Written by: A. Allan Schmid
Primary Source: The Troublesome Economist
The Federal Reserve has gone to great lengths to keep interest rates low. So what have American firms been doing? Borrowing to build new plants and employ more people? Wrong!
They are using retained earnings and borrowing to buy their own stock and other companies.
Prof. Richard Roll of the University of California has formulated “the hubris hypothesis of corporate takeovers.” “Lately Prof. Roll has been studying the role of narcissism–a personality disorder characterized by excessive self-love–in corporate takeovers. When executives are excessively self-involved, he said, they may ascribe unrealistic attributes to themselves, like great strategic vision or deal-making ability, leading them to extend their domains by seeking acquisitions and wheeling and dealing rapidly.” (reported in the NYT Jun 22, 2014)
And what are the results? Prof. Rene Stutz found that during the Merger and Acquisitions mania of the period 1998-2001 shareholders of public corporations over-all lost huge sums.
Economic theorists have gone to great lengths to exclude psychology from economics, but it comes at a cost of reality. Just because psychology does not fit mathematical models is no reason to exclude it. Theorists deride the above as just telling stories. But, a good story is worth a lot of equations that miss the point.