Weekly Roundup 131: A Curated Linkfest For The Smartest People On The Web
Handpicked to satisfy your intellectual curiosity!
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Berta’s Fundamental Law of Economic Rents.. “The only thing more dangerous than an amateur economist is a professional economist.”
There Is No Such Thing as a Free Market - via Truthout- The free market doesn’t exist. Every market has some rules and boundaries that restrict freedom of choice. A market looks free only because we so unconditionally accept its underlying restrictions that we fail to see them. How ‘free’ a market is cannot be objectively defined. It is a political definition. The usual claim by free-market economists that they are trying to defend the market from politically motivated interference by the government is false. Government is always involved and those free-marketeers are as politically motivated as anyone. Overcoming the myth that there is such a thing as an objectively defined ‘free market’ is the first step towards understanding capitalism.
Dan Gilbert – Winners Love Winning and Losers Love Money – via Sagepub- Salience and satisfaction are important factors in determining the comparisons that people make. We hypothesized that people make salient comparisons first, and then make satisfying comparisons only if salient comparisons leave them unsatisfied. This hypothesis suggests an asymmetry between winning and losing. For winners, comparison with a salient alternative (i.e., losing) brings satisfaction. Therefore, winners should be sensitive only to the relative value of their outcomes. For losers, comparison with a salient alternative (i.e., winning) brings little satisfaction. Therefore, losers should be drawn to compare outcomes with additional standards, which should make them sensitive to both relative and absolute values of their outcomes. In Experiment 1, participants won one of two cash prizes on a scratch-off ticket. Winners were sensitive to the relative value of their prizes, whereas losers were sensitive to both the relative and the absolute values of their prizes. In Experiment 2, losers were sensitive to the absolute value of their prize only when they had sufficient cognitive resources to engage in effortful comparison.
Debt Boosts Young People’s Morale - via SciAm- People in their early to mid-20s actually felt that carrying debt was empowering.
Barron’s Red Flags: Do They Actually Work? - via Wiley- Investors are often concerned that managers might hide negative information in filings. With advances in textual analysis and widespread document availability, individuals can now easily search for phrases that might be red flags indicating questionable behavior. We examine the impact of 13 suspicious phrases identified by a Barron’s article in a large sample of 10-Ks. There is evidence that phrases like unbilled receivables signal a firm may subsequently be accused of fraud. At the 10-K filing date, phrases like substantial doubt are linked with significantly lower filing date excess stock returns, higher volatility, and greater analyst earnings forecast dispersion
Dan Ariely: Preferences leading to choices?- via Predictably Irrational – Quite a few years ago (when I was 30), I decided that I needed to trade in my motorcycle and get a car. There are of course many cars on the market and I was trying to figure out which one was the right one for me. The Internet was just starting to boom with decision aids and to my delight I found a website that was providing car purchasing advice. The website was based on an interview procedure that started by asking me a lot of questions that ranged from my preferences for everything from price to safety, lighting, braking distance, and so forth and so on.
Too Hard for Science? Seeing If 10,000 Hours Make You an Expert - via SciAm- “However, a lot of people certainly find this idea of hard to believe, and if you do talk with coaches who teach chess to kids, they do think some of them have more talent, and some have less,” Chabris notes. “The practice theory clashes with intuition, and while scientists don’t rely on intuition but data, when intuition clashes with the data that much, perhaps more experiments are in order.” Moreover, “the fact that people who are experts have practiced more than people who are novices doesn’t prove that the practice, by itself, caused the expertise.”
The Case for Financial Procrastination – via Time- By waiting, you give your subconscious mood or worldview a chance to change, to manifest a different state of mind. Maybe you’ll be a little less hot or anxious or giddy or needy, and maybe that change will alter your appraisal of the decisions at hand. In an ideal world, you’ll also have time to consult with someone you trust, to run the idea up their flag pole just to get someone else’s take, someone with a different state of mind and body than you. In so doing, you’ll end up with multiple viewpoints on the same decision (two of yours, one of theirs) between which you can triangulate. Maybe you’ll reach the same conclusion you had before, but maybe you’ll decide differently.
HOW ELIMINATING DECISION-MAKING LOST ME 15 POUNDS - via Decision Science News- So, I emailed my friend Dan Reeves, who has a fitness-expert sister named Melanie Reeves Wicklow, to request a healthy diet I could follow for seven days with no exceptions.
The science behind the allure of ‘bad boys’ – via Brains on Purpose- In brief, he said that, yes, women may be attracted to these men at a hormonal or brain level, but we are not our brains and we can transcend these animal impulses. If we each consult our inner Wise Advocate, it will enable us to recognize signals that are brain-based and assist us in rising above these signals, in order to make decisions that are in our best interest. His new book You Are Not Your Brain: The 4-Step Solution for Changing Bad Habits, Ending Unhealthy Thinking, and Taking Control of Your Life, which comes out tomorrow, explains all of this in depth, including how to be in frequent touch with your Wise Advocate. I have read the book, and highly recommend it to you if you want to operate at your highest potential.
GRE and SAT validity – via Information Processing – If you are a professor at a research university you have probably spent time on graduate admissions. How good is the GRE as an indicator of candidate quality? Is the subject score more useful than the general score? What about relative to undergraduate GPA? Similar questions apply to the SAT and undergraduate admissions.
Invasion of the body hackers - via FT – Michael Galpert rolls over in bed in his New York apartment, the alarm clock still chiming. The 28-year-old internet entrepreneur slips off the headband that’s been recording his brainwaves all night and studies the bar graph of his deep sleep, light sleep and REM. He strides to the bathroom and steps on his digital scale, the one that shoots his weight and body mass to an online data file. Before he eats his scrambled egg whites with spinach, he takes a picture of his plate with his mobile phone, which then logs the calories. He sets his mileage tracker before he hops on his bike and rides to the office, where a different set of data spreadsheets awaits.
Decision Making/ Psychology/ Risk:
Perceptions of Income Distribution and Preferences for Redistribution- via Situationist – Individual perceptions of income distribution play a vital role in political economy and public finance models, yet there is little evidence regarding their origins or accuracy. This study examines how individuals form these perceptions and posits that systematic biases arise from the extrapolation of information extracted from reference groups. A tailored household survey provides original evidence on the significant biases in individuals’ evaluations of their own relative position in the distribution. Furthermore, the data supports the hypothesis that the selection process into the reference groups is the source of those biases. Finally, this study also assesses the practical relevance of these biases by examining their impact on attitudes towards redistributive policies. An experimental design incorporated into the survey provides consistent information on the own ranking within the income distribution to a randomly selected group of respondents. Confronting agents’ biased perceptions with this information has a significant effect on their stated preferences for redistribution. Those who had overestimated their relative position and thought of themselves relatively richer than they were demand higher levels of redistribution when informed of their true ranking. This relationship between biased perceptions and political attitudes provides an alternative explanation for the relatively low degree of redistribution observed in modern democracies.
Are Investors Rational and Does it Matter? Determining the Expected Utility Function for a Group of Investors – via Wiley – This paper reports on an experiment with a group of 236 Australian superannuation investors to derive an expected utility function for risk and return, and the resulting indifference curves. The paper concludes that the expected utility function is consistent with that anticipated in Markowitz  and Sharpe  except that the investors did not consider time horizon. The paper argues that the analysis of investor behavior is best served by considering the behavior of a group as a whole rather than investors as individuals, and by assessing their choices when faced with successive similar tasks.
Can You Have Too Much Happiness? – via Psych Central – I can safely say that I think few of us struggle with having too much happiness. We turn to the happiness gurus to help us increase our happiness for a reason — who wouldn’t want to be happier? Pretty much all of us do. For many of us, the pursuit of happiness is not only something we’ve grown up on, it’s something we’ve come to expect as a right. I mean, it’s right there in the Declaration of Independence!
Dopamine and risk choices in different domains: Findings among serious tournament bridge players - via Springer Link – We explore how risk-taking in the card game contract bridge, and in a financial gamble, correlate with variation in the dopamine receptor D4 gene (DRD4) among serious tournament bridge players. In bridge risk-taking, we find significant interactions between genetic predisposition and skill. Among men with the 7-repeat allele of DRD4, namely 7R + men, those with more bridge skill take more good risks and fewer bad risks, while the opposite is found for less-expert 7R + men. Conversely, skill does not predict risk-taking among men without the 7R + allele. Consistent with some prior studies, we also find that 7R + men take more risk in the financial gamble. We find no relationship between 7R + and either risk measure among our female subjects. Our results suggest that the dopamine system plays an important role in individual differences in risk-taking among men, and is the first to distinguish between advantageous and disadvantageous risk-taking.
Do Senior Managers Make Better Decisions Than Students? – via Organizations & Markets – Even management students may occasionally suffer from confidence and self-esteem problems. I have had many students confide that they were more than a little scared at the prospect of landing a real job where their decision-making skills would be compared to older, wiser, smarter, etc. colleagues. Rather than directing them to this site, in the future I am going to give such students a copy of Gary E. Bolton, Axel Ockenfels and Ulrich Thonemann’s “Who Is the Best at Making Decisions? Managers or Students?” They set up a simple experiment based on a simple profit maximizing problem, and find that practitioner performance isn’t as good as graduate business students’. Moreover, the learning curve of the latter is steeper than that of practicioners.
The Illusion of Certainty: Risk, Probability, and Chance - via SciAm- Stuff happens. The weather forecast says it’s sunny, but you just got drenched. You got a flu shot—but you’re sick in bed with the flu. Your best friend from Boston met your other best friend from San Francisco. Coincidentally. What are the odds? Risk, probability, chance, coincidence—they play a significant role in the way we make decisions about health, education, relationships and money. But where does this data come from and what does it really mean? How does the brain find patterns and where can these patterns take us? When should we ditch the data and go with our gut? Join us in a captivating discussion that will demystify the chancy side of life.
The Anosognosic’s Dilemma: Something’s Wrong but You’ll Never Know What It Is (Part 1) - via NYT – David Dunning, a Cornell professor of social psychology, was perusing the 1996 World Almanac. In a section called Offbeat News Stories he found a tantalizingly brief account of a series of bank robberies committed in Pittsburgh the previous year. From there, it was an easy matter to track the case to the Pittsburgh Post-Gazette, specifically to an article by Michael A. Fuoco:
Unseen but not unsolved: dong arithmetic unconsciously- via HUJI – The modal view in the cognitive sciences holds that consciousness is necessary for abstract, symbolic and rule-following computations. Hence, mathematical thinking in general, and doing arithmetic more specifically, are widely believed to require consciousness. In the current paper we use continuous flash suppression to expose participants to extremely long-duration (up to 2000 milliseconds) subliminal arithmetic equations. The results of three experiments show that the equations were solved without ever reaching consciousness. In other words, they show that arithmetic can be done unconsciously. These findings imply that the modal view of the unconscious needs to be significantly updated, to include symbolic processes that were heretofore considered to be uniquely conscious.
Resource Allocation in the Brain - via CEPR – When an individual performs several tasks simultaneously, resources must be allocated to different brain systems to produce energy for neurons to fire. Following the evidence from neuroscience, we model the brain as an organization in which a coordinator allocates limited resources to the brain systems responsible for the different tasks. Systems are privately informed about the amount of resources necessary to perform their task and compete to obtain the resources. The coordinator arbitrates the demands while satisfying the resource constraint. We show that the optimal mechanism is to impose to each system with privately known needs a cap in resources that depends negatively on the amount of resources requested by the other system. This allocation can be implemented using a physiologically plausible mechanism. Finally, we provide some implications of our theory: (i) performance is inversely related to the difficulty of the task and can be flawless for sufficiently simple tasks, (ii) the dynamic allocation rule exhibits inertia (current allocations are increasing in past needs), and (iii) different cognitive tasks are performed by different systems only if the tasks are sufficiently important.
Social Influence Modulates the Neural Computation of Value - via Sagepub – Social influence—individuals’ tendency to conform to the beliefs and attitudes of others—has interested psychologists for decades. However, it has traditionally been difficult to distinguish true modification of attitudes from mere public compliance with social norms; this study addressed this challenge using functional neuroimaging. Participants rated the attractiveness of faces and subsequently learned how their peers ostensibly rated each face. Participants were then scanned using functional MRI while they rated each face a second time. The second ratings were influenced by social norms: Participants changed their ratings to conform to those of their peers. This social influence was accompanied by modulated engagement of two brain regions associated with coding subjective value—the nucleus accumbens and orbitofrontal cortex—a finding suggesting that exposure to social norms affected participants’ neural representations of value assigned to stimuli. These findings document the utility of neuroimaging to demonstrate the private acceptance of social norms
Fast lemons and intuitive beliefs - via Cognition Culture- Without any apparent reason, you believe that lemons are fast and violins sound brighter than trombones. These beliefs happen to be shared by most humans, from an early age and cross-culturally. Now, where on earth did we get them from? Most of the earlier studies conducted since Edward Sapir focused on “sound symbolism”, i.e. the associations between sounds and meanings, but not directly on the associations between sensory dimensions – like brightness, pitch, size, etc. Even if you don’t know anything about french names for birds, I could ask you whether you think that a pipit is a small or a big bird – and you would, without any apparent reason, judge that it must be a small one. It’s certainly because, as a large majority of humans across cultures and linguistic groups, you think that the sound /i/ is smaller and brighter than the sound /a/, diminutive words, or names of small birds and fishes are much more likely to contain /i/ than /a/.
Extraverts More Likely to Believe in Free Will - via MIller McCune- Philosophers’ views on freedom and moral responsibility are influenced by inherited personality traits. If they can’t be objective, can anyone?
Americans’ Main Regrets Are Lack Of Romantic Relationships, Higher Education - via Med News Today- Regrets – we’ve all had a few. Although too many regrets can interfere with life and mental health, a healthy amount of regret can motivate us to improve our lives, say researchers Mike Morrison of the University of Illinois and Neal Roese of Northwestern University in the current issue of Social Psychological and Personality Science (published by SAGE).
Social Influence and Household Decision-Making: - via CamAcUk- Housing markets are subject to many interrelated sources of instability on both a microeconomic and macroeconomic scale. Housing decisions of different individuals will be interdependent, generating non-linearities, discontinuities and feedback effects. This paper focuses in on some behavioural factors that contribute to complexity in housing demand. In particular, the impact of herding and social influence is captured using a model incorporating the impact of social information on willingness to pay. This model is tested in an experimental context and this experimental evidence confirms first, that social information has a statistically significant impact and, second, this impact is determined by a person’s individual characteristics including gender and personality traits.
Entrepreneurship/ Finance/ Investing:
Dreamtime Finance & Kelly Formula- via overcoming bias- In 1956, John Kelly introduced his “Kelly criteria” betting strategy: bet on each possible outcome in proportion to (your estimate of) that outcome’s chances of winning, regardless of the (fair) odds for betting. More generally, a Kelly rule invests in each possible asset in proportion to its expected future payout, regardless of current asset prices. For example, if you estimate land will be worth 30% of world wealth in the distant future, you put 30% of your investments into land today, regardless of today’s land prices.
Bloomberg’s Weil Exposes Another Accounting Regulator Coverup - via CJR- Jonathan Weil has a tough Bloomberg View column about accounting regulators covering up wrongdoing by companies and their auditors. Back in 2006, KPMG let Motorola book a sale in the third quarter. That helped Motorola because without it, the company would have missed earnings estimates and sent its shares tumbling. But the sale happened on the first day of the fourth quarter, and the Public Company Accounting Oversight Board, which regulates auditors, said KPMG had no justification for fudging the numbers. Apparently, neither KPMG nor Motorola paid no penalty and Motorola didn’t even have to restate its earnings. Weil reports there’s no evidence the SEC bothered to investigate, either. And the PCAOB covered the chicanery up by not telling the public.
Anticipation and the formation of bubbles- via Paul K – dynamical model is introduced for the formation of a bullish or bearish trends driving an asset price in a given market. Initially, each agent decides to buy or sell according to its personal opinion, which results from the combination of its own private information, the public information and its own analysis. It then adjusts such opinion through the market as it observes sequentially the behavior of a group of random selection of other agents. Its choice is then determined by a local majority rule including itself. Whenever the selected group is at a tie, i.e., it is undecided on what to do, the choice is determined by the local group belief with respect to the anticipated trend at that time. These local adjustments create a dynamic that leads the market price formation. In case of balanced anticipations the market is found to be efficient in being successful to make the “right price” to emerge from the sequential aggregation of all the local individual informations which all together contain the fundamental value. However, when a leading optimistic belief prevails, the same efficient market mechanisms are found to produce a bullish dynamic even though most agents have bearish private informations. The market yields then a wider and wider discrepancy between the fundamental value and the market value, which in turn creates a speculative bubble. Nevertheless, there exists a limit in the growing of the bubble where private opinions take over again and at once invert the trend, originating a sudden bearish trend. Moreover, in the case of a drastic shift in the collective expectations, a huge drop in price levels may also occur extremely fast and puts the market out of control, it is a market crash.
The Role of Expectations in Value and Glamour Stock Returns - via Wiley – What happens when value and glamour stocks miss earnings expectation targets? Although, as expected, prices for glamour stocks have historically fallen, prices for value stocks have gone up—even when business fundamentals deteriorated based on results found in this study of global equities. These results suggest the superior returns delivered by value stocks may not be a result of positive developments relative to expectations but instead are more likely due to a gradual and corrective reversal of earlier overreaction and mispricing. This augments research by select scholars and provides fresh evidence explaining why value investing historically has been a successful long-term strategy.
Energy Spending and Vulnerable Households - via Cam.Ac.Uk – A sustainable energy policy needs to balance between the reduction of carbon emissions and protection of vulnerable households and avoid a widening of the existing “energy gap” among the consumers. This study investigates energy spending for different consumer groups, in particular focussing on vulnerable households. Vulnerable households are more likely to be affected by fuel poverty and have difficulties in warming their homes adequately. In this context we explore energy spending among households on very low incomes, including pensioners, female single parent, and benefit recipients. We describe how energy spending of these households has changed over time using a household panel dataset covering a period of 17 years, starting in 1991. We discuss the reasons that these households have higher than average energy bills and the current policy context and approaches such as the implementation of smart metres are addressed.
Financial Cycles: What? How? When? - via CEPR – This paper provides a comprehensive analysis of financial cycles using a large database covering 21 advanced countries over the period 1960:1-2007:4. Specifically, we analyze cycles in credit, house prices, and equity prices. We report three main results. First, financial cycles tend to be long and severe, especially those in housing and equity markets. Second, they are highly synchronized within countries, particularly credit and house price cycles. The extent of synchronization of financial cycles across countries is high as well, mainly for credit and equity cycles, and has been increasing over time. Third financial cycles accentuate each other and become magnified, especially during coincident downturns in credit and housing markets. Moreover, globally synchronized downturns tend to be associated with more prolonged and costly episodes, especially for credit and equity cycles. We discuss how these findings can guide future research on various aspects of financial market developments.
The Eclectic Mix:
How To Party Your Way Into a Multi-Million Dollar Facebook Job - via Statistical Modeling, Causal Inference, and Social Science – If you want Facebook to spend millions of dollars hiring you, it helps to be a talented engineer, as the New York Times today [18 May 2011] suggests. But it also helps to carouse with Facebook honchos, invite them to your dad’s Mediterranean party palace, and get them introduced to your father’s venture capital pals, like Sam Lessin did. Lessin is the poster boy for today’s Times story on Facebook “talent acquisitions.” Facebook spent several million dollars to buy Lessin’s drop.io, only to shut it down and put Lessin to work on internal projects. To the Times, Lessin is an example of how “the best talent” fetches tons of money these days. “Engineers are worth half a million to one million,” a Facebook executive told the paper.
Video: Ted Talk – Paul Romer: The world’s first charter city? - via Ted- Back in 2009, Paul Romer unveiled the idea for a “charter city” — a new kind of city with rules that favor democracy and trade. This year, at TED2011, he tells the story of how such a city might just happen in Honduras … with a little help from his TEDTalk.
8 Ways to Buy More Happiness – via SmartMoney- If money can buy health and leisure and banish worry and toil, why is the effect of money on happiness so weak in studies? Simple: Most people are bad at spending, according to a paper published this month in the Journal of Consumer Psychology.
Being Ernest: John Walsh unravels the mystery behind Hemingway’s suicide- via The Independent -America’s most celebrated writer, Ernest Hemingway, ended his life 50 years ago – in a manner his biographers have struggled to explain.
Translation: The Machinery of Stability Preservation - via Dui Hua – There is widespread agreement in China, from high officials to ordinary people, about the importance of maintaining social stability. There is rather less consensus, though, about how best to ensure and promote stability. Considering the costs, both fiscal and human, of continued pursuit of the policy of “stability above all else,” some have begun to question whether, perhaps, the effort might actually be counterproductive.
Preschool benefits last into adulthood, study says - via AP – Preschool has surprisingly enduring benefits lasting well into adulthood, according to one of the biggest, longest follow-up studies of its kind. Better jobs, less drug abuse and fewer arrests are among advantages found in the study that tracked more than 1,000 low-income, mostly black Chicago kids for up to 25 years.
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