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Thesis for the Degree of Doctor of Finance

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Thesis for the Degree of Doctor of Finance THESIS FOR THE DEGREE OF DOCTOR OF FINANCE THE ICELANDIC BUBBLE AND BEYOND: INVESTMENT LESSONS FROM HISTORY AND CULTURAL EFFECTS MÁR WOLFGANG MIXA DOCTORAL SCHOOL OF BUSINESS REYKJAVÍK UNIVERSITY 2016 Már Wolfgang Mixa The Icelandic Bubble and Beyond: Investment Lessons From History and Cultural Effects 1. Edition 2016 © The Author ISBN: xxxxxxx ISSN: xxxxxxxx ii Acknowledgements I got a phone call in March 2009 from a person working at Reykjavík University asking me whether I might be interested in writing an article with him. This was a complete surprise. One reason is that Icelanders usually do not call each other for such reasons without knowing each other rather well. I knew this person casually because our children attended the same music school where parents meet each other regularly. Also, despite having written extensively about financial issues in the media for over a decade, no-one had at any point expressed a desire to write with me about the subject. The person, Throstur Olaf Sigurjonsson, asked me to write a paper about financial matters that might become published in a peer-reviewed journal. I had no peers, being in the midst of finishing my MSc in Corporate Finance at that point. Throstur Olaf still convinced me to give it a try. As the writing of the paper progressed, I actually found that it was a learning curve that I enjoyed and had some skills in. My former writing experience had taught me a great deal but writing for journals is still a different beast than setting up interesting discussions in the media. As the paper began taking shape, Throstur Olaf informed me that a PhD program was being started at Reykjavík University and I should apply for it. I was hesitant but it turned out that my wife was no less persuasive that I should take the plunge. I thus quickly once again broke a vow I had just made, more than once, of staying away from the academic life for the remainder of my life. To cut a long story short, I began embarking on the PhD journey late 2010. I have learned more during this time than I would have imagined. I have managed to have a few articles published in either peer-reviewed journals, including the first article Throstur convinced me to write with him. We have already had four additional articles published in either edited book chapters or journals. I feel like I have grown up in a sense, which is probably not a second too late. Not only have I learned how to study and write articles grappling with interdisciplinary iii subjects and putting them in a somewhat organized manner, but I have also gained experiences in other areas not directly related to my PhD program but yet has provided valuable in my studies and sending society messages regarding finance in a better way. Outside of studies I have learned teaching skills at Reykjavík University in a way that students now for the most part grasp what I am saying most of the time. I was fortunate becoming a co-judge in two major cases regarding financial matters that affected Icelandic society to a large degree. An intended 4-6 week break from my studies turned into a full time stint working at the Special Investigation Committee Researching the Prelude, Cause and Fall of the Savings Banks enabled me to further research and set forth complex issues, many of which were related to my PhD research, in a more understandable form than I could have ever have done without that grueling experience. I would like to thank my current and former co-workers at Reykjavík University who have paved the way for me to finish this project and making sure that my work in teaching and exploring ideas within the institution could blossom. I thank my advisor Vlad Vaiman for being there for me, setting the path for exploring a difficult and new subject that needs still a great amount of work. Jesper Rangvid took the next step in showing me the landscape of the subject I tackled. My friend Throstur Olaf Sigurjonsson and my wife, Kristín Loftsdóttir, have been there all the way and much more than that. My father and parents-in-law have shown constant support. Finally, my children, Mímir, Alexía and Sól, have given me love throughout the process, constantly teaching me the meaning of life. May, 2016 Már Wolfgang Mixa iv Executive Summary The Icelandic economic crash in fall 2008 was unprecedented in the nation´s history with the Icelandic banks being bailed out only 5 years after having been privatized. All of Iceland´s three main banks, Glitnir bank, Landsbanki and Kaupthing bank, went into receivership the within a 10 day span, with most of the savings banks system following those same footsteps in the following months. Iceland´s fiscal costs in terms of Gross domestic product (GDP) reached unheard levels within advanced nations in at least 40 years. A banking and economic meltdown on such a grand scale raises questions. Among such questions is what caused such events to occur and maybe more importantly, especially in light of the fact that similar failures are well known in financial history, why were such events allowed to occur? Following such an analysis, a natural question is if lessons could be learned from such events. Given that the crash was to a large extent global, it is worthwhile paying attention to how similar the circumstances were in different societies and what, if any, differed between countries and regions. The research project focuses on investment behavior and the Icelandic economic bubble and crash, emphasizing that investment behavior has to be seen within a historical and cultural environment. As such the project is related to financial history and behavioral finance. The project’s main goals can be summarized into the following key research question: What cultural conditions shaped the appearance and formation of the financial bubble in Iceland and in what way did those conditions differ, if any, from other countries and to what extent? v The main results are that cultural conditions influenced the creation of the Icelandic banking miracle that ended so badly. Certain dimensions in the Icelandic culture were more suspect of embracing values that (temporarily) opened doors to possibly naïve beliefs. Technological and ideological changes on an international level also influenced the Icelandic culture; more than most cultural studies anticipate. Some changes in the Icelandic culture were, however, caused to a certain extent by design, even an invented cultural one, rather than default. With the use of the media some agents convinced the Icelandic country that their best interests were served blindly embracing certain values when in fact those agents were reaping the profits with speculation and risk taking that the public was eventually left to face the consequences of. vi Table of Contents 1. Theoretical Background................................................................................................................... 1 1.1. Objectives of the Project and Research Question ................................................................... 5 1.2 Behavior, Culture, Finance & Finance ..................................................................................... 8 1.2.1. Behavioral Finance .......................................................................................................... 8 1.2.2 Cultural Finance ............................................................................................................ 11 1.2.3 Culture ........................................................................................................................... 13 1.2.4. Cultural Economics ....................................................................................................... 18 1.2.5 History of Culture Related to Economics ...................................................................... 21 1.2.6 Culture in Tandem with Economics .............................................................................. 22 1.2.6 Cultural Literature Linked with Finance ....................................................................... 27 2. Research – Approach & Methodologies ........................................................................................ 30 2.1 Quantitative and Qualitative Approaches ............................................................................. 33 2.2 Further description of studies ............................................................................................... 39 3. Papers of the Thesis – Relevance and Relationship ...................................................................... 41 3.1 Learning from the “Worst Behaved” ........................................................................................... 43 3.2 A Day in the Life of an Icelandic Banker ...................................................................................... 46 3.3 Financial Behavior in Iceland within the Framework of Hofstede’s Cultural Dimensions .......... 48 3.4 A Nation of Money and Sheep .................................................................................................... 55 3.5 Banks Glowing in Nationalism ..................................................................................................... 57 4. Further Thoughts ........................................................................................................................... 62 5. Conclusion ..................................................................................................................................... 67 Bibliography ..........................................................................................................................................
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