Weekly Roundup 44: A Curated Linkfest For The Smartest People On The Web

Readers,

Yesterday I took a break from blogging to attend the Pabrai meeting in Chicago. Now I’m back. Enjoy!

Miguel Barbosa
-Founder of SimoleonSense

SimoleonSense Weekly Favorite : ECONOMICS IS NOT NATURAL SCIENCE – Via EDGE.org- We must stop perpetuating the fiction that existence itself is dictated by the immutable laws of economics. These so-called laws are, in actuality, the economic mechanisms of 13th Century monarchs. Some of us analyzing digital culture and its impact on business must reveal economics as the artificial construction it really is. Although it may be subjected to the scientific method and mathematical scrutiny, it is not a natural science; it is game theory, with a set of underlying assumptions that have little to do with anything resembling genetics, neurology, evolution, or natural systems.

Exclusive Feature – How American Health Care Killed My Father – Via Atlantic (H/T Inoculated Investor) – After the needless death of his father, the author, a business executive, began a personal exploration of a health-care industry that for years has delivered poor service and irregular quality at astonishingly high cost. It is a system, he argues, that is not worth preserving in anything like its current form. And the health-care reform now being contemplated will not fix it. Here’s a radical solution to an agonizing problem.

Exclusive Feature: Replicating Milgram’s Obedience Experiment – Yet Again – Via Situationist – Milgram’s experiment was again repeated — this time as part of the BBC documentary “How violent are you?” first shown in May 2009.  It’s another remarkable rendition.  Of the 12 participants, only 3 refused to continue to the end of the experiment.   The relevant portions of that documentary are below.

Exclusive Feature: The Closer You Are, the More I Believe You Via NeuroNarrative – Let’s say that you’re watching a taped television show in which someone is being interviewed about an alleged theft she may or may not have committed. She offers a detailed explanation as to why she’s innocent, and you as one viewer among many are left to decide if she’s telling the truth.  Now let’s say that instead of watching her on broadcast television, you’re watching her live on closed circuit television. Only you can see her being interviewed about the alleged crime – it’s just you, a TV monitor and a woman in a room telling her story.

Feature: Flaw In Free Markets: Humans Via NYT – THERE is broad agreement that Alan Greenspan, the former Fed chairman, was wrong to have believed that market forces alone would insulate society from excessive financial risk. But Mr. Greenspan was wrong for reasons very different from those offered by his most vocal critics.

Feature: How Groups Form, Conform, Then Warp Our Decision-Making, Productivity and Creativity – Via PsyBlog –  When we’re in a group other people have an incredibly powerful effect on us. Groups can kill our creativity, inspire us to work harder, allow us to slack off, skew our decision-making and make us clam up.The keys to understanding human behaviour—our lives as citizens, as workers, as friends—are in the research on group psychology, which PsyBlog has been exploring over the past few months.

Feature: How Bad Will Unemployment Get, And What Can We Do About It? – Via Naked Capitalism – Unemployment is disastrous on both the individual and societal level. Individuals who look for work but can’t find it are miserable. Indeed, most people who lose their job are unprepared for their circumstances.On the national level, high unemployment is both cause and effect concerning other problems with the economy. As we’ll see below, high unemployment results from a weak economy and – in turn – weakens the economy.Until the causes of, and solutions to, high levels of unemployment are understood, we will not be able to solve the problem.

Feature: New Book – Why Stock Markets Crash? – Via UCLA – The scientific study of complex systems has transformed a wide range of disciplines in recent years, enabling researchers in both the natural and social sciences to model and predict phenomena as diverse as the failure of materials, earthquakes, global warming, demographic patterns, and financial crises. In this book, Didier Sornette boldly applies his varied experience in these areas to propose a simple, powerful, and general theory of how, why, and when stock markets crash. Most attempts to explain market failures seek to pinpoint triggering mechanisms that occur hours, days, or weeks before the collapse. Sornette proposes a radically different view: the underlying cause can be sought months and even years before the abrupt, catastrophic event in the build-up of cooperative speculation, which often translates into an accelerating rise of the market price, otherwise known as a “bubble.” Anchoring his sophisticated, step-by-step analysis in leading-edge physical and statistical modeling techniques, he unearths remarkable insights and some predictions-among them, that the “end of the growth era” will occur around 2050.

Feature: The Cycles of Theory Building in Management Research – Via BU & HBS – The purpose of this paper is to outline a process of theory building that links questions about data, methods and theory. We hope that this model can provide a common language about the research process that helps scholars of management better understand the roles of different types of data and research, and thereby to build more effectively on each other’s work. Our unit of analysis is at two levels: the individual research project and the iterative cycles of theory building in which a researchers attempt to build upon each other’s work. The model synthesizes and augments other studies of how communities of scholars cumulatively build valid and reliable theory. It has normative and pedagogical implications for how we conduct research, evaluate the work of others, train our doctoral students, and design our courses.

Feature:  Swiss Cheese and Medical Errors – Via Why We Make Mistakes -There’s no real reason to single out medical errors from all the other types of errors in the world, except for one: they kill a lot of people. According to a leading study on the matter, about 98,000 patients in the U.S. die each year from medical mistakes.

Feature: The Hierarchy Of Digital Distractions – Via Information Is Beautiful

Feature: Is Happiness Catching? – Via NYT – Founded in 1948 by the National Heart Institute, the study has followed more than 15,000 Framingham residents and their descendants, bringing them in to a doctor’s office every four years, on average, for a comprehensive physical. Each time the Bellolis are examined, every aspect of their health is quantified and collected: heart rate, weight, blood levels and more. Over the decades, the Framingham study has yielded a gold mine of information about risk factors for heart disease; it was instrumental, for instance, in identifying the positive role of “good” cholesterol.

Feature: Earlier Model of Human Brain’s Energy Usage Underestimated Its Efficiency – Via SA – A long-held model of the brain’s efficiency crumbles as researchers find that one function of mammals’ brains consumes a lot less energy than previously assumed. Now, basic measurements of neural activity–from brain energy budgets to fMRI results–may have to be reassessed – Via

1. Centralized versus decentralized control in manufacturing: lessons from social insects Via GaTech – In our increasingly competitive world, companies must become more flexible, adaptive and responsive. However, this can be difficult in the face of complexities and uncertainties such as worker absenteeism, machine breakdown, and variation in customer behavior. One group of economies that exhibits such flexibility, even in highly unpredictable environments, is social insects: colonies of ants, bees, wasps, and termites. Because insect societies 1) exhibit the flexible and adaptive behavior desired by industry, 2) achieve this flexibility without any central planning or management, and 3) must coordinate many workers, we posit that they may be an important model system for industrial logistics. We explore some of the strong parallels that exist between industrial and social insect operation supporting our claims with case studies from both areas. We highlight issues and insights from our knowledge of insect society operation that may have real practical implications in industrial logistical operation.

2. Deciding Advantageously Before Knowing the Advantageous Strategy – ViaColorado –  Deciding advantageously in a complex situation is thought to require overt reasoning on declarative knowledge, namely, on facts pertaining to premises, options for action, and outcomes of actions that embody the pertinent previous experience. An alternative possibility was investigated: that overt reasoning is preceded by a nonconscious biasing step that uses neural systems other than those that support declarative knowledge. Normal participants and patients with prefrontal damage and decision-making defects performed a gambling task in which behavioral, psychophysiological, and self-account measures were obtained in parallel. Normals began to choose advantageously before they realized which strategy worked best, whereas prefrontal patients continued to choose disadvantageously even after they knew the correct strategy. Moreover, normals began to generate anticipatory skin conductance responses (SCRs) whenever they pondered a choice that turned out to be risky, before they knew explicitly that it was a risky choice, whereas patients never developed anticipatory SCRs, although some eventually realized which choices were risky. The results suggest that, in normal individuals, nonconscious biases guide behavior before conscious knowledge does. Without the help of such biases, overt knowledge may be insufficient to ensure advantageous behavior.

3. Governance Matters VIII: Aggregate and Individual Governance Indicators, 1996-2008 – Via SSRN -This paper reports on the 2009 update of the Worldwide Governance Indicators (WGI) research project, covering 212 countries and territories and measuring six dimensions of governance between 1996 and 2008: Voice and Accountability, Political Stability and Absence of Violence/Terrorism, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption. These aggregate indicators are based on hundreds of specific and disaggregated individual variables measuring various dimensions of governance, taken from 35 data sources provided by 33 different organizations. The data reflect the views on governance of public sector, private sector and NGO experts, as well as thousands of citizen and firm survey respondents worldwide. We also explicitly report the margins of error accompanying each country estimate. These reflect the inherent difficulties in measuring governance using any kind of data. We find that even after taking margins of error into account, the WGI permit meaningful cross-country comparisons as well as monitoring progress over time.

4. The Basel Committee on Banking Supervision On Mark To Market – Via Prudent Bear – The Basel Committee on Banking Supervision last week issued new guidelines for mark-to-market accounting by banks. The new guidelines relax the requirements for using mark-to-market (MTM) in downturns, failing to address the fundamental problems that helped to get the financial system into the current mess. Mark-to-market accounting, like the credit default swap, is a novel technique that in the recent crash has proven itself a weapon of mass financial destruction. Bank regulation is being carried out in the wrong Swiss city; it needs a draconian Geneva Convention.

5. Priceless: How The Federal Reserve Bought The Economics Profession – Via Huffington Post – The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found. This dominance helps explain how, even after the Fed failed to foresee the greatest economic collapse since the Great Depression, the central bank has largely escaped criticism from academic economists. In the Fed’s thrall, the economists missed it, too.

6. Video: Meredith Whitney Says Day Of Reckogning Are Coming – Via Pragmatic Capitalist – nteresting thoughts here from Meredith Whitney.  She says the fundamentals of the economy and the banking sector haven’t changed in the last 12 months.  She is sounding far less optimistic than when she upgraded Goldman just a few months ago.

7. The retrospective gambler’s fallacy: Unlikely events, constructing the past, and multiple universes – Via JDM – The gambler’s fallacy (Tune, 1964) refers to the belief that a streak is more likely to end than chance would dictate. In
three studies, participants exhibited a retrospective gambler’s fallacy (RGF) in which an event that seems rare appears to come from a longer sequence than an event that seems more common. Study 1 demonstrates this bias for streaks, while Study 2 does so with single rare events and shows that the appearance of rarity is more important than actual rarity. Study 3 extends these findings from abstract gambling domains into real world domains to demonstrate the generalizability of the effects. The RGF follows from the law of small numbers (Tversky & Kahneman, 1971) and has many applications, from perceptions of the social world to philosophical debates about the existence of multiple universes.

8. Information Risk and Fair Value: An Examination of Equity Betas and Bid-Ask Spreads Via HBS – What is the role of fair values in the current economic crisis? The interplay between information risk—that is, uncertainty regarding valuation parameters for an underlying asset—and the reporting of financial instruments at fair value has been a subject of high-level policy debate. Finance theory suggests that information risk is reflected in firms’ equity betas and the information asymmetry component of bid-ask spreads. HBS professor Edward Riedl and doctoral candidate George Serafeim test 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. Overall, banks with higher exposures to level 3 financial assets have both higher equity betas and higher bid-ask spreads. Both results are consistent with higher levels of information risk, and thus cost of capital, for these firms.

9. Girl Brain, Boy Brain? – Via SA – The two are not the same, but new work shows just how wrong it is to assume that all gender differences are “hardwired”

10. ‘How-to’ guide shows entrepreneurs how to protect their big ideas – Via PhysOrg.com – Successful entrepreneurs turn big ideas into successful business opportunities, but how should they protect those ideas? A new paper from North Carolina State University offers a “how-to” guide on intellectual property protection, laying out the options for budding entrepreneurs as they consider how to move forward.

11.  The Laws Of Conditional Probability Are False – Via Columbia.edu – This is all standard physics. Consider the two-slit experiment–a light beam, two slits, and a screen–with y being the place on the screen that lights up. For simplicity, think of the screen as one-dimensional. So y is a continuous random variable.

12. Overcoming Short-termism: A Call for A More Responsible Approach to Investment and Business Management – Via HLS – We believe a healthy society requires healthy and responsible companies that effectively pursue long-term goals. Yet in recent years, boards, managers, shareholders with varying agendas, and regulators, all, to one degree or another, have allowed short-term considerations to overwhelm the desirable long-term growth and sustainable profit objectives of the corporation. We believe that short-term objectives have eroded faith in corporations continuing to be the foundation of the American free enterprise system, which has been, in turn, the foundation of our economy. Restoring that faith critically requires restoring a longterm focus for boards, managers, and most particularly, shareholders—if not voluntarily, then by appropriate regulation.

13. Feeling Good about Giving: The Benefits (and Costs) of Self-Interested Charitable Behavior – Via HBS – Helping others takes countless forms and springs from countless motivations, from deep-rooted empathy to a more calculated desire for public recognition. Social scientists have identified a host of ways in which charitable behavior can lead to benefits for the giver, whether economically via tax breaks, socially via signaling one’s wealth or status, or psychologically via experiencing well-being from helping. Charitable organizations have traditionally capitalized on all of these motivations for giving, with a recently emerging focus on highlighting the mood benefits of giving—the feelings of empowerment, joy, and inspiration that giving engenders. Indeed, if giving feels good, why not advertise the benefits of “self-interested giving,” allowing people to experience that good feeling while increasing contributions to charity at the same time? HBS doctoral candidate Lalin Anik, Professor Michael I. Norton, and coauthors explore whether organizations that seek to increase charitable giving by advertising the benefits of giving are making claims supported by empirical research and, most importantly, whether such claims actually increase donations.

14. The Short-Term Mortality Consequences of Income Receipt – Via NBER – Many studies find that households increase their consumption after the receipt of expected income payments, a result inconsistent with the life-cycle/permanent income hypothesis. Consumption can increase adverse health events, such as traffic accidents, heart attacks and strokes. In this paper, we examine the short-term mortality consequences of income receipt. We find that mortality increases following the arrival of monthly Social Security payments, regular wage payments for military personnel, the 2001 tax rebates, and Alaska Permanent Fund dividend payments. The increase in short-run mortality is large, potentially eliminating some of the protective benefits of additional income.

15. Top Economists Say We Should Breakup Insolvent Banks – Via Naked Capitalism – The following top economists and financial experts believe that the economy cannot recover unless the big, insolvent banks are broken up in an orderly fashion.

16. 13 more things that don’t make sense Via New Scientist

17. Intellectual property comes of age as an alternative investment – Via Economist – For those who got burned investing in bricks and mortar, it may be time for a punt on property of a more intellectual kind. Patents have traditionally been the domain of wild-haired inventors and computer geeks. These days they are just as likely to attract the interest of slick investors, from hedge funds and private-equity firms to venture capitalists and even distressed-debt funds. What was once viewed as a stodgy legal asset is fast becoming a sought-after financial one.

18. Is This Why I Went to College? – Via Business Week – I’ve run similar charts like this before. But now, with the just-released income data from the Census Bureau, we can see for the first time the entire business cycle from the peak in 2000 to the latest peak in 2008. And we can say, without fear of contradiction.

19. Larry Summers Predicts Extended Period of High Unemployment – Via Rational Walk – President Obama’s chief economic adviser has indicated that he expects unemployment to stay at elevated levels for “a few years”.  In a candid interview with Nightly Business Report (click on the links for a video or a transcript), National Economic Council Director Larry Summers did not express much hope for a quick drop in unemployment:

20. MLP Primer A Framework For Investment – Via Can Turtles Fly –  This report is an update to our second master limited partnership (MLP) primer. In this third edition, we have added new information based on questions and feedback received from investors over the past three years. Included in this edition are updated data about MLPs’ relative performance, the growth of MLPs as an asset class, and developments within the MLP sector (e.g., legislation, fund flow).

About Miguel Barbosa

I run this site.

13. September 2003 by Miguel Barbosa
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