Will the internet magnify 'herd' mentality?

davej

The same psychology that makes the likes of Amazon's "click to buy" concept so profitable might backfire in other areas. For example, it is becoming increasingly easy to transfer one's funds from one bank to another, making bank runs and general herd mentality more likely. This is because it requires less inertia (i.e a few mouse clicks) for it to happen.

The internet "mindset" is likely to have profound effects on many systems that are vulnerable to herd mentalities. For example, could the fractional reserve system come under threat in the coming years ?

davej

Time Magazine

On the other hand, the increase in online banking/credit cards means there's less demand for liquid money at any point in time.

Minder

davej wrote: »

The same psychology that makes the likes of Amazon's "click to buy" concept so profitable might backfire in other areas. For example, it is becoming increasingly easy to transfer one's funds from one bank to another, making bank runs and general herd mentality more likely. This is because it requires less inertia (i.e a few mouse clicks) for it to happen.

The internet "mindset" is likely to have profound effects on many systems that are vulnerable to herd mentalities. For example, could the fractional reserve system come under threat in the coming years ?

davej

I believe that during the recent run on Northern Rock, their internet banking systems were off line. That is why there were hundreds of people queuing at the high street branches to withdraw their money.

Minder

The following exchange was published in Punch on April 03rd 1957

Q. What are banks for ?

A. To make money.

Q. For the customers ?

A. For the banks.

Q. Why doesn’t bank advertising mention this ?

A. It would not be in good taste. But it is mentioned by implication in references to reserves of £249,000,000 or thereabouts. That is the money they have made.

Q. Out of the customers ?

A. I suppose so.

Q. They also mention Assets of £500,000,000 or thereabouts. Have they made that too ?

A. Not exactly. That is the money they use to make money.

Q. I see. And they keep it in a safe somewhere ?

A. Not at all. They lend it to customers.

Q. Then they haven’t got it ?

A. No.

Q. Then how is it an Asset ?

A. They maintain that it would be if they got it back.

Q. But they must have some money in a safe somewhere ?

A. Yes, usually £500,000,000 or thereabouts. This is called Liabilities.

Q. But if they’ve got it, how can they be liable for it ?

A. Because it isn’t theirs.

Q. Then why do they have it ?

A. It has been lent to them by customers.

Q. You mean customers lend banks money ?

A. In effect. They put money into their accounts, so it is really lent to the banks.

Q. And what do the banks do with it ?

A. Lend it to other customers.

Q. But you said that money they lend to other people was Assets ?

A. Yes.

Q. Then Assets and Liabilities are the same thing ?

A. You can’t really say that.

Q. But you just said it. If I put £100 into my account the bank is liable to have to pay it back, so it’s Liabilities. But they go and lend it to someone else, and he is liable to have to pay it back, so it’s Assets. It’s the same £100, isn’t it ?

A. Yes, but……

Q. Then it cancels out. It means, doesn’t it, that banks haven’t really any money at all ?

A. Theoretically……

Q. Never mind theoretically. And if they haven’t any money where do they get their reserves of £249,000,000 or thereabouts ?

A. I told you. That is the money they have made.

Q. How ?

A. Well, when they lend your £100 to someone they charge him interest.

Q. How much ?

A. It depends on the Bank Rate. Say five and a-half percent. That’s their profit.

Q. Why isn’t it my profit ? Isn’t it my money ?

A. It’s the theory of banking practice that…..

Q. When I lend them my £100 why don’t I charge them interest ?

A. You do.

Q. You don’t say. How much ?

A. It depends on the Bank Rate. Say half a percent.

Q. Grasping of me, rather ?

A. But that’s only if you’re not going to draw the money out again.

Q. But of course, I’m going to draw it out again. If I hadn’t wanted to draw it out again, I could have buried it in the garden, couldn't I ?

A. They wouldn’t like you to draw it out again.

Q. Why not ? If I keep it there you say it is a Liability. Wouldn’t they be glad if I reduced their Liabilities by removing it ?

A. No. Because if you remove it they can’t lend it to anyone else.

Q. But if I wanted to remove it they’d have to let me ?

A. Certainly.

Q. But suppose they’ve already lent it to another customer ?

A. Then they’ll have to let you have someone else’s money.

Q. But suppose he wants his too…. And they’ve let me have it ?

A. You’re being purposely obtuse.

Q. I think I’m being acute. What if everyone wanted their money at once ?

A. It’s the theory of banking practice that they never would.

Q. So what banks bank on is not having to meet their commitments ?

A. I wouldn’t say that.

Q. Naturally. Well if there’s nothing else you think you can tell me….?

A. Quite so. Now you can go off and open up a bank account.

Q. Just one last question ?

A. Of course.

Q. Wouldn’t I do better to go off and open up a bank ?

davej

Ibid wrote: »

On the other hand, the increase in online banking/credit cards means there's less demand for liquid money at any point in time.

The "click to buy" consumer mentality being fostered by entrepreneurs might have the unintended consequence of fostering a "click to withdraw funds" mentality. Human behaviour is at the heart of economics and so altering the consumer mindset is bound to have unforeseen repercussions .

Hypothetically, suppose it is reported that BOI or AIB is in trouble (for example because of billions of euros of bad debts from property developers coupled with a lack of liquidity because of a credit crunch). Even if a consumer was only mildly worried, his threshold for decision making via an online medium might have been sufficiently lowered so that he would be willing to act where previously he wouldn't have. It would take him all of 60 seconds to transfer his money elsewhere. If the online system failed to allow him to do this, it would make things even worse and he would start queuing.


davej

Ekancone

davej wrote: »

The "click to buy" consumer mentality being fostered by entrepreneurs might have the unintended consequence of fostering a "click to withdraw funds" mentality. Human behaviour is at the heart of economics and so altering the consumer mindset is bound to have unforeseen repercussions .

Hypothetically, suppose it is reported that BOI or AIB is in trouble (for example because of billions of euros of bad debts from property developers coupled with a lack of liquidity because of a credit crunch). Even if a consumer was only mildly worried, his threshold for decision making via an online medium might have been sufficiently lowered so that he would be willing to act where previously he wouldn't have. It would take him all of 60 seconds to transfer his money elsewhere. If the online system failed to allow him to do this, it would make things even worse and he would start queuing.


davej

Don't forget that Northern Rocks server crashed as people attempted to withdraw their money. Perhaps the Rock pulled the plug themselves, who knows? Things like this can be easily controlled.

edanto

davej wrote: »

Hypothetically, suppose it is reported that BOI or AIB is in trouble...

I think you're dead right in your prediction as to what would happen, people would try to click their money out of the bank, and within hours the online banking system would fall over and be unavailable.

I also agree that in this small example, the facility of online banking enabled by the internet does intensify the ability of the herd to function as one.

In other macroeconomic issues though, I think the internet is facilitating the flow of information to give consumers more power. Notwithstanding that most people aren't yet comfortable exploring the breadth of the web to find all that information, it seems like it's happening more.

The global recession may even be made into something of a soft landing as people plan what to do using online information and resources. That would imply a more empowered citizenry, less likely to blindly follow the herd (and the bank ads), but only time will tell.

There is also the contra-argument that the tsunami of 'information' on the web (take for example, all the 9/11 conspiracy sites) will distract people from the motives of the uber-rich.

Ekancone

edanto wrote: »

I think you're dead right in your prediction as to what would happen, people would try to click their money out of the bank, and within hours the online banking system would fall over and be unavailable.

I also agree that in this small example, the facility of online banking enabled by the internet does intensify the ability of the herd to function as one.

In other macroeconomic issues though, I think the internet is facilitating the flow of information to give consumers more power. Notwithstanding that most people aren't yet comfortable exploring the breadth of the web to find all that information, it seems like it's happening more.

The global recession may even be made into something of a soft landing as people plan what to do using online information and resources. That would imply a more empowered citizenry, less likely to blindly follow the herd (and the bank ads), but only time will tell.

There is also the contra-argument that the tsunami of 'information' on the web (take for example, all the 9/11 conspiracy sites) will distract people from the motives of the uber-rich.

But isn't the fail-safe of such internet herding the fact that the server would 'crash' as people stampede?

SimpleSam06

daithifleming wrote: »

But isn't the fail-safe of such internet herding the fact that the server would 'crash' as people stampede?

Only if your internet is badly built. Properly put together servers should be able to withstand almost any amount of load, and ones financed by banks even more so. In any case referring to bad design as a "fail-safe" is a bit wacky.

I take exception to the referral to people as a herd on the web: the internet in my experience has been one of the greatest slicers-through of bullshit in history. Anyone making wild claims or allegations has to back it up or back right up, witness what happened to IrishMike in the other thread there. The presence of the enormous amounts of information available on the web makes it much less likely that people will make mistaken decisions en masse.

Ekancone

SimpleSam06 wrote: »

Only if your internet is badly built. Properly put together servers should be able to withstand almost any amount of load, and ones financed by banks even more so. In any case referring to bad design as a "fail-safe" is a bit wacky.

I take exception to the referral to people as a herd on the web: the internet in my experience has been one of the greatest slicers-through of bullshit in history. Anyone making wild claims or allegations has to back it up or back right up, witness what happened to IrishMike in the other thread there. The presence of the enormous amounts of information available on the web makes it much less likely that people will make mistaken decisions en masse.

Anyone remember what happened to the Northern Rock server, anyone? Thats right.

If your internet is 'badly built', you are talking out of your ass.

nesf

Minder wrote: »

I believe that during the recent run on Northern Rock, their internet banking systems were off line. That is why there were hundreds of people queuing at the high street branches to withdraw their money.

That was more short sightedness on the techies part than a problem necessarily with the technology. Banks have a lot to learn from the incident. A centralised pool of excess bandwidth and servers paid for emergencies or whatever, it's still a very young technology and mistakes like this, unfortunately will happen.

nesf

SimpleSam06 wrote: »

Only if your internet is badly built. Properly put together servers should be able to withstand almost any amount of load, and ones financed by banks even more so

You can bring down any server with enough of a load on it, from my understanding of these things (which is I admit limited).

SimpleSam06

daithifleming wrote: »

Anyone remember what happened to the Northern Rock server, anyone? Thats right.

If your internet is 'badly built', you are talking out of your ass.

nesf wrote: »

You can bring down any server with enough of a load on it, from my understanding of these things (which is I admit limited).

Google "Akamai" there, lads. They are the ones who pulled Microsoft's fat out of the fire when they were being DDOSed a while back. In fact, google google.

nesf

SimpleSam06 wrote: »

In fact, google google.

Sure, but could a bank the size of Northern Rock pay for that much bandwidth and hardware and still profitably run an internet service? The present approach to internet banking isn't that profitable yet. I was more thinking of the "slashdot effect" in my post. The problem with Northern Rock was the enormous spike because of the panic caused by the news released iirc.

SimpleSam06

nesf wrote: »

Sure, but could a bank the size of Northern Rock pay for that much bandwidth and hardware and still profitably run an internet service?

I think the question is, could a bank of any size afford to not have sufficient bandwidth and hardware. If it goes down, they risk a run. Besides its not horrifically expensive once you have the servers in place, at the least they should have had an emergency failover to something like akamai. The words "mission critical" come to mind.

nesf

SimpleSam06 wrote: »

I think the question is, could a bank of any size afford to not have sufficient bandwidth and hardware. If it goes down, they risk a run. Besides its not horrifically expensive once you have the servers in place, at the least they should have had an emergency failover to something like akamai. The words "mission critical" come to mind.

I don't disagree, but if it's not profitable then why would a bank want to do it? The biggest banks will be able to handle things but the smallest might struggle etc. The Northern Rock incident (on many fronts) was a mess but blithely saying that they should have had a better built internet misses the point, I think. It was people's reactions to the news, the then following weight of traffic bringing down the site, combined with a restricted number of physical outlets and a poorly structured deposit insurance scheme and so on that transformed a minor panic to a bank run.

SimpleSam06

nesf wrote: »

I don't disagree, but if it's not profitable then why would a bank want to do it? The biggest banks will be able to handle things but the smallest might struggle etc.

Well a couple of things here, plumbing isn't profitable but try running a company without it. Another thing is that it could well be said that the failure of their internet presence led directly to their downfall; when people couldn't transfer funds online, they started queueing up outside the brick and mortar address.

The argument could be made that they pulled the plug themselves in order to prevent a much worse online run, but its not something that should have been done if that were the case. If your business model depends on people not being able to access your services, your business model is doomed anway.

nesf wrote: »

The Northern Rock incident (on many fronts) was a mess but blithely saying that they should have had a better built internet misses the point, I think.

True, its not the point, it was an important factor however.

nesf

SimpleSam06 wrote: »

Well a couple of things here, plumbing isn't profitable but try running a company without it.

Yes but if the cost of setting up plumbing was so high as to make a particular branch unprofitable, then the bank would need damn good incentives to build the branch in the first place. Personally I think Northern Rock's difficulties weren't down to its internet services and more down to its business model only working in a limited set of market conditions (ie loads of cheap credit) but the internet services point for "smaller" banks who don't have the depths of resources or scope in terms of other services and income flows, is an interesting one.

Ekancone

nesf wrote: »

Yes but if the cost of setting up plumbing was so high as to make a particular branch unprofitable, then the bank would need damn good incentives to build the branch in the first place. Personally I think Northern Rock's difficulties weren't down to its internet services and more down to its business model only working in a limited set of market conditions (ie loads of cheap credit) but the internet services point for "smaller" banks who don't have the depths of resources or scope in terms of other services and income flows, is an interesting one.

Well, if i think a better analogy would be if the firm had the choice between titanium-plated plumbing or ordinary copper plumbing. The titanium-plated pipes are handy when there is an enormous surge in the mains, though this is very rare. (Happens to a few firms water systems every 50 years or so). Other than that both do the same job, but one would be enormously more expensive than the other with little additional benefit for day-to-day running of water.

Which should the firm choose?

SimpleSam06

daithifleming wrote: »

Which should the firm choose?

The firm should choose to have a pairing agreement with a building with titanium pipes in the event of a water surge. When a surge occurs, pay the other building to handle it.

Besides in this case, the water surge wiped out the business, or at least played an important part in that. All the savings you make over your 50 years don't mean a thing if you end up with nothing after one surge.

SimpleSam06

SimpleSam06 wrote: »

The firm should choose to have a pairing agreement with a building with titanium pipes in the event of a water surge. When a surge occurs, pay the other building to handle it.

Besides in this case, the water surge wiped out the business, or at least played an important part in that. All the savings you make over your 50 years don't mean a thing if you end up with nothing after one surge.

Wrong.

In this case, the firm would build copper, and have flood insurance.

SimpleSam, some of your posts are coming across as quite naive and overly simplistic - it is simply not possible for a firm to account for every eventuality. You do what you can given rational budget constraints.

SimpleSam06

Deleted User wrote: »

Wrong.

In this case, the firm would build copper, and have flood insurance.

But we're not talking about plumbing. We're talking about internet uptime in this analogy. The internet is also not a series of tubes.

Deleted User wrote: »

SimpleSam, some of your posts are coming across as quite naive and overly simplistic - it is simply not possible for a firm to account for every eventuality. You do what you can given rational budget constraints.

If your budget doesn't account for something like your servers getting wiped out, making certain that a run on your bank occurs, you shouldn't be operating a bank. I would classify that as something very much mission critical - if people are worried about the stability of a financial institution, first thing they will do is check online. If they find your website is down, and they can't access their accounts, they will definetely go and pull their cash out as fast as they can. It doesn't cost much of a budget to have an emergency pairing agreement.

I was refering to the example in hand. Stop dodging the question.

Did the servers not crash becuase there was a run on the bank?

If your server can handle day to day transactions, why spend huge amounts of money making sure they can work when your business is going down the pan? If that occurs, you are in trouble anyway so there why should you spend extra to make the failure of your company more efficient?

SimpleSam06

Deleted User wrote: »

If your server can handle day to day transactions, why spend huge amounts of money making sure they can work when your business is going down the pan? If that occurs, you are in trouble anyway so there why should you spend extra to make the failure of your company more efficient?

You still aren't getting the difference between the internet and plumbing. You don't need to own the extra pipes. You don't need to run water through the extra pipes. All you need is a tap and an agreement with the actual owner of the extra pipes that if there is an emergency, you can let your overspill into his pipes. You only pay a nominal fee until that emergency, and when the emergency is done, you turn off the tap.

Look up the term "Mission critical" if you need any further clarification.

This could have made the difference between a bad day for Northern Rock and the run on the bank which wiped it out. I admit thats speculation, but still, distinctly possible.

SimpleSam06

SimpleSam06 wrote: »

You still aren't getting the difference between the internet and plumbing. You don't need to own the extra pipes. You don't need to run water through the extra pipes. All you need is a tap and an agreement with the actual owner of the extra pipes that if there is an emergency, you can let your overspill into his pipes. You only pay a nominal fee until that emergency, and when the emergency is done, you turn off the tap.

Look up the term "Mission critical" if you need any further clarification.

This could have made the difference between a bad day for Northern Rock and the run on the bank which wiped it out. I admit thats speculation, but still, distinctly possible.

Jesus H Christ!

NR failed because of a flawed business policy that meant it couldn't borrow enough money to maintain its operations. Not because of its server!

Seriously man!

And your idea is the same as the insurance idea I mentioned above, yes its a good idea. Yes you probably should do it. BUT, you do not spend huge amounts of money in areas that do not benefit your organisation directly.

I mean, do you go start digging a hold right now in the ground in case Ameria starts a nuclear war?

SimpleSam06

Deleted User wrote: »

NR failed because of a flawed business policy that meant it couldn't borrow enough money to maintain its operations. Not because of its server!

Where did I say otherwise? I'm fully aware of what happened to Northern Rock, and why. Toddle back to my first post in this thread and you'll find that this was only a peripheral discussion which has somehow become a major point with you. You finally agree with what I was saying about the servers, so since there seems to be a bad case of last wordism going around, I'll leave it there. Enjoy that last word!

Ekancone

SimpleSam06 wrote: »

The firm should choose to have a pairing agreement with a building with titanium pipes in the event of a water surge. When a surge occurs, pay the other building to handle it.

Besides in this case, the water surge wiped out the business, or at least played an important part in that. All the savings you make over your 50 years don't mean a thing if you end up with nothing after one surge.

It was an analogy. The fact is that the server going down probably saved NR from this 'internet herd mentality' that was proposed.

Fin.

nesf

daithifleming wrote: »

Well, if i think a better analogy would be if the firm had the choice between titanium-plated plumbing or ordinary copper plumbing.

I wasn't really trying to get at that, I was taking a slightly different approach and thinking of if only "undownable" servers with expensive amounts of resources behind them are allowed through regulation, then the medium might become something that only is feasible with larger banks, which would encourage even greater consolidation in the market, reducing competition etc. If regulations forcing server requirements become a barrier to entry etc.

edanto

lets get back to the economics of the herd mentality and t'internet

Ekancone

Ok, as a thought exercise yes i believe it could have a positive (not good) impact on herd mentality. But in reality, i disagree, for the points stated above.