John Kay

Why do we so often find that events reinforce what we already believe? John explains how confirmation bias characterises reactions to the financial crisis.

John reviews the interim report of the Independent Banking Commission. The direction of travel is right but the devil is in the detail

The suggestion that we might partially turn back the clock has been described as a call for “Hovis banking”, referring to an advertisement that plays on nostalgia. The commercial succeeds because we believe the bread our grandparents ate, before innovations in technology and marketing, was nicer and more wholesome. Perhaps that is true in banking as in baking.

We will succeed in managing financial risk better only when we come to recognise the limitations of formal modelling. Control of risk is almost entirely a matter of management competence, well-crafted incentives, robust structures and systems, and simplicity and transparency of design.

The value of Modigliani-Miller – like any good model in physics or economics – lies as much in the questions it raises as in the truths it reveals.

No one loves the bearer of bad news. But short sellers, Wikileaks, accountants who mark to market, and even rating agencies, should be applauded for telling people the news they do not want to hear.

The risks that the financial sector has devised techniques to manage are not the everyday risks of an uncertain world: they are risks almost entirely created within the financial sector itself.

While there may be some economies of scope in the provision of financial services, they don’t in any event compare in order of magnitude with the collateral economic damage imposed by recent failures in the financial sector.

The Independent Commission on Banking headed by Sir John Vickers which the coalition Government has established will be told that such a separation between utility and casino can’t be done – although it was done in Britain for most of the 20th century.