What do bad decision making organisations have in common?

I think it is human instinct to interpret why organisations and people make bad decisions through a moral lens (e.g. they are bad people) but I am more interested in the question why organisations run by ordinary people seem to end up with often substandard outcomes. My current interaction with one of my financial service providers comes to mind.

This post by Marc Rubinstein and Dan Davies offers some insights that have prompted me to order Dan’s new book

What do bad decision-making organizations have in common?  Quite a few things, but one of the clearest signs is something you might call an “accountability sink”.

Tony – From the Outside

New money, old money – Bank Underground

Always on the look out for things we can learn from history. In that spirit here is an interesting post on a Bank of England blog that explores what lessons the switch from coins to paper money might offer for the expansion of digital currencies.

They identify five lessons. The one that resonates with me is that the adoption of new forms of money can depend on the extent of shortages in the conventional forms …

“Possible lessons for the adoption of digital currencies

Can we learn anything from the switch from coin to paper in the 1690s that might be relevant to any adoption of digital currencies today? One lesson is that shortages of money are a powerful force in stimulating new forms of money to emerge. In the 1690s the extreme shortage of silver created a compelling reason for merchants to adopt new paper currency.  Arguably, this is a force driving some new forms of digital money to emerge – conventional forms of money being incompatible, or lacking the functionality to use, in some digital settings, creating an effective shortage.”

Tony – From the Outside

Residential mortgage risk weights

I have posted a few times challenging the often repeated assertion that advanced banks are subject to materially lower risk weights than their competitors operating under the standardised approach (see here for example).

I have not seen the argument asserted for some time but APRA has chosen to publish a short note repeating their conclusion that the difference is nowhere near as big as claimed.

Here is a link to the APRA note but the short version is

“APRA estimates that the average pricing differential for housing lending due to differences in IRB and standardised capital requirements is 5 basis points.4 Taking into account the IRRBB capital charge and higher operational costs for IRB banks would further reduce this pricing differential.”

Tony – From the Outside

Thirteen Questions about Money – by JW Mason

One for the banking and finance tragics I suspect but I thought this is a pretty good list. In the author’s own words

I have my own opinions about what are more and less convincing answers to these questions. But my goal is not to convince you, or my students, of the answers. My goal is to convince you that these are real questions.

— Read on jwmason.substack.com/p/thirteen-questions-about-money

Tony – From the outside

Sometimes banks suck because we want them to suck.

… exploring why dealing with banks can be hard. US focus but I think it probably rings true across most banking systems. It will be interesting to see if advances in machine intelligence help address any of these long standing issues.

www.bitsaboutmoney.com/archive/seeing-like-a-bank/

Tony – From the Outside

Risk of Ruin – by Marc Rubinstein – Net Interest

Nice post by Marc Rubinstein discussing the Kelly Criterion against a backdrop of Sam Bankman-Fried’s risk appetite. Whether you agree or disagree with the Kelly Criterion, I think at a minimum it is well worth understanding what it says about the optimal betting strategy. Lots of useful links to other posts on the same topic.

— Read on www.netinterest.co/p/risk-of-ruin

Tony – From the Outside

Moneyness – it’s complicated

… arguably too complicated.

Interesting post here by JP Koning exploring the differences between the way PayPal’s two forms of payment mechanisms are regulated. His conclusion might surprise you.

Here is a link to his post

jpkoning.blogspot.com/2023/09/there-are-now-two-types-of-paypal.html

This is the short version if you are time poor

Which type of PayPal dollar is safer for the public to use? If you listen to Congresswoman Maxine Waters, who in response to PayPal’s announcement fretted that PayPal’s crypto-based dollars would not able to “guarantee consumer protections,” you’d assume the traditional non-crypto version is the safer one. And I think that fits with most peoples’ preconceptions of crypto. Not so, oddly enough. It’s the PayPal dollars hosted on crypto databases that are the safer of the two, if not along every dimension, at least in terms of the degree to which customers are protected by: 1) the quality of underlying assets; 2) their seniority (or ranking relative to other creditors); and 3) transparency.

Let me know what I (and JP) might be missing

Tony – From the Outside

Josh Younger on the origins of Eurodollars and Petrodollars

This may not be the definitive account of how the financial system we have today evolved but I got a lot of value out of the interview on the Odd Lots podcast. The role that Communist countries played in the inception of the Eurodollar market was certainly news to me. Josh cites Russia in his origin story but Wikipedia adds another version in which China was the country looking for a way to hold USD outside the USA.

You can find the Apple version of the podcast here

podcasts.apple.com/au/podcast/odd-lots/id1056200096

Tony – From the Outside

The stablecoin business model

JP Koning offers an interesting post here speculating on the reason why Wise can pay interest to its USD users but USDC can or does not. The extract below captures his main argument …

It’s possible that some USDC users might be willing to give up their ID in order to receive the interest and protection from Circle’s bank. But that would interfere with the usefulness of USDC. One reason why USDC is popular is because it can be plugged into various pseudonymous financial machines (like Uniswap or Curve). If a user chooses to collect interest from an underlying bank, that means giving up the ability to put their USDC into these machines.

This may represent a permanent stablecoin tradeoff. Users of stablecoins such as USDC can get either native interest or no-ID services from financial machines, but they can’t get both no-ID services and interest.

Let me know what I am missing

Tony – From the Outside