Opinion: MIT-led team is aiming to build a better cryptocurrency – Sandy Pentland

Sandy Pentland, MIT Sloan Information Technology Professor

From MarketWatch

New technologies that make it possible to reinvent our financial system have exploded over the past decade.

Bitcoin BTCUSD, ethereum and other cryptocurrencies are proof that there’s a market for alternatives to the big, powerful players. And yet, it’s unclear how these cryptocurrencies will affect the economic landscape. Problems like bubbles, financial crashes and inflation aren’t going away any time soon. (Ahem, note recent events.)

But in the future, things could be different. These digital currencies and their supporting infrastructure hold great promise for deepening our understanding of the monetary circuit. With newfound clarity, we can build tools for minimizing financial risk; we can also learn to identify and act on early-warning signals, thus improving system stability. In addition, this new level of transparency could broaden participation in the economy and reduce the concentration of wealth.

A crypto alternative

How might this work? Leading cryptocurrencies, with bitcoin being perhaps the most famous, or infamous, example, have considerable logistical limitations. An alternative is needed. Read More »

Why Americans are unhappier than ever – and how to fix it – George Ward

George Ward, MIT Sloan PhD student

From The Conversation

March 20 is International Day of Happiness and, as they’ve done every year, the United Nations has published the World Happiness Report. The U.S. ranks 18th among the world’s countries, with an average life satisfaction of around 6.88 on a scale of 10.

While that may be relatively near the top, America’s happiness figures have actually declined every year since the reports began in 2012, and this year’s are the lowest yet. The question, then, is whether the government has a role to play in improving the happiness of its citizens. And if so, how might policymakers go about it?

Fortunately, a growing body of work by economists and psychologists can give governments access to the kind of data that can inform the way they think about policy and happiness.

In our new book, “The Origins of Happiness: The Science of Well-Being Over the Life Course,” my colleagues and I provide a systematic account of what makes for a satisfying life.

The role of government

The idea that government ought to focus attention on the well-being of its citizens goes back centuries. Thomas Jefferson himself said, “The care of human life and happiness … is the only legitimate object of good government.”

Historically, this has meant increasing economic productivity and growth to increase personal happiness. But as the data suggest, and many countries are beginning to realize, this isn’t likely to be sufficient. As a result, many governments around the world are now taking steps to broaden their policy goals beyond GDP. Read More »

Wider and direct access to financial market infrastructure is the next step for a more competitive financial market – Haoxiang Zhu

MIT Sloan Assc. Prof. Haoxiang Zhu,

From ProMarket

As of Saturday, January 13, all EU member states were to fully implement the revised Payment Services Directive, known as PSD2.1) Among other things, PSD2 allows third-party payment service providers to gain access to customers’ bank accounts (with the customers’ consent, of course), and customers’ banks are required to provide API connection for identity verification. Its potential impact should not be underestimated. For example, under PSD2, customers and merchants can, in principle, cut credit cards and debit cards out of their transactions, saving significant costs along the way. In addition, banks can no longer “own” their customers’ account data or prevent competitors from accessing them.

The EU’s PSD2 is a major development in payments and financial market infrastructure, a once-sleepy “back-office” function that is now alive and kicking. The essence of PSD2 is to encourage competition and reduce the information advantages of incumbent banks. Likewise, the Bank of England announced in July 2017 that non-bank payment service providers can become direct settlement participants in the UK’s payment system, as long as certain requirements are met.

Access to financial market infrastructure such as payment systems has important implications for market competition. The study of industrial organization shows that competition is reduced by vertical integration. A vertically integrated incumbent that produces both “upstream” and “downstream” goods can effectively reduce competition in the downstream market if its stand-alone competitors rely on the incumbent for providing the upstream good.2) Financial market infrastructure is the ultimate upstream good for almost all economic activities. Privileged access to market infrastructure makes banks “special” and, in some situations, may encourage anticompetitive behavior. Good examples to keep in mind include two antitrust class lawsuits in over-the-counter derivatives markets in which investors accused dealer banks of, among other things, using their unique positions as clearing members in OTC derivatives to shut off new entrants that aim to compete with dealer banks in the transaction of these derivatives.3) One of these lawsuits has been settled, with dealer banks paying $1.86 billion. Read More »

Give mutual fund investors a voice in shareholder proxy voting – Gita Rao

MIT Sloan Sr. Lecturer Gita Rao

From MarketWatch

Are you concerned about climate change, or about social issues such as corporate board diversity? Can you as a shareholder have your preferences communicated to company management and perhaps impact corporate policy on these issues? For the majority of individual investors, the short answer is “no.”

That’s because most individual investors own mutual funds. But the structure of the mutual fund makes it difficult to reflect shareholder objectives and values related to environmental, social, and governance (ESG) issues.

The growth in individual shareholder ownership ironically has created a huge gap in corporate governance and accountability. The ownership of Corporate America lies largely with employees through 401(k) plans and other retirement vehicles, except these same employee-owners cannot and do not have proxy voting rights — these are exercised by the fund providers.

Given the size of retail assets that fund managers control — collectively close to $10 trillion — there is a valid concern about their voting practices not reflecting the preferences of the millions of investors in their funds. A typical fund has to vote on hundreds of proxies each year, most of them routine. The voting process is centralized and fairly automated, with default guidelines regarding how the shares are voted. The fund manager conducts analysis only on issues that materially impact a company’s financial or operating performance, and then casts a vote.

Having managed mutual funds for a long time and voted hundreds of proxies globally, I believe there is a simple and direct way to reflect shareholder ESG preferences in the voting of proxies: Through the fund prospectus.  Read More »

A deep look inside Apple Pay’s matchmaker economics – Richard Schmalensee and David S. Evans

MIT Sloan Professor Richard Schmalensee

MIT Sloan Professor Richard Schmalensee

From Harvard Business Review

Standing on stage on September 9, 2014 at Apple’s Worldwide Developer’s Conference (WWDC), Tim Cook announced, “We’ve created an entirely new payment process, and we called it Apple Pay.” Cook displayed a video of a woman who held her iPhone 6, the company’s upcoming upgrade, near a payment terminal.  She paid in the blink of any eye. “That’s it,” Cook said, exclaiming twice over “just how fast and just how easy” the new payment method was. An Apple press release claimed the new service would “transform mobile payments.”

Read More »