Weekly Roundup 77: A Curated Linkfest For The Smartest People On The Web
I spend 8 hours every Sunday putting this together. If you link this roundup or plan on linking to it (or from it) kindly include a reference to SimoleonSense.com Thanks!
Weekly Joke (Via Work Joe)
An accountant is having a hard time sleeping and goes to see his doctor. “Doctor, I just can’t get to sleep at night.”
“Have you tried counting sheep?”
“That’s the problem – I make a mistake and then spend three hours trying to find it.”
Must Read Articles For All Visitors
Stephen Hawking: How to build a time machine – via Daily Mail – Hello. My name is Stephen Hawking. Physicist, cosmologist and something of a dreamer. Although I cannot move and I have to speak through a computer, in my mind I am free. Free to explore the universe and ask the big questions, such as: is time travel possible? Can we open a portal to the past or find a shortcut to the future? Can we ultimately use the laws of nature to become masters of time itself? Time travel was once considered scientific heresy. I used to avoid talking about it for fear of being labelled a crank. But these days I’m not so cautious. In fact, I’m more like the people who built Stonehenge. I’m obsessed by time. If I had a time machine I’d visit Marilyn Monroe in her prime or drop in on Galileo as he turned his telescope to the heavens. Perhaps I’d even travel to the end of the universe to find out how our whole cosmic story ends.
Free Language Lessons – via Open Culture – Learn languages for free. Features 37 foreign languages, including Spanish, French, English, Mandarin, Italian, Russian and more. Download lessons to your computer and mp3 player and you’re good to go.
Speech – Wisdom: The Highest Aim Of Life & Higher Education – via Wisdom Page – “At present there can be little doubt that the whole of mankind is in mortal danger, not because we are short of scientific and technological know-how, but because we tend to use it destructively, without wisdom. More education can help us only if it produces more wisdom.” A decade later, Nicholas Maxwell wrote a book entitled From Knowledge to Wisdom in which he makes the case that academia could greatly increase its value to society if it switched its focus from the search for knowledge to a search for wisdom. He proposed that scholars conduct what he called a “cooperative rational search for what is of most value in personal and social life.”6 Rational inquiry would continue as always, but its basic task would now be, in his words, “to help us develop wiser ways of living, wiser institutions, customs and social relations, a wiser world.”
Most Important Links of The Week
Out, damn’d decision: Hand washing helps us live with our choices – via SciAm – Shakespeare’s Lady Macbeth could never wash away the guilt of murder from her hands, but research has shown that the simple act of hand washing—or even using a wipe—can in fact help people clean their conscience of dirty deeds. A new study, published online May 6 in Science, reveals the power of hand washing to ease people’s minds about even mundane decisions.
Declining Standards in Higher Education – via Permut – In a paper entitled, “Leisure College, USA“ Philip Babcock and Mindy Marks have documented dramatic declines in study effort since 1961, from 24 down to 14 hours per week. This decline occurred at all different sorts of colleges and is not a result of students working for pay.
In Praise of Embarrassment – via NYT – Today’s idea: Embarrassment is good, an essay says; it’s a social bonding agent. That’s why you should worry about its decline.
Didier Sornette – The Financial Bubble Experiment – via PhysOrg – Professor Didier Sornette from the Department of Management, Technology and Economics (D-MTEC) at ETH Zurich is convinced that financial markets are not just random. Consequently, his Financial Crisis Observatory conducted a daring experiment to prove that you can forecast financial bubbles. Today, Professor Sornette presented the results of the experiment at a press conference.
Too Interconnected To Fail: Financial Contagion and Systemic Risk In Network Model of CDS and Other Credit Enhancement Obligations of US Banks – via Comisef.eu- Credit default swaps (CDS) which constitute up to 98% of credit derivatives have had a unique, endemic and pernicious role to play in the current financial crisis. However, there are few in depthempirical studies of the financial network interconnections among banks and between banks and nonbanks involved as CDS protection buyers and protection sellers. The ongoing problems related to technical insolvency of US commercial banks is not just confined to the so called legacy/toxic RMBS assets on balance sheets but also because of their credit risk exposures from SPVs (Special Purpose Vehicles) and the CDS markets. The dominance of a few big players in the chains of insurance and reinsurance for CDS credit risk mitigation for banks’ assets has led to the idea of “too interconnected to fail” resulting, as in the case of AIG, of having to maintain the fiction of non-failure in order to avert a credit event that can bring down the CDS pyramid and the financial system.
Our brain as a cognitive miser – where decision costs are registered. – via Deric Bownds – Human choice behavior takes account of internal decision costs: people show a tendency to avoid making decisions in ways that are computationally demanding and subjectively effortful
How Businesses Create Wealth – via NYT – This week I explore how companies create “value” and distribute it among various stakeholders. That value can be consumed on the spot to produce other goods and services or to create a consumer’s well-being. Alternatively, it can be saved and stored in the form of some asset. Freshman economics texts define an economic unit’s wealth as the market value of all of its assets minus its liabilities. Value creation and wealth are thus related.
Why You Should Take a Sabbatical – via Good – That’s how the vast majority of us would define sabbatical if pressed. Sabbaticals are typically seen as financially and practically out of reach for all those except the smartest and most fortunate. Yet the idea of an extended paid vacation strikes a chord of deep longing in our workaday hearts.
Miguel’s Weekly Favorites
Explaining the Favorite-Longshot Bias: Is it Risk-Love or Misperceptions? – via IZA – The favorite-longshot bias describes the longstanding empirical regularity that betting odds provide biased estimates of the probability of a horse winning – longshots are overbet, while favorites are underbet. Neoclassical explanations of this phenomenon focus on rational gamblers who overbet longshots due to risk-love. The competing behavioral explanations emphasize the role of misperceptions of probabilities. We provide novel empirical tests that can discriminate between these competing theories by assessing whether the models that explain gamblers’ choices in one part of their choice set (betting to win) can also rationalize decisions over a wider choice set, including compound bets in the exacta, quinella or trifecta pools. Using a new, large-scale dataset ideally suited to implement these tests we find evidence in favor of the view that misperceptions of probability drive the favorite-longshotbias, as suggested by Prospect Theory.
“Near Misses” Encourage Problem Gambling – via Problem gamblers react more intensely to “near misses” than casual gamblers, possibly spurring them on to play more, according to new research published in The Journal of Neuroscience. Researchers found that the brain region that responds to rewards by delivering a dose of the chemical dopamine was especially active in these individuals.
Death of Common Sense Will Spell the End of Free Societies. – via Psychology Today – If you think that this is an isolated incident that is otherwise unrepresentative of postmodernists, academic feminists, or deconstructionists, you’d be wrong. These anti-science movements have spent the greater part of the past four decades polluting the minds not only of bright academics but also of generations of students who were otherwise impressed by the obscurantism and fake profundity of these intellectual charlatans. The concerted efforts of several exemplary scientists have managed to slowly eviscerate the influence of anti-science movements on university campuses. For example, the physicist Alan Sokal purposely submitted a nonsensical postmodernist paper containing pseudo-randomly generated passages to Social Text, one of the elite journals in the field. After it being accepted, Sokal confessed his ruse albeit this did not seem to embarrass the editors. After all, since all meaning is relative, the editors construed his randomly generated nonsensical paper as meaningful!
The value of long-term predictions – via Die Klimazwiebel – With hindsight, it is of course easy to find such ridiculous predictions, in particular when they were issued by a single individual that could perhaps have drunk a beer too much before talking to a journalist. More interesting are forecast that were issued after a targeted brainstorming and not that long ago. The book Global 2000, written in 1980 as a sort of IPCC-like report to the President Carter contains many of predictions and scenarios, many of which are now, after only 30 years, not very accurate. Demography seems to be one of the fields with larger inertia and more tractable concerning long-term predictions. Nevertheless, Global 200 considered that the World population in 2030 would be 10 billion; in 2100 , 30 billion. These figures can be compared to the IPCC SRES scenario A2, the most pessimistic , which assumes 15 billions in 2100. The UN median scenario is today 9 billions in 2050, declining thereafter.
Do More Intelligent, More Dependable Children Live Longer? – via Bakadesuyo – The associations of childhood intelligence and dependability with adult mortality were examined in 1,181 people who were representative of the Scottish nation. Participants were born in 1936 and were followed for mortality from 1968 through early 2003. Higher intelligence and greater dependability were independent, significant predictors of lower mortality
Mathematicians Take On Luck – via WSJ – A belief in superstition and the ability to control luck is widespread, a phenomenon I explore in a Personal Journal article. A quarter of respondents to a Gallup Poll in 2005 said they believe in astrology, and only 55% firmly replied they don’t believe “that the position of the stars and planets can affect people’s lives.” A quarter of respondents also said they were very or somewhat superstitious the last time Gallup asked that question, in 1996. American lotteries racked up $60.6 billion in sales in 2008, according to the North American Association of State and Provincial Lotteries.
The Power of You. No, Wait, Others. I Meant The Power of Others – via Psychology of Games – In their book Nudge: Improving Decisions About Health, Wealth, and Happiness5 authors Richard Thaler and Cass Sunstein describe a study by sociologist Matthew Salganik and his colleagues at Princeton6 where the researchers had over 14,000 people visit a faux music download site and browse through music by previously unknown bands before deciding which songs to download. Half the subjects were asked to pick songs based just on song name, band name, and a sample.7 The other half had all that info, but could also see how many times the song had been downloaded. Psychologists are always pulling crap like this.
Can an adult tell when a child is lying? – via Bakadesuyo – Overall deception detection accuracy (51.5%) was not better than chance.
How economic sociology is different from behavioral finance – via OrgTheory – Daniel Beunza addresses the difference between economic sociology and behavioral finance in a new blog post. Daniel provides an answer to the question of what makes them different, drawing of course on his own work in the social studies of finance. Both fields are interested in how market outcomes deviate from those you’d expect given the lens of the efficient market hypothesis, but Daniel asserts that behavioral finance looks to individual biases as a source of inefficiency while economic sociology focuses on the social conditions (e.g., technology) that cause deviations in pricing.
Men are from hunt, women are from gather – via NYT – The conventional wisdom is that men have better spatial skills, while women have better verbal skills, but a new study offers a more nuanced view. Researchers tracked men and women from a rural village in Mexico as they foraged for mushrooms. Using GPS and activity monitors, the researchers found that men were less efficient–they traveled farther, went higher, and exerted more effort than women for the same amount of mushrooms. Women also collected a greater variety of mushrooms from more sites. This pattern is consistent with the theory that, during the hunter-gatherer period of human evolution, women honed spatial skills needed for gathering while men honed spatial skills needed for hunting.
Does your personality determine the way you use music? – via Bakadesuyo – open and intellectually engaged individuals, and those with higher IQ scores, tended to use music in a rational/cognitive way, while neurotic, introverted and non-conscientious individuals were all more likely to use music for emotional regulation (e.g. change or enhance moods).
The Trouble With Rankings – via WSJ – Rankings are easier to analyze when the methods and source data are revealed. Relocate America doesn’t reveal much detail about its annual rankings, beyond that visitors to the Web site nominate contenders and editors winnow the list using interviews and statistics. “It’s a proprietary system,” said Peter Meyers, who oversees rankings for Relocate America, an informational Web site that last week named Huntsville, Ala., the top place to live in the U.S. “We don’t reveal our data. We haven’t had a reason.”
Why Markets Crash – via PsyFi Blog – Oddly there’s little agreement amongst the experts about why markets crash. Although given that experts in fields without objective measures of success are generally less accurate than a drunk in a ship’s urinal during a storm that’s not really surprising. Still, if the best that the world of investment has to offer doesn’t know when stuff’s overvalued then how can we possibly hope for an end to boom and bust?
Li Lu: Berkshire Hathaway CIO Candidate? – via Street Capitalist – This past weekend was the Berkshire Hathaway (NYSE:BRK.A / BRK.B) annual shareholder meeting. At one point during the Q&A, a questioner asked Warren Buffett about the status of Berkshire’s CIO candidates. Charlie Munger remarked that one candidate who he is particular close with was up 200% in 2009 with 0 leverage. Some people think that the person Munger is referring to is Li Lu, a fund manager who turned Munger and Buffett onto BYD.
Socioeconomic Status Modifies Heritability of IQ in Young Children – via Sage – Scores on the Wechsler Intelligence Scale for Children were analyzed in a sample of 7-year-old twins from the National Collaborative Perinatal Project. A substantial proportion of the twins were raised in families living near or below the poverty level. Biometric analyses were conducted using models allowing for components attributable to the additive effects of genotype, shared environment, and non-shared environment to interact with socioeconomic status (SES) measured as a continuous variable. Results demonstrate that the proportions of IQ variance attributable to genes and environment vary nonlinearly with SES. The models suggest that in impoverished families, 60% of the variance in IQ is accounted for by the shared environment, and the contribution of genes is close to zero; in affluent families, the result is almost exactly the reverse.
The Psychological Benefits of Wilderness – via Huffington Post – But is it really possible to get the psychological benefits of wilderness through nature TV and the like. Or do we actually need to feel the crunch of the snow and smell the pine needles? And what is it exactly that nature contributes to the human experience when we do get out in the elements?
How Gesture Adds Information During Investigative Interviews – via Sage Pub – The accuracy of information obtained in forensic interviews is critically important to credibility in the legal system. Research has shown that the way interviewers frame questions influences the accuracy of witnesses’ reports. A separate body of research has shown that speakers gesture spontaneously when they talk and that these gestures can convey information not found anywhere in the speakers’ words. In our study, which joins these two literatures, we interviewed children about an event that they had witnessed. Our results demonstrate that (a) interviewers’ gestures serve as a source of information (and, at times, misinformation) that can lead witnesses to report incorrect details, and (b) the gestures witnesses spontaneously produce during interviews convey substantive information that is often not conveyed anywhere in their speech, and thus would not appear in written transcripts of the proceedings. These findings underscore the need to attend to, and document, gestures produced in investigative interviews, particularly interviews conducted with children.
The Future Of Food & It’s Supply – via LRB -What we eat is what we talk about. Red meat v. non-red, all meat v. no meat at all, GM v. organic, long haul v. local, dirty v. ‘environmental’ and so on; how we prepare a dish, how Heston Blumenthal does it. What makes these conversations possible is the abundance we’re now accustomed to: plenty is the medium in which our anxieties, our pleasures and even our ‘ethics’ thrive. So it comes as a bigger shock than the salmonella scare (Edwina Currie, 1988) or the BSE scare (John Selwyn Gummer, 1990) to hear the latest strand in the table talk: that the era of endless food is winding down.
Your Wife Does Understand You – via Overcoming Bias – In a prospective study among 199 newlywed couples, partners’ self-reported and perceived understanding and their knowledge in different domains were assessed. Understanding was independent of knowledge. Self-reported and perceived understanding predicted relationship well-being but neither type of knowledge did. Thus, subjectively feeling that one understands and is understood by one’s partner appears to be more important to relationship well-being than actually knowing and being known by one’s partner
Who’s the vital link in your social network? – via Futurity – Call them bridging individuals or critical connectors, but in social networks they’re the ones who drive the flow of information from one network to another. Now researchers have figured out a way to identify them.
Slowing down the brain may enhance creativity. – via Deric Bownds – Geddes points to work by Jung et al. that suggest an inverse correlation in human subjects between brain connectivity, reflected by the amount of the cortical myelin that sheathes nerve tracts (see the illustrations here), and creativity, assayed by a “composite creativity index.” If less myelin corresponds to slower communication between regions of the brain, this could suggest that slowing down our brains makes them more creative:
A Paper on Pain and the Power of Negative Data – via So Sci just wants to take a moment to stand up for negative data. Don’t be afraid to publish it. It deserves to see the light of day. No matter what, you’ve found something important about the world (or a tiny part of the world, studying an effect that is true under certain specific conditions. It’s still the world, dangit). Be proud of your negative data! And Sci is proud of Zen and Sakshi, for a good job, with some pretty data, and for showing something interesting, even if it’s something the world didn’t expect.
Podcast: The Death and Life of the Great American School System: How Testing and Choice Are Undermining Education – via Econotalk – Ravitch argues that the two most popular education reform movements, accountability and choice, have had unintended consequences that have done great harm to the current generation of students. She argues that the accountability and testing provisions in legislation like No Child Left Behind and similar reforms have actually corrupted the testing process, taken time away from subjects other than math and reading, and failed even to boost success in math and reading. She argues that the empirical record has provided little evidence that school choice as it has been implemented has boosted achievement. The discussion closes with a discussion of what reforms might indeed make a difference.
Art De Vany on Steroids, Baseball, and Evolutionary Fitness – via Econotalk – In the first part of the conversation, De Vany argues that there is little physiological or statistical evidence that steroid use increases home run totals in baseball. The second part of the conversation turns to De Vany’s theories of diet and exercise. De Vany argues that our diet and exercise regime should take account of our evolutionary origins, an earlier time when we ate no grains and our exercise was a mix of intense activity punctuated by much milder activity. He argues that jogging is unhealthy and that we would live longer and feel better if we followed a different exercise routine than most Americans do today.
Exclusive Picks + Financial Topics
Stiglitz -Can The Euro Be Saved – via Project Syndicate – The Greek financial crisis has put the very survival of the euro at stake. At the euro’s creation, many worried about its long-run viability. When everything went well, these worries were forgotten. But the question of how adjustments would be made if part of the eurozone were hit by a strong adverse shock lingered. Fixing the exchange rate and delegating monetary policy to the European Central Bank eliminated two primary means by which national governments stimulate their economies to avoid recession. What could replace them?
The Flaky Stock Market – via New Yorker – Having said all that, the thing that’s most striking about what happened yesterday is how quickly the market recovered. Within a matter of minutes, it was back around where it had been when the sell-off started (but still well down on the day, of course). If there’s any comfort to be drawn from yesterday, it’s that the market recognized a senseless move reasonably quickly and acted to correct it. That’s not entirely reassuring, but given the general volatility out there, it’s something.
Book Review: Nouriel Roubini’s Latest Book: Crisis Economics – via NYT -Instead of imposing a doctrinaire theory upon the facts, Mr. Roubini employs an eclectic, common-sense approach to history, picking à la carte from the thinking of such disparate economists as John Maynard Keynes and Joseph Schumpeter. “The insights of both schools can be synthesized and brought to bear on the problems we face now,” he writes. “Indeed, the successful resolution of the recent crisis depends on a pragmatic approach that takes the best of both camps, recognizing that while stimulus spending, bailouts, lender-of-last-resort support, and monetary policy may help in the short term, a necessary reckoning must take place over the longer term in order to achieve a return to prosperity.”
Oil Spill Insights from a Retired Manager of an Offshore Underwater Service Company – via Oil Drum – I have been reading the various reports from the media for the last few days and am distressed by the amount of misinformation that is being provided to the public. In response, I have put together some rough calculations and have tried to develop analogies that are understandable to laymen regarding what has happened and what is/can be done. I have some relevant background, as I was in the offshore industry, primarily in the underwater service side for many years, so I am familiar with diving and ROV operations. I have also been involved in designing and building an oil capture and recovery dome (actually a pyramid) in much shallower water. I also was involved in the Exxon Valdez cleanup and environmental surveys, several years after that incident, among other things.
Bear Stearns: The ‘Immaculate Calamity’ – via Daily Capitalist – The Financial Crisis Inquiry Commission (FCIC) had the former execs of Bear Stearns under the hot lights on Wednesday. It seems it wasn’t their fault, they said. Which caused Chairperson Phil Angelides to quip that the whole thing must have been an “immaculate calamity.” Great line and it’s been going around the blogosphere like a virus.
How computers have transformed the stock market – Via Finance Professor – “Years ago, floor traders matched buyers and sellers. It’s that old Eddie Murphy movie ‘Trading Places,’ where men jockeyed for floor space and used frantic hand gestures to complete transactions. But today, computers dominate much quieter trading floors. High- frequency trading — rapid, automated buying and selling — accounts for 50% to 75% of all daily trading volume,….”
Contagion in financial networks – via Bank of England -This paper models two key channels of contagion in financial systems. The primary focus is on how losses may potentially spread via the complex network of direct counterparty exposures following an initial default. But the knock-on effects of distress at some financial institutions on asset prices can force other financial entities to write down the value of their assets, and we also model the potential for this effect to trigger further rounds of default. Contagion due to the direct interlinkages of interbank claims and obligations may thus be reinforced by indirect contagion on the asset side of the balance sheet particularly when the market for key financial system assets is illiquid.
Video: Understanding Counterparty Risk -Europe is teetering on the edge of a credit crisis, and markets all around the world are tumbling as investors worry about contagion.
The Effect of Corporate Governance on Shareholder Value – via Harvard – We show that, on average, the market reacts to the passage of a governance-related shareholder proposal with positive excess returns around 1.3% on the day of the vote. This reflects between a 2.7% and a 2.8% increase in market value. We identify some heterogeneity of this reaction, with the effect being more pronounced among firms with concentrated ownership, high pre-existing anti-takeover provisions and high R&D expenditures. Firm behavior also changes with the new governance structure: dropping anti-takeover provisions leads to a more conservative investment policy, with fewer acquisitions. Finally, the long-term performance of the firm, measured as Tobin´s Q or book-to-market ratios, improves after two or three years when anti-takeover provisions are dropped; but we find modest results with respect to the return on equity.
Short Selling in Initial Public Offerings – via Harvard – Short sale constraints in the aftermarket of initial public offerings (IPOs) are often used to explain short-term underpricing that is subsequently reversed. This paper shows that short selling is integral to the aftermarket and is higher in IPOs with greater underpricing. Perceived restrictions on borrowing shares are not systematically circumvented by “naked” short selling. Short sellers, on average, do not appear to earn abnormal profits in the near term and our findings are not driven by market makers. Short selling in IPOs is not as constrained as suggested by the literature, implying that other factors may be responsible for underpricing.
Herding of Institutional Traders – via berlin- This paper sheds new light on herding of institutional investors by using a unique and superior database that identifies every transaction of financial institutions. First, the analysis reveals herding behavior of institutions. Second, the replication of the analysis with low-frequent and anonymous transaction data, on which the bulk of literature is based, indicates an overestimation of herding by previous studies. Third, our results suggest that herding by large financial institutions is not intentional but results from sharing the same preference and investment style. Fourth, a panel analysis shows that herding on the sell side in stocks is positively related to past returns and past volatility while herding on the buy side is negatively related to past returns. In contrast to the literature, this indicates that large financial institutions do not show positive feedback strategies.
What Drives Levereage & LBO’s – via Vilerick – This paper examines leverage in European private equity led LBOs. We use a unique, selfconstructed sample of 126 European private equity (PE) sponsored buyouts completed between June 2000 and June 2007. We find that determinants derived from classical capital structure theories do not explain leverage in LBOs, while they do drive leverage in a control
group of comparable public firms. Rather, we document that leverage levels in LBOs are related to the prevailing conditions in the debt market. In addition, our results indicate that reputed private equity sponsors use more debt and that secondary buyouts have higher leverage levels.
Academic Research Worth Reading
Beyond Guilt in the Housing Crisis: The Morality of Strategic Default – via SSRN – Responding to those who argue that homeowners who strategically default on their mortgages are immoral and socially irresponsible, this article argues that breaching a mortgage contract is not only morally acceptable, it may be the most responsible course of action when necessary to fulfill more important obligations to one’s family.
Ownership structure and incentives to stock repurchase – via Hermes IR – This paper examines whether and how ownership structure affects stock repurchase by looking at the incentives to adjust capital structure and signal undervaluation through repurchasing. We find that a strong monitoring structure motivates the adoption of an optimal capital structure with which firms maximize corporate value. We also find that firms with a strong monitoring structure tend to initiate a repurchase plan as a value signal; on the other hand, entrenched firms are more sensitive to market performance and tend to have more stock repurchase if they are undervalued. Additionally, we find by looking at the motivation for sending a value-signal that a U-shaped relationship exists between stock repurchase and ownership structure.
The Origins of the Bilbao Stock Exchange – via Archivo – This paper presents first results of our more recent research on the Bilbao stock exchange from its foundation in 1890 up to the Spanish civil war. We examine the stock market’s origins and follow its evolution over the first half century of existence. To this end we introduce some of the stock exchange indexes we have calculated for Bilbao and put them into comparative perspective with the existing series on general economic and industrial activity and the indexes for other Spanish exchanges for the period considered. Finally, we contrast the degree of market integration associated to the existing Spanish exchange indexes. We find strong support for considering the Bilbao Stock Exchange index an industrial index and little evidence of capital market integration between the principal Spanish exchanges before the 1920s.
The 2008 Financial Crisis & Taxation Policy – via Eu- The 2008 financial crisis is the worst economic crisis since the Great Depression of 1929. It has been characterised by a housing bubble in a context of rapid credit expansion, high risk-taking and exacerbated financial leverage, leading to deleveraging and credit crunch when the bubble burst. This paper discusses the interactions between tax policy and the financial crisis. In particular, it reviews the existing evidence on the links between taxes and many characteristics of the crisis. Finally, it examines some possible future tax options to prevent such crises.
How Implicit Beliefs Influence Trust Recovery – via Sage Pub – After a trust violation, some people are quick to forgive, whereas others never trust again. In this report, we identify a key characteristic that moderates trust recovery: implicit beliefs of moral character. Individuals who believe that moral character can change over time (incremental beliefs) are more likely to trust their counterpart following an apology and trustworthy behavior than are individuals who believe that moral character cannot change (entity beliefs). We demonstrate that a simple but powerful message can induce either entity or incremental beliefs about moral character.
Composite Prospect Theory: A proposal to combine prospect theory and cumulative prospect theory – via le.ac.uk – Evidence shows that (i) people overweight low probabilities and underweight high probabilities, but (ii) ignore events of extremely low probability and treat extremely high probability events as certain. The main alternative decision theories, rank dependent utility (RDU) and cumulative prospect theory (CP) incorporate (i) but not (ii). By contrast, prospect theory (PT) addresses (i) and (ii) by proposing an editing phase that eliminates extremely low probability events, followed by a decision phase that only makes a choice from among the remaining alternatives. However, PT allows for the choice of stochastically dominated options, even when such dominance is obvious. We propose to combine PT and CP into composite cumulative prospect theory (CCP). CCP combines the editing and decision phases of PT into one phase and does not allow for the choice of stochastically dominated options. This, we believe, provides the best available alternative among decision theories of risk at the moment. As illustrative examples, we also show that CCP allows us to resolve three paradoxes: the insurance paradox, the Becker paradox and the St. Petersburg paradox.
Collateral, Netting and Systemic Risk in the OTC Derivatives Market – via IMF – To mitigate systemic risk, some regulators have advocated the greater use of centralized counterparties (CCPs) to clear Over-The-Counter (OTC) derivatives trades. Regulators should becognizant that large banks active in the OTC derivatives market do not hold collateral against all the positions in their trading book and the paper proves an estimate of this under-collateralization. Whatever collateral is held by banks is allowed to be rehypothecated (or re-used) to others. Since CCPs would require all positions to have collateral against them, off-loading a significant portion of OTC derivatives transactions to central counterparties (CCPs) would require large increases in posted collateral, possibly requiring large banks to raise more capital. These costs suggest that most large banks will be reluctant to offload their positions to CCPs, and the paper proposes an appropriate capital levy on remaining positions to encourage the transition.
Other Great Reads
Good Bacteria Eat Bad Greenhouse Gas – via NSF – With NSF support, Amy Rosenzweig’s group seeks to understand the cellular machinery that enable certain bacteria to leech copper out of the environment and metabolize methane
Free Book: Why We Read Fiction – via Ohio State Press
Words to the wise: Experts define wisdom – via PhysOrg – These words would seem to describe at least some of the universal traits attributed to wisdom, each of them broadly recognized and valued. In fact, there is no enduring, consistent definition of what it means exactly to be wise. It is a virtue widely treasured but essentially unexplained, a timeless subject only now attracting rigorous, scientific scrutiny.
How dark chocolate protects the brain – via Futurity – It’s not the distinctive chocolate aroma or the luscious bittersweet taste. Researchers say it’s a compound in dark chocolate that appears to limit stroke damage by amplifying brain signals that protect nerve cells.
Podcast: Munger on Love, Money, Profits, and Non-profits – via Econ Talk – Mike Munger of Duke University talks with EconTalk host Russ Roberts about the world of profit, money, love, gifts, and incentives. What motivates people, self-interest or altruism? Both obviously. But how do these forces interact with each other? Does relying on one always provide a stronger incentive than the other? Do charities, for-profit businesses or government agencies do a better job providing a good or service? Munger and Roberts have a wide-ranging discussion across these issues including a section where they discuss whether Christmas gift-giving and gift-giving in general is inefficient.