The Banking Game: Literature Review Part One by Doreen Soutar
Contrary to many claims at the time, there is a considerable literature prior to the 2007 crash which demonstrates that the circumstances necessary for impending crisis existed. For example, Taylor (1999) noted that “….in a decade perhaps only a dozen mammoth financial institutions may remain….
in the next three to five years, European banks profits will come under severe pressure” (p.60), Nabudere (2009) noted that there are many similarities between the crashes of the 1980s and 2007, and in a history of financial crises, Winter (2005) suggests that they typically have a signature context of a tendency to speculate and lax credit controls. In short, many commentators and researchers suggest that it could have and indeed was predicted, but the portents were ignored.
The literature on banking reform is becoming very substantial. For the most part, it concentrates on avoiding financial crises recurring, with an emphasis on the relative liberalisation of the banking industry and its corporate structure (Ingo, 2004; .Haldane, 2009; March & Shapira, 2010; Nissan & Spratt, 2009).
However, very little attention is paid to models of behaviour within banking (Nowak & Sigmund, 2000; Kolm & Ythier, 2006), and what these can reveal about how reform of the banking system could be achieved. This is unfortunate, particularly in light of the interest bankers themselves pay to cross-paradigm models such as game theory and chaos theory (Rapoport & Chammah, 1965; Lorenz, 1995). Although it may be possible to prevent a similar banking crisis recurring, unless the underlying principles and epistemologies traders experiment with are examined and understood, there can be little hope of predicting the ontology of a future crisis (Ingo, 2004; Johnson et al 2003).
Of course, businesses are not static entities, and the strategies they use alter with time and circumstances. One of the ways of examining both the current behaviour of banks and their chronological trends is through evolutionary modelling.
Darwinian Evolutionary Models And Their Descendants
The most often quoted mantra of Darwinian evolution is the “survival of the fittest”. This phrase is usually cited as a justification for self-serving behaviour whereby physically weaker or emotionally more sensitive members of a community or species are deemed less fit for evolutionary selection than tough, strong, alpha-males. However, this is a mis-quote which distorts the underlying meaning of Darwinism: the complete phrase is “survival of the fittest to survive” (Darwin 1859), whereby “fit” in this case means the goodness of fit between the individual and their environmental complex (e.g. Lukasik et al 2006, Mameli, 2004).
Thus, although there are times when being tough and strong might be essential, it is only one of a multitude of possible forms of “fitness”, all of which are environment-dependant (Little et al 2007; Martin & Lenormand, 2006). Of course, environments vary in their levels of intrinsic competition and co-operation, with different types of person succeeding within them (Sober & Wilson, 1998 in Kerr & Godfrey-Smith). The specific interest here is the interactions between competitive and co-operative environments and their populations.
Altruism And Reciprocity
Altruism can be defined as an action which appears to be of greater benefit to the recipient than it is to the giver. In its pure form, an act of selflessness which benefits someone else at our own expense provides something of a dilemma for evolution (Lukasik et al, 2006). If we are programmed with “selfish genes” with a sole purpose of perpetuating their own existence (Dawkins, 2006), then altruism appears to run counter to this purpose, deliberately deslecting their own genes to benefit another set.
The genetic version of the debate on the purpose of altruism tends to focus on and around the notion of kin selection: that is, that those who share genetic material, such as offspring, will perpetuate our genetic code, and it is therefore in the interest of kin to assist the survival of each other (Dawkins, 2006). This genetic-level theory is popular, but is reliant on the notion that we know who our kin are, what their genetic composition is, and what would be the best way to assist in their survival (e.g. Mameli, 2004; Dugatkin, 2006).
The existence of behaviour such as adoption tends to suggest that a genetic explanation of altruism is insufficient on its own to explain selfless behaviour in a complex environment (Kerr & Godfrey-Smith, 2002). Perhaps we need to look at altruism from a more socially-grounded viewpoint.
Reciprocity is a generally implicit assumption that altruistic acts are preformed with the expectation that the receiver will act with equivalent altruism (Gangestad & Simpson, 2000;Lukasik et al 2006). Given that there may be a delay between an act of generosity and the expected reciprocal act, there is a level of trust involved in this behaviour, as well as a level of self-interest (Lukasik et al 2006). Altruistic reciprocity is much easier to accommodate in evolutionary theory than pure altruism: the most ‘fitting’ behaviour may not be that which serves only one member of the community, but elevates the fitness of several members simultaneously (Hamilton 1964 in Kappeler & Schaik; Clutton-Brock, 2002 in Kappeler & Schaik).
A Public Assumption Of Reciprocity In Banking
This notion of mutual, reciprocal altruism is the foundational concept of many aspects of social life, and banking is one of them: funds are reallocated from those who have a surplus to those who are in need. In return for the benefit of immediate financial assistance, it is assumed that the lender will reap a relatively equivalent reward in profits from interest and fees. The banks trust that the borrower will not default and the borrower assumes that the bank can be trusted to extract only a fair benefit with regard to the risk (King, 2010).
Much of the recent discussion around the behaviour of banks involves the notions of reciprocity and trust, with the roles between borrower and lender reversed. The taxpayer has behaved altruistically towards the banking community in providing emergency funding, and that there is an expectation by the taxpayer that the banks will respond by not defaulting on the taxpayer (Kennedy, 2010; King 2010).
However, this expectation is on the assumption that the banks as individual entities will behave co-operatively within a co-operative environment. Research into the relative benefits of the potential interactions between individual and environment are the domain of game theory (Rapoport & Chammah, 1965), and this will be discussed later. To begin with we need to define the relative co-operative or competitive nature of the banks as individual entities (Sober & Wilson 1998 in Kerr & Godfrey-Smith).