Handpicked to satisfy your intellectual curiosity!
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Weekly Joke:(Via Investing Jokes)
If you had bought $1000.00 worth of Nortel stock one year ago, it would now be worth $49.00.
With Enron, you would have $16.50 of the original $1,000.00.
With WorldCom, you would have less than $5.00 left.
If you had bought $1,000.00 worth of Budweiser (the beer, not the stock) one year ago, drank all the beer, then turned in the cans for the 10 cent deposit, you would have $214.00.
Based on the above, my current investment advice is to drink heavily and recycle.
Must Read Articles!
New Economists worth knowing - Via Dan Ariely – Forbes magazine asked me a few weeks ago to list the “Seven Most Powerful New Economists.” I am not sure what the title exactly means, but here is my list
Joh Allen Paulos: Stories vs. Statistics – via NYT – Half a century ago the British scientist and novelist C. P. Snow bemoaned the estrangement of what he termed the “two cultures” in modern society — the literary and the scientific. These days, there is some reason to celebrate better communication between these domains, if only because of the increasingly visible salience of scientific ideas. Still a gap remains, and so I’d like here to take an oblique look at a few lesser-known contrasts and divisions between subdomains of the two cultures, specifically those between stories and statistics.
The Papers of Benjamin Graham – via Value Hunter
Virgin Finance: Sir Richard Brandson’s pursuit of a significant presence in retail financial services – via MPRA – This teaching case study tells of the foundation and growth of the Virgin Group over the forty years to 2010. The creation of over 300 business interests in parts as far afield as the UK, South Africa, Australia and the USA resulted from a unique management style. Branson and the Virgin brand often associate with music (such as records and music stores) and travel (airlines, trains and booked holidays) but between August 2007 and February 2008 they were involved in a failed takeover of Northern Rock, a collapsed British bank. However, as this case study details, the Northern Rock affair was one of a long series of steps dating to the 1980s through which Branson and Virgin have been developing capabilities to enter the British retail banking sector.
Why You Shouldn’t Make a Contract With a Psychopath - via TIme – Pity the poor psychopathic criminal. O.K., pity might be a strong word, but cut them a little slack. A new study in the journal Psychological Science shows that one of the reasons for their characteristic badness to the bone is that they just don’t understand how to behave any other way.
If Richard Feynman applied for a job at Microsoft - via Sells Brothers -
All About Envy - via Economic Logic – Homo œconomicus is greedy, but why? One explanation is that he is envious, and this makes him competitive, leading to the positive outcomes of market economies that we often tout. Not so fast, says Boris Gershman. Envy can lead to alternative equilibria, some virtuous, some vicious. We are familiar with the virtuous ones, where people “keep up with the Joneses”, and thus exert effort towards getting better. Too much effort in fact. But things can also go dramatically the other way, where the best endowed people restrain their efforts to prevent the destructive envy of the poor. This suboptimal effort is likely to occur when there is large inequality and poor property rights.
Video: Richard Thaler at UC-Berkeley - via Nudge -If Thaler ever appeared on Booknotes, it might look a bit like this interview.
Thinking Like an Economist – via Freakonomics Blog – Previous research indicates that the more years of education a person has, the more he thinks like an economist. A new paper (summarized by the BPS Research Digest) by Bryan Caplan and Stephen C. Miller, however, attempts to separate the role of intelligence and education in “thinking like an economist.” Caplan and Miller found that “the estimated effect of education sharply falls after controlling for intelligence. In fact, education is driven down to second place, and intelligence replaces it at the top of the list of variables that make people ‘think like economists.’ Thus, to a fair degree education is proxy for intelligence, though there are some areas — international economics in particular —where education still dominates.”
Prospect Theory and the Taxpayer Receipts -Mother Jones – via Finance Professor – “Budget allocations are a relatively zero-sum game in the short term, and both sides would have to believe that the odds of getting the other guy’s goodies is overwhelmingly in their favor before they’d agree to anything that puts their existing goodies at risk. So it’s not just a matter of both sides mistakenly thinking the taxpayer receipt is more likely to benefit the other side and therefore shying away. Even if both sides are modestly optimistic about their chances of outgunning the other side, the prospect of a loss is still too daunting. So they won’t do it.”
Study Unmasks the Biology of Bluffing – via Finance Professor – “Bhatt put it this way: ‘We believe the areas indicate that the strategists – bluffers – are essentially thinking ahead. Specifically, they’re keeping track of how their suggestions are changing their reputation in the seller’s mind and are in turn improving or harming their chances at good payouts in the future.’
Misremembering Our Predictions Blinds Us to Past Forecasting Errors - via Paul Kedrosky – An ever-deepening academic literature shows our utter inability to predict what will make us happy or sad. Add to that, however, new work which shows that we also don’t remember, ex post, what made us happy or sad — or if we even felt anything at all. It’s such magnificent obliviousness.
The trust game and wealth creation – via Mind Your Decisions – The article opens with a discussion of the trust game. This is a two player game with the following setup. One player, an investor, is given money at the start. The investor can take the money and end the game, or he can give all or part of it to the other player, the trustee. Whatever money is offered is tripled before the trustee gets it. In turn, the trustee can either take the money or send part or all of it back to the investor.
Chasing Stars: The Myth of Talent and the Portability of Performance - via HBS – How many times have you seen this happen? An organization seeking to make a senior management change goes after someone from outside with a reputation for, and record of, high performance. It pays a premium, thereby disrupting its compensation scheme, and discourages promising internal talent that isn’t considered quite ready for the job. Then the outsider fails to perform up to (probably inflated) expectations, and the staffing process starts again. Is this the exception or the rule, we ask ourselves? Boris Groysberg, in a new book, Chasing Stars: The Myth of Talent and the Portability of Performance, based in part on earlier research with Ashish Nanda, Andrew McLean, and Nitin Hohria, seeks to find out answers to the question. Groysberg and his colleagues studied what he calls “the portability of performance,” and reaches conclusions that might give pause to many who chase stars. Their subjects are top investment analysts (as identified annually by Institutional Investor magazine) and the organizations that develop and hire them away from each other. Their analysis is based on a large base of data for 1988 through 1996. It includes ratings before and after an analyst’s transfer from one investment bank to another as well as the results of extensive interviews over several years of study.
Two honest economists – via Information Processing – I highly recommend this podcast discussion between Russ Roberts and John Quiggin (of Crooked Timber) about Quiggin’s recent book Zombie Economics. Both parties did a good job of putting aside priors and having an enlightening conversation. Quiggin argues that many economic theories such as the Great Moderation, the efficient markets hypothesis and others have been discredited by recent events and should be relegated to the graveyard. I think at one point both participants agreed that (or at least entertained the idea that) economics doesn’t make progress like a real science. Probably too strong a critique, but at least very honest.
What gives victims satisfaction when they seek revenge? - via EJSP – The present paper aims to elucidate under what conditions victims of injustice who seek revenge feel satisfied and perceive that everybody got what he or she deserved. Two hypotheses are discussed: The comparative suffering hypothesis states that seeing the offender suffer from fate is sufficient for evoking satisfaction and perceptions of deservingness among victims. The understanding hypothesis states that revenge can only be satisfactory when the offender understands it as a response to his or her prior behavior. These hypotheses were tested in three experimental studies. The comparative suffering hypothesis received only weak support. The understanding hypothesis, on the other hand, received much stronger support: When the offender understood revenge as punishment, revenge led to satisfaction and deservingness among victims. These findings are discussed with regard to the question why people take revenge.
The glorious mess of real scientific results - via BadScience – Popular science is often triumphalist, presenting research as a set of completed answers, when in reality much of what gets published makes a glorious, necessary mess.
In Praise of Copying: Get Your Free Copy - via Open Culture – Just a quick fyi: If you head over to the Harvard University Press web site, you can grab a free copy of Marcus Boon’s new book, In Praise of Copying, which makes the case that “copying is an essential part of being human, that the ability to copy is worthy of celebration, and that, without recognizing how integral copying is to being human, we cannot understand ourselves or the world we live in.” Boon is a writer, journalist and Associate Professor in the English Literature department at York University, Toronto. You can download a free copy of his book in PDF format straight from this link. (Note that the text is formally released under a Creative Commons license.) Or you can always purchase a printed copy online.
Prefrontal Cortex and Impulsive Decision Making- via BioPsych – mpulsivity refers to a set of heterogeneous behaviors that are tuned suboptimally along certain temporal dimensions. Impulsive intertemporal choice refers to the tendency to forego a large but delayed reward and to seek an inferior but more immediate reward, whereas impulsive motor responses also result when the subjects fail to suppress inappropriate automatic behaviors. In addition, impulsive actions can be produced when too much emphasis is placed on speed rather than accuracy in a wide range of behaviors, including perceptual decision making. Despite this heterogeneous nature, the prefrontal cortex and its connected areas, such as the basal ganglia, play an important role in gating impulsive actions in a variety of behavioral tasks. Here, we describe key features of computations necessary for optimal decision making and how their failures can lead to impulsive behaviors. We also review the recent findings from neuroimaging and single-neuron recording studies on the neural mechanisms related to impulsive behaviors. Converging approaches in economics, psychology, and neuroscience provide a unique vista for better understanding the nature of behavioral impairments associated with impulsivity.
How social scientists think: correlation is not causation – Via Texas in Africa – Whenever I teach students about the difference between causation and correlation, I try to have them do something ridiculous. I might have one student repeatedly flip the light switch while having another jump up and down while another sings “I’m a Little Teapot.” Then I ask, what caused the light to go on and off
Video: Why everyone should learn programming - via Flowing Data – Daniel Shiffman, assistant professor at the NYU Interactive Telecommunications Program, talks programming, computation, data, and why everyone should learn programming in this interview by Mark Webster.
The Brain Suppresses Incorrect Competing Memories - via APS – Imagine that you are trying to remember the name of actor Kevin Bacon, but the name of someone you went to college with, Michael Bacon, keeps getting in the way. Interference is one of the main causes of memory failure. “You might tend to, at least at a subconscious level, think of both last names,” says Karl Healey, of the University of Toronto. A new study in Psychological Science describes how this often-unconscious process works.
Miguel’s Favorite Articles
What Is Beautiful Is Good and More Accurately Understood - via Sagepub – Beautiful people are seen more positively than others, but are they also seen more accurately? In a round-robin design in which previously unacquainted individuals met for 3 min, results were consistent with the “beautiful is good” stereotype: More physically attractive individuals were viewed with greater normative accuracy; that is, they were viewed more in line with the highly desirable normative profile. Notably, more physically attractive targets were viewed more in line with their unique self-reported personality traits, that is, with greater distinctive accuracy. Further analyses revealed that both positivity and accuracy were to some extent in the eye of the beholder: Perceivers’ idiosyncratic impressions of a target’s attractiveness were also positively related to the positivity and accuracy of impressions. Overall, people do judge a book by its cover, but a beautiful cover prompts a closer reading, leading more physically attractive people to be seen both more positively and more accurately.
Caffeine Makes Us Easier to Persuade – via Spring – Eighty per cent of adults in the US and the UK are moderate users of the psychoactive drug, caffeine. Of all the effects it has on our minds—enhanced attention, vigilance and cognition—perhaps least known is its tendency to make us more susceptible to persuasion. This was demonstrated in a study by Pearl Martin and colleagues at the University of Queensland in Australia (Martin et al., 2005). In their experiment they tried to convince participants to change their minds about the controversial issue of voluntary euthanasia.
Gut instincts allow people to make routine decisions without thinking too hard - via WaPo – This morning alone, I must have made a million decisions: Should I grab the wailing baby from his crib, even though it’s still dark outside, or let him cry it out? What’s for breakfast? Do I have time to squeeze in a shower? Should I try to fit in a workout today? Do the boys need coats? Do I have enough gas to make it to Georgetown and back? Should I turn left on to Volta Street to try to avoid running into the trash truck that I see on O Street, or not? And that’s all before my first cup of coffee.
Video: Ted Talk – 7 ways games reward the brain - via Ted – We’re bringing gameplay into more aspects of our lives, spending countless hours – and real money – exploring virtual worlds for imaginary treasures. Why? As Tom Chatfield shows, games are perfectly tuned to dole out rewards that engage the brain and keep us questing for more.
Influencers from Around the World - Anti-Social Proof – via Brian Ahearn – This month’s Influencers from Around the World post is from Yago De Marta. If you’ve followed along in this series then you know Yago hails from Spain and travels quite often to Latin America. He is a public speaking coach and media trainer with much of his work centering on politicians and businessmen. You can connect with Yago on Facebook and LinkedIn.
Puritan Values Still Resonate in Today’s USA - via Miller McCune – A new study finds the value system of the early colonists, which links hard work, conservative sexual behavior and spiritual salvation, still has a hold on Americans’ psyches.
Rage, powerlessness, magical thinking—why is how we think about politics increasingly mirroring the mind-set of a small child? – via NY Mag – During election season, we sometimes give ourselves permission to regress. Not so often, perhaps, when times are good. But in bad times, we frequently suspend what we know about politics—most crucially, how difficult change is—and choose to believe that this time, by pulling a lever or touching a screen, the choice we make will have a magical effect.
Can People Distinguish Pate From Dog Food? - via American Association of Wine Economists – Considering the similarity of its ingredients, canned dog food could be a suitable and inexpensive substitute for pâté or processed blended meat products such as Spam or liverwurst. However, the social stigma associated with the human consumption of pet food makes an unbiased comparison challenging. To prevent bias, Newman’s Own dog food was prepared with a food processor to have the texture and appearance of a liver mousse. In a double-blind test, subjects were presented with five unlabeled blended meat products, one of which was the prepared dog food. After ranking the samples on the basis of taste, subjects were challenged to identify which of the five was dog food. Although 72% of subjects ranked the dog food as the worst of the five samples in terms of taste (Newell and MacFarlane multiple comparison, P<0.05), subjects were not better than random at correctly identifying the dog food.
Attachment Forever: Environmental and Social Dimensions, Temporal Perspective, and Choice of One’s Last Resting Place - via Sagepub – Today, people are highly mobile and identify themselves with various places. Mobility affects the decisions that a person makes about his or her final resting place and how his or her remains will be disposed. A semistructured, face-to-face interview is conducted with residents of Paris and Madrid. Data analyses consist of content analysis and correspondence analysis. The choice of corpse disposal method is related to one’s religious affiliation and the spouse’s decision for his or her own disposal method. The choice of final resting place is related to mobility, degree of attachment to the actual place of residence and to one’s birthplace, and parents’ decision for their final resting place. Younger and more mobile people prefer cremation as a burial procedure. Future research should consider how place identity and place appropriation contribute to one’s choice of a final resting place.
Animal Research: Groupthink in Both Camps – via Chronicle – Professors like me, with established research credentials at animal-research-intensive universities who are also members of People for the Ethical Treatment of Animals, are rare. But a dual identity as a research faculty member and an animal advocate affords a unique perspective on both camps.
The Structure of Success in America - via LongForm -The first article in a two-part history of the Educational Testing Service, the institution behind the SAT.
Video: Stress Depression & Heart Disease - via Scieview – Dr. Sanjay Kapur, Scientific Director at ZRT Laboratory, is talking about the effects of depression and stress on the risk of heart disease.
Want to Ward Off the Evil Eye? Just Be Nice, A New Study Says - via APS – Mexicans call it mal de ojo, and in Brazil it’s olho gordo. Turks call it the Eye of Medusa and ward it off with the ubiquitous talisman called nazar. American Jews use the Yiddish phrase Keyn aynhoreh to counter the jinx. Cultures all over the world, dating back to antiquity, have some version of the “evil eye” — the poisonous stare of those who envy others’ good fortune. We recognize these beliefs as magical thinking, of course, but as with any superstition that is so widespread, belief in the evil eye raises some intriguing questions: What psychological purpose do these beliefs serve, and what are their roots in human nature? Psychological scientists at Tilburg University in the Netherlands have an idea about this common fear and the magic used to fend it off.
It Costs How Much? My Brain Says Otherwise - via According to a new study in The Proceedings of the National Academy of Sciences, skilled negotiators are using extra brainpower to do so. Researchers created a game in which players were given the true value of an object on a scale of 1 to 10. The players used this information to make a bid to the seller of the object, who did not know the true value.
Lunch Line Redesign - via NY- School cafeterias are much criticized for offering the kind of snack foods and desserts that contribute to childhood obesity. But banning junk food from cafeterias, as some schools have tried, or serving only escarole or tofu, can backfire. Students then skip lunch, bring in their own snacks or head out for fast food. We’ve even seen some pizzas delivered to a side door.
Investigating “Texas Hold ‘em Heads Up Poker” - via Two Plus Two – Recently there was a discussion in the TwoPlusTwo “News, Views, and Gossip” forum, now closed, about a new video casino game that might be of interest to poker players. Called, “Texas Hold’em Heads Up Poker”, it’s a slot machine style console that contains a computer that plays regular old heads-up limit Texas hold ‘em against players who care to put up their money.
Are Scarcest Products the Most Attractive - via Bakadesuyo – The data obtained from two surveys show that the appearance of a positive scarcity effect depends on the product’s suitability for conspicuous consumption. If a product is used for conspicuous consumption, signals of scarcity due to limited supply are advantageous compared to signals of scarcity due to high demand. On the contrary, if a product is not used for conspicuous consumption, signals of scarcity due to high demand result in more favorable product evaluations.
Are we fundamentally the same person from childhood to adulthood? – via Bakadesuyo – “We remain recognizably the same person,” Nave said. “This speaks to the importance of understanding personality because it does follow us wherever we go across time and contexts.”
Does spending money increase happiness? – via Bakadesuyo – We find that only one component of consumption is positively related to happiness—leisure consumption.
Light @ Night Makes Us Fat - via Deric Bownds – The experiments were motivated by wondering whether the global increase in obesity that is occurring might be related to the extended night time light exposure that goes with our modern life style and is known to disrupt the biological clocks that regulate our energy metabolism. Their abstract is worth reading:
Who Gives a Hoot? Intercept Surveys of Litterers and Disposers - via Sagepub – Across 14 different outdoor settings in 8 states, the authors interviewed 102 disposers to examine how littering behavior is affected by environmental factors, social norms, demographic characteristics, and self-reported motivations. Observations revealed that 25% of all disposals were littered, and the most commonly littered item was cigarette butts. Participants were less likely to litter in locations with more receptacles available and with receptacles positioned so they could be easily reached. Younger participants, who reported weaker personal norms against littering, were more likely to litter. Implications of this work suggested the necessity of adequate receptacle availability and accessibility, especially cigarette-butt receptacles. In addition, antilittering campaigns were advised to direct their appeals to those most at risk for littering—targets under the age of 30.
Video: Norman Doidge: The Neuroplasticity Revolution - via Fora.tv – What is brain plasticity? It’s a term that explains how brain functions aren’t rigid and set in stone at an early age, but rather are changeable and adaptable. Put simply, an old dog CAN learn new tricks…but they need to apply themselves. It’s “use it, or lose it.”
Video: Crowds, Clouds, Sheep and Beautiful Data - via Paul Kedrosky – Thoughtful and fun MIT talk by Google’s Aaron Koblin about crowds, clouds, “data trails” and sheep. He is the creator of the famous flight patterns data visualization, as well as having created part of a Radiohead video.
The Myth of Multitasking - via Freakonomics – If you think your multitasking skills are improving your productivity, think again. Consistent with other multitasking research, a new working paper (ungated version) by Decio Coviello, Andrea Ichino and Nicola Persico analyzes a sample of Italian judges with different caseloads and finds that “task juggling, i.e., the spreading of effort across too many active projects, decreases the performance of workers, raising the chances of low throughput, long duration of projects and exploding backlogs.” The authors highlight the role of work scheduling in employee productivity, writing that “[i]ndividual speed of job completion cannot be explained only in terms of effort, ability and experience: work scheduling is a crucial ‘input’ that cannot be omitted from the production function of individual workers.”
Risk, Reality and Richard Feynman – via PsyFi Blog – One of the problems that lies behind many of the crises that have afflicted the financial sector over the past thirty years or so is that business managers seem to have difficulty relating the level of risks that they’re taking to something akin to reality. For various reasons, not entirely unrelated to the need to make business cases look reasonable, the potential risks in many transactions are downplayed to the point where they simply vanish.
Wisdom: A Course Book for College Students (in Chinese) - via Defining Wisdom – is a text book for a college course which aims at providing a comprehensive understanding of wisdom for college students. The course was designed with two purposes: let college students know the importance and benefits to put obtaining wisdom as their goal for college study and to teach students how to use wisdom to improve their learning so that they can have a higher goal for their college learning and in the meantime obtain new tools to handle their study and future life.
Judges Are Like – via Situationist – Featuring prominently in the last four sets of Supreme Court confirmation hearings, the judge-as-umpire analogy has become the dominant frame for understanding the role of the Justice and may also now act as a significant constraint on judicial behavior. Strong criticisms from legal academics and journalists attacking the realism of the analogy have had little destabilizing effect. This Essay argues that the best hope for shifting the public conception of the work of a Justice is to offer a counter analogy that draws from an equally intuitive and familiar context, while also capturing the core essence of Supreme Court adjudication—the particular process of creative interpretation and explanation. The metaphor of the Justice as color commentator in the press box not only meets these criteria, but also makes explicit that judges are not robotic, objective arbiters. Moreover, in exposing the myth of judicial rationality and neutrality bolstered by the umpire analogy, the commentator alternative provides the possibility of helping Justices to better control for their biases and reducing damaging episodes of cognitive illiberalism. As further evidence of the appropriateness and robustness of the commentator analogy, the Essay concludes by demonstrating how sports commentating can be critiqued employing the precise implements developed by legal scholars to analyze judicial decision making.
Recognizing Spatial Intelligence - via SciAm – Our schools, and our society, must do more to recognize spatial reasoning, a key kind of intelligence.
A brief guide to hiring PhD economists – via Voxeu – Whether you are in academia, government, or private business, the hiring of PhD economists is very different from standard recruiting. This column documents the peculiarities of the job market for junior economists and describes how the job market boards of walras.org and VoxEU.org can be used to disseminate information about job openings and receive online applications.
Why Those Burgers Don’t Rot, Decompose, or Molder Away – via good – Kenji Lopez-Alt, an MIT-trained chef who’s behind the very smart blog The Food Lab (and a forthcoming book by the same name), dug into one of the most perplexing and disturbing questions that’s been buzzing around the Internet: Why did that McDonald’s hamburger not decay for over 137 days?
Video: Susan Fiske Discusses her Work on Different Types of Prejudices - via Situationist – Susan Fiske discusses her research on stereotypes and prejudice and the systematic principles that influence how groups are treated in society.
The Science of Makeup - via Science Blogs – What is it about cosmetics that is so appealing? Why do people wear makeup, and what might have caused early man to play around with blush and lipstick? Well, like everything else in life, a lot can be explained by science.
Gazprom and Igor Sechin: The Dale Carnegies of Gas – via Streetwise Professor – Several Gazprom related stories, with a common (and all too familiar theme): the company’s rather unconventional ways of trying to win friends and influence people. Unconventional, except for the Mafia, perhaps.
The Influence of Fleeting Attraction - via Psyblog – There’s little doubt that friends are easier to persuade than strangers. That emotional connection and shared history is often enough to get the poor wretches doing things they’d rather avoid, like helping us move home. Forgive the mercenary language, but friendship is a fantastic lever for persuasion and influence, a lever we happily push on every day.
Five Ways to Avoid Getting Ripped Off - via Neuronarrative – Rip offs come in many flavors. Often they are financial, but they can also be related to any behavior someone wants you to engage in that, in truth, isn’t in your best interest. Below I offer five ways to avoid being ripped off financially or otherwise.
More than rhetoric - via Boston.com – What makes a great presidential speech? Ten top moments from Ted Sorensen and John F. Kennedy.
Male Names Are Still Mentioned First – via SciAm -A recent study finds that despite our efforts for parity between the sexes, male names still come first when referring to a couple. Christie Nicholson reports
Who Needs a Library Anyway? - via LongNow – I just received this nice piece on the future of books and libraries from our friends at Stanford Libraries.
Financial & Business Related
CEO-Director Connections and Corporate Fraud - via HLS – In the paper, CEO-Director Connections and Corporate Fraud, which was recently made publicly available on SSRN, we study the propensity of firms to commit financial fraud using a sample of SEC enforcement actions from 2000 to 2006. Controlling for year effects, Fama-French 48-industry effects, and several firm characteristics, we find a significant relation between fraud probability and CEO-board connectedness. The nature of this relation depends on the institutional origin of the connection. While nonprofessional connectedness due to shared educational and non-business antecedents increases fraud probability, professional connections formed due to common prior employment decrease fraud. The positive effects of professional connectedness are pronounced only when individuals share prior service as executives. The impact of professional-connections persists after the 2002 Sarbanes-Oxley Act while nonprofessional connections lose significance after SOX.
The Microstructure of the ‘Flash Crash’: Flow Toxicity, Liquidity Crashes and the Probability of Informed Trading - via SSRN – The ‘flash crash’ of May 6th 2010 was the second largest point swing (1,010.14 points) and the biggest one-day point decline (998.5 points) in the history of the Dow Jones Industrial Average. For a few minutes, $1 trillion in market value vanished. In this paper, we argue that the ‘flash crash’ is the result of the new dynamics at play in the current market structure, not conjunctural factors, and therefore similar episodes are likely to occur again. We highlight the role played by order toxicity in affecting liquidity provision, and we provide compelling evidence that the collapse could have been anticipated with some degree of confidence given the increasing toxicity of the order flow in the hours and days prior to collapse. We also show that a measure of this toxicity, the Volume-Synchronized Probability of Informed Trading (the VPIN* informed trading metric), Granger-causes volatility, while the reciprocal is less likely, and that it takes on average 1/10 of a session’s volume for volatility to adjust to changes in the VPIN metric. We attribute this cause-effect relationship to the impact that flow toxicity has on market makers’ willingness to provide liquidity. Since the ‘flash crash’ might have been avoided had liquidity providers remained in the marketplace, a solution is proposed in the form of a ‘VPIN contract’, which would allow them to dynamically monitor and manage their risks.
An SEC Insider’s Guide to Reform- via HLS – Today I want to speak with you about financial regulatory reform. This is a pivotal time for the financial service industry and for its regulators. It was, after all, just over two years ago that Lehman Brothers collapsed and the American financial system went into tailspin followed by massive government bailouts. On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) into law. It will result in changes to the regulatory framework, operations and supervision of the financial services industry. A few of these changes include — the new Financial Stability Oversight Council, the new Consumer Financial Protection Bureau, and a new mechanism for seizing and liquidating large financial companies on the verge of failure, to a host of other changes.
Corruption as a barrier to entry – via Voxeu – Conventional wisdom says that corruption hurts the economy because it taxes investment and weakens public services. This column presents evidence from interviews with CEOs in Brazil. It argues that corruption acts as a barrier to entry, with potential entrants put off by the uncertainty over what bribes to pay and when to pay them.
How Did Increased Competition Affect Credit Ratings?- via HBS – When Fitch Ratings took on Standard & Poor’s and Moody’s as an alternative credit rating agency in the 1990s, there was a general assumption that the increased competition would lead to higher-quality corporate debt ratings from the incumbents. In fact, their ratings quality declined during the 10-year study period, according to Harvard Business School’s Bo Becker and Washington University’s Todd Milbourn. One possible cause: competition weakens reputational incentives that drive ratings quality.
Reviewing Asset-Backed Securities – Increasing Transparency - via HLS – We are proposing rules today that are mandated by, or that are intended to implement, provisions in the Dodd-Frank Act relating to issuer and third-party review of the assets underlying asset-backed securities.
Goodhart’s law and leverage ratios - via IIMhad – I am a strong believer in Goodhart’s Law which says that any measure begins to lose its usefulness when it is used as a regulatory target. The Basel Committee paper on “Calibrating regulatory minimum capital requirements and capital buffers: a top-down approach” released last week shows that this is quite true of the leverage ratio.
So Much to Do and So Little Time - via Sagepub – In a series of five experiments, we showed that the perception of temporal distance to a future event is shaped by the effort one must invest to realize the event. Studies 1a and 1b showed that when actors are faced with realizing an event by a certain deadline, more effortful events are perceived as closer in time, regardless of the objective temporal distance to the deadline. This negative relationship was reversed, however, when deadlines were absent (Study 2). Finally, priming high effort reduced perceived temporal distance to an event, whereas priming low effort increased perceived temporal distance to the event (Studies 3 and 4). The implications of these findings for models of temporal distance are discussed.
Indulgence or Self-Control: - via U Chicago – This research examines the largely unexamined effect of incidental pride on consumer self-control. The results demonstrate that incidental pride influences long-term goal pursuit through dual processes that result in conflicting outcomes for consumer decisions: indulgent choices when promoting a sense of achievement and virtuous choices when promoting self-awareness. A series of four experiments in the money and health domains shows that the relative weight of each process at the time of a decision determines whether incidental pride leads to more or less indulgence. We provide outcome and process support for our theory, linking pride to self-control behavior in the consumption domain, and rule out alternative explanations for our findings. Thus, the findings demonstrate that the influence of incidental pride on self-control is contingent on the cognitive and contextual factors that affect decision making.
DECIDING TO DECIDE: GENDER, LEADERSHIP AND RISK-TAKING IN GROUPS – via KU – Being the leader in a group often involves making risky decisions that affect the payoffs of all members, and the decision to take this responsibility in a group is endogenous in many contexts. In this paper, we experimentally study: (1) the willingness of men and women to make risky decisions on behalf of a group, (2) the amount of risk men and women take for the group, in comparison to their individual decisions. We observe a striking difference between males and females, with a much lower fraction of women being willing to make the group decision than men. The amount of risk taken for the group is generally lower than in the case where subjects decide for themselves only, indicating a cautious shift. The women that would like to make the group decision and the women that do not are no different in terms of how much risk they take for themselves, nor for their group. For men, on the other hand, we find that the ones who would like to lead tend to take more risk on behalf of the group. We also present several results on the relationship of risk-taking and leadership decisions with personality traits.
Trust me, it is High Trust: On Trust and its Measurement - via Konstanz – As the positive impact of trust on business success is widely undisputed, the question of how to measure trust naturally arises. Both expectations of trustworthy behavior and possible gains and losses from a trusting relationship influence the level of trust between two parties or individuals. This paper explores whether an exchange featuring (almost) equal expected gains and expected losses for a trusting individual is evidence for high trust or low trust; we argue that such an exchange tends to display low trust. A simple trust measure is suggested that can be applied both in experimental and analytical research.
Biased Information and Effort- via Gate.CNRS – We study the impact of information manipulation by a principal on the agent’s effort. In a context of asymmetric information at the principal’s advantage, we test experimentally the principal’s willingness to bias (overestimate or under-estimate) the information she gives to her agent on his ability in order to motivate him to exert more effort. We find that i) principals do bias information, ii) agents trust the cheap-talk messages they receive and adjust their effort accordingly. Therefore, biased messages improve both the agent’s performance and thus the principal’s profit. This, however, does not increase efficiency. We also find that over-estimation occurs much more often than under-estimation. Making the signal costly in an additional treatment reduces this effect.