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by 趙永祥 2018-04-21 22:35:00, 回應(0), 人氣(37)

What is the Difference Between Gambling and Investing?

"It is generally agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of stock exchanges." 

- John Maynard Keynes

What is the difference between gambling and investing? In order to differentiate between the two, we should start by defining them. Comparisons are often made between the two activities, but I've never seen the terms explicitly defined. If you're sufficiently motivated, I encourage you to try to define the terms 'gambling' and 'investing' before you continue reading this essay...
you may surprise yourself. (Go ahead, I'll wait here for you.)

What definitions did you come up with? Are investing and gambling mutually exclusive, or is there an area of overlap? And are the boundaries clearly delineated, or is there a gray area in the middle?

Let's see what the dictionary says. Here's what the Random House dictionary on my bookshelf says:
  • Gamble: "To play at any game of chance for stakes. To stake or risk money, or anything of value, on the outcome of something involving chance."
  • Invest: "To put money to use, by purchase or expenditure, in something offering profitable returns."
Both seem reasonable upon cursory review, but a closer look reveals that they're not terribly helpful. The definition for gambling could apply just as well to investing, and vice-versa.

The Dictionary.com web site says:
  • Gamble: "To bet on an uncertain outcome, as of a contest. To take a risk in the hope of gaining an advantage or a benefit."
  • Invest: "To commit money or capital in order to gain a financial return."
Again, the distinction isn't clear. In investing, are you not betting on an uncertain outcome? Are you not taking a risk in the hope of gaining an advantage or benefit? In gambling, are you not committing money? Are you not doing it in order to gain a financial return?

Beyond the Dictionary

OK, so the dictionary definitions aren't very useful. Perhaps if we examine some of the ways in which gambling and investing are generally perceived to differ, we might be able to build definitions from those characteristics.

Investing is a good thing, gambling is a bad thing.

I think it would be hard to argue with the claim that investing is, on the balance, a good thing. Investing is widely regarded as the engine that drives capitalism. It tends to put money in the hands of those with the most promising and productive uses for it, and drives the economy gradually upward. Investors aren't merely betting on which companies will succeed, they're providing the capital those companies need to accomplish their goals. The U.S.'s leadership position in technology is largely due to investments by venture capital firms, angel investors and technophilic individual investors. Similarly, you can change the world in a small way by investing in companies you believe in, such as socially or environmentally conscious firms and mutual funds, or biotech companies that are working on diseases that might affect you or someone close to you.

Gambling, on the other hand, is not so clearly making a positive contribution. Gambling does tend to help local economies, but also usually brings with it well-documented unpleasant side effects. I'll leave it up to the reader to decide whether gambling is, on the balance, a plus or a minus. Looking to the financial markets, one could make the case that people who gamble in this realm do serve a function, by adding to the market's depth, liquidity, transparency, and efficiency. But that's of relatively minor value, and those gamblers probably capture most of that value for themselves. On the other hand, they often increase the volatility of the markets, which is on the balance usually a negative (although it does afford savvy investors opportunities for larger profits). As Warren Buffett has said,
"Wall Street likes to characterize the proliferation of frenzied financial games as a sophisticated, prosocial activity, facilitating the fine-tuning of a complex economy. But the truth is otherwise: Short-term transactions frequently act as an invisible foot, kicking society in the shins."

The questions of whether gambling is morally wrong and how strictly it should be regulated are important but are well beyond the scope of this essay, and so I'll mention them only in passing. Governments generally frown on gambling (unless, of course, they're getting the lion's share of the profits, such as with state lotteries). Many religions frown on gambling (but they don't seem to mind church bingo). I have no problem with a person being morally opposed to gambling, as long as that person knows exactly what he/she means by 'gambling'.

I should hasten to add that not all types of investing are productive. Buying and holdingresults in a positive contribution to the economy, but buying and selling quickly, the way day traders do, results in no net contribution. For the purposes of the current investigation, we could either reclassify investing-type activities that aren't productive as gambling, or we could consider these to be exceptions to the rule. I lean toward the latter interpretation.

In investing, the odds are in your favor; in gambling, the odds are against you.

Peter Lynch has said that
"An investment is simply a gamble in which you've managed to tilt the odds in your favor."

But that position is too simplistic. There are plenty of investments where the odds are against you: futures, options, and commodities trading (where you get hurt on commissions and the bid/ask spread), frequent stock trading (for the same reason), and selling short (since the market goes up rather than down in the long run), to name just a few examples. Similarly, while for most types of gambling the odds are against you, it is possible for the odds to be in your favor. I spent one summer during college working in Arizona, and I drove up to Nevada most weekends to play blackjack. By counting cards, I was able to obtain a small but predictable advantage over the house, about 1.5% per betting unit on average. (I haven't returned since then, for several reasons: it's not intellectually challenging; while card counting is not illegal, Vegas casinos can make you leave if they suspect you of doing it; and I've found it easier and more enjoyable to make money in stocks than in blackjack.) Expert poker players can also make money at casinos, because their competition is other players rather than the house, and as long as the house takes its cut it doesn't care how the rest of the money is redistributed among the players.

There are additional problems with this attempted characterization of gambling as a losing bet and investing as a winning bet. It implies that a given activity switches from gambling to investing (or vice versa) as soon as the odds swing past the breakeven point. Similarly, if two players are participating in an activity in which one has an advantage over the other, it would mean that one person is gambling and the other is investing. That would imply that institutions which get in on IPOs at the offering price would be investors, and the little folks that those institutions immediately flip the shares to for a profit would be gamblers. Furthermore, while it's possible to calculate exact odds for some casino games, this is rarely the case on Wall Street. How can you know for sure whether the odds are for or against you if you decide to buy a particular stock today?

What about venture capital investments, you say? Aren't the odds stacked against them? Yes, the majority of venture capital investments result in loss, often a total loss of the amount invested. However, venture funds typically yield higher returns than stocks because a small percentage of the firm's investments are home runs, more than making up for complete losses on other investments. So while venture capital might seem like gambling in that the odds are against the VC firms on any given bet, on average the expected payoff is positive, so the odds in the long run are actually in their favor.

Gambling can be addictive and destructive, but investing can't.

Compulsive gambling has been correctly identified as a problem, and organizations like Gamblers Anonymous are helping people cope with the problem. No similar problem is generally thought to exist in investing. There is no Investors Anonymous, and no one talks about compulsive investors. But while there isn't yet widespread acknowledgement of investing addiction, there will be soon. Marvin Steinberg, executive director of the Connecticut Council on Compulsive Gambling, recently said this about investing addiction:
"We don't know the true extent of the problem because hardly anyone identifies it as a gambling problem -- they see it as a 'financial problem' or an 'investing problem.' "

Many online investors who claim to be buy-and-hold investors check their portfolios on a daily or hourly basis, and jump in and out of stocks more often than they realize. Active trading can be expensive, both in terms of the commissions and bid/ask spreads and in terms of emotional fatigue. Also, some people invest more aggressively than they should, which is virtually identical to gamblers who bet more money than they can afford to lose. This page provides a list of questions to help a person determine if he/she might be a compulsive gambler. Replace the word 'gambler' with 'investor' for each question and the questionnaire is equally useful, but for a different purpose.

Gambling is entertainment, investing is business.

As Brad Hill has said,
"Global financial markets represent the greatest spectator sport humanity has ever devised. It has planetary reach, a multitude of local competitive arenas, volumes of statistics, star players, and -- best of all -- anyone can move between the domains of observer and participant, fan and player. If you squint just right, the steadfast newscasters of CNBC appear to be play-by-play announcers, calling the game for U.S. fans. And do financial sections of newspapers differ from sports sections in their presentation of story, data, and personality? Not essentially."

While the 'gambling as entertainment, investing as business' dichotomy may have been clear in the past, the line is being blurred. The internet has enabled online brokerages and other financial web sites to revolutionize retail investing, which on the balance is a tremendous benefit to both individual investors and the economy in general. However, the widespread accessibility of cheap online trades has also attracted some people who enjoy betting and view online trading as a new form of entertainment. The major factors accelerating this trend are that gambling is strictly regulated and not ubiquitous, and that the odds are usually better in investing than in gambling.

Chris Anderson, executive director of the Illinois Council on Problem and Compulsive Gambling, has said that compulsive gambling isn't really about making money, it's about "action", and the lure of the big win. While I'm not a neuroscientist, I suspect that the chemical changes that occur in the brains of compulsive gamblers and compulsive day traders are similar, since they're both riding on the same emotional roller coaster of wins and losses. Similarly, while some people who invest in high-tech stocks do it for the potential returns, others do it because of the rush they get from the tremendous volatility. It feels right to classify the latter group as gamblers rather than investors.

I don't mean to imply that I think it's acceptable to gamble for entertainment but not to invest for entertainment. I think both are equally acceptable, provided the person enjoys the activity (as opposed to feeling a compulsion to participate) and provided the person uses only money he/she can afford to lose. But I'm probably not the best person to make a judgment on this question, because I've never found either gambling or investing to be entertaining... my goal has always been value creation rather than enjoyment, and I place bets only where the odds are most heavily in my favor, not where I expect to find the most excitement.

Investing is saving for specific goals, such as retirement, while gambling isn't.

Many people regard investing as a planned strategy of wealth-building for specific future goals. And this is certainly true of some types of investing. But this is largely a by-product of having the odds in one's favor. If you have the edge (whether in blackjack or in equities), time and the laws of probability are a powerful combination. Gambling would work just as well as investing for financial event planning if gambling games were in your favor.

Investors are risk-averse, while gamblers are risk-seekers.

Risk-taking is intrinsic to both gambling and investing. There are a few investments that don't entail risk, such as fixed annuities and government bonds held to maturity, but even those have inflation risk. The major difference between the two groups seems to be the participant's relative willingness to accept risk. Investors tend to avoid risk unless adequately compensated for taking it, but gamblers don't. To put it another way, investors take only the risks they should take, while gamblers also take some risks they shouldn't take. Would you rather have $50 or a 50/50 chance at $100? If you take the $50, you're an investor. If you go for all or nothing, you're a gambler. Would you rather put your money under your mattress or in an extremely volatile stock that could go bankrupt or could double in value? The question is slightly different, but the answer is equally instructive. If you expect to double your money quickly, whatever you're doing is probably gambling, even if it happens on Wall Street rather than in Las Vegas.

However, this characterization of gamblers as risk-takers applies only to non-professional gamblers, people who visit Atlantic City for a weekend for entertainment purposes. Professional gamblers who have managed to tip the odds in their favor behave more like investors, shying away from risk unless the reward is sufficient to justify taking the chance. In fact, one could make the argument that investors generally take on more risk than professional gamblers, because of the uncertainly inherent in the financial markets. As I mentioned before, it's difficult for investors to calculate how much of an advantage they have, but the odds of a given gambling strategy can be known either precisely or at least approximately.

Investing is a continuous process; gambling is an immediate event or series of events.

This rule does seem to hold in most cases. Investing is a continuous process of deployment of capital in search of continually increasing net worth. As a result, delayed gratification is implied. Gambling is a specific act or series of acts, centered around immediate gratification. In this respect, day trading resembles gambling: the participant gets in, the price moves up or down, and he/she gets out, usually in a matter of minutes. The same could be said of buying with the belief that a stock is about to jump, or buying IPO shares with the intention of flipping them in a few hours or days, or buying options which are close to expiration. On the other hand, buying in the belief that a stock's price will eventually reflect its value, with the plan of holding as long as it takes for this to happen, is more like investing.

Investing is the ownership of something tangible; gambling isn't.

The latter half of the statement is certainly true, but the former half is only sometimes true. Some investments involve the ownership of something tangible, but many don't. For example, derivatives are investments 'derived' from other investments. An option is a derivative that gives the owner the right to buy or sell a specific amount of a given security at a specified price during a specified period of time. Options are generally classified as investing rather than gambling, and rightly so, but they do not represent ownership of anything tangible. However, when you realize that an option is essentially a bet that a given security will or won't be above a certain price on or by a certain date, it starts to feel more like gambling than investing.

An even more strict definition of investing would require that it involves the purchase of an asset which either produces a stream of income or can be made to produce a stream of income. But this definition would eliminate such assets as collectibles, stamps, art, and gold, which have no intrinsic value. I don't think it makes sense to exclude them simply on this basis. We might choose not to consider them investments because of their poor long-term performance, but we shouldn't choose not to consider them investments simply because they won't ever produce a stream of income.

Investing is based on skill and requires the use of a system based on research, while gambling is based on luck and emotions.

A lot of so-called investors don't do nearly as much research as they should. Many buy on tips or rumors, or based on some analyst's price target, without doing their own exhaustive research. It feels right to call such behavior gambling. Similarly, investors who are making decisions based on emotions (especially greed and fear), rather than remaining emotionally detached and sticking with their strategy, are to some extent gambling.

On the other side of the coin, some gamblers do serious research, often paying hundreds of dollars a month for real time data on what the current lines are (for example, on http://www.scoresandodds.com or http://www.vegasinsider.com). Professional sports investors devote 12 hours a day, every day, to handicapping sports. They read dozens of newspapers, subscribe to line services, maintain inside contacts, and have years of experience, usually on both sides of the betting counter. These professionals keep their emotions away from the decision-making process. Once they have a system that works for them, they don't second-guess it, focusing on long-term profits instead of day-to-day performance. Also, they concentrate on the areas in which they achieve maximum results. Many professionals bet only on one sport, which bears more than a superficial resemblance to Warren Buffett's idea of staying within one's "circle of competence".

While investing and gambling probably initially appear to be worlds apart, the above attempts at differentiation revealed that the actual differences are smaller than the perceived differences, and that there is a significant gray area in the middle. Based on the above characterizations, it is clear that the appropriate classification isn't wholly dependent on the activity, but also on the way in which the activity is conducted. There's a big difference between buying a stock after thoroughly researching it and buying a stock by hitting it on a dartboard. This is true even if the same stock happens to be chosen. Similarly, there's a big difference between buying exotic derivatives to hedge against an existing risk or position and buying the same derivatives because you saw a web site touting them. As a final example, there's a big difference between buying a government bond in order to collect the interest it earns and buying the same bond in the belief that interest rates are about to drop and the bond's value will skyrocket.

One interesting thing to note is the pattern of exceptions to the attempted characterizations. Most of the exceptions were people who were doing investing-related things but weren't behaving like investors, or people who were doing gambling-related things but weren't behaving like gamblers. Of the four groups, recreational investors, professional investors, recreational gamblers, professional gamblers, there are more similarities between the two recreational groups and between the two professional groups than between the two investing groups and between the two gambling groups. Specifically, those who use a rigorous system, do research, tilt the odds in their favor, treat it as a business rather than as entertainment, avoid addiction, and keep their emotions in check tend to behaving like investors, and those who don't tend to be behaving like gamblers. It might not be such a stretch to call professional gamblers 'investors' and recreational investors 'gamblers'.

A Third Option: Speculating

Another possibility is that the two terms 'gambling' and 'investing' aren't sufficient to cover the entire range of activities under consideration. A third term, 'speculating', is often used to straddle the two, specifically to handle activities that would ordinarily be considered investing but are done in a way that make them feel more like gambling.

In The General Theory of Employment, Interest, and Money, John Maynard Keynes defined speculation as "the activity of forecasting the psychology of the market", and speculative motive as "the object of securing profit from knowing better than the market with the future will bring." Many people consider billionaire George Soros to be an investor, but he prefers the term speculator. In fact, he has said that "an investment is a speculation that has gone wrong." What he means by this is that, among speculators, an 'investment' is the name they give to a speculation that didn't work out the way they expected and that left them stuck with a position they hope will improve with time. Soros and other speculators make their predictions partially based on market psychology, and in this respect their behavior fits perfectly with the Keynes' definition of speculation. But there is much more to speculating than just interpreting market psychology, and this definition isn't sufficiently distinct from the ones we formulated for gambling and investing in the above section.

According to the dictionary on my bookshelf, speculation is "the engagement in business transactions involving considerable risk for the chance of large gains." By this definition, the entire distinction rests on the degree of risk and size of potential gains. In support of this definition, bond rating agencies commonly use the term "speculative" to refer to high-risk bonds (those rated below BBB by S&P or Baa by Moody's).

In their book Investments, Zvi Bodie, Alex Kane, and Alan Marcus argue that "a gamble is the assumption of risk for no purpose but enjoyment of the risk itself, whereas speculation is undertaken in spite of the risk involved because one perceives a favorable risk-return trade-off." But this is too simplistic... no one would play casino games if the only possible outcomes were either breaking even or losing; the rush they experience comes from the possibility of winning and not merely from the taking of risk. They continue: "To turn a gamble into a speculative prospect requires an adequate risk premium for compensation to risk-averse investors for the risks that they bear. Hence risk aversion and speculation are not inconsistent." This part I agree with. In fact, whether they realize it or not, their definition reclassifies gambling as speculation when the odds can be sufficiently tipped in the player's favor, such as in professional blackjack or poker, which fits in nicely with argument made in the previous section.

Zvi Bodie et al appear to be saying that in order to be speculating rather than gambling, the person must not take greater risks than are justified by the potential reward. Others say that in order to be speculating rather than investing the person must be taking greater risks than are justified by the potential reward. For example, in Benjamin Graham and David Dodd's classic Security Analysis, they argue that "an investment operation is one which upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative." Both positions are defensible. But perhaps a better interpretation would rest on the realization that different investors have different tolerances for risk. Perhaps speculators are those who are risk-neutral, while gamblers are risk-seekers and investors are risk-averse. While adding the term 'speculation' to the mix might have some value, it probably adds more confusion than clarification, so I prefer to leave it out and focus on just 'gambling' and 'investing'.


So what's my resolution to this definition conundrum? Well, the purpose of words is to communicate concepts. So it doesn't really matter what definitions you use, as long as you and the person(s) you're communicating with are clear about what is meant by those words. And even more importantly, as long as you know what you're doing, investing or gambling, before you do it.

But with that said, it would be beneficial if everyone could agree on what the terms mean, so we don't need to make our definitions explicit every time we want to use them. To this end, I offer the following definitions, which are built from the various characterizations in the above section:

"Any activity in which money is put at risk for the purpose of making a profit, and which is characterized by some or most of the following (in approximately descending order of importance): sufficient research has been conducted; the odds are favorable; the behavior is risk-averse; a systematic approach is being taken; emotions such as greed and fear play no role; the activity is ongoing and done as part of a long-term plan; the activity is not motivated solely by entertainment or compulsion; ownership of something tangible is involved; a net positive economic effect results."

"Any activity in which money is put at risk for the purpose of making a profit, and which is characterized by some or most of the following (in approximately descending order of importance): little or no research has been conducted; the odds are unfavorable; the behavior is risk-seeking; an unsystematic approach is being taken; emotions such as greed and fear play a role; the activity is a discrete event or series of discrete events not done as part of a long-term plan; the activity is significantly motivated by entertainment or compulsion; ownership of something tangible is not involved; no net economic effect results."

Speculating - I would prefer to avoid this term entirely, but if necessary I would define it as:
"Investing or gambling characterized by a high degree of risk and a high potential for reward."

Are you disappointed that I didn't crystallize the essence of gambling and investing into a single distinguishing feature? Did I merely sidestep the ambiguity, and sweep the gray areas and the important exceptions under the rug? I don't think so. The taxonomy doesn't have to be completely distinct in order to be useful, nor does it need to be just a single feature. And just because some of the characterizations had exceptions doesn't mean they should be thrown out entirely. Nearly everyone agrees that the concept of 'chair' is a useful one, even though it's difficult to define exactly what the necessary and sufficient characteristics of a chair are.

Why Does it Matter?

  • Lawmakers and regulatory bodies need to be clear on what the terms mean, so they understand the scope of their legislation and regulation, regarding prohibited behavior, adequate disclosure, participant protection and similar issues. In general, I'm in favor of less regulation and more disclosure for both activities described as gambling and those described as investing, but I'm no expert on the subject and a thorough discussion is beyond the scope of this essay.
  • Everyone needs to realize how easy the internet makes it to gamble under the guise of investing. When people use generic terms without ever specifying what they mean, it's easy for those terms to gradually change in meaning, and I think that's exactly what the internet is causing to happen. I don't mean to imply that the internet's democratization of investing is a bad thing. In fact, I think it's the one of the most important developments in the history of investing. My hope in pointing this out is to awaken those individuals who are acting like gamblers but who think they're acting like investors.
  • Investing addiction is as serious as gambling addiction, and should be treated as such. If more people start to view buying and selling stocks online as a way to get the betting rush that previously required a trip to a casino, is there any reason to think the same negative consequences that follow gambling won't also follow investing? Perhaps investing addiction is not getting the attention it deserves because most people are attaching to it all the positive connotations of investing and none of the negative connotations of gambling.
  • Those who have ethical problems or religious issues with gambling (or even investing) owe it to themselves to figure out exactly what they object to and why. As I mentioned, I have no such ethical problems with either gambling or investing, but again, this discussion is beyond the scope of this essay.
I'll leave it to Benjamin Graham to further emphasize why such clarity is essential. In The Intelligent Investor he said:
"The distinction between investment and speculation in common stocks has always been a useful one and its disappearance is a cause for concern. We have often said that Wall Street as an institution would be well advised to reinstate this distinction and to emphasize it in all dealings with the public. Otherwise the stock exchanges may some day be blamed for heavy speculative losses, which those who suffered them had not been properly warned against."

He continues:
"Outright speculation is neither illegal, immoral, nor (for most people) fattening to the pocketbook . . . There is intelligent speculation as there is intelligent investing. But there are many ways in which speculation may be unintelligent. Of these the foremost are: (1) speculating when you think you are investing; (2) speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it; and (3) risking more money in speculation than you can afford to lose."

I agree completely, and I suspect that his use of the term 'speculating' is very similar to this essay's use of the term 'gambling'.

Special Disclaimer

  1. This essay is not meant to condone gambling, or to suggest that you cash out your portfolio and become a professional blackjack or poker player. Those are tough ways to make money, and were mentioned primarily for illustrative purposes.
  2. We recommend that you get assistance from a professional before doing anything you don't know how to do.
  3. Some of these activities, especially those considered gambling, might not be legal in certain places. Even if you find bets for which the odds are in your favor, we encourage you to make sure your chosen activity is legal before participating.


by 趙永祥 2017-11-22 07:07:04, 回應(0), 人氣(40)

Risk Managements in the Financial Markets


Announced by Dr. Chao Yuang Shiang 

Dep. of Finance in Nan Hua University (NHU) May, 2016.

by 趙永祥 2017-11-10 08:29:32, 回應(0), 人氣(41)

UK Business and Economy News Opinions Analysis

(Announced : 15-October-2017)

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UK Business and Economy News Opinions Analysis

3rd November 2017 – More Signs That Most UK Economists Are Wrong About British Economy Again

Britain’s services sector grew by the fastest rate in six months.

IHS Markit/CIPS purchasing managers’ index (PMI) jumped to 55.6 in October from 53.6 in September, its highest level since April and its biggest one-month rise since August 2016.

2nd November 2017 – UK Interest Rates Rise For First Time In 10 Years

The Bank of England BoE increased UK bank base by 0.25% to 0.50%.   The Governor of the BoE says that this is a good news story for the UK.   It indicates that the economy is growing.   Businesses are investing more.

Consumer debt is not out of control, but inflation needs controlling with a rate rise now and more rate rises in near future.

Borrowing is set to increase.   Hopefully UK savers will benefit from higher rates.

1st November 2017 – UK Manufacturing Sector Outperforms The Economic Experts Once Again

The UK pound has jumped to a new intraday high against the USdollar after it was revealed that the UK manufacturing sector is buzzing.

UK manufacturing posted stronger than expected sector performance in October, according to latest IHS Markit’s PMI survey.

Britain’s manufacturers are increasingly confident that the global economy, including the often derided UK economy, is recovering.   Recruitment in UK manufacturing factories is up and set to increase at its fastest rate in years so UK manufacturing output is going to increase too.

UK growth accelerated in the manufacturing sector in October, with new orders increased and UK exports grew.   The UK manufacturing sector may even hit annualised growth of 4% if the present rate of expansion continues over the next 12 months.   The number of UK manufacturers expecting new orders to fall is in single digits.

Will UK interest rates will rise this week?   Yes.

9th October 2017 – UK Wage Costs Rising Faster Than Thought

The Office for National Statistics ONS miscalculated a measure which suggest UK wages are rising faster than first indicated.   This means that it is more likely that UK interest rates will rise in November 2017.

The ONS issued a correction after it messed up the calculation of a crucial measure the Bank Of England BoE uses to decide on interest rate adjustments in UK.   The ONS used the wrong set of data to calculate UK labour cost, the cost of employment per worker.

UK labour cost rose 2.4% in second quarter of 2017 not the 1.6% the ONS previously said it rose.   Now that the BoE knows UK labour unit costs are rising faster than thought there is more pressure to raise interest rate in UK to mitigate the threat to rising inflation.

On the plus side this shows that wages are rising faster which is a sign that the UK economy will strengthen further.

29th September 2017 – Mark Carney, governor of Bank of England BoE, indicates a UK interest rate rise in November 2017

Mark Carney said on BBC’s Today programme today that UK interest rates “on track” to rise in November 2017.

“What we have said, that if the economy continues on the track that it’s been on, and all indications are that it is, in the relatively near term we can expect that interest rates would increase”

Most financial economists and commentators are now factoring in a UK interest rate rise in November.

21st September 2017 – Public Sector Spending Deficit Lowest August Deficit In 10 Years

Domestic and foreign shoppers increased UK government VAT receipts, reducing the amount needed to be borrowed in August.   As a result, the Chancellor might be able to give some money away in the upcoming budget in November including increasing public sector pay faster.

If people have more money to spend, this could boost future government receipts and boost corporate earnings.

20th September 2017 – Majority Of Economists Expect UK Interest Rate Rise In November 2017

The majority of economists polled by Reuters expect the Bank of England BoE to increase UK interest rates in November.

According to the economists polled an interest rate hike in November is now a certainty, yet fairly recently very few were predicting an interest rate rise in 2017.

18th September 2017 – UK Is Growing Faster Than First Thought

The Centre for Economics and Business Research (CEBR) is predicting the economy to grow by 1.5% in 2017, where it previously forecast just 1.3% UK growth.

The CEBR has revised UK growth upwards due to the improved performance of UK manufacturing and increased consumer confidence in UK economy.

16th September – Higher Inflation and Pick Up In UK Growth and Global Growth Could Mean Interest Rate Rise Sooner Than Later

Bank of England representatives on MPC have recently hinted that the UK needs higher interest rates, potentially before the end of 2017.   As a result the value of the pound has risen in the expectation that rates will soon be on the up and not 2019 as previously many economists thought.

Fears that Brexit vote will cause a collapse of the UK economy have failed to materialise.   In fact house prices continue to rise in most parts of the UK, unemployment is a record low’s, wages are starting to rise faster, manufacturing in UK has experienced a renaissance and things are generally very healthy as indicated by rising inflation.

31st August 2017 – UK Should Increase Interest Rates

According to a member of the Monetary Policy Committee MPC, Michael Saunders, the UK needs to increase its interest rate now to help keep inflation under control in the next few months.

In addition, it will start to educate and familiarise people with more noraml interest rate levels and start to adjust their attitude to borrowing and expenditure.   This may help head off a debt bubble bursting in the UK.

27th August 2017 – UK Consumers Are More Confident In UK Economy

British consumer morale improved in August according to poll from YouGov.

Strong trade, particularly UK exports, and business investment should counterbalance any reduction in UK consumer spending, according to the Bank of England, but any uptick in UK consumer confidence will be a welcome bonus to the UK economy.

6th August 2017 – Credit Boom Threatening UK Resilience

The majority of actual real economic figures suggest that interest rates should have risen by now, however the Bank of England BoE continues to resist interest rate increases in the UK.

UK consumers are borrowing more.   Much of this extra borrowing is being spent on consumer goods like new cars.   The UK consumer is very used to cheap money and there is a belief that interest rates will never increase.   This belief is being fed by the BoE who don’t raise interest rates.

In addition, there is no reason to save money in the UK.   Interest rates are so low the return doesn’t even cover inflation.   If interest rates were increased inflation would reduce and savers would have more of an incentive to save for the future.

5th August 2017 – UK Economy To Boom In Second Half Of 2017

Britain’s economy is about to prove to people it is far healthy than the figures for the first half of 2017.

The National Institute Of Economic and Social Research (NIESR) is a think tank that believes that the UK economy is about to perform very strongly.   Overall growth for 2017 will be 1.7% but this is only because of the relatively slow growth of the first half of 2017.   UK economic growth will be driven by UK exporters, who will continue to outperform even recent good business development.

4th August 2017 – Former Bank Of England Deputy Governor Says The UK Should Be Raising Interest Rate Now

Sir John Gieve says there is a “strong case” for raising UK interest rates because the economic disaster predicted by Remainers if the UK voted to leave the European Union EU has not happened.

The Bank of England this week held UK interest rate at 0.25%.   Sir John Gieve looks at low unemployment will start to push up UK wages and inflation is already high compared to recent years and way above the Bank of England’s own target of 2%.   If now is not the right time to raise UK interest rate then when is?

The website linkage 


by 趙永祥 2017-11-08 07:03:56, 回應(0), 人氣(33)

Business Risk Management

- Global Business Collaboration



by 趙永祥 2017-08-22 10:43:22, 回應(0), 人氣(177)

How to implement Firm-wide Risk Management

Firm-wide risk management entails a significant commitment of time and resources. It requires a focus on the central businesses of a firm, bottom-to-top review of lending or origination, trading or market making, and intermediation with a risk management perspective. It leads to the construction of databases and reporting systems quite different from standard accounting systems. In this process, there are some guiding principals for successful implementation:

First, risk management must be integral to an institution’s business plan. Decisions to enter, leave, or concentrate on an existing business activity require careful assessment of both risks and potential returns. A firm must define risk management practices for each business activity it pursues. It must eliminate those activities not part of its focus so that it does not assume avoidable risks because of a lack of management oversight.

Second, a firm must define the specific risks of each activity and develop ways to measure them. Similarly, it must develop databases to measure risk consistently across the entire organization.Credit risk evaluation techniques, for example, should be the same in corporate lending as in correspondent banking. Only then will aggregate credit quality reports have meaning for senior management.

Third, a firm must establish procedures so that risk management begins at the point nearest to the assumption of risk. This means it must adapt trade-entry procedures, customer documentation, client engagement methods, trading limits, maximum loan sizes, hedging strategies, and a myriad of other normal activities to maintain management control, generate consistent data, and eliminate needless exposure to risk.

Fourth, a firm must develop databases and measurement systems in accordance with how it conducts business. For example, most accounting systems for trading operations record trades on the basis of settlement day. However, to measure trading-desk risks, risk management systems must record positions on a trade-date basis, which means that the risk management system must access the trade-entry system directly. Moreover, for accurate daily reports, trades must be recorded, entered, and checked frequently. Next-day corrections of bad trade information are not timely enough.

Finally, none of these procedures or databases are effective or meaningful until the firm establishes an overall risk management system that senior managers use.23 It must use the system to evaluate businesses, individual performance, and its value added. The system must be the ongoing focus of management analysis and discussion and, over time, become part of board meeting presentations. To achieve this, the business units being monitored must check risk reports regularly and tailor reports for their users. The system must be part of management’s oversight, control, and compensation.

Written by Dr. Chao Yuang Shiang
Faculty, Dep. of Finance, Nan Hua university

趙永祥 博士
(南華大學財務金融學系暨財務管理研究所 專任助理教授)

by 趙永祥 2017-08-21 20:58:20, 回應(0), 人氣(76)

Five Ways to Make Risk Managements Well

Financial investing is a common way businesses and individuals generate passive income streams. Investing money can be done through a wide variety of investment instruments. Stocks, bonds, derivatives, mutual funds, money markets and other items are just a few types of available investments. All investments involve some type of risk, albeit certain investments are less risky than others. Properly managing risk can ensure businesses and individuals generate income and do not lose their capital on unwise choices.

1. Diversify

The standard investing guideline for risk management is diversification, which requires businesses and individuals to invest in a wide variety of investments. A common diversification method is to split money in a specific way, such as 25 percent in low-risk money markets, 25 percent in government bonds, 30 percent in domestic stocks or derivatives and 20 percent in international investment instruments. Diversification attempts to spread risk among several safe and risky investments in various economic markets.

2. Use Savings Account

Businesses and individuals should hold a portion of their capital back when making investments. Using a savings account ensures these individuals have cash on hand for emergency purposes if necessary. Savings accounts may also represent an extremely safe investment if the bank or credit union offers interest on the savings account balance. Businesses and individuals can also use a savings account to electronically transfer funds when buying or selling investments, creating quicker transaction times.

3. Invest Sooner Than Later

Investing sooner rather than later allows businesses and individuals to let their money work longer and potentially earn higher returns. If investment markets become extremely risky and businesses or individuals start losing money, investment decreases will only reduce earned income rather than the original principal balance. This allows individuals to cash out of extremely risky investments with little economic loss relating to their original investment.

4. Learn About Investments

Managing financial risk often requires businesses and individuals to spend copious amounts of time learning and understanding about the investment market. A portion of this time should also be spent on learning about specific investment instruments offered by companies and governments. Investment education may come from brokerage houses, investment websites, books or other similar materials. Proper investment education can mean the difference between highly successful returns and significant losses.

5. Be Savvy, Not Greedy

Financial investing often requires businesses and individuals to be savvy, not greedy. Savvy investors often understand when to cash out and accept current financial returns. Greedy investors will continually wait for the investment to go higher and provide better financial returns. The problem with waiting for investments to go higher is the investments might begin to go down. Significant reductions in investments can occur quickly and erase all financial returns earned on investment instruments.

Written by Dr. Chao Yuang Shiang (趙永祥 博士)

Faculty, Dep. of Finance, Nan Hua university

(南華大學財務金融學系暨財務管理研究所 專任助理教授)

21- August- 2017   
by 趙永祥 2017-08-21 07:06:06, 回應(0), 人氣(68)

When to Practice Risk Management

The contrast between the REMIC and the commercial bank is stark. The debt and equity claims that both the REMIC and the commercial bank issue are risky in almost any sense. Yet, in the case of the REMIC, investors buy the instruments and seldom hold the intermediary accountable for their performance. The trustee monitors the service and foreclosure firm for a fee but is not held liable for market performance. Theoretically, the REMIC is the ultimate passive intermediary. Conversely, active management is critical to the commercial bank’s activity. The bank originates and manages illiquid assets whose values in the open market are imprecise and over time. Unlike the REMIC, the bank has no predetermined life span or constraints on asset replacement.

Differences between Institutions

The difference between a REMIC and a bank is the transparency or permanency of each organization’s investor interests. An investor in a REMIC can obtain a very detailed description of its assets, contracts, and payment schemes for regular interests. The rules for operation are quite clear. Thus the many unexpected events that severely affect the REMIC’s value do not lead to questions of confidence or competence on the part of the trust.

In a typical, actively managed financial firm, however, such information is only available to managers because of the uncertainty concerning the economic value of financial claims. Either because of product tieins, as in insurance products, or because of ambiguity in underlying asset value, pricing these assets and therefore shareholder value is problematic for the intermediary. In addition, the extent of dynamic asset change and the rules followed for such portfolio adjustment are rarely communicated or subject to monitoring, due to the features of the assets held.

We can generalize from the distinctions between these two institutional types by imagining principal financial institutions arrayed in a two-dimensional space in which one axis measures how transparent its actions are to investors and the other axis measures how actively its investments are managed . For simplicity, institutions are either transparent, translucent, or opaque in information and either active or passive in operation. Discretionary risk management activity is concentrated in the actively managed, opaque institutions, clustered in the top right corner. On the other hand, transparent institutions with rather passive investment strategies are in the lower left. In these institutions, rules substitute for management.

There are also institutions at the other extremes. In the upper left are the actively managed institutions such as open-end mutual funds, which are fully transparent but actively managed in a manner clearly defined by their prospectus. These institutions limit risk management to eliminating unnecessary risk. They shed nonessential risk at the same time that they seek those risks essential to the value-added activity. At the other extreme are agency mortgage pools, which flourish only with implicit government guarantees. The opaqueness of these portfolios makes the institutions’ asset value uncertain, and only through credit enhancements can the investor be convinced of the timeliness of future cash flows.

Institutions can also flourish inside this two-dimensional space, labeled translucent, because some information is available, but it is often not timely or wholly credible. At institutions in the vertical, intermediate range, a substantial amount of energy is spent communicating with stakeholders and presenting clear statements of investments or investment policy. These actions are attempts to clarify the institutions’ positions and perhaps move them into the transparent area.

Fees associated with intermediation services tend to correlate with the extent of active management. For example, index funds generally carry lower management fees than either actively managed investment funds or depository institutions. In part, this is because the latter have higher operating costs associated with more portfolio transactions and a higher turnover rate. However, this is also due to the presumed greater value added that the managers provide. They have discretion because of their expertise in the chosen market and their associated reputation for above-average performance and skill in active risk management. In essence, one value-added activity that managers perform is to control risk at the firm level in order to increase portfolio value to stakeholders.

Written by Dr. Chao Yuang Shiang (趙永祥 博士)

Faculty, Dep. of Finance, Nan Hua university

(南華大學財務金融學系暨財務管理研究所 專任助理教授)

20- August- 2017   
by 趙永祥 2017-08-21 06:36:26, 回應(0), 人氣(95)

Why Does Risk Management Matter?

According to standard economic theory, firm managers should maximize expected profits 

without regard to the variability of reported earnings. However, literature on the reasons 

for managers’ concern about the volatility of financial performance dates back to 1984, 

when Stulz offered a viable economic reason for firm managers’ concern. 

Since then, there have been alternative theories and explanations; a recent review of the literature 

presented four reasons to justify active risk management:

  1. Managerial self-interest
  2. Tax effects
  3. Cost of financial distress
  4. Capital market imperfections

In each explanation, the volatility of profit leads to lower value to at least some of the firm’s 

stakeholders. In the first, it is noted that managers have limited ability to diversify their 

investment in their own firm, due to limited wealth and the concentration of human capital 

returns in the firm they manage. This fosters risk aversion and a preference for stability. 

In the second, it is noted that, with progressive tax schedules, the expected tax burden is 

lessened by reduced volatility in reported taxable income. The third and fourth explanations 

focus on the fact that a decline in profitability has a more than proportional impact on the 

firm’s fortunes. Financial distress is costly, and the cost of external financing increases rapidly 

when a firm’s viability is in question. Any one of these reasons is sufficient to motivate 

managers to be concerned about risk and carefully assess both the level of risk associated 

with any financial product and potential risk-mitigation techniques.

How Can a Firm Mitigate Risk?

Managers can consider three generic risk-mitigation strategies

  1. Eliminate or avoid risks by simple business practices.
  2. Transfer risks to other participants.
  3. Actively manage risks at the firm level.

Risk avoidance involves reducing the chances of idiosyncratic losses by eliminating risks 

that are superfluous to the institution’s business purpose. Common risk-avoidance activities 

are underwriting standards, hedges or asset-liability matches, diversification, reinsurance or 

syndication, and due diligence investigation. The goal is to rid the firm of risks that are unessential 

to the financial service provided or to absorb only an optimal quantity of a particular risk.

What remains is some portion of systematic risk and the risks that are unique to an institution’s 

business franchise. In both, risk mitigation is incomplete and can be enhanced. Any systematic risk 

not required to do business can be minimized. Whether this is done is a business decision that the 

firm can clearly indicate to stockholders. Likewise, in operational risk, the firm can address the risks 

of providing service — including fraud, oversight failure, lack of control, and managerial limitations. 

Aggressive risk-avoidance activities in both these areas will constrain risk, while reducing the 

profitability from the business activity. Accordingly, the firm can communicate the level of 

effort it makes to reduce these risks to shareholders and justify the costs.

The firm can eliminate some risks or at least substantially reduce them by transferring them. 

Markets exist for the claims that many of these financial institutions issue and/or the assets 

they create. 

Individual market participants can buy or sell financial claims to diversify or concentrate the risk in 

their portfolios. To the extent that the market understands the financial risks of the assets that the firm 

creates or holds, the assets can be sold in the open market at their fair market value. If the institution has no comparative advantage in managing attendant risks, it has no reason to absorb or manage such risks rather than transfer them. In essence, for the firm, there is no value added associated with absorbing the risks.

However, the firm should absorb another class of assets or activities in which the risk is inherent. 

In these cases, risk management must be aggressive, and there must be good reason for using further resources 

to manage firm-level risk. These financial assets or activities have one or more of these characteristics:

  1. 1. The equity claimants, or others for whom the institution has a fiduciary interest, may own claims 
  2. that the investors cannot trade or hedge easily themselves. For example, defined-benefit pension plan participants can neither trade their claims nor hedge them on an equivalent after-tax basis. 
  3. This also applies to the policies of mutual insurance companies, which are complex bundles of insurance 
  4. and equity.
  5. The nature of the embedded risk may be complex and difficult to reveal to nonfirm-level 
  6. interests, such as banks, which hold complex, illiquid, and proprietary assets. 
  7. Communication in such cases may be more difficult or expensive than hedging the underlying risk. 
  8. Moreover, revealing information about customers or clients may give competitors an undue advantage.
  9. If moral hazard exists, it may be in the stakeholders’ interest to require risk management as part of 
  10. standard operating procedures. For example, providers of insurance, e.g., the FDIC, can insist that 
  11. institutions with insured claims follow appropriate business policies.

Written by Dr. Chao Yuang Shiang (趙永祥 博士)

Faculty, Dep. of Finance, Nan Hua university

(南華大學財務金融學系暨財務管理研究所 專任助理教授)

21- August- 2017   
by 趙永祥 2017-08-18 08:40:26, 回應(0), 人氣(87)

The evolution of insurer portfolio investment strategies for long-term investing

by Helmut Gründl, Ming (Ivy) Dong, Jens Gal*

The recent global financial crisis, combined with regulatory changes in financial industries, has altered the financial landscape in terms of how financing can be achieved and the potential role of institutional investors. The potential role that insurers, particularly life insurers and pension funds, can play as long-term institutional investors has become a central topic of discussion in various fora. How this role develops will, in the long run, affect how firms obtain financing for their investments and ultimately lead to growth of the real economy. This article provides an overview of the evolving investment strategies of insurers and identifies the opportunities and constraints they may face with respect to long-term investment activity. 

The report investigates the extent to which changes in macroeconomic conditions, market developments and insurance regulation may affect the role of insurers in long-term investment financing. It concludes that regulation should neither unduly favour nor hinder long-term investment as such, but place priority on incentivising prudent assetand-liability management with mechanisms that allow for a “true and fair view” of insurers’ risk exposures. In risk-based solvency regulation, an asset’s risk relative to liabilities is reflected in the capital requirements. 

JEL classification: G22, E22, F21, O16, 

Keywords: insurance, long-term investment, asset-liability management, 
                 risk-based capital
by 趙永祥 2017-04-01 12:31:29, 回應(0), 人氣(87)

Business relationship responsibilities 

in the context of institutional investors

The OECD has previously concluded in a paper on the scope and application of business relationships in the financial sector that a relationship between an investor and investee company including a minority shareholding can be considered a "business relationship " under the OECD Guidelines.

Hence investors, even those with minority
shareholdings, may be directly linked to adverse impacts caused or contributed to by investee companies as a result of their ownership in, or management of, shares in the company causing or contributing to certain social or environmental impacts. In other words, the existence of RBC risks (potential impacts) or actual RBC impacts in an investor’s own portfolio means, in the vast majority of cases there is a “direct linkage” to its operations, products or services through this “business
relationship” with the investee company.

As a result, investors are expected to consider RBC risks throughout their investment process and to use their so-called “leverage” with companies they invest in to influence those investee companies to prevent or mitigate adverse impacts. However, investors are not responsible for addressing those adverse impacts themselves.

In some limited circumstances, adverse impacts caused by companies associated with an investment will not be directly linked to an investor’s own operations, products or services (e.g. their own portfolio). For example, in circumstances where an investor buys shares or other equity in a joint venture (JV) company,
it will have an investor-investee business relationship with that JV company. 

However, if one of the JV partners is causing/contributing to adverse impacts (e.g. forced labour) through a separate, unrelated project (i.e. which the investor has no investment, ownership or other connection with), the investor is not directly linked to the forced labour impacts through its investment in the JV. However since there may be a risk of similar behaviour in the projects operated by the JV company, if the investor becomes aware of this situation, it should trigger ‘heightened ongoing due diligence’ on the JV.
by 趙永祥 2017-02-28 20:54:31, 回應(0), 人氣(185)

FRM course

- Figures and Tables on Impact of risk and action strategy 

(Date: 2017-03-01)
by 趙永祥 2017-02-28 20:36:25, 回應(0), 人氣(164)

FRM textbook enhanced 05
-Risk Assessment in Practice
by 趙永祥 2017-02-28 20:30:32, 回應(0), 人氣(180)


- A framework for success

The implementation and maturity of ERM programs in healthcare organizations—while making significant strides—still lag behind large organizations, public companies, and financial services organizations. Although many healthcare risk-management professionals implement ERM strategies for new programs, projects and services (particularly to manage clinical, and patient-safety related risks), they fail to advance ERM strategies on an organization-wide basis beyond those risks and thus miss tremendous opportunity to increase or create value. Recognizing the elements necessary for ERM program development and implementation and embedding them in the enterprise is central to program success and sustainability. 
by 趙永祥 2017-02-28 20:23:05, 回應(0), 人氣(117)

FRM textbook enhancement 03:Risk management overview

Risk in itself is not bad; risk is essential to progress, and failure is often a key part of learning. But we must learn to balance the possible negative consequences of risk against the potential benefits of its associated opportunity. (Van Scoy, 1992) 

A risk is a potential future harm that may arise from some present action (Wikipedia, 2004), such as, a schedule slip or a cost overrun. The loss is often considered in terms of direct financial loss, but also can be a loss in terms of credibility, future business, and loss of property or life. This chapter is about doing proactive planning for your software projects via risk management. 

Risk management is a series of steps whose objectives are to identify, address, and eliminate software risk items before they become either threats to successful software operation or a major source of expensive rework. 

The Risk Management Practice The risk management process can be broken down into two interrelated phases, risk assessment and risk control, as outlined in Figure 1. These phases are further broken down. Risk assessment involves risk identification, risk analysis, and risk prioritization. 

Risk control involves risk planning, risk mitigation, and risk monitoring.(Boehm, 1989) Each of these will be discussed in this section. It is essential that risk management be done iteratively, throughout the project, as a part of the team’s project management routine. 

Risk Identification In the risk identification step, the team systematically enumerates as many project risks as possible to make them explicit before they become problems. There are several ways to look at the kinds of software project risks, as shown in Table 1. It is helpful to understand the different types of risk so that a team can explore the possibilities of each of them. Each of these types of risk is described below. 

Figure 1: The Risk Management Cycle.  
by 趙永祥 2017-02-28 15:34:28, 回應(0), 人氣(98)

Supplement to FRM course (FRM Supplement 003) 

- Professor Chao
by 趙永祥 2017-02-28 15:33:47, 回應(0), 人氣(179)

Supplement to FRM course (FRM Supplement 002) 

- Professor Chao
by 趙永祥 2017-02-26 00:03:13, 回應(0), 人氣(206)

Financial Risk Management (FRM file 05) 

Impact of risk and action strategy
by 趙永祥 2017-02-23 11:37:37, 回應(0), 人氣(201)

Financial Risk Management (FRM file 04) 

Base concepts- Nature of Financial Risk
by 趙永祥 2017-02-23 11:00:16, 回應(0), 人氣(202)

Financial Risk Management (FRM file 03) 

Ethics in financial market

- The main points and concepts