Fair-Value Accounting Did Not Fuel Crisis

Fair-value accounting (FVA), also known as “mark-to-market” accounting, has been blamed for contributing significantly to the current financial turmoil. But FVA rules actually allowed banks to use discretion to keep values high, according to new research by Christian Leuz, Joseph Sondheimer Professor of International Economics, Finance, and Accounting and Neubauer Family Faculty Fellow.

In the study, “Did Fair-Value Accounting Contribute to the Financial Crisis?” Leuz and coauthor Christian Laux analyze the role of FVA for U.S. banks and conclude that its impact is limited because treatment of financial assets under U.S. accounting standards (GAAP) is more flexible than many people realize.

Using U.S. banks’ financial statements, they show that as the crisis deepened, banks dealt with assets by reclassifying them and valuing them according to what their models said made sense. This switch from “mark-to-market” to “market-to-model” allowed banks to avoid reporting their assets solely according to market prices as those prices plunged during the crisis.

The research contradicts the mainstream view that fair value accounting contributed significantly to the financial crisis, said a November article in the German newspaper Handelsblatt.—P.H.


What Does God Believe? You Decide

In wondering what someone else thinks of us, we often use our own minds as a guide, assuming that others believe and think as we do. This tendency is especially strong when people infer what God believes, according to research by Nicholas Epley, professor of behavioral science and Neubauer Family Faculty Fellow.

In the paper, which appeared in Proceedings of the National Academy of Sciences, Epley and his coauthors explain how they asked volunteers who said they believe in God to give their own views on controversial topics, then to guess the opinions of God, average Americans, and such public figures as Bill Gates. Participants’ own beliefs corresponded more strongly with what they thought God believed than with what they thought other people believed, according to the study, which was covered in USA Today.

The volunteers were then asked to argue a viewpoint opposite of their own, which led to shifts in the beliefs they attributed to other people, but not to God, the article said. “The experiments in which we manipulate people’s own beliefs are the most compelling evidence we have to show that people’s own beliefs influence what they think God believes more substantially than it influences what they think other people believe,” Epley said.—P.H.

When to Serve Your Best Wine

When serving wine at a dinner party, is it better to pour the best wine first or save it for later in the evening? It depends on how wine-savvy your guests are, according to research by Reid Hastie, Robert S. Hamada Professor of Behavioral Science, and his coauthors. Faced with an array of aesthetic choices, most people prefer the first option they select, according to “Order in Choice: Effects of Serial Position on Preferences,” published in Psychological Science.

Focusing on wine to control for biases, the researchers gave 142 subjects three to five samples of wine. “We found a large primacy effect—the first wine had a large advantage in the end-of-sequence choice,” 
the study said. But, a story on the work in Toronto’s Globe and Mail noted, while unsophisticated tasters who know little about wine tend 
to prefer the first vintage they taste, connoisseurs preferred the last. “Wine geeks thrive on discovering new and ever-better drinking experiences, so they’re more likely to give subsequent options a chance,” the article said.—P.H.


Last Updated 3/5/10