The value of confidence and credibility has been the subject of extensive analysis in many fields, including jurisprudence and the social sciences. One conclusion is clear – progress can be achieved if promises are kept. If keeping promises is clearly beneficial, why is it then so difficult? The expressions empty promises and empty threats reflect the temptation to renege. The social scientist and philosopher Jon Elster writes in his book “Ulysses and the Sirens” 2 about weakness of will, shifting preferences over time, and the complexities of human nature. This is familiar ground. As early as 1960, the economist Thomas Schelling 3 discussed similar issues in analyses for which he was awarded the Nobel Prize in economics. According to Schelling, a credible threat can be difficult to establish when realising the threat involves costs for all the parties involved. A promise or a threat will be more credible if the person who has made the promise ties himself to the mast. Two other economists carried out groundbreaking work when they applied Schelling's analysis to economic issues. In 1977, Finn Kydland from Norway and Edward Prescott 4 from the US wrote an article showing that authorities who attempt to follow an optimal economic policy plan may have strong incentives to depart from the same plan at a later time. This applies even if no news has emerged to indicate that the plan should be changed. 5 Later, Kydland and Prescott were awarded the Nobel Prize in economics for their work.
EMBARGO: not for release before 19:30 on Wednesday 4 October 2017 Geofinance Speech given by Sam Woods, Deputy Governor, Prudential Regulation and Chief Executive Officer, Prudential Regulation Authority  Mansion House City Banquet, London 4 October 2017  I am grateful to Alex Holmes for his assistance in preparing this speech and to other colleagues for comments and contributions. 1  All speeches are available online at www.bankofengland.co.uk/speeches  EMBARGO: not for release before 19:30 on Wednesday 4 October 2017  Lord Mayor, Ladies and Gentlemen  The Prudential Regulation Authority had a bracing return from the summer break. There was no time for supervisors to compare sun-tans, which was just as well given the deathly pallor I acquired from a summer spent in London and Ireland. The only person with an even worse sun-tan than mine was a colleague who, in what I’m assured was not a political statement, took his summer holiday in Brussels. In fact, I was so desperate to boost my Vitamin D levels in September that (like a few others in this room) I headed south to Frankfurt, where I regret to inform you all that it was very sunny indeed. Yes, even the weather – a traditional safe harbour topic for financial regulators – seems to have acquired a Brexit-y tinge this autumn. It was therefore a relief to get stuck into some domestic topics when we returned from the summer.