In January 2008, the press were full of reports of the impact of Jérôme Kerviel’s impact on world stock markets. This trader cost Société Générale €4.9 billion by hiding trading positions he should never have taken. The impact of these trades being unwound is widely believed to have been a significant factor in the decline of market values around the world. Press reports at the time such as this one in the Times were full of phrases like global crisis, panic, nervous traders fears’. This story unfolded as it was becoming clear that the impact of the overinvestment in poor quality ‘sub-prime’ housing loans in the USA was tuning into a major threat to economic stability around the world. The effect has been that institutions, which were once blithely lending money to all and sundry almost regardless of ability to repay, have become fearful of lending even to each other. As this story has unfolded there has, again, been an important subtext of emotion in markets (for example Buy Panic: Gene Marcial on How Market Meltdowns Can Be Your Ally).

Photo: Helico

Emotion in financial markets is not all about fear and panic. We know for example that, on average, prices on the New York Stock Exchange are higher on sunny days than on cloudy days. Sunny weather tends to make us feel more optimistic and it turns out that professional traders are no exception.

Meanwhile recent work by Cambridge University neurologists John Coates and Joe Herbert has shown a significant link between traders behaviour and the levels of hormones, such as testosterone, which have important links to emotion.

This is all in complete contrast to financial economists accounts of market behaviour which see investor decisions as driven by rational analysis, and prices as perfectly reflecting rational analysis of all available information.

So should we simply conclude that traders need to get a better grip on their emotions, calm down and start making rational decisions on the basis of considered analysis? Certainly my own research (with colleagues Nigel Nicholson, Emma Soane and Paul Willman) shows that learning to regulate their emotions is an important part of traders learning as they gain experience. As one trader told us:-

“I would cite myself as a great example of someone who started trading when I was 18 and got terribly emotional about everything, every loss; and I’d lie awake at night and think everything through and try and replay the tape - I wish it happened a different way … Over time you realize that nothing matters and you not only realize that nothing matters in here, it doesn’t matter outside here either. It took me a long time to get that.” 

However our research, which involved detailed interviews with 118 traders and their managers, also seemed to suggest that learning effective emotion regulation is not simply learning to set feelings aside. In the fast paced world of trading, rapid decision-making is at a premium; and the emotional cues and hunches that come from long experience can be an important aid. Rather than emotionless machines, high performing traders were often aware of their emotions. They used them as important sources of information; but were not at their mercy. Our findings are supported by a recent study by Myeong Seo and Lisa Barrett (220K PDF) who found that stock investors who were better able to identify and distinguish among their current feelings outperformed other investors.

As we learn more about the ways in which human cognition and emotion are inseparably entangled it is becoming clear that emotional competence is not just important to our relationships, it is a vital element of success in the world of high finance.

If you are interested in learning more about decision-making, you can find a free course designed by this author on Openlearn: Making decisions. You can also find a free course which gives a financial economics perspective on markets: The financial markets context.

About the author

Mark Fenton-O'Creevy is Professor of Organisational Behaviour at the OU Business School. His research includes investigations into the performance of traders in financial markets, and the problems that occur when management practices are transferred from one country to another.

He is also a National Teaching Fellow, and Principal of the Centre for Practice-Based Professional Learning.

A study by the European Commission (0.6MB PDF) in 2002 identified 4 key drivers of entrepreneurship and small firm development in Europe. These were:

• Continuous technological developments
• Shorter product life-cycles
• Increasingly demanding consumers
• Global competition

Research in 2006 by the Institute of Chartered Accountants of England and Wales (ICAEW) (based on a survey of 1,000 companies) revealed that 60% of companies with 49 or fewer staff bought goods or services from abroad or had customers or operations there.

“Increasingly, small businesses do not start off trading locally as they did in the past,” said Clive Lewis, ICAEW head of enterprise. “If you have a website you can think globally from the beginning”.

[from Small companies look beyond local to go global in the Financial Times, Thursday October 12, 2006, page 4]

The drivers of this trend according to the ICAEW have been globalisation together with the spiralling cost associated with red tape. Increased staffing costs were also becoming a problem for UK SMEs and was a primary reason for the outsourcing of back office jobs to the low cost economies in Eastern Europe and Asia . This is a trend that is likely to double over the next five years.

It is not just in the area of back office support services that SMEs (Small and medium enterprises) and small business start-ups are seeking overseas resources. If a business’ core product or service is information-based then virtual structures, using the Internet as a conduit, may have spawned new form of mini-multinational. For example, GNI is a biotechnology start-up that carries out research in Cambridge UK, data analysis in Japan, clinical trials in China and sells its outputs in the USA to large pharmaceutical companies.

“We take the best of what is available in each country and put them together,” says Mr Savoie GNI’s founder

[from March of the mini-multinational in the Financial Times onThursday May 4, 2006, page 12]

Video conferencing is used to link up personnel and the organisation is able to exploit national differences, cost and expertise to operate as a mini-multinational. Carol Cherkis, Vice President of GNI says that GNI is not a virtual company but a real company “It’s just that we are not all in the same place” [from March of the mini-multinational in the Financial Times on Thursday May 4, 2006, page 12].

Another example of a virtual mini-multinational is Lingo 24 which is a translation company  employing 40 staff in China, New Zealand and Romania with a turnover of £1.5 million and profits of £120,00 (as in 2004). The company’s headquarters are a two bedroom house in Deptford where clients ranging from BP, Honda, Ikea Orange and Travelex are served. Instead of having to physically travel to expensive offices employees can simply log on to a Lingo 24’s central database to obtain all the necessary information relating to translation projects. Homeworking and using international staff reduces overhead costs by 30% and permits a 24/7 service to be offered. Lingo 24 communicate on a daily basis using Skype and e-mail whilst the company intranet is used to monitor quality and provide an editorial oversight.

Richard Portes, an expert on globalisation at London Business School, said: “Small businesses are now operating on a global scale. They could not have done [this] 15 years ago.” Professor Portes added: “The advantage small businesses have is that they are not burdened with long lines of command, where important pieces of information come from operations in one country [back to the centre] then travel up and down chains of command”.

[from Small companies look beyond local to go global in the Financial Times, Thursday October 12, 2006, page 4]

So has the Internet spawned a new form of organisational structure and a new source of competitive advantage for agile and responsive entrepreneurial companies? Are the “big boys” shaking in their boots and would it be premature to start throwing out the textbooks on downsizing, delayering and business process re-engineering…….. or is this just a passing fad?

About the author

Nigel Walton is an associate lecturer for the Open University and the University of Worcester, specialising in strategy, entrepreneurship and international marketing. He previously worked as a management consultant, primarily advising medium-sized companies with growth problems.

Two of the leading technology web sites, silicon.com and its sister site, ZDNet.co.uk, recently reported that spending on consultants by the Home Office had reached £147m in 2006/07 – up from £7.6m when new Labour came to power in 1997. This figure includes spending by the Identity and Passport Service (IPS) – responsible for the soon to be launched ID card – of £30m. The two reports quote Home Office Minister Liam Byrne’s response to criticism of this huge increase. Byrne argued that it was necessary to buy in ‘…specialist knowledge, skill, capacity and technical expertise that would not otherwise be available.’ and that the vast majority was attributed to large outsourcing contracts and IT projects.

Photograph by stevecadman, used under Creative Commons license

The Home Office’s spending on consultants is only a small part of the total amount of public money that flows to the consultancy industry, of course. In its 2006 report Central Government’s use of Consultants, The National Audit Office (NAO) stated that spending hit a high point of £2 billion in 2003/04 – up from £217 million in 1997. The authors of Plundering the Public Sector estimate that around two-thirds of this amount goes on IT systems consultants; a claim borne out by the NAO’s finding that the five consultancy companies with the highest earning from government are all primarily IT focused.

There are understandable reasons why the consultancy industry occupies such a powerful position in government and public services in the UK – particularly in IT. One of the most significant, as Helen Margetts points out in 'E-Government in Britain — A Decade On' (in Parliamentary Affairs), was the 1990s pursuit of ‘…a particularly radical form of IT outsourcing (or “totalsourcing”), in which government agencies retained very little expertise internally.’ The upshot, as Margetts goes on to note, was that by the early 2000s this had created a situation where five IT services and supply companies held 90 percent of the government market in the UK.

However, there's a second dimension to this relationship that lies beyond the often reported scale and scope of operations. This is the rise of what's been called the ‘consultocracy’: the number of senior personnel in government and the civil service who have a consultancy background and/or interests. In fact Liam Byrne will be familiar with this situation as he previously worked for Accenture (formerly Andersen Consulting), as did James Hall, the current Chief Executive of the IPS. There are many other past and present examples I could cite but space prevent this. Suffice to note that this is not a new development. The process started in the late 1960s through the Fulton Committee’s review of the civil service. By the early 1980s the relationship had developed to such an extent that the Management Consultancies Association (MCA) had begun to arrange a regular series of meetings between its representatives and senior civil servants. And by the early 1990s the head of the Prime Minister’s policy unit was a consultant from McKinsey.

There are several ways in which we can examine the significance of this relationship. One relatively straightforward approach is to analyse how many of the bases or sources of organisational and institutional power the industry and its stakeholders and supporters in government can utilise. I’d argue it’s all of the following: formal authority, the use of organizational structure, rules and regulations, the ability to cope with uncertainty, symbolism and the management of meaning, structural factors that define the stage of action and interpersonal alliances, networks, and “informal organisation”. Six further bases relate specifically to control and of these the control of scarce resources, decision processes, knowledge and information, boundaries, and technology are also highly significant.

In short, when both dimensions of the relationship are combined it's doubtful whether any other stakeholder group enjoys such a potentially influential position in central government policy making and implementation, particularly if it's IT related - which is nowadays pretty much everything. This raises a number of significant questions, two of which I’d highlight.

The first stems from comparative research reported in Digital Era Governance, that ‘…the greater the overall power of the IT industry in a country, the lower the performance of government IT systems.’ The question posed, therefore, is whether in countries where we also have to contend with the power and influence of a largely IT-centred consultancy industry  does this create a double wammy - aggravating this situation further, therefore making the development and implementation of best value, effective, government and public sector IT systems even less likely? 

The second relates to a long standing concern of scholars of policy studies and political science, and a good number of ordinary citizens as well: is the credibility, legitimacy and function of the policy process in a democracy undermined when the formulation, implementation and evaluation of public policy is dominated by one set of stakeholders? Furthermore, is this situation compounded where the basis of this relationship is such that transparency and oversight - even by Parliamentary bodies - can be significantly restricted by claiming commercial confidentiality? Call me naive or lacking a grasp of real politic but my reading of the evidence suggests the answer is yes, yes and yes. 

About the author

Ivan Horrocks is a lecturer and member of the Technology Management Group at The Open University. He has written many publications about the relationship between information and communication technologies (ICTs) and government and politics.