Weekly Roundup 43: A Curated Linkfest For The Smartest People On The Web

Readers,

Thanks for your patience. I hope you will enjoy this roundup.

-Miguel Barbosa
Founder Of Simoleon Sense

SimoleonSense Weekly Favorite: Finance Models, A Bit of Knowledge & Mt. Doom – Via Designing Better Futures -One of the current debates going in finance is about models and the role they played in the current problems ie. CDO disasters and ratings flaws.  To paraphrase a popular expression, models don’t shoot holes in balance sheets, overly confident bankers shoot holes in balance sheets. The models are merely one of the tools used to establish the false beliefs (over confidences) that collectively lead to many financial actors taking bad actions.

Exclusive Feature:  Interview with Jim Chanos Via NewDeal & Lincoln Minor – Here at New Deal 2.0 today we’re pleased to be able to talk with the guest, Jim Chanos, famous hedge fund manager and a short-seller, who’s been very involved in market developments for the better part of three decades and has – how would you say, played a very interesting role in public policy as well. The Enron situation which Alex Gibney covered in his film, “The Smartest Guys in the Room.” Is, I want to say, a portrait of social discovery of financial misdealings. And Jim played a very, very large role in the developments that led to the book and the film.

Exclusive Feature: Optimal Behavior & Risk Taking (Must insert email to access document) -Via Zero Hedge- Traditional approaches to investment risk, whilst mathematically convenient, do not correspond with what people mean by ‘risk’. ‘Risk’, in everyday language, refers to the chance of something bad happening, but the conventional measure used in the finance industry, volatility, also treats better-than-expected performance as risky. Financial institutions’ failure to reflect risk as it is psychologically experienced by investors is reflected in misconceived portfolio optimisation techniques. The result is that investment managers provide portfolios that do not reflect their clients’ true risk/return trade-off. After all, it is clear that each investor has his or her own view of what constitutes ‘risk’. A more appropriate approach first assumes that better-than- expected possible investment outcomes detract from perceived risk rather than adding to it. It would also assume that the potential for catastrophic outcomes results in higher perceived risk than a volatility-based risk measure would suggest.

Exclusive Feature: IQ and Stock Market Participation – Via SSRN – An individual’s IQ stanine, measured early in adult life, is monotonically related to his stock market participation decision later in life. The high correlation between IQ and participation, which exists even among the 10% most affluent individuals, controls for wealth, income, and other demographic and occupational information. Supplemental data from siblings is used with both an instrumental variables approach and paired difference regressions to show that our results apply to both females and males, and that omitted familial and non-familial variables cannot account for our findings.

Feature: Eddie Lampert, Chairman of Sears Holdings responds to a Barron’s cover story about his company– Via Barrons – The Barron’s piece on Aug. 24 about  Sears and ESL Partners was misleading, inaccurate, and poorly researched. Without responding to each inaccuracy, I want to correct some of the more important misstatements and address the overall negative bias in the presentation of facts.

Feature: Trading  Black Swans – Via Michael Covel – Do we forecast? You bet. Do we have confidence in our forecasts? Never! Confidence about a non-linear chaotic system can only come in degrees, and even those degrees of confidence are guesses. Not all hope is lost. There are times when it seems our ability to predict is better than others. Thus we need to take advantage of it if we see it. Trading ranges, pivot points, support and resistance, and the like can help, and do help the trader. But

Feature: The Last Temptation of Risk – Via National Interest – The Great Credit Crisis has cast into doubt much of what we thought we knew about economics. We thought that monetary policy had tamed the business cycle. We thought that because changes in central-bank policies had delivered low and stable inflation, the volatility of the pre-1985 years had been consigned to the dustbin of history; they had given way to the quaintly dubbed “Great Moderation.” We thought that financial institutions and markets had come to be self-regulating—that investors could be left largely if not wholly to their own devices. Above all we thought that we had learned how to prevent the kind of financial calamity that struck the world in 1929.

Feature:  Infographic – US Energy Use Decreases In 2008 – Via Cool Infographics

Feature: Video Fixing America’s Healthcare System – Via Fora.Tv – Policy analyst Jacob Hacker reviews the dangerous escalation of America’­s uninsured and underinsured, and presents an innovative new plan for reshaping America’s healthcare system, and for providing universal coverage for all.

Feature: 50 Most Common Mistakes Traders Make – Via Ratio Trading – A survey of more than 500 experienced futures brokers asked what, in their experience, caused most futures traders to lose money. These account executives represent the trading experience of more than 10,000 futures traders. In addition, most of these Account Executives (AEs) have also traded or are currently trading for themselves. Their answers are not summarized because different traders make (and lose) money for different reasons. Perhaps you may recognize some of your strengths and weaknesses. Yet many of the reasons given are very similar from broker to broker. The repetitions stand to demonstrate that alas, many futures traders lose money for many of the same reasons. Perhaps these statements from experienced brokers can make a contribution to you, and make this sometimes fickle, often intricate, always interesting market place of futures trading possible.

Feature: What Behavioral Economics Can Teach Lawyers About Settlement Discussions – Via WowMyNews – Frequently, defense attorneys involved in settlement discussions become frustrated when what they believe to be perfectly reasonable settlement offers are rejected by the plaintiff. They encounter this situation most often when dealing with novice plaintiff lawyers, or plaintiffs who have not previously been involved in civil litigation. Why does this happen? Is it because the plaintiff is irrational or stupid (as many defense lawyers posit in this situation) or is there another reason? We can answer this question by taking a look at something called the “endowment effect”-a major precept of behavioral economics.

Feature: The Statistics of Prediction – Via Gestalt – Given the high level of ambiguity in the economy and markets at the moment (both gold and Treasuries rallying?), I thought it might be useful to revisit the concept of forecast error. Economic forecasters, even (perhaps especially?) the top, highest paid Wall Street celebrity economists, are egregiously poor predictors of stock market levels or direction over any meaningful time frame.

Feature: Nature or Nurture:  What Determines Investor Behavior? – Via SSRN – This paper examines the foundations of investor behavior. Using data on identical and non-identical twins, matched with their portfolio choices, we decompose the cross-sectional variation in key measures of investment behavior into genetic and environmental influences. We find that up to 45 percent of the variation in stock market participation, asset allocation, and portfolio risk choices is explained by a genetic component. The family environment has an effect on young individuals’ financial behavior, but disappears after the individual acquires own experiences. Our evidence implies that an individual’s genetic composition is an important determinant of financial behavior, and offers new insights into what explains investor heterogeneity.

Here is what they said:
1. Many futures traders trade without a plan. They do not define specific risk and profit objectives before trading. Even if they establish a plan, they “second guess” it and don’t stick to it, particularly if the trade is a loss. Consequently, they overtrade and use their equity to the limit (are undercapitalized), which puts them in a squeeze and forces them to liquidate positions.
Usually, they liquidate the good trades and keep the bad ones.
2. Many traders don’t realize the news they hear and read has already been discounted by the market.
3. After several profitable trades, many speculators become wild and aggressive. They base their trades on hunches and long shots, rather than sound fundamental and technical reasoning, or put their money into one deal that “can’t fail.”
4. Traders often try to carry too big a position with too little capital, and trade too frequently for the size of the account.
5. Some traders try to “beat the market” by day trading, nervous scalping, and getting greedy.
6. They fail to pre-define risk, add to a losing position, and fail to use stops.
7 .They frequently have a directional bias; for example, always wanting to be long.
8. Lack of experience in the market causes many traders to become emotionally and/or financially committed to one trade, and unwilling or unable to take a loss. They may be unable to admit they have made a mistake, or they look at the market on too short a time frame.
9. They overtrade.
10. Many traders can’t (or don’t) take the small losses. They often stick with a loser until it really hurts, then take the loss. This is an undisciplined approach…a trader needs to develop and stick with a system.
11. Many traders get a fundamental case and hang onto it, even after the market technically turns. Only believe fundamentals as long as the technical signals follow. Both must agree.
12. Many traders break a cardinal rule: “Cut losses short. Let profits run.”
13. Many people trade with their hearts instead of their heads. For some traders, adversity (or success) distorts judgment. That’s why they should have a plan first, and stick to it.
14. Often traders have bad timing, and not enough capital to survive the shake out.
15. Too many traders perceive futures markets as an intuitive arena. The inability to distinguish between price fluctuations which reflect a fundamental change and those which represent an interim change often causes losses.
16. Not following a disciplined trading program leads to accepting large losses and small profits. Many traders do not define offensive and defensive plans when an initial position is taken.
17. Emotion makes many traders hold a loser too long. Many traders don’t discipline themselves to take small losses and big gains.
18. Too many traders are under financed, and get washed out at the extremes.
19. Greed causes some traders to allow profits to dwindle into losses while hoping for larger profits.
This is really a lack of discipline. Also, having too many trades on at one time and overtrading for the amount of capital involved can stem from greed.
20. Trying to trade inactive markets is dangerous.
21. Taking too big a risk with too little profit potential is a sure road to losses.
22. Many traders lose by not taking losses in proportion to the size of their accounts.
23. Often, traders do not recognize the difference between trading markets and trending markets.
Lack of discipline is a major shortcoming.
24. Lack of discipline includes several lesser items; i.e., impatience, need for action, etc. Also, many traders are unable to take a loss and do it quickly.
25. Trading against the trend, especially without reasonable stops, and insufficient capital to trade with and/or improper money management are major causes of large tosses in the futures markets; however, a large capital base alone does not guarantee success.
26. Overtrading is dangerous, and often stems from lack of planning.
27. Trading very speculative commodities is a frequent mistake.
28. There is a striking inability to stay with winners. Most traders are too willing to take small profits and, therefore, miss out on big profits. Another problem is under capitalization; small accounts can’t diversify, and can’t use valid stops.
29. Some traders are on an ego trip and won’t take advice from another person; any trades must be their ideas.
30. Many traders have the habit of not cutting losses fast, and getting out of winners too soon. It sounds simple, but it takes discipline to trade correctly. This is hard whether you’re losing or winning.
Many traders overtrade their accounts.
31. Futures traders tend to have no discipline, no plan, and no patience. They overtrade and can’t wait for the right opportunity. Instead, they seem compelled to trade every rumor.
32. Staying with a losing position because a trader’s information (or worse yet, intuition) indicates the deteriorating market is only a temporary situation can lead to large losses.
33. Lack of risk capital in the market means inadequate capital for diversification and staying power in the market.
34. Some speculators don’t have the temperament to accept small losses in a trade, or the patience to let winners ride.
35. Greed, as evidenced by trying to pick tops or bottoms, is a frequent error.
36. Not having a trading plan results in a lack of money management. Then, when too much ego gets involved, the result is emotional trading.
37. Frequently, traders judge markets on the local situation only, rather than taking the worldwide situation into account.
38. Speculators allow emotions to overcome intelligence when markets are going for them or against them. They do not have a plan and follow it. A good plan must include defense points (stops).
39. Some traders are not willing to believe price action, and thus trade contrary to the trend.
40. Many speculators trade only one commodity.
41. Getting out of a rallying commodity too quickly, or holding losers too long results in losses.
42. Trading against the trend is a common mistake. This may result from overtrading, too many days trades, and under capitalization, accentuated by failure to use a money management approach to trading futures.
43. Often, traders jump into a market based on a story in the morning paper; the market many times has already discounted the information.
44. Lack of self-discipline on the part of the trader and/ or broker creates losses. Futures traders tend to do inadequate research.
45. Traders don’t clearly identify and then adhere to risk parameters; i.e., stops.
46. Most traders overtrade without doing enough research. They take too many positions with too little information. They do a lot of day trading for which they are under margined; thus, they are unable to accept small losses.
47. Many speculators use “conventional wisdom” which is either local, or “old news” to the market. They take small profits, not riding gains as they should, and tend to stay with losing positions. Most traders do not spend enough time and effort analyzing the market, and/or analyzing their own emotional make-ups.
48. Too many traders do not apply money management techniques. They have no discipline, no plan. Many also overstay when the market goes against them, and won’t limit their losses
49 Many traders are undercapitalized. They trade positions too large, relative to their available capital. They are not flexible enough to change their minds or opinions when the trend is clearly against their positions. They don’t have a good battle plan and the courage to stick to it.
50. Don’t make trading decisions based on inside information. It’s illegal, and besides, it’s usually wrong.A survey of more than 500 experienced futures brokers asked what, in their experience, caused most futures traders to lose money. These account executives represent the trading experience of more than 10,000 futures traders. In addition, most of these Account Executives (AEs) have also traded or are currently trading for themselves. Their answers are not summarized because different traders make (and lose) money for different reasons. Perhaps you may recognize some of your strengths and weaknesses. Yet many of the reasons given are very similar from broker to broker. The repetitions stand to demonstrate that alas, many futures traders lose money for many of the same reasons. Perhaps these statements from experienced brokers can make a contribution to you, and make this sometimes fickle, often intricate, always interesting market place of futures trading possible.

0. Infographic: Physical Storage vs Digital Storage – Via Mozy.com

1. Benjamin Franklin: the grandfather of personal productivity? – Via Academic Productivity –  A few years ago I visited the Huntington Library in Los Angeles. We spent most of our time poking around the beautiful gardens, enjoying the Californian sun. But the Library collection is pretty remarkable too and it holds copies of the Gutenberg bible, Audubon’s bird drawings, early Shakespeare editions and – a definite highlight – Benjamin Franklin’s autobiography. I’m not sure why I suddenly remembered this now, almost four years later, but when he wasn’t experimenting with electricity and founding countries, Franklin was also a bit of a productivity guru.

2. Moral Machines? New Approach To Decision Making Based On Computational Logic– Via ScienceDaily — Researchers from Portugal and Indonesia describe an approach to decision making based on computational logic in the current issue of the International Journal of Reasoning-based Intelligent Systems, which might one day give machines a sense of morality.

3. Examining The Housing Crisis – Via Pragmatic Capitalist – The current housing crisis has been long and severe.Some areas of the country—particularly California,Florida, and Arizona—have been hit much harder thanother areas, such as the Midwest. A less-discussed issue is thathome price tiers—high-priced, mid-priced, and lower-pricedhomes—each responded differently to the mortgage boom andsubsequent implosion.

4. Video: Paul Wilmott on CNBC – Via Money Science

5. Information Risk and Fair Value: An Examination of Equity Betas and Bid-Ask Spreads – Via HBS – Finance theory suggests that information risk―that is, the uncertainty regarding valuation parameters for an underlying asset―is reflected in firms’ equity betas and the information asymmetry component of bid-ask spreads. We empirically examine these predictions for a sample of large U.S. banks, exploiting recent mandatory disclosures of financial instruments designated as fair value level 1, 2, and 3, which indicate progressively more illiquid and opaque financial instruments. Consistent with predictions, results reveal that portfolios of level 3 financial assets have higher implied betas and lead to larger bid-ask spreads relative to those designated as level 1 or level 2 assets. Both results are consistent with a higher cost of capital for banks holding more opaque financial assets, as reflected by the level 3 fair value designation.

6. Arctic ‘warmest in 2,000 years’ – Via BBC –  Changes to the Earth’s orbit drove centuries of cooling, but temperatures rose fast in the last 100 years as human greenhouse gas emissions rose. Scientists took evidence from ice cores, tree rings and lake sediments. Writing in the journal Science, they say this confirms that the Arctic is very sensitive both to changes in solar heating and to greenhouse warming.

7.Capital Structure Decisions Around the World: Which Factors are Reliably Important? by Özde Öztekin – Via Finance Professor – “The most reliable determinants are past leverage, tangibility, firm size, research and development, depreciation expenses, industry median leverage, and liquidity. The signs of the reliable determinants give consistent support to the dynamic trade off theory.”

8. On Fearlessness – Via Scientific Living – Intellectually, we say “Don’t be afraid.” And our mind immediately revolts and says “Be afraid!” The mind is a sense organ. Just like our eyes and our ears, the mind gathers perceptions about the world. Many of these perceptions are ones of fear. It is not really a question about the mind being rational or irrational. It simply is what it is. The mind is an instrument that is constantly presenting us with perceptions about the world. And these perceptions are often wrong.

9. Human Brain Could Be Replicated In 10 Years, Researcher Predicts Via ScienceDaily — A model that replicates the functions of the human brain is feasible in 10 years according to neuroscientist Professor Henry Markram of the Brain Mind Institute in Switzerland. “I absolutely believe it is technically and biologically possible. The only uncertainty is financial. It is an extremely expensive project and not all is yet secured.”

10.Infographic: Housing The United States vs Vermont – Via Chart Porn

11. Poor Money Saving Linked To General Impulsiveness– Via ScienceDaily — Financial imprudence is linked to other impulsive behaviour such as overeating, smoking and infidelity, according to a new study led by UCL researchers, published in the journal Personality and Individual Differences.

12. Inexperience a key factor in youth crashes – Via Phys.org- A University of Adelaide (Australia) study has found that young drivers are twice as likely to have an accident during their first few months of driving on a provisional licence than after a year of driving experience.

13. Infographic: Federal Research and Development Dollars – Via Chart Porn

14. Radio Show : Gary North & Lew Rockwell On Making A Difference In The World Via Lew Rockwell

15. Are bankers intermediaries between savers and investors? – Via Debtonation – The truth that will not speak its name is that banks do not even do that….I learned all this at the feet of Dr. Geoff Tily, author of an important book on Keynes as first and foremost a monetary economist. Because banks are licensed to create credit, and because bank money is such a wonderful human invention – there is no need for an investor to dip into someone else’s savings – or to  hire an agent to act as an intermediary…..as I explained in a recent letter to the Guardian. (below my unedited version). I was responding to a piece by J Freedland, urging us all to join Zopa, and share our savings with those needing to borrow….

16. Worst of slump yet to come – Via TimesOnline –  Ann Pettifor is a member of a select club — the seers who saw it all coming. Now the economist, who predicted the credit crunch as far back as 2003, believes that the worst is yet to come unless there is radical reform of the financial system.Six years ago she parodied the International Monetary Fund’s annual economic forecast with her own — The Real World Economic Outlook. Then, in 2006, her book The Coming First World Debt Crisis, warned that rich countries were heading for a debt crisis that would overshadow anything seen in the developing world. Both were ridiculed.

17. The Art Of Persuasion: Are Consumers Interested In Abstract Or Concrete Features? – Via ScienceDaily — What types of messages are most persuasive? For example, would you be more likely to buy a TiVo if an ad described it as offering you freedom or if it explained how you could replay sports events? A new study in the Journal of Consumer Research says the key to an effective message is finding the fit between the consumers’ goals and the level of abstraction.

18.  Infographic: Oil & Alternative Fuel -Price Points – Via FT

19. Infographic: On Poverty & The Unequal Distribution Of Weath As Seen in Wash. DC via GetDropBox & Flowing Data

20. New Book!! 1917-1927 Benjamin Graham Investment Writings – Via Value Investing Resource – While recently perusing the value shelves at our local library, we were pleasantly surprised to find a tremendous 2009 title we’d heard nothing about: Benjamin Graham on Investing–Enduring Lessons from the Father of Value Investing. The book contains a collection of writings from The Magazine of Wall Street penned by Graham from 1917-1927; and collected, compiled and edited by Rodney Klein–himself a former student of Graham’s at UCLA in 1960.

About Miguel Barbosa

I run this site.

06. September 2003 by Miguel Barbosa
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