Loss aversion has bank regulators looking too much at the cost of the crisis, while ignoring the benefits of the whole boom-bust cycle.

Sir, Tim Harford writes: The concept of “loss aversion” developed by Daniel Kahneman and Amos Tversky…showed that we tend to find a modest loss roughly twice as painful as an equivalent gain… Those who were forced to evaluate and decide at a slow pace were… not intimidated by short-term fluctuations… less likely to witness losses.”, “The languid pleasures of slow investing” February 10.

That is precisely what happens when bank regulators go into action during a crisis; they just look at the losses, and completely ignore what good might have been achieved during the whole boom-bust credit cycle.

And that is why our regulators in the Basel Committee, panicking, imposed risk weighted capital requirements for banks, which pushes debt that relies more on existing servicing capacity, like financing “safe” houses, than debt that hopes to generate new revenue streams, like loans to “risky” entrepreneurs.

And we all know there’s little future in that!

Harford ends with: writes: “Perhaps we slow investors should adopt a mascot. I suggest the sloth” Indeed, and let us send a stuffed one to Basel.

An aide-mémoire on the major mistakes with the risk based capital requirements

@PerKurowski

Gillian Tett also suffers from "biases in our brains that undermine our capacity to make rational decisions”

Sir, Gillian Tett writes on the issue of “how bad humans are at assessing risk”, and refers to that “academics Daniel Kahneman and Amos Tversky have highlighted all manner of biases in our brains that undermine our capacity to make rational decisions.” “Fear of cultural ‘pollutants’ can be allayed with acceptance”, February 11.

As an example, Tett mentions that in the US “the data suggest that the chance of dying in a terrorist attack by a refugee, of any religion, was just one in 3.64bn in any given year. That is far lower than the risk of being struck by lightning”. Yet Tett writes, there is “irrational” fear of immigrants.

Ms. Tett, should perhaps do well showing more humility because, like all of us, she is just as bound to be afflicted by exactly the same human weakness. 

There is no data that would indicate that any major bank crisis was caused by excessive bank exposures to something perceived as risky when placed on balance sheets; and all data points that the real dangers lies with what is perceived as very safe, yet Ms Tett, her colleagues, and most of the bank regulation community see nothing strange with risk weights of 20% for what is AA to AA rated and 150% for the below BB-.

Ms Tett writes “There is little point in countering people’s “irrational” fear of immigrants by throwing statistics about or dismissing Trump’s supporters as “racist”.

Sir, I am of course not talking about racism, but should I not insist, as I do, day after day, with thousands of letters, in trying to illuminate those that who by favoring the dangerous safe, actually discriminate against the access to bank credit of the innocuous risky?

Over the last decade, around the world, millions of SMEs and entrepreneurs have seen their begging for an opportunity denied by sheer financial regulatory bigotry. And Sir, you are well aware that FT shamefully keeps mum on it.

@PerKurowski

What behavioral theory explains how hard it can be for even those who know it to understand?

Sir, Tim Harford discusses “base rate” and admonishes us:“It is easy to leap to conclusions about probability, but we should all form the habit of taking a step back instead. We should try to find out the base rate, or at least to guess what it might be. Without it, we’re building our analysis on empty foundations” “How to make good guesses” February 26.

So Mr. Harford: Clearly an asset that is evaluated as risky is normally expected to cause larger losses to a bank than an asset that is perceived as safe. But, what is the base rate for that a bank would create excessive exposures to what is ex ante perceived as risky? Is really what’s risky more dangerous to the bank system than what is perceived or has been deemed as safe? 

What sort of behaviorial explanation would Daniel Kahneman, Amos Tversky, Maya Bar-Hillel, Richard Nisbett, Eugene Borgida, Philip Tetlock and other experts give to the fact that a person like the Undercover Economist, even when in possession of the required knowledge, just cannot accept the fact that the pillar of our current bank regulations, the credit risk weighted capital requirements, is built upon a completely wrong foundation? 

@PerKurowski ©