The Problems with Performance Related Pay in Finance

Close up shot of pen
Creative Commons License photo: ArtemFinland

I was asked today what I felt about performance related pay in the banking/financial sector and the huge bonuses given to the bankers who are responsible for the financial crisis.

To my general thoughts on the topic, I’ll point you towards Tim Harford’s wonderful article in his Undercover Economist column. He talks about some of the adverse incentives created:

If you hired me as a hedge fund manager and paid me “2 and 20” – a 2 per cent management fee, plus 20 per cent of any gains – then I’d be tempted to take your money to a roulette table and put it all on black. If I won, I’d get to keep 20 per cent of the gains. If I lost – well, I would have been sure to deduct the management fee first.

Fairly recently, I was invited to participate in a trading simulation and competition run by the bank JP Morgan. It was lots of good fun: we had a simulated market running in the room where everyone could buy and sell shares in technology companies. Everyone was given some virtual money to invest. Throughout the simulation, the ticker would update with news about what was happening in the industry (e.g. earnings reports, new products, etc.)

I think there was roughly 40 teams or so participating in the simulation. The top four teams (i.e. the teams which made the most money) won the competition and went through to the next round.

My teammate and I were fairly sensible investors: we invested in a portfolio of stock, we knew when to cut our losses and we hedged our risks. I think that would be a good strategy to follow for an investment fund manager: after all you don’t want to lose all of your clients money and you want performance to be pretty stable.

Creative Commons License photo: Petrick2008

We came about 10th in the competition so we missed out on being in the top four. Anyway, it turned out that the winning teams which won the game had invested larger sums and taken much larger risks than we had. In retrospect, it made sense. Seeing as you wern’t playing with your own money (in this case it was virtual money), the whole game encouraged taking risks. A sensible investor who took fewer risks might make a good return on their portfolio but they would never be able to win it. An investor taking large risks would either come last (in which case, nothing has been lost) or first (in which case they would win the game).

The investors who took the most risks – a level of risk which you wouldn’t want to be exposed to if the money was your pension or savings – won the game. The prize is probably an internship or a job or something.

I think that illustrates the whole problem with the system of rewards in the financial sector and what caused the traders to take huge risks with our money.

Create Adobe Acrobat PDFs and XPS files from Microsoft Office

Motherly Love
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It’s often very useful to distribute your  Word documents in the PDF file format as not everybody has Word and the same fonts you’ve got on your computer.

If you had used an early beta version of Microsoft Office 2007, you will have noticed there was a built in feature to export your documents into Acrobat PDF files or Microsoft’s obscure XPS (XML Paper Specification) format. That disappeared in the final version of Office 2007 but it’s available as a free plugin. According to Microsoft, it’s compatible with:

  • Microsoft Office Access 2007
  • Microsoft Office Excel 2007
  • Microsoft Office InfoPath 2007
  • Microsoft Office OneNote 2007
  • Microsoft Office PowerPoint 2007
  • Microsoft Office Publisher 2007
  • Microsoft Office Visio 2007
  • Microsoft Office Word 2007

This is a really useful plugin. Sending your documents as PDF has a lot of benefits: recipients won’t inadvertently edit them and the document will look more like it is supposed to (fonts are embedded for example). Especially as Office 2007 users have new fonts such as Calibri and Cambria which many people may not have, this comes in really handy.

Once installed, save as PDF by going to Office Button > Save As > PDF or XPS.

If you want to save as PDF from other programmes, the best thing to do is to get a PDF printer. I personally use PrimoPDF which is totally free and works really well. For open source junkies, PDFCreator does a pretty good job too – although I had issues with certain documents.

Integrate Facebook Identity & Comments into your Blog

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If you run a blog or a website, you might have heard about Facebook Connect and the possibility of using it with the WordPress blog system. Basically, Connect is Facebook’s attempt to spread their identity system across the rest of the web. By integrating connect, you can use Facebook’s user system, comment system, etc. on your site. You give a lot of power and leverage to Facebook over your website but it could make interacting with your site a lot more attractive and easier for users.

Their first widget allows you to use Facebook Connect to add commenting functionality to your site or blog. Here’s some Facebook developers explaining it all…

A quick tutorial by Facebook engineers on how to create a Comments Box social widget quickly and easily for iframe applications and websites.

I made a proof of concept of something similar about 8 months ago.

As far as I can see, this is a very easy way to add commenting functionality to your site without needing to have your own user, moderation system, etc. Comments made on your site will appear on the news feed on Facebook which can be good advertising. But the problem of course, is that your comments are not accessible. Google will never be able to index it and anyone with Javascript turned off won’t be able to see it. And when all the useful discussion, knowledge and information is tied up in comments in Facebook’s system, it’s a lot less open and less useful for everybody.

Savers are earning more as real interest rates rise

Creative Commons License photo: G & A Sattler

So lots of my friends have been complaining about interest rates over the last weeks or so. The Bank of England has dropped base interest rates from 5.75% where they were just 6 months ago to 1.0% today. For savers, that also means interest rates have been cut which is bad news for everybody who is saving for a house/college/etc. Right?

Not really. The Times discussed this very recently. It’s no good looking at the nominal interest rate which is advertised by your bank or the Bank of England as it is meaningless. What’s important is the real interest rate. Let me explain.

Let us take a basket of goods which we define to be representative of your expenditure. The basket of goods has a cost of £100 this year.

If we have inflation of 5%, that means the same basket of goods would cost £105 next year.

What if you decide, instead of buying a basket of goods today, you choose to put your money in a savings account earning 5%? Well, the £100 you invest will have turned into £105. When you come to spend your money, all you’ll be able to buy is a basket of goods. You’ll have nothing left over. In real physical terms, you haven’t gained anything from saving as the amount you can consume has stayed the same.

Hopefully this example illustrates that the important thing is real interest rates. Whilst nominal (advertised) interest rates are at the lowest point in yonks, real interest rates aren’t too bad as inflation is very low.

Let’s take a look at nominal interest rates and RPI inflation over the last few years:

Interest rates and RPI inflation

We see that it was pretty bad for savers towards the end of 2008 as inflation totally eroded any interest being earnt. However, with inflation now very close to zero, this is no longer the case. This is more clearly illustrated in a graph of real interest rates:

Real interest rates

As you can see, real interest rates are climbing back up to around 1.5% where they’ve been for the last couple of years.


  • Whilst it appears that savers are losing out, they’re not doing too badly considering the drop in inflation.
  • Your savings for college are still growing. And if you’re saving for a house, you’re also benefiting from the huge drops in house prices.
  • The low interest rates shouldn’t be encouraging you to borrow. After all, if a house is losing 10% of it’s value each year and you’re paying 1% interest on the mortgage, you’re paying an effective mortgage rate of 11%. That’s a much higher rate than a few years ago when house price inflation would essentially pay off the interest on your mortgage.

The Great Digital TV Switchover: Freeview or Freesat?

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The UK is currently in the process of switching over from analogue broadcast to fully digital television. Essentially that means the analogue broadcasts will be turned off channel by channel and the frequencies those channels currently occupy will be replaced by digital TV channels. The reason the government are doing this is two-fold: primarily so it can auction off the frequencies that Freeview is currently broadcasting on and because moving Freeview to current analogue frequencies will allow much better reception for Freeview channels.

When do I switch?

According to Digital UK, switchover is happening region-by-region. The timetable as it currently stands:

  • Border has already started and finishes in 2009
  • West Country starts in April 2009 and finishes in September 2009
  • Granada switches in 2009
  • Wales starts in August 2009 and finishes in 2010
  • STV North switches in 2010
  • STV Central switches between 2010 and 2011
  • West switches between 2010 and 2011
  • Channel Islands switch in 2010
  • Central, Yorkshire and Anglia switch in 2011
  • Meridian switches between 2011 and 2012
  • London switches in 2012
  • Tyne Tees and Ulster switch in 2012

What are the free options?

The Office Monkey
Creative Commons License photo: shaz wildcat

There are of course a huge range of  services you could choose to replace analogue TV. Most of these involve subscription; I won’t talk about these options in this post. I’m working based on the assumption that if you wanted to subscribe to a TV service, you already would be doing so.

Essentially, you’ve got three options. The first is Freeview which is the most similar to analogue TV. You recieve television through an aerial. This can cause difficulties if you’re using an indoor aerial because digital TV tends to require better reception for it to work. Enter your postcode on the Freeview website.  There is a fairly good selection of channels too and the shopping channels gradually seem to be disappearing from the service. A Freeview box costs under £20 and you can install it quickly and fairly easily. It’s also worth considering getting a Freeview+ PVR (personal video recorder) for £100 which will allow you to record programmes.

Typical Freeview cost: £20

The other two options are to recieve television through your satellite dish. Rather confusingly, there are two services called Freesat: there is Freesat from BBC/ITV (“Freesat”) and Freesat from Sky. These are much pricier options but they might be your only choice if you don’t get Freeview in your area.

Hanging out with the coloured cottons 2
Creative Commons License photo: treehouse1977

You can get a Freesat box from £50 or a high definition box from £100. If you want to record, you’ll have to fork out at least £300. On top of that, if you don’t have a satellite dish, it’s another £80 for installation. The costs are significantly higher than Freeview but it does mean you can get the most out of that new high definition TV.

Typical Freesat Cost: £130

Then there’s Freesat from Sky. Sky will charge you £150 for a box and installation. You’ll probably get spammed by Sky to take out insurance on your box (and my Sky box just after 1 year when the warranty expired). You’ll also constantly get annoyed flicking through channels displaying “please subscribe” nags. This is certainly an uncompetitive option and there is no chance of subscription-free high definition or PVR.

In fact, if you’re considering Freesat from Sky, you might as well consider the full thing. Sky’s Pay Once Watch Forever offer gives you 4 months of free Sky TV for £73. If you cancel after 4 months, it’ll revert to Freesat from Sky. Obviously, they’re counting on you staying as a subscriber.

Typical Freesat from Sky Cost: £150 + spam from Sky (or £73 if you’re willing to sign up to the full Sky and then cancel)


Expanded Perception
Creative Commons License photo: jurvetson

By far the best and cheapest option is Freeview. For most people, this will probably be first choice. I strongly recommend Freeview+ as having a PVR changes your life 🙂

However, Freesat from BBC/ITV is worth considering if:

  • You already have a satellite mounted outside your house
  • You want high definition television
  • You can’t receive Freeview where you live

Freesat from Sky is probably not at all worth considering. I’ve had to put up with nuisance calls, letters and emails from Sky.My first Sky box broke after about a year and my current Sky+ box (which I’ve almost very nearly had for a year) looks like it might be on it’s last legs…

Money Saving Expert – Beat the Credit Crunch

Gold at the end of the rainbowAlmost everybody is feeling a strain on their pockets due to the credit crunch and the global recession. For us Brits, I strongly recommend you pay a visit to Martin Lewis’ website. Martin Lewis is fairly well known as a UK consumer champion these days, often appearing on TV shows such as ITV1’s Tonight and Five’s “It Pays To Watch”. The MoneySavingExpert website and weekly newsletter always has some fantastic tips and offers which could easily save you hundreds every year.

A couple of picks:

  • Cheap restaurant deals – It’s amazing just how many restaurant chains are offering 2for1 on meals. We use these deals all the time when we go out for meals with friends or family. After the discount, it often turns out that you pay more for a glass of Coke than for the main meal you had. Some of the deals don’t work between Thursday and Saturday as those tend to be the busiest days for restaurants… check the small print first.
  • Tesco Value Greeting CardSupermarket shopping – The challenge to downsize one brand and see if you can notice the difference. For example, trying items from the “Sainsbury’s Basics” or “Tesco Value” ranges. My personal experience is that on the whole, the value brands don’t tend to be too bad at all. Take tangerines – the Basics tangerines don’t look great on the outside but once you’ve peeled them, you wouldn’t notice a thing. In fact, I prefer the taste of the Basics tangerines to the ‘Taste the Difference’ ones but of course this isn’t a scientific double blind experiment.
  • Cashback sites – If you shop online for technology or electronics items, this one can save you loads. One of my friends claimed that he managed to get a £35/mo. phone contract (with a free phone) for just £5/mo after cashback.
  • Cheaper petrol and diesel – Fuel costs ridiculous amounts in Britain. But you can easily improve the efficiency of your car and make it use less fuel – for example by ensuring the tyres are correctly inflated, turning off the air conditioning or practising eco-safe driving.
  • Cheap train tickets – You can save loads by booking in advance and by splitting your ticket. I recently managed to travel for £15 return on a journey which would have cost £80 full fare. This was achieved by a) booking in advance, b) buying two singles and c) buying a ticket to the station which I would have had to change at anyway and then a separate ticket for the rest of the journey.

I also strongly recommend signing up for the weekly newsletter which is very good. It’s the best way of making sure you know about those time-limited deals.

Amazon launching online grocery store in UK?

Grocery shopping
Creative Commons License photo: ralphbijker

In what could be a very exciting move, Amazon UK is set to launch an online grocery store on the UK to take on the mights of the big four – Tescos, Sainsburys, ASDA and Ocado (Waitrose). Certainly it’ll be a very interesting launch at a time where consumers are looking for ways to cut down on their weekly shopping because of the credit crunch and after the supermarkets began to encroach onto Amazon’s traditional territory of books, CDs and DVDs.

Amazon has trialled out a grocery service in Seattle, WA called AmazonFresh so it is likely a UK launch will be modelled on this. The UK would be much more profitable for Amazon to launch a grocery service given the UK’s smaller geographic size and higher population density.

Here’s what Retail Week said:

Amazon is expected to emulate its US grocery offer, comprising more than 45,000 non-perishable items, in this country. A launch date has yet to be decided but industry sources said it is likely to be this year.

In the US, Amazon offers shoppers savings by enabling them to buy in bulk. The e-tailer also offers free delivery to prime customers and tracks routine purchases on a shopping list feature on its site.

Sainsburys Haringey London) (11)
Creative Commons License photo: zongo69

The Daily Mail of London says of Amazon Fresh:

Customers pick up groceries from virtual supermarket aisles. Delivery times are flexible, with a ‘pre- dawn’ drop guaranteed before 6am if you order by midnight; a daytime delivery in a one-hour time slot picked by the customer and evenings up until 9pm.

The customer does not have to be at home and for orders over £20 delivery is free.

Certainly something to watch and the possibly of some new and exciting competition into the UK grocery market which has been dominated by Tescos and Sainsburys for way too long.

BT line rental increases – Why do paper bills at BT cost so much?

The Telegraph reports that line rental for all British Telecom customers will increase by £1/month.

Communication Breakdown
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For somebody who receives paper bills, this is a rise from £11.50/month to £12.50/month for those on paper billing. For those on paperless billing (i.e. online), bills will increase from £10.25/month to £11.25/month. According to BT, customers can mitigate the price rise by switching to paperless billing at the same time. This is a fantastic demonstration of price discrimination.

On face value, having to pay an extra of £1.25/month for a paper bill seems ridiculous. It is obvious that this £3.75 per quarterly bill charge isn’t there to cover BT’s costs. There is no way that printing, processing and mailing a phone bill every quarter would cost more than 30p. That would leave BT with an additional £3.45 of pure profit per quarter for every paper bill customer.

I’ll explain using the old prices of £11.50 for paper billing and £10.25 for paperless billing.

The market rate for line rental is £11. BT’s rivals such as Virgin Media charge approx. £11. For BT to be price competitive, it must have a lower line rental than Virgin. If BT generally offered line rental at the paper bill rate of £11.50, it would be extremely uncompetitive against Virgin. However, at the paperless rate of £10.25, BT would be much cheaper than Virgin. But they’d probably make a lot less money as the profit on each line rental would be lower than it could be.

Companies get the best of both worlds by charging customers who don’t mind paying more (price inelastic customers), more. Customers which do shop around for line rental and do care how much they pay (price elastic) will pay less.

Red London Phone Boxes
Creative Commons License photo: markhillary

The costs of paper and paperless billing have absolutely nothing to do with the different line rental charges. It’s simply a way for BT to differentiate between how price elastic customers are. My grandmother can’t be bothered to shop around or to go to the effort of accessing electronic bills. She has paper bills and pays £11.50.

On the other hand, somebody like me will shop around to find the best deal. If BT charged me £11.50 as well, I would choose Virgin for a saving of 50p/month. But as BT’s paperless line rental is lower than Virgin’s line rental, I would choose to go with BT and paperless. For me, the cost saving would be worth the small extra effort to check an online bill.

By charging different prices to different customers depending on how much they are willing to pay, BT can increase their customer base without cutting their prices for everybody and their profits.

It is quite a clever way of operating price discrimination and has a double whammy in allowing BT to proclaim that it is encouraging people to be green. It’s something businesses do a lot and something well worth being aware of. See my previous post , “Why is popcorn at the cinema so expensive?”, for another example.

Take a holiday in the UK!

With the UK economy now officially in recession and the Pound recently breaking through the 1986 low of $1.37, it’s never been more expensive for us British to take a holiday abroad. The Pound has lost 35% of it’s purchasing power in less than a year.

River Thames
Creative Commons License photo: wili_hybrid

So I guess the days where we used to be able to go to the States, eating lavishly for £4 a go and stocking up on plenty of shopping and electronics are long past us. I’ve been staying in the UK and enjoying the sights here rather than going abroad.

But Whilst the exchange rates have been terrible news for UK residents, my American friends have been over the moon. Everything in the UK is now at a 35% discount compared to last year which means there has never been a better time in recent memory to visit the UK.

London must be one of the most amazing places in the world to visit. As somebody who has recently moved to the big city, I have loved every minute of being in London. There is never a shortage of things to do and see. The host of the 2012 Olympic games, London is also the home to the iconic Big Ben and the Houses of Parliament, the London Eye, Buckingham Palace, Trafalgar Square, the British Museum, the Tower of London, St. Paul’s Cathedral, Camden Market, Piccadilly Circus… And the list goes on.

Creative Commons License photo: defrog

A short train journey from London, there are the wonderful historic university towns of Oxford and Cambridge. Go further North and you’ve got the wonderful Scottish capital, Edinburgh (which I’m going to this weekend!) There are also some wonderful places to go hiking in England – the Seven Sisters country park is a short train journey from London. I did the day hike from Seaford to Eastbourne along the coast. It’s a wonderful day-long hike with some wonderful sights.

There are some wonderful things to see in the UK; it’s well worth taking some time to see it. And if you’re American, we’d love to have you in UK as our guests. Our economy could do with a bit more money! 😉

"Carbon cost" of Google search same as boiling a kettle

Google Lego 50th Anniversary Inspiration
Creative Commons License photo: manfrys

The BBC reports today on a study by Harvard physicist Alex Wissner-Gross. Wissner-Gross claims that performing a standard Google search on a desktop computer produces 7g of CO2. A quick session with two searches will produce 14g of CO2 – the same as that from boiling a kettle.

From the BBC article:

Although the American search engine is renowned for returning fast results, Dr Wissner-Gross says it can only do so because it uses several data banks at the same time.

Speaking to the BBC, he said a combination of clients, networks, servers and people’s home computers all added up to a lot of energy usage.

“Google isn’t any worse than any other data centre operator. If you want to supply really great and fast result, then that’s going to take extra energy to do so,” he said.

According to Google Web History, I’ve performed 9,308 Google searches and it’s only counted the searches I’ve performed whilst I was logged on.

I’m guesstimating I perform about 40 searches a day; that’s 15,000 Google searches per year (sounds scary when you put it like that). My annual Google carbon footprint would be 105kg of CO2 (0.15 tons).

Google have disputed this figure; saying that a search only produces 0.2g of CO2.

I’m not able to comment on what I think of the methodoly as I don’t know how either figure was reached. But I think it is important to point out the difference between average cost and fixed cost.

As an example, imagine a server farm which was responsible for 100g of CO2 emissions every day. If ten people perform searches, the average carbon cost of a search is 100g divided by 10 searches = 10g of CO2 per search. This is the average cost of the search.

Beijing smog
Creative Commons License photo: kevindooley

Whereas, the marginal cost would be the CO2 cost of performing one more search. If we then performed an 11th search, the CO2 emissions of the server farm stay the same (we assume it’s running with spare capacity). The marginal cost of performing a search of zero grams of CO2.

With eleven searches, you could claim each search had a carbon cost of 9g. But that’s a bit unfair – considering the CO2 output of the server farm if you had made the search and if you had not, you find the CO2 output it exactly the same. Your search had a marginal cost of zero grams of carbon.

Whether Wissner-Gross and Google stated the average cost or the marginal cost I don’t know (although I suspect the first may have been the average cost and the second the marginal cost).

With Google’s server farms, we know that they will be running regardless of whether we perform searches or not. The important thing then is the marginal cost of a search – this being so close to zero, I don’t think any of us should feel a guilty conscience from using Google.