Friday, February 26, 2010

An economic hoot

Shares in the Royal Bank of Scotland (RBS) reportedly went up by 6% yesterday, on news that their losses for the past year – at a mere £3.6 billion compared to the £24.3 billion the previous year - “were better than expected”! This substantial loss, being much “better than expected”, also allowed RBS to pay out some £1.3 billion in bonuses to their employees. Apparently if they did not pay out these vast sums, the talent of these employees, which gave them a loss of £24 billion last year and £3.6 billion this year, might leave for other banks (presumably ones also dependent on government handouts).

Meanwhile the Lloyd’s group reported losses of £6.3 billion for last year, but were apparently very upbeat because they expected a “significant improvement” for 2010.

And the gullible have sent the shares of RBS up by 6%.

It reminds one of the friar who consumed one bottle of scotch per day and landed an appointment at a seminary, where drinking was forbidden. Once the Father Superior became aware of the friar’s drinking habits, he gave him a severe dressing down and told him to stop it.

So the friar cut down his consumption of whiskey to half a bottle per day. This earned him the gratitude and friendship of all at the seminary.

It has been postulated that the dopaminergic neurons in the reward centres of the brain are more active during the expectation of reward than when the reward is obtained. Perhaps this explains why rewards are often disappointing.

But what if the reward far exceeds expectations, as a diminution in loss to a mere £3.6 billion, obviously was.

Would this entail an even more vigorous activity by these dopaminergic neurons?

An interesting brain experiment for neuroeconomics?


paopasc said...

Dear Professor Zeki's exactly what happens in Italy.
Politicians are often surprised to receive the reward of the election despite knowing of not keeping promises.
It 'just a case of " reward far exceeds expectations."
Best regards from Italy

Angela said...

Dear Professor Zeki, I always enjoyed reading your musings and insights. here's some of my musings upon your musings.
According to the theory of reinforcement learning, stimuli indicative of expected reward would lead to a dopamine pit for the reward driven dopamine release to fill.

Hence if the reward causes the same amount of dopamine release, if it were unexpected would the flat line turn into a peak? (Analogous to finding 10 pounds on the pavement?)

Hence by inference perhaps the intelligence of the economists in their erroneous predictions have been overlooked, and they are in fact misunderstood individuals. They predicted a depression that would overshadow that of 1929, crumple society and lead to anarchy. this was perhaps to diminish any signs of our optimistic expectations of a swift recovery. Then the unexpected reward would hit us in a timely fashion, when we realise the speedy expansion and recovery of the economy and our circumstances. Perhaps global glee was what they were in fact scheming.

Professor Zeki said...

Thanks, Angela, for your comments. You may, just may, be right. But that would be crediting economists with more intelligence than they apparently have or have demonstrated. I do not rate their intelligence at all highly. And when it comes to optimism and pessimism, it is perhaps instructive to recall that the Japanese Finance Minister was reported some three months ago to have told the Director of the Bank of Japan not to be so optimistic! There is an interesting lesson in that.