Observations Observations

November 1, 2010

A Taste for Risk

Do you enjoy "positive surprises"? If so, should you invest in aggressive growth funds? A questionnaire formulated by Batterymarch Financial back in 1989 categorized respondents as risk-takers, as opposed to risk-averse or risk-neutral investors, if they expressed an interest in "positive surprises" or "outwitting the crowd."

Questionnaires have grown in importance since then, says Laura Rigsby, vice president at Fiduciary Trust in Boston, as more middle-income households invest in mutual funds and advisors spend less time with clients. The questionnaires typically help determine, first, how much risk an investor may need to take on to reach specific goals; and, second, how much risk an investor is willing to take on. The latter task is especially difficult, for it relies on introspection by the investor.

In the past few years, the questionnaires have shifted from trying to assess general client attitudes to inquiring specifically about investment behavior. Fidelity Investments, for example, currently asks investors whether or not they previously invested in bond or stock funds and how they felt about it. It asks new investors for reactions to hypothetical investment losses.

This shift away from abstract questions that outline general behavioral patterns, points to a change in conception. How we deal with money, it seems, is different from the way we behave in other risk-taking activities. Someone who enjoys sky-diving could be a conservative investor, says Richard Geist, president of the Institute of Psychology and Investing. "How people treat money depends on their background, how their family treated it. How they treat their bodies can be very different."

- Susan Bannon

Electron Resistance

Electronic payments mechanisms are increasingly touted as cheaper, faster, and easier than traditional paper checks. Sending a check through the mail costs roughly $2.90 in paper, postage, and back-office processing, estimates Kirstin Wells, of the Federal Reserve Board of Governors staff; the electronic automated clearinghouse (ACH), most commonly used for paycheck deposits and other recurring payments, transfers funds for about $1.30.

But ACH adoption has been slow. ACH use, as a share of all non-cash payments, has only grown from 1 to 3 percent between 1983 to 1994. Public Service of New Hampshire, an electric utility based in Manchester, for example, offers automated bill payment that saves consumers postage, banking fees, and hassle. Fewer than 10 percent signed up.

The mortgage market would seem particularly ripe for ACH since mortgage payments, unlike utility charges, are fixed and carry penalties for delinquency. But here again, experience suggests resistance to cyber-payments. BayBank in Boston reports only one-third of its mortgage customers use automatic payment, an option offered since the early '80s, even when incentives sweetened the pot. BayBank offered borrowers a $100 discount on their loan if they paid by ACH. But the bank cancelled the promotion when its savings failed to justify the expense.

Consumers and businesses thus need larger inducements before they give up their checks. As electronic and paper payment systems both exhibit large economies of scale, such gains might materialize only if more users switch.

- John Piazza

The World Is Round

After Asia's economic explosion shifted the locus of the world economy to the Pacific Rim, West Coast ports became major ports-of-entry for U.S. imports. But as the nations of northeast Asia developed and their labor costs rose, industrial activity in Asia shifted south and west, mainly to China. It has now moved far enough that some goods shipped to the U.S. Eastern Seaboard come directly, through the Suez Canal, saving time and expense over the trans-Pacific, transcontinental route.

New York and Halifax, Nova Scotia, are the main destinations. Feeder vessels then carry goods to Boston, three times a week, to serve the New England market. Only 10 percent of the goods leave the region.

Most of these imports are low-cost consumer products, mainly footwear and textiles. The industries that produce these goods are highly sensitive to labor costs, and their plants can be transferred more easily than those making TVs, autos, or computers. But as Asian production of higher-value goods shifts south and west, these products, at some point, might also come to Boston via the Suez Canal.

Most of Boston's waterborne Asian imports are currently brought in by very large distributors. The wholesaler J. Baker supplies footwear to stores near the Massachusetts Turnpike and along Boston's South Shore. Wal-Mart, the giant retailer, distributes clothing and other textiles throughout New England from its regional disbursement center. Smaller retailers and distributors in the region might purchase goods in New York and have their goods shipped in by truck.

The gains from this new trading channel are divided between the importers and consumers. If competition among importers grows, and more goods find it advantageous to arrive via Suez, consumers could reap the bulk of the gains through lower prices.

- Anna Onishi