Slow track, fast track, and the “Galactic Club”

Discoveries in the physical and biological sciences suggest that intelligence is widely distributed throughout the universe. Before long, either we will decide that these discoveries have pointed us towards a false conclusion, or we will obtain undeniable evidence of extraterrestrial life. After finding one extraterrestrial society, we are likely to discover others and, in this manner, become a part of the “Galactic Club”. Following the “slow track”, an initial encounter will lead to accelerated search efforts that will put us in touch, one by one, with additional societies. Following the “fast track”, our initial contact will be with an affiliate of the Galactic Club, and this society will give us instant access to other members. The physical constraints imposed by interstellar distances, coupled with our understanding of large social systems, suggest that the Galactic Club will be large, stable, slow-paced, and exert only loose control over its members. The two tracks have different implications for managing initial contact, protecting our security, knowledge transfer, handling culture change, and preserving our identity.     

Health care reform and reform for health: creating a health system for communities in the 21st century

If we are to improve the health of the population and reduce the inequalities in health that plague our communities and our planet, we will have to give greater attention to the determinants of health. The reform of the health care system, necessary though it is, will never be sufficient; we need to reform our whole society and in particular to focus on human rather than economic development. At the community level we need to create healthy communities that are “health-creating systems” of environmental, social and human development, as well as health care systems that focus first on improving and maintaining health. Such a “bottom-down” health care system would see the hospital become once again the place of last resort (but still a potentially important partner in creating healthier communities) and would focus instead on how to provide health promotion and health care from the household level up.     

Extreme observations and risk assessment in the equity markets of MENA region: Tail measures and Value-at-Risk

The standard “delta-normal” Value-at-Risk methodology requires that the underlying returns generating distribution for the security in question is normally distributed, with moments which can be estimated using historical data and are time-invariant. However, the stylized fact that returns are fat-tailed is likely to lead to under-prediction of both the size of extreme market movements and the frequency with which they occur. In this paper, we use the extreme value theory to analyze four emerging markets belonging to the MENA region (Egypt, Jordan, Morocco, and Turkey). We focus on the tails of the unconditional distribution of returns in each market and provide estimates of their tail index behavior. In the process, we find that the returns have significantly fatter tails than the normal distribution and therefore introduce the extreme value theory. We then estimate the maximum daily loss by computing the Value-at-Risk (VaR) in each market. Consistent with the results from other developing countries [see Gencay, R. and Selcuk, F., (2004). Extreme value theory and Value-at-Risk: relative performance in emerging markets. International Journal of Forecasting, 20, 287–303; Mendes, B., (2000). Computing robust risk measures in emerging equity markets using extreme value theory. Emerging Markets Quarterly, 4, 25–41; Silva, A. and Mendes, B., (2003). Value-at-Risk and extreme returns in Asian stock markets. International Journal of Business, 8, 17–40], generally, we find that the VaR estimates based on the tail index are higher than those based on a normal distribution for all markets, and therefore a proper risk assessment should not neglect the tail behavior in these markets, since that may lead to an improper evaluation of market risk. Our results should be useful to investors, bankers, and fund managers, whose success depends on the ability to forecast stock price movements in these markets and therefore build their portfolios based on these forecasts.     

Overreaction in the Hong Kong stock market

Overreaction reported in the equity markets of the United States, Spain, and Brazil is also observed in the Hong Kong stock market. The “loser” portfolios of the 33 stocks in the Hang Seng Index (HSI), on average, outperform the “winner” portfolios by 9.9% 1 year after the formation periods. Besides its emphasis on the importance of the Hong Kong market in international investment, this paper is unique in some special features related to the overreaction study. Hong Kong has markets for index futures and stock futures. Only three stocks are used in the portfolios. All the stocks in the HSI have large market capitalization and liquidity and can be shorted with no up-tick rule. Unlike other studies in international stock markets, the “arbitrage” portfolio of buying the loser portfolio and shorting the winner portfolio can actually be formed with minimum cost and easy execution, which makes the overreaction phenomena in this study very powerful.     

Derivatives and systemic risk: Netting, collateral, and closeout

In the U.S., as in most countries with well-developed securities markets, derivative securities enjoy special protections under insolvency resolution laws. Most creditors are “stayed” from enforcing their rights while a firm is in bankruptcy. However, many derivatives contracts are exempt from these stays. Furthermore, derivatives enjoy netting and closeout, or termination, privileges which are not always available to most other creditors. The primary argument used to motivate passage of legislation granting these extraordinary protections is that derivatives markets are a major source of systemic risk in financial markets and that netting and closeout reduce this risk. To date, these assertions have not been subjected to rigorous economic scrutiny. This paper critically re-examines this hypothesis. These relationships are more complex than often perceived. We conclude that it is not clear whether netting, collateral, and/or closeout lead to reduced systemic risk, once the impact of these protections on the size and structure of the derivatives market has been taken into account.     

Psychology, meaning and the challenges of longevity

Humankind has begun to reap one of the most valued harvests of its scientific and technological pursuits: a significant increase in human longevity. We now live longer than ever before, due in large part to advances in medicine and health care that provide those who have the opportunity to afford them a lifespan that for many approaches or exceeds the 100-year mark. It is now within the realm of possibility that people will live lives of 125 years or more within the next century. However, our ability to increase physical longevity may have outstripped our ability to deal individually and socially with these new lives, these new existences that go well beyond what has traditionally been considered a “working life”. How well-prepared are we psychologically to cope with the meaning of a life that extends to as much as 150 years or more? In this new “age of longevity”, what are the challenges for psychology as a resource for humanity in its quest to give definition to the experience of being alive, as well as for managing the affairs of everyday life? Traditional developmental theories in psychology tend to articulate early stages of life in detail, but are generally mute on the matter of later life. Cognitive psychology has been inclined to view longevity as leading to a deterioration of mental faculties due to “aging”. This paper examines the psychological implications of increased lifespans from an optimistic perspective by reviewing current developments in research on cognition, emotion and aging. The review identifies trends in psychology that, if emphasized and strengthened, may lead to improved theoretical frameworks that cast longevity in a positive light, and that identify how people can find meaning and fulfillment throughout their whole lifespan.

“Grow old along with me! The best is yet to be, The last of life for which the first was made.” Robert Browning “Rabbi Ben Ezra”

I first encountered Browning’s works as an undergraduate, and being a pre-engineering student at the time my tendencies toward poetry were stunted to say the best. Few of the great works of literature my teachers compelled me to read at that stage of my life and development made enough of an impact to last beyond the length of the course requiring their reading. Much has changed since then and my interests in literature and what literature has to say that is of value for our lives has deepened. But Browning’s enthusiastic call to join him in aging has always been a fascination. Indeed, what could be more of a contradiction to modern attitudes about becoming elderly than to claim “the best is yet to be”? What can be more of a challenge to how we approach the relationship between being young and being old than to claim that the last of life is “for which the first was meant”? What can the possible rewards of the golden years be that transcend the glorious enthusiasms, unfettered optimisms, and just pure physical conveniences of being young? Or, was Browning simply trying to sucker us all into a fait accompli, the hopeful outcome of which is the envy of the very youth that the aged often envy so much?There is little enough envy of the aged today. I approach these years with great caution, recognizing that how I look upon those who are two decades older than myself will, in turn, condition me to see myself in those years much in the way that I see them now. “Aging” is not something anyone really wants to do. We want to, at best, “grow older”, a perspective that carries with it a more positive spin: growing wiser, growing up, or simply “growing” with all of its new-age connotations of personal enlightenment and becoming. I am not “aging”, I am “becoming at one”.The language we have adopted to talk about the time-course of life, and particularly about the years in the latter third of that course, does much to frame both how we live those years and how we anticipate them in our youth. Our expectations are ones of decline, physical debilitation and mental infirmity. We “retire”, as in withdrawal into seclusion, away from the mainstream of life and into the backwater eddy of inaction. On the shelf.Much of this view has been reinforced by how humanity has approached examining this aspect of its own time course through science. We study aging with an eye to how its effects influence the abilities of those so afflicted to perform or operate compared to those who still have a grasp on their full faculties. And, of course, we find that as people grow older, they do not approach life in the same way as do younger people.Part of our view on life comes from the very way in which science is funded: those interested in the last of life often receive their support from the National Institute on Aging, not the National Institute on The Last of Life for Which the First Was Made. Research agendas often focus on identifying sources of infirmity and potential prostheses, either physical or social, that can ease the lives of the elderly on their way toward achieving the goal of successful aging. All too often, success in aging means imposing relatively few demands on social resources or on the lives of younger people, such as family members. In our “ageist” society, elderliness is not generally equated with status and stature. Less and less, the young “listen” to the old out of deep interest in their lives and their experiences. Wisdom is the providence of the freshly matured and recently educated.The shortcomings of life in the advancing years are many and well-documented in the research literature. Memory spans decrease, information retrieval becomes less reliable, and new information is less readily assimilated. As people become older, they appear to rely more and more on automatic processing of information, quick associations and the like, rather than deliberative and conscious reasoning [1]. For the older mind, intuition is at least moderately preferred over analysis. For example, younger people tend to interpret stories analytically, focusing on details, while older people tend to focus less on a story’s details and more on its “gist” and its underlying significance to things that are important to them [2], and tend to do better at grasping and dealing with information in terms of its holistic meaning [3 and 4].The effects of these differences in information processing between young and old can be seen in practical matters of everyday life, such as decision making and judgment. Johnson [5], for example, found that older adults use simplifying decision strategies more often than younger adults. These strategies, such as noncompensatory rules that consider only the positive or the negative aspects of a decision option but not both, relieve one of the psychological burden of making complex and effortful tradeoffs, at the possible expense of efficiency and accuracy. Chasseigne et al. [6] found that as people age, they become less consistent in their use of information in making judgments and predictions; even reducing the overall information load and demands on memory does little to improve the reliability of their judgments. ¹     

Mediating instruments and making markets: Capital budgeting, science and the economy

We examine in this paper how certain instruments link science and the economy through acting on capital budgeting decisions, and in doing so how they contribute to the process of making markets. We use the term “mediating instruments” to refer to those practices that frame the capital spending decisions of individual firms and agencies, and that help to align them with investments made by other firms and agencies in the same or related industries. Our substantive focus is on the microprocessor industry, and the roles of “Moore’s Law” and “technology roadmaps”. We examine the ways in which these instruments envision a future, and how they link a multitude of actors and domains in such a way that the making of future markets for microprocessors and related devices can continue. The paper begins with a discussion of existing literatures on capital budgeting, science studies, and recent economic sociology, together with the reasoning behind the notion of “mediating instruments”. We then address the substantive issues in three stages. Firstly, we consider the role of “Moore’s Law” in shaping the fundamental expectations of an entire set of industries about rates of increase in the power and complexity of semiconductor devices, and the timing of those increases. Secondly, we examine the roles of “technology roadmaps” in translating the simplified imperatives of Moore’s Law into a framework that can guide and encourage the myriad of highly uncertain and confidential investment decisions of firms and other agencies. Thirdly, we explore one particular and recent example of major capital investment, that of post-optical lithography. The paper seeks to help remedy the empirical deficit in studies of capital budgeting practices, and to demonstrate that investment is much more than a matter of valuation techniques. We argue, through the case of the microprocessor industry, for greater attention to investment as an inter-firm and inter-agency process, thus lessening the fixation in studies of capital budgeting on the traditional hierarchical and bounded organization. In addition, we seek to extend and illustrate empirically the richness of the notion of “mediating instruments” for researchers in accounting, science studies, and economic sociology.     

Long memory options: LM evidence and simulations

This paper demonstrates the impact of the observed financial market persistence or long term memory on European option valuation by simple simulation. Many empirical researchers have observed the non-Fickian degrees of persistence in the financial markets different from the Fickian neutral independence (i.i.d.) of the returns innovations assumption of Black–Scholes’ geometric Brownian motion assumption. Moreover, Elliott and van der Hoek [Elliott, R.J., van der Hoek, J., 2003. A general fractional white noise theory and applications to finance. Math. Finance 13, 301–330] provide a theoretical framework for incorporating these findings into the Black–Scholes risk-neutral valuation framework. This paper provides the first graphical demonstration why and how such long term memory phenomena change European option values and provides thereby a basis for informed long term memory arbitrage. By using a simple mono-fractal fractional Brownian motion, it is easy to incorporate the various degrees of persistence into the Black–Scholes pricing formula. Long memory options are of considerable importance in corporate remuneration packages, since stock options are written on a company’s own shares for long expiration periods. It makes a significant difference in the valuation when an option is “blue” or when it is “red.” For a proper valuation of such stock options, the degrees of persistence of the companies’ share markets must be precisely measured and properly incorporated in the warrant valuation, otherwise substantial pricing errors may result.     

Interstellar humanity

Fifty years after Olaf Stapledon's landmark essay “Interplanetary man?”, we propose the coming era of “interstellar humanity”. Over the next 1000 years the domain of humanity will increasingly spread to the stars, a process that will alter our future in profound ways. At least three factors will drive this expansion: (1) increased understanding of cosmic evolution, changing our perception of ourselves and our place in the universe; (2) contact with extraterrestrial intelligence, bringing knowledge, wisdom, and problems of culture contact now unforeseen; and (3) interstellar travel, transporting humanity's emissaries to at least the nearest stars. The consequences of these events are not predictable in detail, but may be studied by examining the lessons of cosmic evolution; by using history to analyze the reception of new world views and intellectual culture contacts on Earth; and by anticipating the likelihood of success in interstellar travel and its effects. The prospect of interstellar humanity during the next millennium is likely to have an effect on all branches of terrestrial endeavor, whether religion, philosophy, science or the arts. The stage of human drama will be vastly expanded.     

Auditor changes following big eight mergers with non-big eight audit firms

This paper examines the reaction of clients of “non-Big Eight” audit firms to mergers of their auditors with “Big Eight” firms. We postulate that a non-Big Eight audit firm's clients will retain a Big Eight acquirer following a merger if they benefit from the Big Eight firm's specialized services and/or reputation. Clients that do not have these economic incentives to retain the Big Eight firm are more likely to change to another non-Big Eight audit firm following the merger. Empirical tests of the characteristics of clients that remain with a Big Eight acquirer or change to another smaller auditor following an audit merger generally support our hypotheses.     

Aggregate implications of indivisible labor, incomplete markets, and labor market frictions

We study the impact of tax and transfer programs on steady-state allocations in a model with search frictions, an operative labor supply margin, and incomplete markets. In a benchmark model that has indivisible labor and incomplete markets but no trading frictions we show that the aggregate effects of taxes are identical to those in the economy with employment lotteries, though individual employment and asset dynamics can be different. The effect of frictions on the response of aggregate hours to a permanent tax change is highly nonlinear. There is considerable scope for substitution between “voluntary” and “frictional” nonemployment in some situations.     

A Vertical Application Platform for Knowledge-Based Financial Systems

Implementations of knowledge-based systems can be divided into two distinct parts: the knowledge base and the underlying control software. The underlying control software implements reasoning mechanisms and manages data required by the knowledge base. We call this underlying control software a ‘vertical application platform‘. The vertical application platform may be re-used by other knowledge-based applications which have similar reasoning requirements. This paper studies a knowledge-based system called Risk Advisor^sm which aids in the identification and assessment of audit risks. The knowledge roles and reasoning requirements of the knowledge base, and the architecture and implementation of the vertical application platform which implement the necessary reasoning mechanisms are described. The Risk Advisor^sm application platform has in fact been applied with a different knowledge model to other problems in a similar domain.     

CRITICAL THEORY AND ACCOUNTING HISTORY: CHALLENGES AND OPPORTUNITIES

This paper briefly examines the contributions that postmodern (critical) research has made to the historical accounting literature and the opportunities that this new body of literature has created for traditional historical researchers. I suggest that the “new history” that has rendered the “familiar strange” has provided new understanding of our discipline that should be welcomed by all historians. The paper briefly examines two areas, the emergence of double entry bookkeeping and cost accounting, to demonstrate the new insights that critical historians have provided to what has been considered a settled agenda. I conclude by noting that the diversity critical research has added to the accounting history research should be celebrated, but caution that we not engage in the modernist strategy of trying to find a “certified path to knowledge.” Accounting history will be enhanced if our community adopts the values–tolerance, willingness to listen, and respect for alternative views–ithat have enabled researchers in other disciplines to flourish.     

Mortality Risk and the Value of a Statistical Life: The Dead-Anyway Effect Revis(it)ed

In the expected-utility theory of the monetary value of a statistical life, a well-known result found by Pratt and Zeckhauser [1996] asserts that an individuals’ willingness to pay (WTP) for a marginal reduction in mortality risk increases with the initial level of risk. Their reasoning is based on the so-called “dead-anyway effect” which states that marginal utility of a dollar in the state of death is smaller than in the state of survival. However, this explanation is based on the absence of markets for contingent claims, i.e. annuities and life insurance. This paper reexamines the relationship between WTP and the level of risk under more general circumstances and establishes two main results: first, when insurance markets are perfect, for a risk-averse individual without a bequest motive, marginal WTP for survival does increase with the level of risk but this occurs for a different reason, namely an income effect. Secondly, when the individual has a bequest motive and is endowed with a sufficient amount of wealth from human capital, the effect of initial risk on WTP for survival is reversed: the higher initial risk the lower the value of a statistical life. In the imperfect-markets case we interpret this result as a “constrained-bequest effect”.JEL Classification No.: D8, H43, I18     

A writing intervention for the accounting classroom: dealing with the problem of faulty modifiers

Good communication skills continue to be viewed as critical for success in accounting. This paper demonstrates a writing-skills “intervention” that deals with faulty modifiers, a grammatical problem that can inhibit accounting students and professionals from achieving the clarity and conciseness widely regarded as essential in the accounting profession. The intervention consists of a handout distributed to students – fashioned to sensitize them to the pervasiveness of faulty modifiers and help them avoid the problem – and an in-class discussion of the handout. By design, this intervention is both inexpensive and unobtrusive. For the accounting instructor, we provide in the body of the paper a technical, but unpedantic and informal, analysis of faulty modifiers, including numerous examples of the problem, accompanied by alternative corrections. To date, few papers in the accounting education literature that deal with writing problems present direct assessment evidence. To assess the efficacy and perceived value of our learning intervention, we collected assessment data – both direct (i.e., a set of three diagnostic tests) and indirect (i.e., feedback from a student questionnaire) from two institutions at which our learning intervention was tested. These data suggest than an intervention of the sort described here can be valuable in remedying discrete weaknesses of student writing. In a larger sense, we believe our paper can be used as a model for the development of similar “interventions” that cover other grammatical problems, and that can serve either as stand-alone entities (similar to the method proposed by Reinstein and Houston (2004) [Using the Securities and Exchange Commission’s “plain English” guidelines to improve accounting students’ writing skills. Journal of Accounting Education, 22, 53–67]) or as complementary resources to more comprehensive and formal writing programs.     

Coexistence of disposition investors and momentum traders in stock markets: experimental evidence

Prior research documents that many investors disproportionately hold on to losing stocks while selling stocks which have gained in value. This systematic behavior is labeled as the “disposition effect”. The phenomenon can be explained by prospect theory's idea that subjects value gains and losses relative to a reference point like the purchase price (PP), and that they are risk-seeking in the domain of possible losses and risk-averse when a certain gain is obtainable. Our experiments were designed to test whether individual-level disposition effects attenuate or survive in a dynamic market setting. We analyze a series of 36 stock markets with 490 subjects. The majority of our investors demonstrate a strong preference for realizing winners (paper gains) rather than losers (paper losses). We adopt different reference points and compare the behavioral patterns across three main trading mechanisms, i.e. rules of price formation. The disposition effect is greatly reduced only within high-pressure mechanisms like a dealer market (DM) when the last price (LP) is assumed as a reference point, which is a more market driven (external) benchmark. If disposition investors use the PP as a reference point, which is a more mental-accounting driven (internal) benchmark, they die hard in all market settings. Interestingly, our markets do not collapse or become illiquid by disposition investors' reluctance to trade. A main reason for this is the coexistence of two or more groups of investors, e.g. momentum traders and disposition investors.     

Dispersion trading: Empirical evidence from U.S. options markets

This paper develops empirical evidence on the viability of a form of volatility trading known as “dispersion trading.” The results shed light on the efficiency with which U.S. options markets price volatility.Using end-of-day implied volatilities extracted from equity option prices for the stocks that comprise the S&P 500, the implied volatility of the S&P 500 is computed using a modification of the Markowitz variance equation. This Markowitz-implied volatility is then compared to the implied volatility of the S&P 500 extracted directly from index options on the S&P 500. These contemporaneous measures of implied volatility are then examined for exploitable discrepancies both with and without transaction costs. The study covers the period October 31, 2005 through November 1, 2007.It is shown that, from a trader's perspective, index option implied volatility tended to be more often “rich” and component volatilities tended to be more often “cheap.” Nevertheless, there were times when the opposite was true; suggesting that potential dispersion trades can run in either direction.     

Minority membership on boards of directors: the case for requiring pictures of boards in annual reports

Affirmative action and diversity continue to be contentious issues in the United States. Financial markets are still reeling from the effects of Enron, WorldCom and other corporate exemplars of corruption and malfeasance. The role of the board of directors in these scandals is the subject of serious and ongoing concern. Weak and/or ineffectual boards are often the consequences of “old-boy networks” and a lack of diversity in membership. This research study argues for an increased presence of gender and race diversity on boards of directors. Empirical evidence is presented that shows a significant increase in the presence of ethnic minorities and females when pictures of board members are included in annual reports. We suggest that requiring pictures of board members in annual reports and regulatory filings would result in a larger presence for gender and race diversity on boards of directors. This requirement is not a significant burden and merely represents compliance with the spirit and intent of the “full disclosure” principle.     

The effect of cognitive style and sponsorship bias on the treatment of opportunity costs in resource allocation decisions

The incorporation of opportunity cost is stressed in normative approaches to resource allocation decisions. Empirical evidence has revealed a variety of behaviours. A consequence of inappropriate treatment of opportunity costs is an incorrect assessment of the economic consequences of resource allocation decisions. Improved understanding of why some managers treat opportunity costs inappropriately permits identifying situations where the incorrect economic evaluations will lead to sub-optimal resource allocation and therefore provides a basis for remedial action. This study identifies two conditional factors which potentially influence the way managers respond to opportunity cost information.These factors are managers' cognitive style and whether or not managers sponsor a project (project sponsorship), and it is argued that they influence managers' decisions on opportunity costs in situations in which opportunity cost implications are implicit. In particular, the paper proposes, first, that in the absence of project sponsorship, managers with an “intuitive” style of “taking in data” will tend to incorporate opportunity costs in their economic decisions whereas those wiht a “sensation” style will not. Second, it is suggested that because sponsorship encourages managers to ignore negative economic signals (sponsorship bias) any effects of cognitive style will be moderated in conditions where sponsorship is evident.A laboratory experiment with managers as subjects was used to examine these propositions. The results indicated that intuitive managers tended to incorporate opportunity costs in their decisions whereas sensation individuals appeared to focus more on the directness of the relationship between expenditure and a project to determine the relevance of the cost. Opportunity cost implications tended not to be identified by the sensation group. Evidence was found that sponsorship moderated the influence of cognitive style on decisions to include opportunity costs.     

The average hospital

In 1998, the UK government introduced the National Reference Costing Exercise (NRCE) to benchmark hospital costs. Benchmarking is usually associated with “excellence”; the government emphasised the raising of standards in the 1997 White Paper “The New NHS: Modern, Dependable” that heralded the NRCE. This paper argues that the UK “New Labour” government's introduction of, and increasing reliance on, hospital cost benchmarking is promoting “averageness”. Average hospitals will be cheaper to run and easier to control than highly differentiated ones; they may also score more highly on certain measures of service improvement. The paper aims, through empirical investigation, both to demonstrate how the activities and processes of hospital life “become average” as they are transformed to comply with the cost accounting average and to indicate how the “average” is being promoted as the norm for hospitals to aspire to. To benchmark to average costs, comparisons are necessary. To compare hospital costs involves the creation of categories and classification systems for clinical activities. Empirical evidence shows that as doctors, patients and clinical practices are moulded into costed categories, they become more standardized, more commensurate and the average hospital is created.