I spend 8 hours every Sunday putting this together. If you like this roundup or plan on linking to it kindly include a reference to SimoleonSense Thanks!
Weekly Joke (Via Jstivers)
Newlan’s Truism: An “acceptable” level of unemployment means that the government economist to whom it is acceptable still has a job.
Must Read Article For All Visitors (Semi excerpted)
The Origins of the Next Crisis – via Naked Capitalism – William White, the former chief economist at the Bank of International Settlements (BIS) gave an important speech at George Soros’ Inaugural Institute of New Economic Thinking (INET) conference in Cambridge. While everyone is casting about for the one magic bullet solution which would have prevented this and future crises, he placed the blame for the credit crisis on short-termism, pointing the finger most notably at economists and their models. White said that the models almost all economists use are ‘flow’ models which leave no room for ’stocks’ and thus completely miss unsustainable secular trends.
“So, you have economists using flow models that completely disregard debt. This gives intellectual cover to the asymmetric monetary policy of flooding the system with money every time the economy hits a rough patch. As a result, private sector agents increase debt levels dramatically across the board. All of this continues for a generation because of a secular decline in interest rates which allows the servicing of ever greater debt burdens.”
There are four ways to reduce real debt burdens:
1. by paying down debts via accumulated savings.
2. by inflating away the value of money.
3. by reneging in part or full on the promise to repay by defaulting
4. by reneging in part on the promise to repay through debt forgiveness
Most Important Links of The Week
Practice, Our Brains, Inner strength, Athletes & Success - via Mind Hacks – Discover Magazine has an excellent piece by Carl Zimmer on the brains of elite athletes and how they have adapted with practice to process movement and the body differently.
Measuring Worth: Relative Value of US Dollars – via Reflections On Value Investing - Comparing & Contrasting the Nominal vs Real value of goods & services
Singapore Prime Minister Lee Hsien Loong on Charlie Rose – via Value Investing World
The relationship between social leisure and life satisfaction - via University of Rome – Social leisure is generally found to be positively correlated with life satisfaction in the empirical literature. We ask if this association captures a genuine causal effect of this good on subjective wellbeing by using panel data from the GSOEP. Fixed effect estimation techniques take care of some but not all of the endogeneity issues involved: we then have recourse to instrumental variables estimation. Our identification strategy exploits the change in social leisure brought about by retirement: more specifically we instrument social leisure with the ratio of retired in the sample by year and geographic location (East vs West Germany). Our results show a gendered difference in the impact of this ratio on social life. Our final message is that social leisure has a positive causal effect on life satisfaction, a finding with potentially important policy implications.
What Exactly Is Legal Tender - via Ideas Repec – The legal foundation of the monetary system is the law of legal tender. The “legal tender” concept is used in models to describe almost anything except for what it really means in actual laws. Such errors prevent an accurate evaluation of the importance of this legal status. This note explains in simple terms what “legal tender” really means.
How to Learn Something for Nothing – via NYT – Thousands of pieces of free educational material — videos and podcasts of lectures, syllabuses, entire textbooks — have been posted in the name of the open courseware movement. But how to make sense of it all? Businesses, social entrepreneurs and “edupunks,” envisioning a tuition-free world untethered by classrooms, have created Web sites to help navigate the mind-boggling volume of content. Some sites tweak traditional pedagogy; others aggregate, Hulu-style.
Use heuristics to shed unwanted pounds - via Boston – Is willpower failing you in your efforts to get in shape? Wray Herbert, a columnist for True/Slant, suggests harnessing some cognitive quirks that scientists have identified in recent years to shake you out of regretful behavioral patterns. These cognitive quirks usually work against us, but they can also be, Herbert argues, forces for change.
New Research Finds Bureaucracy Linked to a Nation’s Growth - via NSF – A state’s collective organizational structure, procedures and protocols develop hand-in-hand with “predatory” expansion
Jim Grant’s U.S. Treasury Prospectus - via Above Average Odds – Below is the fifth in Grant’s Interest Rate Observer Prospectus Series, and is an absolute must read for those concerned about this country’s current fiscal predicament.
Harvard Business Review: The Five Competitive Forces That Shape Strategy- via Reflections On value Investing – With prodding and assistance from Harvard Business School Professor Jan Rivkin and longtime colleague Joan Magretta, Porter here reaffirms, updates, and extends the classic work. He also addresses common misunderstandings, provides practical guidance for users of the framework, and offers a deeper view of its implications for strategy today.
After Getting Bailed Out By American Taxpayers, General Electric Pays ZERO U.S. Taxes, Pretending that All of Its Profits are Overseas – via Naked Capitalism – General Electric got bailed out by American taxpayers. Specifically, it was given $139 billion in FDIC guarantees and support by the Federal Reserve for it’s commercial paper (see this). So you’d think that GE would return the favor by paying American taxes, right? Wrong. GE paid no U.S. taxes for 2009.
Satyajit Das: New & Old Greek Lessons - via Naked Capitalism – The language is reminiscent of the start of the sub-prime mortgage problems. The problem is “small” and “contained”. Despite the “solution” announced by the European Union (”EU”), the problems of Greece have deepened. Greek borrowing costs have increased sharply. Greece now must pay around 4.00 % p.a. more for their debt than Germany, the most creditworthy EU borrower. That is, if anyone will lend to them. This is a rise of over 1.00% p.a. over the last few days and roughly a doubling of the margin since January 2010. Recent Greek debt issues are now deep under water. The most recent attempt by Greece to raise money was substantially under subscribed, proving almost as popular as Ebola fever and. This combined with the day-to-day volatility of the risk margin for Greece makes it difficult for traders to price and investors to commit to purchases of Greek securities.
Miguel’s Weekly Favorites
Rick Bookstaber: The Accidental Egalitarian: Technology and the Distribution of Income - via Rick Bookstaber- This month’s Institutional Investor AR magazine came out with its list of the highest compensated hedge fund managers. I already have expressed my doubts about the accuracy of their approach, though you can adjust the numbers by an order of magnitude and it is still off the charts. But for all that is being written about hedge fund managers and their poorer cousins, the banking elite, about the expanding income gap, and about the new frugality and the changing American dream, the differences between the very rich and the rest of us are shrinking.
Take the “Dope” Out of Your Finances - Finance Professor – Neuroscientists like Dr. Brian Knutson, a professor at Stanford University, have found that your dopamine levels become elevated when you anticipate a large, uncertain financial gain. Scientific studies have also shown that the more surprised you are by a financial gain the bigger your dopamine rush.
How have young people’s sexual behavior and attitudes changed over the years? - via Bakadesuyo – Attitudes toward premarital intercourse became more lenient, with approval increasing from 12% to 73% among young women and from 40% to 79% among young men. Feelings of sexual guilt decreased. The correlation between attitudes and behaviors was stronger among young women. These data support theories positing that culture has a larger effect on women’s sexuality.
Botox may diminish the experience of emotion - via Science Blos – Botox, which is used by millions of people every year to reduce wrinkles and frown lines on the forehead, works by paralyzing the muscles involved in producing facial expressions. A study due to be published in the journal Psychological Science suggests that by doing so, it impairs the ability to process the emotional content of language, and may diminish the quality of emotional experiences.
The deep roots of inequality - via MIT - economics student’s study of Peru shows how practices from hundreds of years ago can influence prosperity today. ‘Pathbreaking,’ says a Harvard economist.
The Hidden Costs of Extra-Value Meals – via NewsWeek – See Golden Arches, save less? No, not because we shell out $7.99 for meals we could make at home for $3, but because of how our environment subliminally affects our behavior.
Passwords we love - via Boston Globe – Imperva, a data security company based in Redwood Shores, Calif., analyzed 32 million user passwords that were posted online as the result of a December security breach at RockYou, which makes apps for social networking websites. A flaw in RockYou’s system allowed a hacker to gain access to the passwords.
Our Human: Conspiracy Capacities- via Overcoming Bias- Huge brains helped primates fight via coalition politics, and language let human foragers enforce egalitarian norms against such fights. If neutrally applied, such norms should have cut the gains to huge brains, yet we had the biggest brains. This suggests hierarchy and coalition politics continued via covert rule bending. Support for this hypothesis comes from our highly evolved capacities for covert coalitions:
Christopher Hitchens re-reads Orwell’s Animal Farm- Via Guardian – Still outlawed by regimes around the world, Animal Farm has always been political dynamite – so much so, it was nearly never published. Christopher Hitchens on George Orwell’s timeless, transcendent ‘fairy story’
Power Increases Hypocrisy : Moralizing in Reasoning, Immorality in Behavior – via APS- In five studies, we explored whether power increases moral hypocrisy (i.e., imposing strict moral standards on other people
but practicing less strict moral behavior oneself). In Experiment 1, compared with the powerless, the powerful condemned other people’s cheating more, but also cheated more themselves. In Experiments 2 through 4, the powerful were more strict in judging other people’s moral transgressions than in judging their own transgressions. A final study found that the effect of power on moral hypocrisy depends on the legitimacy of the power: When power was illegitimate, the moral-hypocrisy effect was reversed, with the illegitimately powerful becoming stricter in judging their own behavior than in judging other people’s behavior. This pattern, which might be dubbed hypercrisy, was also found among low-power participants in Experiments 3 and 4. We discuss how patterns of hypocrisy and hypercrisy among the powerful and powerless can help perpetuate social inequality.
The Prime Ultimatum - via Leigh Cadwell- The experiment combines two really interesting cognitive principles. It’s an example of the ultimatum game, a game theory experiment which measures our attitude to fairness. In a rational world, the person making the split should offer their partner just £1 (or even £0) and the partner would have no reason to refuse. In the real world, people do tend to refuse offers less than about £3, and knowing this, the offerer tends to offer an average of about £4.40, with a strong peak on the even split, £5.
Exclusive Picks + Financial Topics
Joel Greenblatt on Forbes: Testing The Formula That Beats The Markets - via Forbes – This is what I wrote the book about five years ago. It follows the principles I’ve used in investing since I started my firm in 1985, and I’ve been teaching at Columbia for the past 14 years and these are the principles I’ve used to teach. About seven or eight years ago, we set out to test it. The two things I look at are earnings yield, which is how cheap is the company. A simple earnings yield would be the inverse of the P/E ratio or earnings to price. So, in other words, if something earned $2 and it cost you $10 a share, you’d have a 20% earnings yield.
Goldman-plated excuses - via Interfluidity – My first reaction, upon reading about the SEC’s complaint against Goldman Sachs was to shrug. Basically, the SEC claims that Goldman failed to disclose a conflict of interest in a deal the firm arranged, that perhaps Goldman even misdirected and misimplied and failed to correct impressions that were untrue but helpful in getting the deal done. If that’s the worst the SEC could dig up, I thought, there’s way too much that’s legal. Had you asked me, early Friday afternoon, what would happen, I would have pointed to the “global settlement” seven years ago. Then as now, investment banks were caught fibbing to keep the deal flow going (then via equity analysts who hyped stocks they privately did not admire). The settlement got a lot of press, the banks were slapped with fines that sounded big but didn’t matter, promises were made about “chinese walls” and stuff, nothing much changed.
In Markets Bad Stuff Happens – Frequently - via PsyFi Blog – We’ve seen before that investors are generally attracted to a good story and tend to shy away from the hard problems associated with analysing numbers. Worse, even if people do look at the numbers they tend to be swamped by information to the extent of not knowing what’s important and what’s not. Although generally this is only obvious in retrospect, anyway. However, there are strong suggestions that our inclination to follow a good and particularly interesting story isn’t simply stuff that happens. It looks as though this is built into our processing centres and is a driving force behind a lot of what we do on an everyday basis. We’re simply misapplying the lessons of life.
New Real Estate Regulations From China’s State Council That May Bite Still No Property Tax - via Sinocism – Phoenix News is reporting that China’s State Council has issued a new circular outlining new policies and regulations designed to cool off the property markets (State Council Document Number 10). They will probably make Jim Chanos happy, at least in the short-term, though longer-term these measures may help reign in the growing bubble in time to manage a softer landing.
The US-Sino currency dispute: Introducing a new eBook – via Voxeu- Today Vox posts a new eBook “The US-Sino currency dispute: New insights from economics, politics, and law” that gathers 28 short essays written by 33 authors from around the world. The eBook provides the best available economic, legal, political, and geopolitical thinking on the confrontation, as well as on the causes and likely consequences of the dispute.
Why recessions aren’t all about job losses - via Undercover Economist – Imagine a recession on Planet Vulcan. Thanks to weak demand, an able and hard-working Vulcan subordinate is simply not doing enough business to justify his salary.
Do Investors Look Beyond Insured Triple-A Rating? - via My Investing Notebook – Due to the prevalence of municipal bond insurance, investors are increasingly relying on the underlying ratings of insured bonds in gauging the relative riskiness of these bonds.
On The Shipping Industry - via Corner of FFH & BRK -
SHILLER: HOME PRICES WILL DOUBLE DIP AND STOCKS ARE EXPENSIVE - via Pragmatic Capitalist – Robert Shiller is out with his updated PE ratio and stocks are once again creeping into the very expensive zone:
Advanced Distressed Debt Concept: Reinstatement - via Distressed Debt Investment – Grant, a member of the Distressed Debt Investors Club, pens a piece on the advanced distressed debt concept of pre-petition debt reinstatement. Enjoy!Some companies currently experiencing financial distress raised large amounts of debt capital on significantly easier terms during the last decade’s “credit bubble” than they could obtain today.
Some Further Comments on the Leverage Cycle & Asset Prices - via Rajiv Sethi – One of the key features of the Geanakoplos model is that the same set of physical assets can serve as collateral multiple times for loans of different maturities. For example, housing serves as collateral for long-term loans in the mortgage market, while the loans themselves (after securitization and tranching) can serve as collateral for short-term borrowing in the repo market. Geanakoplos shows that the extent of leverage in the long-term market will endogenously be such as to allow for a positive probability of default, and is interested in the effects of bad news in this market (interpreted as an increased likelihood of eventual default) on the market for short-term loans backed by financial rather than physical assets.
How Do You Avoid Falling into a Value Trap? - via Investor Questions Podcast -
Currency Choices in Company Valuation - via Damodaran – I am currently in Bogota, Colombia, doing a seminar in risk. One of the topics that came up yesterday was about the choice of currency to do a valuation in, and how it affects your inputs. In particular, the question that I was asked was whether an analyst should value a Colombian company in Colombian pesos or US dollars, and the implications of this choice. Here is how I responded:
Michael B. Rapps on WGI Heavy Minerals Inc (TSE:WG) - via Greenbackd -WGI Heavy Minerals (“WGI”) operates two businesses: (i) the mining and sale of abrasive minerals; and (ii) the sale of aftermarket replacement parts for ultrahigh pressure waterjet machine cutting systems. WGI trades at $0.40/share on the Toronto Stock Exchange under the symbol “WG”. There are 23,617,610 shares outstanding for a market cap of approximately $9.4 million. I believe the upside in WGI’s share price is at least +65% and the downside is at least +22%.
Enough Magnetar, now on to Paulson, Goldman and the SEC - via Information Processing – See Felix Salmon for a discussion of the SEC complaint against Goldman. They allege that Goldman violated its fiducial responsibilities in marketing a synthetic CDO called ABACUS. The SEC allegations are very similar to the story told by ProPublica and This American Life, with John Paulson’s fund playing the role of Magnetar.
When I Will Sell A Business - via Fallible Investor – I have this rule because once a business’s price equals my estimate of its intrinsic value there is no ‘margin of safety’ in owning it.
What are Emotions? - via Psychology Today – Philosophers and psychologists have long debated the nature of emotions such as happiness. Are they states of supernatural souls, cognitive judgments about goal satisfaction, or perceptions of physiological changes? Advances in neuroscience suggest how brains generate emotions through a combination of cognitive appraisal and bodily perception.
How Mathematics Might Have Caused the Financial Crisis – via Economists View -
Goldman Sachs Flipbook for Abacus – via Paul kedrosky
The Deeply Captured Situation of the Economic Crisis – via Situationist – “How did Big Finance grow so powerful that its hijinks nearly brought down the global economy – and what hope is there for real reform with Washington politicians on Wall Street’s payroll? Bill Moyers talks with authors Simon Johnson and James Kwak, two of the nation’s most respected economic experts and authors of the new book 13 Bankers: The Wall Street Takeover and the Next Financial Meltodown.”
How Does Competition Impact Bank Risk-Taking? – via Bank of Spain – A common assumption in the academic literature is that excessive competition among banks could threaten the solvency of particular institutions and hamper the stability of the entire banking system at an aggregate level. Competition arising from the liberalization of the banking system should erode the value of a bank’s charter by reducing monopoly rents and encourage it to pursue riskier policies in an attempt to maintain its former profits, as per Keeley (1990). Examples of riskier policies are taking on more credit risk in the loan portfolio, lowering capital levels, or both. These riskier policies should also increase the probability of banks experiencing higher non-performing loan ratios and correspondingly more bank bankruptcies. In contrast, restrained competition should encourage banks to protect their higher franchise values by pursuing safer strategies that contribute to the stability of the whole banking system. This franchise value paradigm has been widely supported both theoretically and empirically in the banking literature.
Affective Decision-Making: A Theory of Optimism-Bias - via Cowles – Optimism-bias is inconsistent with the independence of decision weights and payoffs found in models of choice under risk, such as expected utility theory and prospect theory. Hence, to explain the evidence suggesting that agents are optimistically biased, we propose an alternative model of risky choice, affective decision-making, where decision weights of which we label affective or perceived risk are endogenized
Measuring the Willingness to Pay to Avoid Guilt: Estimation Using Equilibrium and Stated Belief Models - IZA – We estimate structural models of guilt aversion to measure the population level of willingness to pay (WTP) to avoid feeling guilt by letting down another player. We compare estimates of WTP under the assumption that higher-order beliefs are in equilibrium (i.e. consistent with the choice distribution) with models estimated using stated beliefs which relax the equilibrium requirement. We estimate WTP in the later case by allowing stated beliefs to be correlated with guilt aversion, thus controlling for a possible source of a consensus effect. All models are estimated using data from an experiment of proposal and response conducted with a
large and representative sample of the Dutch population. Our range of estimates suggests that responders are willing to pay between 0.40 and 0.80 Euro to avoid letting down proposers by 1 Euro. Furthermore, we find that WTP estimated using stated beliefs is substantially overestimated (by a factor of two) when correlation between preferences and beliefs is not controlled for. Finally, we find no evidence that WTP is significantly related to the observable socio-economic characteristics of players.
A New Global Shock Absorber - via Columbia – The dramatic increase in multinational production has realigned aggregate risk on a global scale, buffering firms and nations from shocks.
How causal-impact judgments depend on the strength of a cause - via EJSP – Causal impact is maximal when weak causes have strong effects. Do people understand this logic when they assess causal impact? In four experiments, participants judged the causal impact of strong or weak dietary treatments leading to strong or weak health effects in fictitious health studies. Rather than following the ratio of effect strength to treatment strength, judgments were influenced by three aspects of the detectability of a cause-effect relation. First, because detectability depends on the effect being strong more than on the cause being subtle, causal judgments were mainly determined by effect strength, whereas the strength of the causal treatment necessary to induce an effect was often neglected. Second, if causal input was not ignored, judgments increased when the maximal covariation between a strong causal treatment and a strong effect rendered the causal link most detectable. Or, third, causal judgments increased when a plausible causal schema facilitated detection. Consistent with sampling models of judgment and decision making, causal-impact ratings were driven by an uncritical assessment of a detectable difference in a study sample. However, ratings were insensitive to the logical implications of the underlying causal treatment that was necessary to induce a detectable effect.
Bankers’ conflicts of interest in the interwar years: Lessons for today’s regulators - via Voxeu- The global crisis is frequently compared to the Great Depression and the interwar debt crises. This column argues that, contrary to prevailing opinion, the interwar debt crisis had little to do with bankers’ conflicts of interest – intermediaries were in fact careful in selecting and placing sovereign bonds. Then, as now, public opinion may not be the best guide to policy.
Other Great Reads
How to Get In: Harvard Business School - via Us News & World Report – We posed questions to admissions officials at Harvard Business School regarding the application process, what they look for in applicants and what sets their school apart.
Get at least 12 observations before making a confidence interval? - via Decision Science News – The first example in the book is titled “use at least 12 observations in constructing a confidence interval”. When people first hear this they think, nonsense, there’s nothing magic about the number twelve. And then they think that confidence interval sizes have to do with the square root of the sample size, but that still doesn’t do it.
Why Do Offices Get Messy - via Bakadesuyo – When academic staff members and postgraduate students observe that others violated the social norm of keeping the common room clean the probability of littering increases ceteris paribus by around 40 percent.
The Joy of –ext Sexting, chexting, drexting…the rise of a salacious suffix - via Boson Globe – As even the most sports-averse people know, Tiger Woods returned to golf this month, which was an excuse, however flimsy, for people to revisit the scandal that led to his hiatus from the sport in the first place. The Tiger Woods story has plenty of head-scratching details (including the irony of Billy Payne, the chairman of the Augusta National Golf Club — which does not allow women as members — lecturing Woods about his inappropriate behavior) but has been relatively short on iconic vocabulary, with one notable exception: chexting.
How to catch a baseball during batting practice using game theory – Youtube video – via Mind Your Decisions – Check out his four-minute Youtube video with suggestions on how to improve your odds. I love how he analyzes the equilibrium using math and then uses a bit of psychology to give his game theoretic suggestion.