities.

Of course, since the model contains only two economies, UK exports equal US imports, and vice versa:

rium, which constitutes the baseline case by opposition to the baseline simulation that we are conducting. In the baseline case, the trade account, the current account and the capital account are all balanced and the exchange rate has reached a constant level, here equal to unity.

and

Similarly, the import prices in the USA are the export prices in the UK,

And

These equations clearly show the link between trade flows and the exchange rate. One may wonder however how the trade prices on the right-hand side are themselves determined. We assume that they vary as a function of domestic prices in both countries as well as the exchange rate, so that:

We begin our experiments with a baseline simulation where economic agents expect future currency prices to remain where they are. In other words, expectations of exchange rate changes are set to 0. The results of this baseline experiment are presented in figure 1.

and

6. Exchange rate expectations with v1 > v1 since it is a well-established empirical fact that, following depreciation, there is some deterioration in the terms of trade, implying that import prices rise faster than export prices.

It is often assumed that the sum of the elasticities with respect to relative prices found in equations (11) and (12) must sum to at least one (e1+μ1 ≥ 1) if the trade balance is to improve following devaluation. This is the well-known Marshall–Lerner condition.

5. Baseline simulation To study the role of expectations on the exchange rate we could modify any of the parameters or exogenous variable of the model, such as interest rates or discretionary government expenditures. As an illustration, we choose to raise the propensity to import of the US economy. In order to do so, we increase the e0 parameter in equation (11) that governs UK exports (and hence US imports) from -2.1 to -2. As is standard in such simulation work, we start off from a full equilib-

24 • A behavioural finance model of exchange rate expectations within a stock-flow consistent framework

Having analysed the baseline case, we can now introduce expectations about exchange rate changes, as defined in equation (9), and see how the extended model reacts to an increase in the propensity to import of the US economy. In so doing, we set the xr£* variable—what conventionalist investors consider to be the ‘fundamental’ value of the UK currency—equal to 1. This is the starting long-run equilibrium value of the exchange rate in the baseline case. In other words, portfolio holders believe that any change in currency prices is of a transitional nature. Or they believe that the monetary authorities are likely to take some counter-measures that will bring the exchange rate back to its initial value.

Once again, we shock the model by increasing the parameter in the equation governing UK exports from -2.1 to -2. The results are presented in figure 2.

The first thing to notice is that the general picture that arises from the shock to the propensity to import in the model with exchange rate expectations is broadly similar to the baseline case. Once again, the UK trade balance (the broken line in figure 2) becomes positive in the short run and negative in

the long run, while once again the UK exchange rate (the continuous line) keeps appreciating, apparently converging towards a steady level. Market expectations about the exchange rate (the line with the smaller dots) keep diverging from the actual rate, as conventionalists still believe that the initial steady-state value constitutes a fundamental given of the economic system. A careful examination of figure 2 reveals that the actual exchange rate in the model with exchange rate expectations shows some volatility, more visible in the early stages of the shock.

revisions of the estimates of the conventional exchange rate ought to drive the economy towards the steady-state exchange rate achieved without expectations.

The conventionalists' opinion has an impact on

the actual long-run value of the exchange rate.

Indeed, when the exchange rate expectations of the conventionalist traders correspond to the steady-state value of the model without expectations, this steady-state value is also realized in the model with expectations.

7. Destabilizing exchange rate expectations An examination of the steady-state values reached through the simulations highlights the role played by the exchange rate expectations of the conventionalists. Their opinion about the ‘fundamental’ value of the exchange rate does have an impact on the actual long-run value of the exchange rate, which converges to 1.55 with long-run exchange rate expectations set at xr£* = 1, whereas the same change without expectations had led to a steady-state exchange rate equal to 1.38 in the previous simulation. As a consequence, there is also a discrepancy in the amount of net exports reached in the steady states with and without exchange rate expectations.

Incidentally, if expectations about the long-run exchange rate value is instead xr£* = 1.55, then the steady-state exchange rate turns out to be 1.32. Thus, when the long-run value of the exchange rate is being underestimated, the economy tends towards a steady-state value of the exchange rate that is above its long-run value without expectations; and reciprocally, when the long-run value of the exchange rate is being overestimated, the economy converges towards a steady-state value of the exchange rate that is below its longrun value without expectations. Thus in this case, adaptive

What happens if chartists represent a greater proportion of exchange rate traders and investors? In the previous simulation, we assumed that chartists and conventionalists had an equal impact on exchange rate expectations, implying that the two main parameters in equation (9) were such that wc= wf = 0.5. We now redo the same experiment, but on the assumption that chartists dominate on exchange rate markets, with wc = 0.7 and wf = 0.3.

Figure 3 illustrates what occurs when, once more, the US propensity to import is hiked up in the model. The cyclical behaviour of the exchange rate, which in the early years looks rather tamed, is driven to movements of ever greater amplitude and hence there is no convergence. These cyclical movements also generate cyclical movements in the trade account, which in turn amplify the cyclical movements of the exchange rate. Interestingly, we verified through another simulation that whether or not conventionalist traders use the right long-run value of the exchange rate makes no difference whatsoever. In other words, the ‘fundamental’ value of the exchange rate, as assessed by the conventionalists, has no impact on whether or not the model dominated by chartists generates non-converging cycles. Once the chartists become dominant on exchange rate markets, the model

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A behavioural finance model of exchange rate expectations within a stock-flow consistent framework • 25

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becomes unstable. Indeed, the instability and the speed at which the model broke down were even greater when conventionalists responded to the shock by using the right new long-run exchange rate value—the steady-state exchange rate that would have been achieved in the model without expectations—than when they were underestimating the new conventional exchange rate value.

To understand the cyclical behaviour of the exchange rate, one has to remember that the portfolio demand for assets depends on the expected change in the exchange rate, given by , and not on the level of the exchange rate. Following the increase in the US propensity to import goods and services, the exchange rate of the pound tends to rise. This, as explained earlier, is due to the larger amount of US dollars supplied to UK investors. As the exchange rate rises, the demand for UK assets arising from traders and investors that stick to the starting exchange rate value tends to fall, or seen from another angle, the demand for US assets tends to rise, partially compensating for the rise in the supply of US assets.

This is because, as the UK exchange rate rises, it is getting ever further away from the rate expected by conventionalist traders who still see a one to one exchange rate as the norm.

They thus expect a negative change in the UK exchange rate.

This negative change gets ever larger in absolute terms as long as the exchange rate keeps rising.

Chartists have an opposite view. Their expected change in the UK exchange rate depends on the realized change of the previous period. So their expected change is in fact the first derivative of the realized exchange rate of the previous period, which, as can be inferred from figure 1 without expectations, tends to decrease on its own. Thus, as the UK exchange rate keeps rising, chartists think that the next change will be positive, but the expected change gets ever

26 • A behavioural finance model of exchange rate expectations within a stock-flow consistent framework

smaller, because, as shown in figure 1, the past realized change gets ever smaller. Thus, whether we consider chartists or conventionalists, we can say that the expected change in the UK exchange rate is getting ever smaller, meaning that, if still positive it is moving towards zero, and if negative its negative value is becoming more negative. As a result, the demand for UK assets is falling over time, as the demand for UK assets depends positively on the expected change in the UK exchange rate.

If chartists dominate, the demand for UK assets will be falling very quickly, so quickly that the UK exchange rate, otherwise pushed up by the surplus UK trade balance, will now be

Capital account flows led by trend-following investors may destabilize exchange rates. pulled down by the fall in the expected change of the UK exchange rate, i.e. by the fall in the demand for UK portfolio assets. The behaviour of speculators, through the capital account, will overturn the initial rise in the UK exchange rate. What happens is that the increase in the supply of US assets, which is supposed to push up the UK exchange rate, is being eventually overcome by the speed of the reversal in the demand for assets, more specifically the reduction in the demand for UK assets and the increase in the demand for US assets. The cyclical behaviour arises from the fact that the destabilizing effects of asset demand overtake the stabilizing effects arising from the supply of assets. Naturally, all these effects get into reverse gear once the UK exchange rate has gone down for a while. There is thus some legitimacy in claiming that capital account flows led by trend-following investors may destabilize exchange rates.

8. Path dependence?

In this section we show with the help of simulations that the Godley and Lavoie (2007) open-economy model with a flexible exchange rate exhibits persistence properties, but no hysteretic properties. We ran two sets of simulations, with and without exchange rate expectations, where we first

impose an increase in the US propensity to import, only to bring it back to its initial value after 90 periods. We also assumed, as in our very first simulation, that the conventionalist investors believe that the exchange rate is to return to its initial steady-state value, equal to unity. In both simulations, the exchange rate eventually returns to its starting value, equal to one, while the UK trade account returns to zero. Figure 4, in which the simulation period has been tripled compared with that of baseline simulations, illustrates the experiment that incorporates exchange rate expectations, thus showing that the introduction of exchange rate expectations does not modify the long-run behaviour of the model. We can thus conclude that there is no hysteretic effect in the Godley and Lavoie (2007) flexible exchange rate model, with or without exchange rate expectations.

However, we can certainly infer from these two simulations that there is persistence. After 200 periods, in the simulation without exchange rate expectations, the exchange rate and the trade account are still 3 per cent and 9 per cent off their respective long-run values. With exchange rate expectations, still after 200 periods, the simulations reveal that the exchange rate is higher than its initial level by approximately 9 per cent while the trade account is lower than its initial level by approximately 23 per cent. Thus, with exchange rate expectations, although the model converges back to its longrun equilibrium value, it does so much more slowly than in the model without expectations. Indeed, in the simulations, the model with exchange rate expectations took twice as many periods to reach a steady state compared with the model without expectations. One may thus argue that exchange rate expectations that incorporate the behaviour of chartists introduce a dose of persistence into the economy.

9. Concluding remarks After running numerical simulations, we find that exchange rate expectations have a significant effect on exchange rate movements and trade account balances during the traverse and in steady states. We have found that exchange rate expectations are a cause of persistence, with variables taking much more time to get to their steady-state values (in the stable configuration) than they would without the presence of expectations. We have also found that the stable configuration of the model does not exhibit hysteretic properties, i.e. the reversal of an import shock, with or without expectations, returns the economy to where it came from.

A flexible exchange rate regime where import and export elasticities with respect to relative prices are sufficiently high compared with the elasticity of terms of trade will continue to provide stabilizing properties, as long as the proportion of chartist traders is not overly large. Indeed, as long as the share of trend-following chartists is not too high, the functioning and the qualitative results of the model with expectations remain broadly similar to those of the model without expectations. This in itself is an interesting result, for it means that larger and more detailed stock-flow coherent openeconomy models without exchange rate expectations could act as a fair proxy for a complex world with uncertainty and expectations, as long as expectations are not too destabilizing.

However, if chartists—here defined as trend followers— dominate, any shock will provoke cyclical changes of ever greater magnitude, and the reversal of these shocks will not bring back the original steady state, so that we may say that there is hysteresis in the unstable configuration of expectations.

Notes The reference list and full article can be found in Metroeconomica 62:3 (2011), p.434-458.

A behavioural finance model of exchange rate expectations within a stock-flow consistent framework • 27

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fsrforum • volume 14 • issue #1

Interview Jeroen van den Bosch Authority Financial Markets

By Jeroen van Oerle and Anne van Driesum (AFM, 30-09-2011, Amsterdam)

How was the Authority Financial Markets (AFM) founded in the Netherlands?

Taking the short rout, the AFM was a follow up of the STE (Stichting toezicht effectenverkeer). The STE was developed in 1995 as a result of the WTE (Wet toezicht effectenverkeer) and had as main goal to oversee the financial markets and the trade taking place on the Dutch financial markets. Next to the STE, the DNB (De Nederlandsche Bank, Dutch central bank) had the oversight of the banking industry and was focused mainly on financial stability. In 2002 the AFM was developed as a result of more (mainly European) consumer protection in the financial industry. Supervising the financial markets alone was not enough anymore. The Netherlands chose to use the Twin Peaks model (see figure 1) to supervise financial markets. New supervision tasks were added to the supervision performed by the AFM and some existing tasks were shifted from the AFM to DNB.

Jeroen van den Bosch started out as math student at the Technical University of Eindhoven. After one year he decided that he preferred to bring mathematics in practice, hence he started a study in teaching at Fontys Hogescholen in Eindhoven. After graduating as a first degree teacher in Tilburg, sir Van den Bosch started his current career path by joining the Philips pension fund in 1994. After working himself up from actuarial staff member to manager of the actuarial division, Jeroen set up the pensions division for HR Philips Netherlands. Here, amongst others, conversations between unions and Philips take place on the topic of collective labour agreements.

Together with an Erasmus student who was doing his internship at Ortec Finance bv, Jeroen van den Bosch has developed a tool which should inform all Dutch citizens, free of charge, about their latest pension schemes and outlays. On the website www.pensioenkijker.nl the tool can be found.

Since September 1st of 2010, Jeroen has joined the AFM pensions supervision.

30 • Interview

Since intermediaries were making a lot of money based on the provisions they received instead of on their neutral services as financial expert, additional guidance was required.

Together with the DNB, the AFM is now monitoring the entire finance field in The Netherlands.

Where DNB is focusing mainly on prudential supervision (ensuring the financial stability), the AFM is focusing more on the behavioural monitoring. Figure one shows the so called twin peaks model. Both institutes are complementary in ensuring financial stability in The Netherlands. The AFM is funded by the companies they oversee as well as the government.

Figure 1: division of the pie between AFM and DNB

Both the AFM and the DNB make a clear distinction between illegal practices and harmful practices.

Illegal practices is clear enough as it is stated, but harmful practices are equally important. The focus here is not on whether certain practices are illegal but whether or not these practices do harm to the consumers. A result of focusing on behaviour and harmful practices is the ban on provisions for intermediaries as of the first of January 2013. The AFM is always trying to optimize consumer’s welfare. Since intermediaries were making a lot of money based on the provisions they received instead of on their neutral services as financial expert, additional guidance was required.

Why did it take until 2002 to found the AFM while the SEC was founded already in 1934?

It is the question of the chicken and the egg. What was present first? The abuses of practitioners which required the AFM to be founded or the founding of the AFM which exposed the abuses?

One cannot compare the SEC (Security exchange markets) in the USA to the AFM. The Netherlands is the only country which is using the before mentioned twin peaks model. Prior to the founding of the AFM, the DNB was already in place, but their focus was less on behaviour and more on prudential supervision. At that time, behaviour was of lesser relevance. Pensions have been part of the DNB monitoring portfolio, but only as of 2007 behavioural elements have been taking into account here. The AFM is now in place to monitor behavior and communication.

What is the AFM doing today?

The quality investments case (big fraud case in The Netherlands) is a typical case where the AFM is taking a lead role. In the future, we must try to prevent new companies with similar goals from operating on the market. The behaviour of quality investments has been very harmful

» Interview • 31

fsrforum • volume 14 • issue #1

Hanriëtte Prast has conducted research and came to the conclusion that individuals are eventually better off when someone is taking a larger role in controlling individual's actions.

to consumers and on top of that, it was of course also illegal. When discussing pensions, an important development in The Netherlands has been the recent pension agreement. The AFM is on top of this in the sense of communications to consumers. There is going to be a major shift in pension land as a result of the pension agreement. The bill will eventually end up with the individuals in two ways. First of all individuals have to work longer. Since our population is reaching higher ages, it is the question whether or not the system remains solvent. One way of dealing with this is to increase the pension age. However, this implies that the full bill of the new pension agreement goes to the individual employee.

Next, there is a second shift taking place in terms of financial risks for employees. The pension reserves are very dependent on the state of the financial markets. Up untill 2008 this has never been a problem. Financial markets where thriving and there was more than enough money in the pension funds in order to pay out pensions and even index those payments. It used to be the case that companies would pay extra contributions to their pension account when certain movements in the economy made it impossible for the pension funds to distribute the money to their members. After 2007/2008 the movements have been so extreme that individual companies are not able to refund their pension accounts anymore. On top of that, the population is aging. There are going to be more pensioners, relatively, to workers. This implies that the individual companies are not going to be able/willing to fully refund the pension funds in order to pay for the larger group of pensioners.

All balances need to be based on market value. Assets at market value is a phenomenon which we were used to for quite some years now, but liabilities on market values is something completely new. It used to be the case that liabilities were valued at a uniform 4% interest rate.

Today’s interest rates are much lower, which implies that the reserves on the asset site need to be much larger in order to cover the future liabilities.

Is this last part not a pure accounting technical manipulation?

That’s just how you look at it. Pension fund assets are higher than ever before at the moment, but this is not enough to finance the future liabilities given the current interest rate. For me personally, from the viewpoint of an actuary, I can only conclude that this is the best practice.

It is only fair to also value the liabilities at non arbitrary market rates.

Are we not creating fear in this way because interest rates fluctuate a lot (especially recently) which implies that the balance of pension funds and thereby their solvability changes daily?

This is indeed the case if we would take the daily rates. We could look at the valuation of liabilities on a day to day basis taking into account daily interest rate changes, but this is not optimal for the market. Indeed we have to look at the influence of daily interest rates but we do not have to (re)act on every small movement in interest rates. We have to be able to look at a longer period, keeping an eye on extreme shocks.

How are pensions and behavioural dynamics with regard to pensions developing recently?

Pension funds are becoming more and more based on individual employees. The needs of

32 • Interview

employees in their early careers are much different than the needs of employees reaching their pension age. For company pension funds it is therefore of utmost importance to look at the dynamics of the company in order to determine their investment strategy. A young ICT company will have a totally different investment strategy as compared to a governmental pension fund. As from 1994 on, there has been a change in pensions. Pensions have become much more individualistic.

Where the policies used to be based on final pay, it has shifted to average pay (some sort of average to the wage over time) in a so called collectively defined contributions (CDC). This was also the time that companies would still make contributions to the pension fund when shocks occurred.

Does the individual employee know this is happening to their pensions?

This is exactly where the AFM comes in. We must optimize the communication to employees. No employee should be penalized for the change in pension agreements. Every employee must know what risks he/she is facing today. Pension overviews that take inflation into account are one example of information to employees which needs to be realized. Currently the information to employees about their pensions is based on today’s values and is not always indexed. In order to give a better picture with regard to purchasing power in the future, the indexed information must also be provided.

The big problem is that the consumer is not interested in the information about their pension. 75% of population could be reached via campaigns, internet (pensioenkijker.nl) and education. This implies there is a group of 25% of the population who are not interested in pensions and are not triggered in any way to become interested in pensions. The AFM wants to specify on this group in order to reach this group as well.

Why does the AFM want to focus on this 25% group?

One could argue this is own responsibility.

Yes, you are correct about that. In the Dutch pension law it is stated that individuals are ultimately responsible for their own pensions. But the government has a task to guide individuals. At this point in time 75% of the Dutch citizens is fully unaware of their own pension. As said before, we can reach a group of 75% via campaigns and education, but there will always remain 25% of uninterested individuals. This is

where the AFM is investigating what behavioural finance can offer. This can be done for the reachable group as well, but we must concentrate on the small group. One could think to do this by means of specifying choices for the individual. In doing so it is important to build up personal profiles in which they take into account for instance marital situation, the number of children, the income prospects and many more factors. The information in order to build these profiles can be retrieved for a large part from the company information on that specific individual, but next to this, the pension fund can also play a role in providing information.

Big brother is watching you?

I would like to refer to this as liberal paternalism as used by Hanriëtte Prast. She has conducted research in this area and she came to the conclusion that individuals are eventually better off when someone is taking a larger role in controlling individual’s actions.

How does the AFM operate in Europe?

In Europe ESMA, EIOPA and EBA have been created as from last year (2010). ESMA is taking care of monitoring the European financial markets. EIOPA is monitoring the insurance companies and pension funds and finally EBA is monitoring the European banking sector. EBA is in that sense more related to the DNB where ESMA is related to the AFM. EIOPA is related to both DNB and the AFM. In terms of EIOPA and the AFM department of pensions, one could state that the Netherlands is a European policy setter with respect to pension funds schemes. In the Netherlands the occupational pension market and the controlling of that market is very far developed. DNB is advising the European Commission on solvability margins for pension funds and the AFM is advising on the communication of pension information to the participants. This will be a big challenge in Europe for the upcoming period.

What will be the future for the AFM? Pension communication and therefore the work of the AFM will become more and more important due to the shift of risks towards participants. Behavioural controlling can become more important in the future. If risks are shifted to the individual participant, there is lesser need for prudential controlling, but much more need for behavioural control-

» Interview • 33

fsrforum â&#x20AC;˘ volume 14 â&#x20AC;˘ issue #1

ling. It is most likely that both DNB and the AFM will get an increased controlling power in the future because the financial sector is becoming more complex and therefore the work on controlling and communication to consumers will increase.

Also the European setting will become more important to the AFM. Examples are the recent advises to the European Commission on the revision of the European Pensions Directive.

AFM is operating in a dynamic climate which implies that new insights for the future are needed as well. For that reason, recruitment and hiring from universities is always of importance to the AFM. Not only econometric students or accounting students, but also behavioural finance students are becoming more important in the work of the AFM in the future.

Figure 2: website www.pensioenkijker.nl

34 â&#x20AC;˘ Interview

“De overstap van studeren naar een vaste baan is vaak groot. Dat hoeft niet zo te zijn.”

Desiree Salentijn, assistent accountant

Onze ruimte, jouw groei Meer weten over de carrière van Desiree en haar collega’s? Of benieuwd naar onze mogelijkheden? Scan de QR. Of surf naar onze website.

www.carrierebijGT.nl

Accountancy - Belastingen - Advies

fsrforum • volume 14 • issue #1

Je kunt als bedrijf nog zoveel willen, je krijgt pas iets voor elkaar met goede mensen Company presentation KPMG

Om maar meteen met de deur in huis te vallen: wij willen nogal wat! Nummer één blijven op gebieden waarop we het al zijn en nummer één worden waar we het nog niet zijn. Dat bereik je alleen door het talent dat je in huis hebt te koesteren. En door daarnaast voortdurend op zoek te gaan naar mensen met dezelfde passie. Mensen die ambitieus en betrokken zijn en het beste uit zichzelf willen halen door heel goed samen te werken.

Nummer één blijven op gebieden waarop we het al zijn en nummer één worden waar we het nog niet zijn.

Als je de markt waarin wij opereren zou vergelijken met de eredivisie, dan is accountancy binnen KPMG zoiets als voetballen voor een topclub. KPMG behoort tot de meest prestigieuze accountants –en advieskantoren wereldwijd.

KPMG Audit Bij KPMG Audit start je als trainee en volg je naast je werk een opleiding tot registeraccountant.

Omdat je werkt in wisselende teams, voor meerdere klanten en op verschillende locaties (in binnen- en buitenland) en geen bedrijf en geen jaarrekening hetzelfde is, is het een heel dynamisch vak. Dat je continu blijft leren en alle ruimte krijgt om jezelf te blijven ontwikkelen, maakt het alleen maar extra aantrekkelijk. Naarmate je meer kennis en ervaring hebt, krijg je steeds een andere rol binnen het controleteam, met meer verantwoordelijkheden en bevoegdheden.

KPMG Advisory Onder de noemer Advisory levert KPMG adviesdiensten aan alle soorten organisaties op diverse terreinen, zoals business performance, restructuring, IT, valuations en advies bij fusies of overnames. We werken voor grote (inter)nationale ondernemingen en voor not-for-profitorganisaties, maar net zo goed voor (semi)overheidsinstellingen. En dat doen we niet zonder succes. Onze passie en ambitie, gecombineerd met kennis van zaken en sterke teams, zorgen voor eersteklas adviezen. Die ook zo worden gewaardeerd door onze opdrachtgevers. Zodat Advisory een onmisbare pijler is van de KPMG-organisatie.

Meer informatie?

Voor meer informatie kun je kijken op www.gaaan.nu. Of je neemt contact op met het KPMG Recruitment Centre via recruitment@kpmg.nl of op 020-6567162.

36 • Company presentation

Kun je jezelf kort introduceren?

Mijn naam is Romain Wigny, ik ben 25 jaar en ik werk sinds april 2011 bij KPMG Corporate Finance in het Financing team. Financing is één van de drie sub units van Corporate Finance en adviseert over alle mogelijke vraagstukken die bedrijven kunnen hebben met betrekking tot vreemd vermogen. Voorbeelden hiervan zijn projectfinancieringen, securitisaties en overnamefinancieringen. Ik heb Economie gestudeerd aan de Erasmus Universiteit in Rotterdam waar ik ook actief was als (bestuurs)lid van de Financiële Studievereniging Rotterdam. Daarnaast voetbal ik bij Antibarbari en probeer ik (nog steeds) mijn GVB te halen.

Hoe ben je gekomen op de keuze voor KPMG? Mijn eerste kennismaking met KPMG vond plaats tijdens een Advisory inhousedag in Rotterdam waar alle facetten van het werken bij KPMG Advisory aan bod kwamen. Tijdens mijn tijd bij de FSR heb ik veel bedrijven gezien, maar KPMG sprong er voor mij echt uit met name door de grote diversiteit aan werkzaamheden en de ‘klik’ die ik had met de mensen. Daarnaast is KPMG Corporate Finance marktleider in het middensegment op het gebied van mergers & acquisitions en leidend op het gebied van securitisaties en projectfinancieringen. Door mijn specifieke interesse in projectfinancieringen kwam ik na mijn afstuderen al snel bij KPMG Corporate Finance terecht en na mijn deelname aan Fast Forward Friday kreeg ik dezelfde dag nog een baan aangeboden. Tijdens Fast Forward Friday doorloop je in één dag het gehele sollicitatietraject dat bestaat uit sollicitatiegesprekken, het uitwerken van cases en uiteindelijk een gesprek met een partner. Je maakt tijdens deze dag bovendien kennis met veel toekomstige collega’s. Aan het einde van deze intensieve dag wist ik zeker dat ik bij KPMG wilde beginnen.

Hoe was je start bij KPMG? De eerste maanden kwam er best veel op me af. Hoewel ik mijn studie goed had afgerond, kwam ik al snel tot de conclusie dat je in het werkende leven van voren af aan moet beginnen en dat je vooral heel veel nog niet weet. Dat maakt het werk erg uitdagend en geen dag is tot nu toe hetzelfde geweest. Bij KPMG Corporate Finance ligt de nadruk op ’learning-on-the-job’ waardoor je direct bij klanten aan tafel zit en meedraait in opdrachten. Daarnaast investeren collega’s veel tijd in het ontwikkelen van je kennis. Je wordt goed opgevangen en begeleid en er zijn ­verschillende mogelijkheden voor het volgen van opleidingen en cursussen.

Wat waren je verwachtingen van KPMG en voldeed KPMG aan je verwachtingen?

Ik verwachtte bij KPMG vooral veel te leren, veel te zien bij klanten en samen te werken met jonge, ambitieuze mensen. Tot nu toe voldoet KPMG zeker aan mijn verwachtingen. De diverse klantportefeuille, de uitdagende projecten en met name de leuke collega’s maken voor mij echt het verschil.

Welke tips kun je tenslotte geven aan Accountancy / Finance studenten?

Binnen zowel accountancy als finance zijn er ontzettend veel leuke banen te vinden. Ik heb daar goed de tijd voor genomen, een keuze maken was voor mij dan ook een intensief proces.

Zorg er dus voor dat je gebruik maakt van alle mogelijkheden die de FSR je biedt voor een goede oriëntatie op de arbeidsmarkt.

Company presentation • 37

fsrforum • volume 14 • issue #1

Nominale waarde is geen waarde

K(r)anttekening | Drs. Joost Groeneveld RA RV1

Europa is groot gegroeid. Misschien wel te groot. In ieder geval kost het moeite – en bergen geld - om de zaak bij elkaar te houden. Het is de vraag of dat lukt. Wie heeft schuld? Dat is in dit verband een tamelijk dubbelzinnige vraag. Griekenland rijdt als grote boosdoener voorop. Op enige afstand gevolgd door een groepje waarin Italië aardig meedoet. ING verkoopt vandaag ( 21 september 2011) voor e 2,5 mrd aan Italiaanse staatsobligaties. Zou die e 2,5 mrd de marktwaarde zijn? Vast niet: de rente is vandaag weer verder opgelopen. Die e 2,5 mrd zal wel de nominale waarde zijn die voor heel veel minder geld is verkocht. Een verlies om naar verwachting een groter verlies te voorkomen. ING heeft er niet meer zoveel vertrouwen in?

Van Italië worden bezuinigingen verwacht. Maar nadat profvoetballers met een staking dreigden, heeft Berlusconi – die met Milan-voetballer Pato als de geliefde van zijn dochter Barbara hiervoor misschien extra gevoelig is - zijn extrabelasting voor de rijken geschrapt. Zo gaat dat in Italië. Wel is de BTW daar een paar weken geleden met een procentpunt verhoogd tot 21%. Dat helpt niet echt om een economie te laten groeien.

Drs. Joost G. Groeneveld RA RV is directeur van Wingman Business Valuators B.V. te Breda en voorzitter van de Stichting WBO (register van business valuators).

Hij was hoofddocent aan de Economische Faculteit van de Erasmus Universiteit te Rotterdam.

Italië viert dit jaar dat het 150 jaar één land is. In staatkundige zin is dat ook zo, zij het dat de datum tamelijk willekeurig is gekozen. In bijna alle andere opzichten zijn de verschillen groot. Zelfs de speelkaarten zijn in het Zuiden (Napoletane) anders dan in het Noorden (Piacentine). Bij de staatkundige eenwording heeft het Zuiden een onevenredig zware schatting moeten betalen. Dat heeft zeker bijgedragen tot de bestaande tweedeling van het schiereiland tussen Noord en Zuid. Maar het waren ook vooraf verschillende landen.

Het Zuiden heeft het in economisch opzicht niet gemakkelijk.

Daar ontwikkelt zich buiten het zicht van de fiscale autoriteiten een informele economie die bijna vanzelfsprekend ten koste gaat van de formele economie. Lonen worden contant betaald en zijn vaak zo laag dat er werkelijk geen belasting van af kan. Rekeningen worden vaak contant voldaan. En natuurlijk is er ruilhandel. Dat is niet een economie die je een beetje kunt aandraaien als de financiële staatsnood aan de man komt. Of je door het tarief te verhogen daar echt meer BTW int, is de vraag.

Dààr groeit de informele economie. In òns land zie je een

38 • Nominale waarde is geen waarde

tegengestelde beweging. Steeds meer betaalde arbeid. Informaliteit wordt ontmoedigd. Ouders moeten liefst een betaalde baan nemen en de eigen niet-betaalde zorg voor hun kinderen aan anderen toevertrouwen die daarvoor dan wel worden betaald. Dat zal wel goed zijn voor ons Nationaal Inkomen. Niet-betaalde vrijwilligers zoals leesmoeders (een voorbeeld van minister de Jager op Prinsjesdag 2011) kunnen door hun organisatie worden gestimuleerd met een gespreide betaling tot een maximum van e 1.500 per jaar. Ook in Nederland zal zwart geld in omloop zijn, maar onze economie is in hoge mate gedetermineerd.

Vergelijk Zuid-Europa met zijn informele economie eens met Noord-Europa en zijn formele economie, en je ziet de twee polen van de Europese Economische Gemeenschap die de EU in feite is. Natuurlijk treedt daartussen spanning op.

Even natuurlijk zijn Noord-Europese maatregelen niet passend voor het Zuiden. Die gedachte dat wij in het Noorden wel weten hoe het moet, getuigt van hoogmoed. Als dat waar was, zou het zover niet zijn gekomen.

Ik herinner me dat de EU richting het voormalige Oostblok werd uitgebreid. Bij die gelegenheid is opgemerkt dat het geld dat voortaan naar het oosten moest niet meer naar het zuiden kon. Hebben we Zuid-Europa toen al in de steek gelaten?

Of hebben we met Oost-Europa onze hand overspeeld? Het lijkt toch echt te eenvoudig dat we die hand dan nu in onschuld wassen.

Griekenland heeft de Euro. Dat is ten minste net zo goed de verdienste, respectievelijk de schuld van de andere landen als van Griekenland zelf. Ze wilden denk ik wel heel graag dat zoveel mogelijk landen daarin meededen. Wanneer naar analogie de ene onderneming een andere onderneming overneemt, heeft de andere een informatieplicht en de ene een onderzoeksplicht. Heeft de rest van Europa toen haar onderzoeksplicht wel voldoende vervuld? En er zijn leningen ­verstrekt. De geldgever hoort zich een oordeel te vormen over de kredietwaardigheid van de geldontvanger. Nee, de schuld ligt echt niet alleen bij Griekenland, respectievelijk de Zuidrand van Europa.

De bankencrisis heeft als oorzaak dat het risico van leningen destijds niet goed is ingeprijsd. Het marginale nut van de beschikbare hoeveelheid geld leidde tot lage rentes (op dit

moment geeft de Rabobank een negatieve rente). En dan neem je voor een wat betere rente vaak graag wat risico onder het motto “beter iets dan niets”. Ja, tot het mis gaat. Dat moest mis gaan. Risico verdwijnt niet door er geen rekening mee te houden. Dat is met IJsland gebeurd.

Voor een procentje meer een te groot risico nemen. Hetzelfde nu in Griekenland.

Nee de schuld ligt echt niet alleen bij Griekenland, respectievelijk de Zuidrand van Europa.

Het is niet een kwestie van alleen een paar controleurs. Het is ook niet een kwestie van even wat belastingverhoging. Het is zelfs niet een kwestie van een flinke bezuiniging. Het zal allemaal gepaard moeten gaan met sociale reorganisatie. Daar kun je niet op wachten. Je kunt die ook niet afdwingen door zoals nu voor Griekenland strakke voorwaarden te stellen aan de verstrekking op korte termijn van nog eens e 8 mrd. In een benarde economie groeit onder die druk de informaliteit alleen maar sterker. Zelfs zwart geld verliest dan aan waarde.

Er zitten euro’s in Zuid Europa. ING probeert een deel daarvan terug te halen. Dat mag wat kosten. Ik weet niet hoeveel euro’s in Zuid Europa in omloop zijn. Maar als iedereen zijn deel terughaalt, zal er niet veel overblijven. Misschien is dat wel een efficiënte manier om ter plaatse de introductie van noodgeld af te dwingen: drachmen, peseta’s en lire. Tenminste voor zover daar het geld nog rolt. Veel zal inmiddels neerkomen op ruilhandel. Euro’s zijn al buiten het land gebracht.

Hoe verder? In de termen van Zuid-Europa: we weten zelfs hier in het Noorden dat je van olijven eigenlijk alleen de eerst-geperste “extra vergine” olie moet hebben. Verder persen levert niet meer de goede kwaliteit. Op dit moment dreigt het Zuiden verder te worden uitgeperst. Daar zal niet veel meer uitkomen. Het Zuiden krijgt - in de vorm van terugbetalingen - schattingen opgelegd als in Italië 150 jaar geleden en als in Haïti in 1825. Daar spreken we nu schande van.

Die landen zijn de gevolgen nooit te boven gekomen.

De hele wereld zit te wachten op duidelijkheid en zekerheid. Neem het verlies dat mede door eigen toedoen is veroorzaakt. De miljarden zijn al verdampt. Door nieuwe zekerheid kunnen de beurzen zich herstellen, waarmee de nu te aanvaarden verliezen ten minste voor een belangrijk deel zullen worden gecompenseerd. Getreuzel is onoprecht en schadelijk. Dat levert alleen verliezers op.

Tot slot. Onze Minister-president liet weten dat we ons geld wel terugkrijgen. Ja, het kon wel wat langer duren. Misschien maakt hij dezelfde fout als ING: hij verwart nominale waarde met marktwaarde.

1 Directeur Wingman Business Valuators B.V., Breda

Nominale waarde is geen waarde • 39

fsrforum • volume 14 • issue #1

Big Peanuts

By: Martijn van den Assem and Dennie van Dolder

The cameras are rolling. The presenter has just explained what each of you has to do: to choose between ‘splitting’ and ‘stealing’. Opposite you stands your opponent, who you have only just met and will never see again after the game is over. Together you have built a jackpot of £100,000. If you both choose to split, the two of you will share the jackpot equally and take home £50,000 each. If you choose to split while your opponent chooses to steal, you will get nothing and your opponent takes it all. If you steal while your opponent splits, you will receive the entire £100,000 jackpot. If you both opt to steal, both of you go home empty-handed. Millions of viewers will watch your choice on TV. What is your choice? Split or steal?

The final of the UK TV game show ‘Golden Balls’ all comes down to this decision. Anyone with a background in economics will probably recognize the well-known ‘prisoner’s dilemma’. One minor difference from the standard version – viewed from a purely material self-interest perspective – is that the non-cooperative choice (‘defect’) is weakly dominant rather than strictly dominant: if the other steals your choice has no effect on your own winnings, as either option will leave you empty-handed.

The abovementioned situation roughly describes the situation in which the contestants Stephen and Sarah found themselves. It made good TV viewing, and anyone curious about what happened should definitely watch the final via YouTube (www.youtube.com/watch?v=p3Uos2fzIJ0).

Together with our colleague Richard Thaler from Chicago University, we conducted a study into the choices of 574 finalists. The show provides an excellent opportunity to study cooperative behavior. As a result of the fixed rules and circumstances the show resembles the behavioral experiments in psychology and economics. Given that the game show was not designed by researchers for scientific purposes, this experiments is in the category of ‘natural’ experiments.

Compared to conventional experiments, the show has the advantage that large sums of money are at stake (average ≈ £13,400). Combined with the rather unusual setting of a TV studio and the diversity across participants, Golden Balls provides a unique opportunity for testing the robustness of existing experimental findings. We will briefly describe some of our main findings; anyone interested to read more can find our paper at ssrn.com/abstract=1592456.

As in the average prisoner’s dilemma experiment, roughly half of the contestants (53 percent) opt for the cooperative alternative, in this case ‘split’. Although the percentage is probably influenced by the visibility of the decisions, this finding confirms the importance of motives other than purely financial ones.

When we try to explain the choices made by contestants using demographic and game-related variables, we find, among other things, evidence that people have a preference for reciprocity: contestants like to pay back in kind. Each episode starts with four contestants, and only two make it to the final via two voting rounds. It sometimes happens that one of the finalists had unsuccessfully attempted to vote the other finalist off the show during the elimination rounds, and this is found to have a large impact on the decision to either ‘split’ or ‘steal’. The probability of someone choosing ‘split’ drops by as much as 21 (!) percentage points if she faces an opponent who has tried to vote her off: an eye for an eye, a tooth for a tooth.

40 • Big Peanuts

The probability of someone choosing 'split' drops by as much as 21 (!) percentage points if she faces an opponent who has tried to vote her off: an eye for an eye, a tooth for a tooth.

The most interesting result from our study is perhaps the evidence that we have found for – what we call – a ‘big peanuts’ phenomenon. Choices are largely insensitive to the size of the jackpot: contestants cooperate about 50 percent of the time, irrespective of whether they are playing for a couple of thousand or one hundred thousand pounds. Striking, how-

80%

Cooperation rate

70% 60% 50% 40% 30% Below 30

30-40

50 and above

40-50

Age category Males

Females

Total

Lies, however, are not punished. Voting in the elimination rounds is based on the set of ‘golden balls’ that each player has in front of her. The balls contain monetary amounts that are relevant for the size of the final jackpot. The contents of some balls are hidden for other players, and players can lie to conceal their poor contribution and try to avoid being voted off. Lies are always revealed immediately after the vote. In contrast to an attempt to vote someone off, lies do not affect the decisions in the final. One explanation could be that lies are purely defensive in nature here, and not aimed at a specific opponent. Besides, we neither find any evidence that liars are less cooperative in the prisoner’s dilemma.

Rather surprisingly, we find no support for so-called conditional cooperative preferences, defined as a preference for matching the (expected) choice of the opponent (splitting if the opponent splits and stealing if she steals). Players can guess the choice of their opponent reasonably well if they would take into account whether or not the opponent explicitly promised to split. Right before the decision to split or steal, contestants are allowed to chat with each other. If an opponent explicitly promises to split the likelihood that she indeed does so rises by 31 (!) percentage points. In spite of this, players do not condition their choices on such promises.

Players neither condition on their opponent’s demographic characteristics, despite the predictive power of some of these.

For the effects of age and gender, we find that young men are less cooperative than young women. The figure shows the relative frequencies of splitting contestants across different age categories and subdivided into men and women. Our regression analyses indicate a difference of 22 (!) percentage points for 20-year-olds. The difference, however, decreases with age. Men are more cooperative the older they are, and, from an age of about 46 onwards men are even more likely to split than women.

ever, is the high degree of cooperation when the jackpot is relatively small: for amounts of several hundred pounds, 70 percent of the contestants choose to split. This high rate leads us to suspect that in the context of the game – in which a jackpot of ten thousand pounds is ‘normal’ – sums of money that are normally viewed as ‘large’ (in experiments, the largest winnings are typically no more than a few tens of pounds) are perceived as being relatively ‘small’. Although a couple of hundred pounds may appear to be peanuts, these are BIG peanuts!

The conclusion that players ‘think relatively’ also follows from another part of our analysis. The players who reach the final determine the ultimately level of the jackpot by drawing five golden balls from the balls that are left over from the previous rounds. Prior to this draw, a great deal of attention is paid to the maximum possible jackpot. During the show’s first seasons – when few or no episodes of Golden Balls had been broadcast at the time of recording and contestants were not yet able to accurately estimate what they should expect to win in the show – we find that the choices of contestants are strongly influenced by the maximum potential jackpot prior to the final: the higher their maximum jackpot, the smaller the actual jackpot appears, and the greater the likelihood that players cooperate. Amounts perceived as negligible – peanuts – apparently are not worth stealing, especially not on TV. Our findings confirm a similar result for risk behavior identified in another game show, ‘Deal or No Deal’. In that context – where the stakes were even larger – sums of tens of thousands were viewed as small when hundreds of thousands had just been at stake. These are very big peanuts indeed!

References In our sub-study into the role of demographic factors, we also examined whether students behave differently from ‘normal’ people. Some researchers are concerned about the generalizability of results from experiments that use students as ‘guinea pigs’, but in our data we find no indications for a different attitude toward cooperation among students other than what should be expected on the basis of their age and education profile.

Van den Assem, Martijn J., Dennie van Dolder, and Richard H. Thaler. 2011 ‘Split or Steal? Cooperative Behavior When the Stakes Are Large.’ Management Science, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1592456

Big Peanuts • 41

fsrforum • volume 14 • issue #1

Word of the chairman

Wessel Ploegmakers

Dear reader,

FSR News

Column Paul Boxhoorn

Column Fouad Mehadi

E&Y drink

International Banking Cycle

42 • FSR news

44 45 50 52

This edition of the FSR Forum is the first out of the hands of the XIVth board. The new board is extremely proud to finally take control over the Financial Study association Rotterdam. We look forward to an outstanding year full of events and activities. As the chairman of the board it will be my pleasure to keep you informed about the latest developments of our association. I would like to make my compliments to Anne van Driesum who is the responsible editor of the FSR Forum this year. She and the editor’s committee have many new exiting plans for the next four editions.

First of all, I would like to thank the XIIIth board for their guidance in the past months. Due to their effort and trust we could successfully take control of the FSR. After two months of preparation in the summer, the XIVth board was officially installed during the General Assembly at the 1st of September. Second, I would like to take the opportunity to welcome all of the new committee members who will dedicate themselves to the FSR this year. From my involvement in the Corporate Finance Competition last year I can tell that being a committee member of the FSR is truly a great experience.

The academic year started with the Master Kick-Off at the 29th of September. At this day the master students could orient themselves with the structure of the master, the lecturers and the FSR. Next to the Master Kick-Off we also organised two Minor Kick-Off sessions. You can find a detailed report of these three days in our activities reports overview later in this magazine.

Currently, the prestigious International Banking Cycle is taking place at Rotterdam and Amsterdam. Ten of the world best investment banks come to both universities to give workshops, presentations and interviews. This event offers the perfect opportunity for finance students to get acquainted with the dynamic world of investment banking.

Moreover, the accounting student is not left behind as simultaneously the Big 4 cycle is taking place. During four in-house days, the largest accountancy firms open their doors to welcome our members. You can imagine that this is a busy period for both the new board and our committee members. Not to forget, that nothing is more rewarding than finally seeing the success of all the time spent on preparation.

To complete my word, I would like to pay attention on the year to come. The events of the FSR will not stick to the Netherlands as our International Research Project will travel to Bangkok and Ho Chi Minh City. These cities known for their high pace and turbulent history; will be the home for 20 participants and committee in April and May. Next to this, our European Finance Tour will visit the financial heart of Italy, Milan. At this location the group of participants will have many company visits and masterclasses. The theme of this year’s trip is ‘Managing Uncertainties’.

This suits the location as Italy is facing financial support and the plan for the future is still uncertain.

Also when you stay in the Netherlands, the FSR offers many events in the upcoming year. For instance, the first round of the Trader Trophy is already taking place on the 1st of December at the Erasmus campus. Later in the year, we come back to you with the Financial Business Cycle, Multinational Battle, Corporate Finance Competition and many other events and activities.

I would like to invite you once again to participate in our events, as a participant or as a partner.

I am proud to say that the XIVth board will do her best to make this year a remarkable one for the FSR. I look forward to have the honour to welcome you at one of our events, battles, cycles, master classes or social drinks.

fsrforum • volume 14 • issue #1

FSR News update

Financial news

Accountancy news

Table 1: our randomly selected portfolio Long/Short Instruments

number

Buy price €

Value €

Current price € 08/10/11 Current value €

Profit €

New tax measure

L

Aalberts

589

10,63

6.261

11,43

6.732

471 (+7,52%)

L

Aegon

4796

2,65

12.701

3,26

15.640

2.939 (+23,14%)

L

Arcelor Mittal

577

10,86

6.266

13,20

7.614

1.347 (+21,5%)

In the first Amending Letter on the Belastingplan 2012 (Tax Plan 2012) the Dutch Ministry of Finance has presented a new measure to promote investments in the development of new products and services. Companies that make such investments receive a tax advantage of 10 percent. According to the State Secretary Weekers the measure, called Research & Development aftrek (RDA), is an alternative to the subsidies and it will provide companies with more freedom in the development of innovative products. The RDA is an extra tax deduction from the profits of companies for non-wages and investments that are related to the development of new products and services.

L

Binck

850

7,37

6.265

8,19

6.962

697 (+11,13%)

L

Fugro

178

35,12

6.252

37,50

6.675

423 (+6,77%)

L

KPN

688

9,14

6.290

9,93

6.832

542 (+8,62%)

L

Mediq

517

11,02

5.695

11.58

5.987

292 (+5,12%)

L

Ordina

4429

1,42

6.290

1,27

5.643

-648 (-10,29%)

L

SBM Offshore

508

12,37

6.282

13,63

6.924

642 (+10,22%)

L

TNT Express

1221

5,11

6.243

5,15

6.288

45 (+0,72%)

L

USG

1098

5,66

6.218

6,51

7.148

930 (+14,96%)

L

Wavin

1294

4,83

6.251

5,22

6.755

503 (+8,05%)

L

Wessanen

1886

3,21

6.053

3,46

6.526

472 (+7,80%)

L

Wolters Kluwer

538

11,61

6.246

12,51

6.728

481 (+7,71%)

109.069

+9,59%

99.529

Our inactive random portfolio has underperformed the indices for the first period. Table 2 shows the results.

Table 2: investments in indices relative to investments of stocks from those indices Long/Short Instruments

number

Buy price €

Value €

Current price € 08/10/11 Current value €

Profit €

L

AEX Index

271

258,19

69.969

288,31

78.132

8.163 (+11.67%)

L

AMX Index

58

430,75

24.984

465,12

26.977

1.993 (+7.98)

L

ASCX Index

13

387,66

5.040

404,70

5.261

222 (+4,40%)

110.370

+10,38%

99.993

Table 3 shows the prices for commodities and currencies and how they developed. We also made a portfolio based on investments in commodities alone. We shall leave this portfolio untouched until the end of the academic year to see if commodities were a better investment as opposed to stocks.

Table 3: commodity and currency prices (08-10-11) and their profits Long/Short Instruments

number

Buy price $

Value $

Current price $ 08/10/11 Current value $

Profit $

L

244

81,85

19.972

79.87

-484 (-2,42%)

Brent blend

19.488

L

Gold (spot)

12

1682

20.184

1636

19.636

-564 (-2,7%)

L

Copper (spot)

3

5789

17.367

5419

16.258

-1.109 (-6,39%)

L

Silver (spot)

614

32,59

20.010

31,14

19.120

-890 (-4,45%)

L

Zinc (spot)

14

1472

20.620

1379

19.308

-1312 (-6,36%)

93.812

-4.42%

98.153 L

EUR/USD

1,350

1,337

-0,64%

L

EUR/GBP

0,871

0,859

-1,53%

IFRS gains popularity According to a research of the Association of Chartered Certified Accountants (ACCA) the use of the International Financial Reporting Standards (IFRS) gains popularity among CFO’s and investors. The popularity is growing because of the financial crisis. The ACCA interviewed 163 senior executives from diverse sectors. These participants originate from Europa, the USA, the Middle East and Asia. Forty percent of the chief executives felt that the access to capital has improved and that the corporate financing has become cheaper. The reason for this is that investors strive to improve worldwide accounting standards. Clients also appear to have the need for more disclosure.

FSR news • 43

fsrforum • volume 14 • issue #1

FSR Former board member

Paul Boxhoorn

It feels like only yesterday, but has actually already been four years since it all started for the tenth FSR Board. I was handed the gavel by my predecessor Joris Kil during the Annual General Meeting in Restaurant Sud. The general meeting was a very entertaining evening which ended up with myself and my fellow board members being appointed.

Well before I became a board member, I got in touch with FSR through their activities which were promoted during the classes I took during the bachelor phase of my study.

During my third year of the bachelor I decided to sign up for a FSR committee. I ended up joining the Big Four Cycle/ Accountancy day committee, which organized several accountancy related activities. During that year I got further acquainted with the FSR through several social drinks and the infamous active members weekend in Antwerp. When this year came to an end, I decided to go for a position on next year’s FSR board.

My board year started with a weekend trip with the 9th board, with the goal to make plans and get to know my fellow board members. Subsequently, we were appointed board members at the Annual General Meeting and the year evolved with several successful activities. One of the highlights was the active members weekend in Koln as well as the celebration of the second Lustrum of the FSR. I am proud that we were able to introduce the Master Kick-off as a new activity during my board year. This activity has contributed to the growth of FSR memberships and has given the FSR a platform to reach all master students. After this event it was time to hand over the chairman’s gavel to Niek Bosman and continue my studies.

My year as board member has turned out to be one of the most valuable experiences during my study. Together with my fellow board members, we achieved many things while also making very important and difficult decisions. Now, 4 years later, we are still a very closely knit group of friends and we see each other many times a year. We have just returned from our 4th annual board weekend to Groningen. It was once again a weekend that won’t be easily forgotten.

After having finished my FSR board year I went on to finish my master Financial Economics and I completed two internships. Based on my experiences during my study and the practical knowledge I collected during my internships I decided to pursue a career in Corporate Finance/M&A.

44 • FSR news

During and after my FSR board year, I was in touch with Kempen & Co through the Financial Business Cycle.

I started working at Kempen & Co Corporate Finance in April 2010 as an analyst in the Construction, Maritime and Offshore sector. The corporate finance department is part of Kempen & Co which is subsidiary of Van Lanschot Bankiers.

Kempen & Co is a Dutch merchant bank providing financial services in asset management, securities broking and corporate finance. Our clients include institutional investors, companies, financial institutions, (semi)public institutions, foundations and high net-worth individual clients. At Kempen & Co, I was reunited with my fellow board member Floris Vossestein as well as many other Rotterdam alumni.

In the past 1.5 years I have worked on numerous transactions. As of 1st of July, I am part of the Financial Institutions Group (FIG) cluster. Our cluster focuses on advising insurance companies, banks and financial intermediaries.

As an analyst at Kempen & Co Corporate Finance you are part of a team with highly talented individuals which together try to deliver premium advice to our clients. From the start, analysts are given responsibilities which offer them opportunity to immediately make a difference. We perform our work in project teams which usually consist of 3 to 5 people. In midst of a transaction this means a lot of hard work, but it is also very rewarding when a project successfully comes to a close. At these times the skills which I have learned during my FSR board year are very useful. Working with tight deadlines and coping with last minute changes is something I am confronted with every day, as I also was during my FSR board year.

Besides my work as a corporate finance professional I am also active as a recruitment contact for Rotterdam. This entails that I am in touch with all the student associations and we organize events with them on a regular basis. Last year, I hosted an inhouseday for Kempen during the Financial Business Cycle and I was present at the Finance dinner. By organizing these events, it is possible for me to stay in contact and keep an eye on the FSR. I must say that I am still amazed by the professionalism of the FSR and the way it organizes its activities. I am proud to have been a part of this association.

Passport Name Paul Boxhoorn Age 27 Residence Amsterdam Employed at Kempen & Co Current position Analyst Corporate Finance Which FSR Board 10th FSR Board Board function Chairman Study Financial Economics Year of graduation 2010 Which car do you drive None, 5 minute walk to work What do you drink on a Friday night A gin-tonic Life Motto Work hard, play hard

fsrforum • volume 14 • issue #1

FSR Member

Fouad Mehadi

Passport Name Fouad Mehadi Study Economics & Business (Master: Financial Economics) FSR event Investment Banking Master Class Internship at Barclays Capital (London) Department of internship Rates Sales

During my studies I frequently encountered some ‘FSR people’ promoting events at various finance related classes.

But curiously enough I’ve never thought of participating at any of these events. As I moved closer to the end of my studies - and started to think more seriously about my future - I got more and more interested in the FSR. Eventually I’ve decided to apply for a position within the corporate finance competition committee and became an active member. It’s here where I’ve learned how well connected the FSR is with the financial services industry. I had a fantastic time organizing this event with my fellow team members and obviously enjoyed all the perks of being an active member.

In the last two years of my studies my interest in investment banking started to increase and I tried to make a decision between Sales & Trading and M&A. Later that year I’ve participated in the Investment Banking Master Class sponsored

by Training The Street and Barclays Capital. The first day of this two day master class was all about learning different valuation methodologies from Training The Street. The second day was all about working in teams on M&A and Sales & Trading related cases. I remember I really enjoyed this master class since we were presenting our results in front of analysts and vice presidents of BarCap. We also got plenty of opportunities to network and speak to various BarCap representatives and it is here where I’ve gained more insight in equities and rates sales. I was also very impressed by the fact these people were so easy approachable and helpful. I had started to spend more time learning about the various roles in an investment bank and decided to apply for a summer analyst position in sales at BarCap. I had three separate interviews and surprisingly enough I had my last interview with a vice president I’ve met during the Investment Banking Master Class. He remembered who I was and obviously he was the one who saw me give presentations and evaluated our team performance. I cannot deny that this was very helpful.

from research, trading, sales, IT and operations is available for help, advice or assistance.

Furthermore I interned during market turmoil, and I had the opportunity to learn more about the financial markets in uncertain times. But most importantly I’ve learned that clients rely heavily on sales by giving them new insights about what’s happening in the markets. A sales person has to be on top of everything and has to be able to give colour and views at all times; strengthen client relationships and consequently facilitate trades. The most interesting day was in the last week of July when there was a lot of client activity and huge uncertainty in the financial markets. Sales people and traders were literally all over the place – in sales these are the most exciting times - the trading floor at an investment bank is definitely a magical place.

All in all, don’t underestimate the opportunities the FSR has to offer, grasp every opportunity you get.

My summer internship at BarCap was absolutely fantastic; it’s a great place to work in terms of culture and responsibility.

A summer internship is in fact a 10 week long interview process where you get assessed on different objectives. This is not only about finishing projects but also about getting to know the entire firm; the different departments and build a network where you can rely upon when you need help.

BarCap emphasizes the ability to work in a team i.e. everyone

FSR news • 45

fsrforum • volume 14 • issue #1

FSR Introduction Committees

Lizzy Veldt, Sandy Huw, Romy Rijke, Jordy Streng

Accoutancy committee People frequently say that accountants are boring, always working with numbers and less social than others. However, students will get the opportunity during the Big 4 Cycle and the “Accountancy Firms day” to see and experience that this is absolutely not true. During the Big 4 Cycle, students will get the chance to meet KPMG, Deloitte, PWC and Ernst & Young and get to know the “Big 4” better by doing cases at their offices and having an informal dinner at the end of the day. For those, who would like to know how it is to work at small accountancy firms, there will also be an “Accountancy Firms day”. Thanks to these two events, students will get a better understanding of the accountancy world.

Bas Lips, Femke van de Looveren, Nicolas Bakker, Babette van Spronsen

Corporate Finance committee Do you want to increase your knowledge, apply your academic skills and get to know five potential employers in the financial sector?

The Corporate Finance Competition offers you these opportunities!

During the Corporate Finance Competition, the five participating companies will provide you with the opportunity to become acquainted with the corporate finance profession.

In teams students face several challenging corporate finance related cases. By solving these cases and taking on the challenges with the competing teams, you and your team fight for the sought-after victory. Adjacent to the formal contact during the cases the business course hands you the chance to get to know the companies in an informal manner.

We are looking forward to organize this event!

46 • FSR news

Editorial committee The editorial committee for the academic year 2011-2012 consists of Anne van Driesum and Jeroen van Oerle. Our goal is to inspire our readers. Via the publication of articles, columns and interviews we go deeper into a particular theme. In total, we shall publish five themes this academic year. Next to these formal provisions of information, we shall also provide informal information. This shall take the form of a cartoon, the analysis of the market from a financial and accounting view and the description of FSR activities.

On behalf of FSR we wish you a pleasant time when reading our FSR Forum.

Any questions: forum@fsr.nu

Jeroen van Oerle, Anne van Driesum

European Finance Tour committee The destination of this year’s European Finance Tour (EFT) is going to be the financial capital of Italy: Milan. Joined by the FSR, participants will explore many hotspots of one of the world’s financial metropolises. Besides being the seat of Borsa Italiana and housing a wide range of cultural attractions, Milan also has the reputation of being one of the world’s most well-known fashion capitals. Prior to the tour, the EFT Committee will prepare its participants by organizing several in-house days at outstanding corporations in the Netherlands. The tour, which will take place during the period between 26 March and 30 March 2012, allows EFT participants to enjoy formal as well as informal activities.

The EFT committee looks forward to realizing this fantastic tour and has already set its first steps. This European Finance Tour to Milan will definitely be another unforgettable experience for all its participants.

Filip Shen, Bas Lips, Quinten Smit FSR news • 47

fsrforum â&#x20AC;˘ volume 14 â&#x20AC;˘ issue #1

Daan Gankema, Mirthe Riekwiel, Bas Lips

Finance committee

Wessel Ploegmakers, Minh Ho Khouw, Lynette Chong

The Finance Committee will organize two major events of the Financial Study association Rotterdam, being the Financial Business Cycle and the Investment Banking Masterclass.

During the Financial Business Cycle inhouse days with multinationals, banks and trading companies will be organized.

Participation will give you the possibility to get to know the different business segments and experience the corporate business styles.

FAN committee The FAN Committee is responsible for three national events this year. In cooperation with the financial study associations, gathered in the Financial Association Netherlands (FAN), the Traders Trophy, Multinational Battle and the National Investments Competition will be organized.

The Traders Trophy is organized in cooperation with Oxyor and Optiver and offers students a chance to get to know the world of trading. During the Multinational Battle, there will be qualifying rounds as well in the several cities. The best team from each city will continue to the nationwide final which is held at a luxury location and lasts for three days. The last event is the National Investment Competition in which we are looking for the best student investor in the Netherlands.

During the Investment Banking Masterclass a professional training in corporate valuation and financial modeling is provided by Traning the Streets on the first day. The next day, an investment bank will be present to discuss investment banking cases in several fields and share insights in the daily life of a banker with you.

As the Finance committee we are looking forward to organize these events and we hope to see you during your pariticipation!

To conclude, we will make these events a success and provide an excellent opportunity for our members to get in contact with the different companies.

Female Business Tour committee The Female Business Tour is an activity for female students.

The tour is spread over two days, where the students can get in contact with four diverse companies. Last year Aegon, Heineken, BCG and Post NL participated in this event.

The company visits start with a company presentation, after which the students will work on a business case. The first day will end with a company dinner where the students can talk with the employees and get a good impression of the company and what the company is looking for in female employees. The students will spend the night in a nice hotel.

Maaike van Lanphen, Anne van Driesum 48 â&#x20AC;˘ FSR news

We are looking forward to organizing the Female Business Tour this year and we hope it will be a great success. We would like to see all the female FSR members at the Female Business Tour!

International Banking Cycle committee After 15 successful years, also this year the FSR and the FSA organize the largest investment banking recruitment event of the Netherlands. During the International Banking Cycle (IBC), 10 leading international investment banks give workshops, presentations and afterwards a drink reception for students who are interested in investment banking. During this event, students get the opportunity to really get a taste of the day to day life of a banker. Despite of the workshop and presentation the IBC also gives the student the opportunity to get informal with bankers.

The IBC is a fantastic event and is organized by the IBC committee, consisting of four people. The committee has worked to make hundreds of students acquainted with the challenging world of the Investment Banks.

Diederick van Es, Clemens van Vuurde, Bas Lips, Tim Odenkirchen

International Research Project committee The International Research Project provides finance and accountancy students an exciting opportunity to meet top companies located in the Netherlands, while researching foreign business opportunities and eventually taking a trip to these booming destinations.

This year we have selected Bangkok and Ho Chi Minh City as locations which guarantee a fantastic blend of culture and emerging markets.

Starting in January, the participating students will follow guest lectures of top companies and EUR teachers to guide their research. This year groups of four students will each focus on a different sector of the local economies.

In April we will leave for Bangkok and Ho Chi Minh City to experience the culture and local businesses ourselves! This will be a wonderful trip filled with visits to leading local companies as well as a cultural program to enjoy the beauty of both countries.

Anushka Chin, JoĂŤl Ramzan, Anne van Driesum, Sander Barendse, Leonie van der Lugt FSR news â&#x20AC;˘ 49

fsrforum • volume 14 • issue #1

FSR Activity report

Master Kick-Off Day At the 29th of August, the first event of the academic year 2011-2012 took place. Together with the Erasmus School of Economics we organised the Master Kick-Off Day. For the Masters Accounting, Auditing and Control and Accounting and Finance, as well as the Master Financial Economics we organised this day to give the students a better insight in the opportunities they face in the upcoming year.

Club is the perfect location; students can enjoy some drinks and finger food with the beautiful skyline of Rotterdam at the horizon. A band with some funky Jazz music made the day complete. We had the honour to welcome many new members and the students got an overview of the opportunities they have this year. For the FSR, students and lecturers this Master Kick-Off day proved to be a great success.

Minor Kick-Off Days The day started with some general information about the academic programme for the Master students. Furthermore, the lecturers introduced themselves and gave an overview of their courses and interesting seminars that can be followed.

For the second time, the FSR organised two Minor Kick-off days. The purpose of these days is to make third year bachelors aware of the opportunities we offer them as future finance and accountancy students.

After this, the FSR presented an overview of the opportunities it offers to students. In a presentation, we highlighted some of our important upcoming events. When the presentation ended, the FSR had organised a social drink at the Faculty Club. This drink offered students the opportunity to meet each other, ask questions to the lecturers and become a member of our association. Like the years before, the Faculty

The lecture of the minor Ondernemen en Belastingen started with a presentation of the FSR. Here we showed the opportunities Accountancy students have as a member of our association. After the minor, we had organised a drink at Café In de Smitse, here the students and lecturer could meet the FSR and socialize.

50 • FSR news

The second minor was Behavioural Finance about the psychology behind human decision making in finance. Here we also held a presentation about the FSR and some of our upcoming events. Afterwards, we had a drink and muffin for the students outside of the lecture room in the L-building.

There were more than enough muffins available for everyone and it proved to be a good day as we welcomed many new members.

Ernst & Young Drink At the 21st of September we hosted a drink of Ernst & Young in Café de Stoep. This drink kicked-off the academic year with an inspiring talk of Jochem Uytdehaage, double gold medal winner of the Olympic winter games of 2002. Due to his stunning performance as long track speed skater he has gathered experience that he shared in a moving speech. He compared the performance of business people with that of a top sport and taught us some valuable lessons.

employees of Ernst & Young present. It was the perfect opportunity to meet the company in an informal way. Furthermore, you could also get more information about their upcoming masterclass in November.

Dies Every 6th of October means party time for the FSR. At this date the association celebrates her Dies Natalis. During the day, we served cake at our room and invited everyone to come and celebrate this day with us. Many of our active members and lecturers of the department Business Economics did not resist some delicious cake and we had a good time.

Together with many members, alumni, committee members, friends and other associations we went to Café de Stoep to make the evening a remarkable one. The FSR board received many congratulation and gifts and we were very pleased that so many came to celebrate this special day with us.

Afterwards, you could approach the Olympic champion to ask questions. Next to Jochem Uytdehaage, there were many

FSR news • 51

fsrforum â&#x20AC;˘ volume 14 â&#x20AC;˘ issue #1

FSR International Banking Cycle

As every year, the Financial Study Association has organized as first event, the International Banking Cycle (IBC). Ten top investments banks active in global investment banking came to Rotterdam and Amsterdam to provide students with presentations, workshops, drinks and interviews. The participating banks were The Royal Bank of Scotland, Lazard, Nomura, J.P. Morgan, Credit Suisse, Bank of America Merrill Lynch, Deutsche Bank, Barclays Capital, Morgan Stanley and ING. The IBC is the biggest recruitment event for Investment Banks in the Benelux and provided great opportunities for all participating students.

For two months a true vibe of Investment Banking was sensible on Campus Woudestein. Despite the difficult times that the financial sector is experiencing, the interest in the IBC has never been greater. The number of applicants for the IBC has risen for another consecutive year as hundreds of students applied for the workshops in order to make a chance

52 â&#x20AC;˘ FSR news

for one of the few spots available. The interest was mutually present on the side of the banks as all of them have actively recruited students for one of their internship programs.

The selected students for the different workshops all got challenged with interesting M&A cases which reflected one of the large deals of that particular bank. For these cases, small groups of approximately 5 students shortly dived into the world of investment banking. In a few tense hours, the participants valued firms, negotiated deals and pitched their ideas in front of the bankers. These sessions gave students an opportunity to get familiar with some of the key features of investment banking while the bankers were able to select suitable candidates for the interviews the next day.

The presentations were open for a broad public and enabled them to learn more about the participating bank and about Investment Banking in general. The banks that have offices

in London often flew in some of their bankers to attend the presentation and the drink afterwards. Repeatedly, inspiring Managing Directors talked passionately about the uniqueness of their bank and the great track record it has in a particular field of business. It was very special and fun to hear of their experiences in The City and their exciting ‘war stories’ about the deals they have done.

Every IBC-day ended with a drink at ‘De Etage’ where the bankers and students had the opportunity to interact with each other. For both, these drinks were valuable since they provided a rare chance to get to know each other in such laid-back way. Those which were interested in Investment Banking used this moment ultimately to ask questions about their work experiences, career opportunities etc. In contrast to what many expected, the bankers did not fit the tough stereotype and appeared to be very approachable and helpful.

The lucky few that had really impressed the bankers got the opportunity to make clear for a last time why they were suitable for the job. These people will hopefully appear in another edition of the IBC. But this time, like many other former participants, as a banker.

All-in-all, the IBC-committee, has all reason to look back on the Banking Cycle in a satisfied way. Both the bankers and the participants were again enthusiastic about the smooth organization of this unique event. Despite that, we have still seen many possibilities for further improvement. This we will all incorporate in next year’s edition. See you next year!

FSR news • 53

Word jij de aanjager van onze nieuwe investeringen?

YEP!

Het Young Executive Programme van PostNL Er is veel aan het veranderen bij PostNL. Zo zijn we in juni 2011 als zelfstandig bedrijf verder gegaan, na een splitsing van het vroegere TNT in TNT Express en PostNL. We blijven als marktleider actief in post, maar we gaan ook groot inzetten op pakketten en e-commerce.

Daar kunnen we jou goed bij gebruiken, want een nieuw plan is pas goed als de ďŹ nanciĂŤle specialisten het kunnen onderbouwen.Je mag direct meedoen en leert de organisatie vanuit alle hoeken kennen. Daarom kiest echt talent voor het YEP van PostNL. Kijk voor meer informatie op werkenbijpostnl.nl

fsrforum • volume 14 • issue #1

FSR Alumni Association The asset in your network!

Dear FSR Alumni, September marks the month of changes at the university. New students have their first introduction to their future alma mater of which they will become alumni after graduation, while study clubs change boards and make ambitious, promising plans on the year to come. Just like this yearly returning cycle, the FSR alumni board has changed its composition and it is my honor as new FSR alumni chairman to welcome you to what promises to be another exciting year for the FSR alumni!

The start of this new year for the FSR is of course marked by the ALV, held at Restaurant Kip, where to my delight numerous FSR alumni were also present to see and test the new board of the FSR. After presenting their plans for the coming year, the FSR alumni also held a strategic session to rethink the current state of activities and develop a plan for this year focusing on increased alumni-member interaction and attendance. My fellow board members, Bart Lips, Lizzy Veldt and Jordy Streng, and I are planning 2 main alumni events this year which will appeal to every FSR alumnus. The FSR alumni board is currently negotiating a Friday afternoon drink to take place before the end of the year on location somewhere in Rotterdam to blow off steam after a week of hard work. Also, the spring time will again be the period when yours truly will defend the acclaimed FSR golf tournament trophy, nicknamed the Big Cup! Along with activities open to both alumni and current FSR members, like the gala dinner in January and the OBD somewhere around March it promises to be a year where we can meet and mingle with each other on numerous occasions.

Just recently I met someone who was one of the initiators of what is now know as the Corporate Finance Competition. Although he had nice stories and memories from his time as committee member at the FSR, he was unaware of the activities the FSR alumni organized. I will not disagree that in the past there have been some problems with the automatic enrollment of past committee members into the FSR alumni, but I would like to take this opportunity to ask each of the alumni members to actively approach people that have been active at the FSR in the past to subscribe and attend the activities organized for the alumni.

Together we can increase the strength of the FSR alumni network and make the events fun and worthwile to attend!

Joris Kil Chairman FSR Alumni Association

FSR news • 55

fsrforum • volume 14 • issue #1

FSR Activity Agenda 2011-2012

November Accountant Firms Day Get familiar with the world of accounting at a top class location in Rotterdam!

December Traders Throphy Can you handle the pressure?

January/February Financial Business Cycle Explore the financial opportunities.

February Young Financials Diner Get to know interesting financial companies.

Cartoon: Deef Smits

March European Finance Tour

May Bachelor Accountancy Day

Milan, managing uncertainties.

Will you choose for a career in accounting?

Multinational Battle

Corporate Finance Competition

Five multinationals, five battling cities, are you part of it?

Five star event: hotel, companies and participants!

April Female Business Tour It might be a men’s world but it would be nothing without women.

April/May International Research Project Examine the corporate world of Bangkok & Ho Chi Minhcity.

National Investment Competition Invest and be a winner!

56 • FSR news

Finance Day Want to know what finance is all about…

Investment Banking Masterclass Learn to valuate, like an investment banker.

<On the ambition to excel>

We view ambition as a quality to be cherished. Because we see it as a force that fuels initiatives. The best form of ambition combines the will to be independent with the willingness to take on responsibility. That’s what we call the ambition to excel. If you think you, too, have that kind of ambition, we would like to hear from you.

For our Analyst Program, NIBC is looking for university graduates who share our ambition to excel. Personal and professional development are the key-elements of the Program: in-company training in co-operation with the Amsterdam Institute of Finance; working side-by-side with professionals at all levels and in every financial discipline as part of learning on the job. We employ top talent from diverse university backgrounds, ranging from economics and business administration, to law and technology. If you have just graduated, with above-average grades, and think you belong to that exceptional class of top talent, apply today. Joining NIBC’s Analyst Program might be the most important career decision you ever make!

Want to know more? Surf to www.careeratnibc.com.

Interested? Please contact us: NIBC Human Resources, Frouke Röben, recruitment@nibc.com. For further information see www.careeratnibc.com. NIBC is a Dutch specialised bank that offers advisory, financing and investing in the Benelux and Germany. We believe ambition, teamwork, and professionalism are important assets in everything we do.

THE HAGUE

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LONDON

•

BRUSSELS

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FRANKFURT

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NEW YORK

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SINGAPORE

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WWW.NIBC.COM

Weten wat je kan, begint met weten waar je naartoe wilt.

Inge Tjeerdsma Senior Staff Audit FSO

Een succesvolle carrièrestart is meer dan een goede cijferlijst. Het begint met karakter en inzicht in jezelf. Ontdekken wie je bent, weten waar je naartoe wilt groeien Ên hoe je dat voor elkaar krijgt staat altijd aan de basis. Ernst & Young coacht jou actief op weg naar jouw succes. We bieden je volop kansen in de wereld van assurance, tax, transaction en advisory. Ontdek ze op ey.nl/carriere