For many people North Korea evokes the comic image of the lonely playboy Kim Jong-il in Trey Parker & Matt Stone’s Team America World Police (2004). I found a more complex sociopolitical reality in 2006 whilst researching a Masters mini-thesis which dealt in part with North Korea’s covert nuclear weapons program. A week after handing the mini-thesis in Disinformation’s video producer Nimrod Erez sent me links to stark photos of daily life in North Korea’s capital Pyonyang (folio 1, folio 2 & discussion board): deserted highways, military monuments to past battles and derilect residential towers.
Kim Jong-il’s nuclear ambitions were a significant barrier to foreign direct investment (FDI) in North Korea notably under South Korea’s Sunshine Policy to achieve geostrategic stability in the Korean Peninsula. Jong-il’s nuclear rollback “opens the way” to Hyundai Asan‘s FDI investment in the Kaesong Industrial Park (YouTube promotional video). South Korea’s small and medium enterprises (SMEs) spearhead the FDI initiative which creates an emerging market, provides knowledge transfer, and hedges against country and currency risks. South Korea’s government further offsets the SME’s country and operational risks with “low-interest loans and insurance.” The SME’s engagement strategy also benefits emerging market watchers such as the blog North Korean Economic Watch.
If the FDI initiative fails then North Korea officials can always turn Kaesong Industrial Park into a subsidiary of the Erich von Daniken theme park in Interlaken, Switzerland.
US capital and derivatives markets in mid-2008 provide a real-time laboratory for behavioural finance analysts who want to understand the madness and wisdom of crowds. The past week’s case studies include the implosion of the US bank IndyMac and the market volatility triggered by fears that Fannie Mae & Freddie Mac are highly exposed to liquidity risk.
As financial reporter Michael S. Rosenwald notes in The New York Times, these recent events appear to fit the behavioural finance hypothesis that individual investors who make fear-driven and risk-averse decisions can trigger pricing shifts as an aggregate rational herd. Guillermo A. Calvo and Enrique Mendoza found in a 1997 paper that globalisation counteracts the emergence of rumour markets based on imperfect information and country-specific knowledge, although not in emerging markets due to uncertainties.
However the recent events have different conditions that set delimits on Calvo and Mendoza’s model: the United States is the epicentre of the bear market triggered by the 2007 subprime crisis, Fannie Mae and Freddie Mac have psychological primacy as major financial institutions with US Federal Government backing, and investment media firms such as Bloomberg and CNBC use globalisation to create de facto rumour markets amongst day-traders and others.
Readers interested in rational herds should also check out Christopher P. Chamley’s book Rational Herds: Economic Models of Social Learning (Cambridge University Press, Cambridge UK, 2004), excerpt here.
Decision researchers are the other early winners of the 2007 subprime crisis, due to the failure of many quantitative models to predict the Black Swan event. Rosenwald mentions Harvard University’s new Bio-Behavioral Laboratory for Decision Science which conducts ‘conducts research on the mechanisms through which emotional and social factors influence judgment and decision making.’ He also refers to the Oregon-based nonprofit group Decision Research. An Australian-based counterpart might be the Capital Markets CRC, an R&D consortia that focuses on ‘new technologies and improvements in market design’.
Investment analysts still have divergent opinions on recent events. However the research agenda above prompts several new questions: What happens to rational herds and rumour markets when bio-behavioural methods of decision-making are no longer ‘imperfect information’ but are widely understood and integrated into investment choices? How will markets be redesigned to cope with this eventuality, and who will take on this responsibility? What new financial instruments, markets and products will emerge generativity?