Monthly Archives: December 2024

Worries About Possible Risks of Tests Marketed Directly to Consumers

Experts argue in The BMJ today that improved information and regulation are crucial to shielding consumers from the potential dangers of tests marketed directly to them. Emma Gram from the University of Copenhagen, alongside her colleagues, raises concerns that consumers may purchase more harmful than beneficial products. They emphasise the necessity for high-quality information and effective communication to guard against unbalanced and misleading marketing strategies.

The rapid progress in diagnostic technology and digital health has expanded the array and volume of direct-to-consumer (DTC) tests. These range from self-test kits and multi-cancer detection tests to testosterone and food sensitivity tests. Sales of these tests in the United States have escalated dramatically, from $15 million in 2010 to $1.15 billion in 2022. However, there needs to be a dedicated regulatory framework to oversee the appropriate use of these burgeoning products.

The authors highlight specific tests, such as those indicating menopause or fertility chances, which may deliver incorrect or misleading information to women about their fertility or symptoms. They note that while the availability of self-testing kits could encourage communities that are typically underserved, such as those at high risk of sexually transmitted infections, to access testing more readily, the inaccuracies in these tests could lead to mismanagement. False positive results might prompt unnecessary follow-up consultations and further testing, while false negatives could delay necessary treatment by offering false reassurance.

Furthermore, the instructions, packaging, and advertising accompanying these tests sometimes require accurate completion, leading consumers to make uninformed decisions regarding their health. Tests marketed for assessing “wellness,” such as hormone levels, may also present significant risks. Abnormal results, which may not be clinically important, could cause distress, lead to excessive testing, or result in the use of unproven supplements and treatments, posing serious health risks, including issues with fertility and cardiovascular conditions.

The marketing strategies often target healthy individuals, who are the least likely to benefit from these tests. The potential harms of multi-cancer detection tests are particularly significant. Currently marketed and sold in the US, these tests claim to detect over 50 types of cancer before symptoms appear. However, Gram and her team argue that they are more likely to detect cancers at a late stage, potentially causing considerable harm without providing tangible benefits.

While acknowledging that DTC tests could benefit certain situations, the authors note that studies have yet to prove their use improves health outcomes. Professional organisations advocate for tests to offer clear interpretations and results in response to these potential consumer harms. They also call for patients to be well-informed about when self-testing is advisable and when it is not. Nevertheless, with formal policy directives and regulations of commercial suppliers operating outside the traditional healthcare system, progress in implementing these changes could be more active.

The authors conclude that current regulatory frameworks are insufficient to address the novel ways DTC tests are sold and used. They insist that commercial suppliers must demonstrate the benefits of their products, including clearly defining the appropriate targeted populations for the tests to avoid harmful misinterpretations. Additionally, they urge industry and regulatory bodies to consider broader concepts of harm, including financial, psychological, and physical harm, as well as the risks of overdiagnosis and ineffective diagnosis associated with DTC testing.

More information: Emma Grundtvig Gram et al, Direct-to-consumer tests: emerging trends are cause for concern, The BMJ. DOI: 10.1136/bmj-2024-080460

Journal information: The BMJ Provided by BMJ Group

Study Reveals Cost-of-Living Crisis Affects Health Among Black Communities

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A pioneering study has unveiled the profound effects of the cost-of-living crisis on both discrimination and health outcomes within the Black community in the UK, highlighting a correlation between escalating interest rates and bank rates and the worsening of general and mental health, alongside an increase in experiences of discrimination.

Published in the “Ethnic and Racial Studies” journal during Black History Month, this research marks the first of its kind to investigate the repercussions of fluctuating interest rates and bank rates amid a cost-of-living crisis on the health of Black individuals.

Conducted by a team from Anglia Ruskin University (ARU), the study utilised participant forms distributed at social events in London commemorating Black History Month in 2021. Subsequently, an electronic questionnaire was sent to participants from October to December of the same year, with follow-up data gathering extending into 2022 and 2023. The research encompassed 722 responses, with 264 participants in 2021, 235 in 2022, and 223 in 2023.

Findings from the study during the 2022/2023 period of the cost-of-living crisis indicated a 3.75% rise in discrimination against Black individuals, a 4.45% decline in general health, and a 5.62% fall in mental health. Notably, episodes of discrimination were linked to a 26.4% decrease in general health and a 27.1% decline in mental health.

The period also saw significant economic shifts, with inflation escalating from 2.49% in 2021 to 7.9% in 2022 before slightly decreasing to 6.83% in 2023. Concurrently, the Bank of England’s base interest rate surged from 0.11% in 2021 to 1.58% in 2022 and further to 4.81% in 2023. Analysis from the study suggests that inflation was associated with a 2.9% rise in discrimination towards Black people, while the increased bank rate correlated with a 1.1% uptick in such discrimination.

Moreover, the study revealed that rising inflation was connected to a 2.3% deterioration in general health and a 2.5% worsening in mental health. In comparison, an uptick in the Bank Rate was linked to a 1.9% decline in general health and a 2.3% decrease in mental health.

Additionally, the research highlighted that minority subgroups within the Black community, including gay men and lesbian women, encountered higher levels of discrimination and poorer health outcomes when compared to other groups.

Professor Nick Drydakis, the lead author and a Professor of Economics at ARU, provided valuable insights into the dynamics at play. He noted that the study illuminates the intricate relationships between discrimination and health outcomes within the Black community amidst the economic strife of the cost-of-living crisis. This era, defined by significant uncertainty for most UK residents, disproportionately impacted minority groups.

Professor Drydakis elaborated on the socio-economic tensions exacerbated by such crises, which often heighten when dominant groups perceive their access to resources as threatened, leading to increased prejudice and discrimination. He underscored the critical need for societal efforts towards equality and enhanced well-being for all, especially those most vulnerable, reflecting on the broader implications of the study’s findings.

More information: Nick Drydakis, Discrimination and health outcomes in England’s black communities amid the cost-of-living crisis: evaluating the role of inflation and Bank Rates, Ethnic and Racial Studies. DOI: 10.1080/01419870.2024.2410900

Journal information: Ethnic and Racial Studies Provided by Anglia Ruskin University

Analyst Exposes Supply Chain Vulnerabilities as Significant Threat to Financial Security

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When Europe’s largest car manufacturer faces significant challenges, the repercussions ripple beyond the automotive sector, potentially threatening the broader financial system. This sentiment was underpinned by Volkswagen’s recent announcement of job cuts, which was echoed by similar warnings from Germany’s auto parts supplier Bosch, as well as Brawe and Adient in Czechia. These developments spotlight the escalating risks within the industry.

As Volkswagen grapples with deepening crises, the present economic instability could be exacerbated. The situation prompted Moody’s to revise its creditworthiness outlook following the shutdown of Volkswagen’s factories. Furthermore, in its recent Financial Stability Report, the German Central Bank projected an increase in corporate defaults nationwide by 2025.

“This scenario highlights the extent to which supply chain disruptions can amplify financial risks,” remarked CSH scientist Zlata Tabachová, who, along with her research team, developed an innovative model that delineates the pivotal role of supply chain disruptions in magnifying financial risks, thereby reshaping credit risk assessment and financial stability paradigms.

The researchers’ model illustrates that interruptions in supply chains can precipitate financial losses that substantially exceed those anticipated by traditional credit risk assessments. In scenarios of supply chain shocks, banks’ financial losses could quintuple compared to the losses foreseen by conventional credit risk models, which typically do not consider the ramifications of supply chain contagion.

“Our findings suggest that traditional credit risk models, which predominantly rely on the financial performance of corporate clients, tend to underestimate the genuine financial exposure of banks to supply chain disturbances,” Tabachová assessed.

For this groundbreaking model, the research team utilised an expansive dataset encompassing over 240,000 Hungarian companies and 27 banks, with more than 1.1 million supply chain connections and over 25,000 bank-firm loans. “This multi-layer network model marks a significant advancement in the accurate assessment of true credit risk,” Tabachová explained. “Traditionally, banks assess risk primarily based on client information and their immediate suppliers and buyers. However, these firms are intricately interconnected through more extensive supply chains, and disruptions at any point can trigger a cascade of effects across the entire network.”

Moreover, Tabachová and her colleagues disclosed in the Journal of Financial Stability that the risk posed by individual firms is considerably higher than previously assumed. A mere fraction of firms, especially those most integrated within the supply chain or those supplying critical production inputs, could instigate defaults leading to up to 22% of the total equity loss in the banking sector. Notably, these losses are predominantly indirect, stemming from defaults provoked by supply chain disruptions rather than the initial failures.

“We discovered that many of the systemically important firms are crucial for production within the country,” Tabachová noted.

The study posits that financial regulators must revisit their systemic risk monitoring approaches. While firms with large loan portfolios are usually considered pivotal for economic stability, the researchers advocate for more attention to those firms that could trigger widespread defaults due to their central roles in supply chains. “These types of firms would be overlooked if supply chain contagion is not considered. Regulators could enhance their capabilities to monitor risks generated and amplified through supply chains,” the researchers cautioned.

To validate the relevance of their model, Tabachová and her team conducted simulations of a real-world economic crisis inspired by the COVID-19 pandemic. Their simulations showed that, without intervention, bank equity losses could soar to as high as 6%. However, a modest liquidity injection, amounting to merely 0.5% of total bank equity, could mitigate losses by over 80%, thereby offering targeted support to illiquid yet solvent firms, per the study.

“Our findings from the Covid-19 inspired contagion scenario validate the common practice of providing liquidity support to firms during crises. By acquiring detailed insights into the supply chain network and the contagion-induced losses of individual firms, financial support can be tailored more effectively, mitigating the adverse impacts of the crisis while maintaining inflation control,” the researchers concluded.

“Volkswagen is undeniably a systemically important firm with a significant influence that extends well beyond Germany’s borders. A thorough understanding of its upstream and downstream supply chains is crucial for policymakers and regulators to ensure a smooth and cost-effective transition in line with climate policy objectives without jeopardising financial stability,” added Tabachová.

More information: Zlata Tabachová et al, Estimating the impact of supply chain network contagion on financial stability, Journal of Financial Stability. DOI: 10.1016/j.jfs.2024.101336

Journal information: Journal of Financial Stability Provided by Complexity Science Hub

Sports Wagering and Financial Market Trends Reveal Common Misinterpretations of Fresh Information

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Suppose it’s a home match for the Golden State Warriors, and Steph Curry demonstrates his prowess early on, sinking consecutive three-pointers within minutes of the first quarter starting. The fans at the Chase Center are impressed, and the impact is immediately noticeable in the betting markets as the odds shift to favour the Warriors.

However, the game is far from over. The opposing team mounts a comeback, and with only 10 seconds remaining, the Warriors find themselves trailing by two points after missing a crucial shot. Logic dictates that the betting odds should now favour the away team, considering their advantageous position. Yet, the odds remain unexpectedly stable.

Eben Lazarus, an assistant professor of finance at UC Berkeley’s Haas School of Business, explains that according to historical NBA game data, a team in possession of the ball with a two-point lead and only 10 seconds left on the clock has over 90% chance of winning. Nevertheless, betting markets seem to overly emphasise early-game events, such as initial baskets, while downplaying significant late-game developments.

This phenomenon of misinterpreting new information isn’t confined to sports betting — it’s prevalent across financial markets, too, as revealed in a study published in the Quarterly Journal of Economics. Lazarus, along with Ned Augenblick from UC Berkeley Haas and Michael Thaler of University College London, conducted three experimental studies and analysed millions of betting transactions and options contract prices. Their findings consistently showed that people overreact to relatively insignificant information and underreact to more crucial data.

Lazarus comments on the standard difficulty in gauging the true significance of new information, regardless of whether its impact is positive or negative. This pattern of skewed reactions to information has been observed universally, much to the researchers’ surprise, given the high stakes in both betting and financial market environments.

Their research builds upon decades of behavioural psychology and economics studies, exploring how people update their beliefs in response to new information. This includes seminal works such as a 1966 paper suggesting people are overly conservative in revising their beliefs and a 1992 study by Dale Griffin and Amos Tversky that indicated a tendency to focus excessively on dramatic information while neglecting its reliability.

Recent studies further show that people often err systematically due to miscalculations in probability and a propensity to choose a middle-ground option when unsure. The paper also ties into broader observations of financial markets occasionally overreacting or underreacting to news.

“We believe our framework simplifies the analysis of numerous scenarios in financial markets and real-world settings,” Lazarus asserts. He explains that while we constantly absorb new information—from election polls favouring a particular candidate to feedback from a superior—accurately assessing its significance often eludes us, leading to default middle-ground responses.

In one innovative experiment involving 500 NBA fans, the research team simulated parts of basketball games, asking participants to estimate win probabilities after each sequence of events. Despite recognising the greater importance of late-game events, participants significantly overvalued early baskets and undervalued those nearer the end of the game.

Further tests using real-world sports betting data from Betfair and option price quotes from the Chicago Board Options Exchange confirmed the same pattern: early events in a game disproportionately affect betting odds despite their limited actual predictive value, while crucial late-game events fail to sway the market as much as they should.

Lazarus cautions that recognising these market patterns only partially eliminates risk. He advises considering how much weight to give different pieces of information, especially in ambiguous situations. He concludes with a personal anecdote about overreacting to a negative interaction with a boss, suggesting that people often benefit from taking a step back to evaluate the real significance of such events.

More information: Eben Lazarus et al, Overinference from Weak Signals and Underinference from Strong Signals, The Quarterly Journal of Economics. DOI: 10.1093/qje/qjae032

Journal information: The Quarterly Journal of Economics Provided by University of California – Berkeley Haas School of Business

A Single Policy Is Insufficient for Effective Corporate Climate Action

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Investors with a climate consciousness should opt to back companies that adopt a comprehensive suite of climate policies instead of selecting those that implement only specific, isolated measures. This advice emerges from a study published on November 13, 2024, in the open-access journal PLOS Climate by Lena Klaaßen of ETH Zurich, Switzerland, and her team.

Policymakers regard the private sector as a pivotal force in driving climate initiatives. As investors become increasingly focused on robust climate strategies, they are likely to channel their investments towards companies that demonstrate a proactive stance on climate issues. With an uptick in companies openly sharing their climate strategies, there has been a corresponding interest in analysing how these policies translate into actual reductions in corporate greenhouse gas emissions.

In their research, Klaaßen and her team analysed data concerning policy and emissions obtained from the CDP dataset, which encompasses over 1,700 companies that disclosed their climate policies from 2010 to 2022. The findings revealed that companies endorsing only a singular climate policy did not consistently demonstrate significant emissions reductions. However, those with diverse policies, including emission targets, financial incentives, and monitoring standards, showed a notable average reduction in emissions of more than 20% across the years evaluated.

These findings underline that standalone corporate climate policies might hold limited utility for policymakers and investors aiming to foster substantive climate action. The study advocates for a shift in policy decisions and disclosure requirements towards embracing a collection of complementary policies. The researchers highlighted the need for additional studies to evaluate further the impact of corporate policies relative to local government regulations and the dependability of corporate emissions reporting.

Ms Klaaßen noted, “Our study indicates that while individual corporate climate policies might provide limited insights into a company’s actual climate performance, a broad spectrum of policies is more strongly correlated with significant reductions in absolute emissions. This revelation underscores the importance of comprehensive climate disclosures in aiding investors to pinpoint companies with genuine emission reduction commitments. However, it also cautions against an overreliance on disclosures as the sole mechanism for redirecting capital effectively towards sustainable ventures.”

More information: Lena Klaaßen et al, Assessing corporate climate action: Corporate climate policies and company-level emission reductions, PLOS Climate. DOI: 10.1371/journal.pclm.0000458

Journal information: PLOS Climate Provided by PLOS

Money Reigns Supreme: Unexpected Insights into Expenditure Patterns in a Digital Economy

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Physical cash does not merely influence our spending habits but engenders a profound sense of psychological ownership that digital payments fail to replicate. Research from the University of Surrey illuminates this phenomenon.

A paper in Qualitative Market Research discusses how the gradual disappearance of cash from our wallets correlates with diminished spending awareness. This trend encourages more impulsive and unnecessary purchases. The findings highlight the importance of retaining a tangible element in our payment systems to foster responsible spending behaviours.

Dr Jashim Khan, Associate Professor of Marketing and Director of International Business Management at the University of Surrey and the study’s lead author emphasised the tangible aspects of cash, which create a unique emotional bond that digital payments lack. He noted, “The visceral attributes of cash — its distinct smell, texture, and the very act of counting it — forge an emotional link absent in digital transactions. Handling cash is not merely a financial transaction; it feels like parting with a piece of oneself.”

The research team conducted their study across two culturally diverse contexts and markedly different times—New Zealand in 2013 and China in 2023. They employed focus groups and open-ended questionnaires to obtain detailed insights into consumer experiences with cash and cashless payment methods. Participants described their feelings and behaviours associated with various payment modes, revealing that cash usage promotes a heightened awareness of expenditure. Conversely, using cards and apps often results in a disconnect from the actual money spent.

A diminished sense of financial ownership was commonly reported in China, where app-based payments account for 50% of transactions. One participant observed, “Digital money doesn’t truly feel like spending one’s own money; it lacks a tangible concept of money. However, with cash, there is always a palpable sense that your funds are depleting.”

This sentiment was consistent across both studies, underscoring the emotional impact of cash compared to digital alternatives. Furthermore, the research revealed that while digital payments are associated with feelings of happiness and security, they sometimes lead to a sense of loss when cash is used. The emotional reactions to cash transactions—such as sadness and guilt—reflect a more profound psychological connection to physical money. In contrast, the convenience of digital payments often results in mindless expenditure as the tangible aspect of cash is substituted with mere numbers on a screen.

Dr Khan added, “Our findings demonstrate that cash is more than just money; it is a reminder of the value of what we spend. Holding cash makes its worth more perceptible, a reminder that is easily forgotten with digital payments. Recalling the lessons cash teaches us about prudent spending is crucial as we gravitate towards more cashless options.

We’re not suggesting that cash is becoming obsolete. Instead, we are re-evaluating our relationship with money in the face of evolving financial landscapes. Transitioning to a cashless society necessitates a deeper understanding of how different payment methods impact us financially and emotionally. Such awareness can guide us to make wiser financial decisions in a world where money often seems invisible.”

More information: Jashim Khan et al, Money you could touch: cash and psychological ownership, Qualitative Market Research An International Journal. DOI: 10.1108/qmr-04-2023-0049

Journal information: Qualitative Market Research An International Journal Provided by University of Surrey

Trapping Fiscal Vermin: The Need for an Improved Mousetrap

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Over the past quarter century, Enron, Lehman Brothers, General Electric, and Supermicro have all been notorious for financial mismanagement, especially the malpractice of “cooking the books.” Despite this, such deceptions often go undetected until they have cost investors billions. Analysts have thus been compelled to develop methods to detect companies employing dubious or outright illegal accounting strategies to obscure their underperformance.

Urooj Khan, an accounting professor and Deloitte & Touche Centennial Faculty Fellow at Texas McCombs, has introduced pioneering research offering a novel and more effective method for assessing what he terms “earnings quality”. His innovation, the earnings quality score (EQSCORE), has demonstrated remarkable success in surpassing the capabilities of existing models at pinpointing firms potentially engaged in accounting misconduct.

The strength of EQSCORE lies in its comprehensive approach. Khan highlights that, unlike other models, EQSCORE considers an extensive array of accounting red flags and integrates considerations such as governance issues—for instance, the potential bias of an insider board chair—along with other discrepancies identified by financial auditors.

Khan’s research genesis was aimed at closing the disconnect between the theoretical models of earnings quality discussed in academic circles and the practical applications used by Wall Street. This led to the creation of a more robust model that reflects a wider spectrum of factors influencing company performance and the accuracy of financial reports.

In developing EQSCORE, Khan collaborated with Venkat Peddireddy of the China Europe International Business School and Shiva Rajgopal of Columbia University. They meticulously analysed 613 detailed reports from a leading private research firm highlighting various companies involved in potentially illegal or questionable financial reporting. These reports revealed critical metrics and “signals” used to identify 230 companies, with the majority of indicators related to accounting practices like questionable revenue figures and profit margins, as well as concerns related to corporate governance and auditing.

The team identified 51 red flags from these analyses, which formed the basis of EQSCORE. These included 31 accounting variables, eight about board characteristics, and 11 related to audit issues. To validate EQSCORE, the researchers applied it to a different dataset—companies targeted by Securities and Exchange Commission (SEC) enforcement actions. While the SEC’s dataset does not encompass all instances of suspect corporate accounting, it does capture the most egregious cases, particularly given the SEC’s constrained budget, which necessitates selecting cases with substantial evidence of manipulation.

EQSCORE was developed using data from companies subjected to SEC enforcement actions between 2004 and 2009. Its efficacy was then tested against a sample of companies charged by the SEC from 2010 to 2016. The results were compelling; EQSCORE successfully predicted 71% of the accounting years investigated by the SEC, a significant improvement over the next best model, which only predicted 55%. Additionally, it missed only 29% of the years flagged by the SEC, compared to 45% for the competing model.

Khan is optimistic that EQSCORE could garner interest from the SEC, which has been developing its model since 2012 to detect fraud and accounting irregularities. The model could also be an invaluable tool for private investors, aiding them in identifying companies that tread close to, but do not necessarily cross, the legal boundaries of accounting practices.

To illustrate the potential benefits for investors, the researchers devised a stock market strategy based on EQSCORE. They simulated investment scenarios where they bought stocks of companies with low EQSCOREs and shorted those with high scores, betting that stocks with high scores would decline. Over seven years, this strategy yielded average annual returns 7.8% higher than expected.

In conclusion, Khan asserts that EQSCORE significantly enhances the ability to predict fraudulent activities and effectively identifies firms that resort to aggressive accounting tactics to misrepresent their proper financial health, mainly when they are in a state of decline.

More information: Urooj Khan et al, Earnings quality on the street, Contemporary Accounting Research. DOI: 10.1111/1911-3846.12975

Journal information: Contemporary Accounting Research Provided by University of Texas at Austin