Weekly Roundup 78: A Curated Linkfest For The Smartest People On The Web
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Weekly Cartoon (via Cartoon Stock )
Weekly Joke (Via Obliquity By John Kay )
“A well known joke tells of the economist in the wilderness who, when he sees a bear approaching, pulls out his computer and begins to calculate an optima strategy. His colleague, appalled, says: “we don’t have time for that!” “Don’t Worry”, replies the economist smugly, “the bear has to work out an optimal strategy too.”.
Must Reads For All Visitors
Video: Bill Gates @ MIT – Giving Back: Finding the Best Way to Make a Difference – The world’s most intractable problems might be cracked if more of our “brightest minds” could be tempted to work on them, asserts Bill Gates. Too many graduates of top universities like MIT find it infinitely more satisfying to deal in derivatives, he says, or lucrative areas of medical science like “baldness drugs.” Gates, in his full-time job as foundation head, is pondering what might happen if “all that IQ and talent could be shifted to some degree” into the areas he’s deeply engaged in, such as global health and education.
Video: Ted Talk: Viktor Frankl: Youth In Search Of Meaning – H/T Joe Koster! – One of Charlie Munger’s Favorite Authors
Super Hedge Fund Manager: Ray Dalio’s Recepie For Success…(very wise words) – h/t Joe Koster@ Value Investing World – Principles are concepts that can be applied over and over again in similar circumstances as distinct from narrow answers to specific questions. Every game has principles that successful players master to achieve winning results. So does life. Principles are ways of successfully dealing with the laws of nature or the laws of life. Those who understand more of them and understand them well know how to interact with the world more effectively than those who know fewer of them or know them less well. Different principles apply to different aspects of life – e.g., there are “skiing principles” for skiing, “parenting principles” for parenting, “management principles” for managing, “investment principles” for investing, etc. – and there are over-arching “life principles” that influence our approaches to all things. And, of course, different people subscribe to different principles that they believe work best.
New Book : How I Caused the Credit Crunch: An Insider’s Story of the Financial Meltdown – via Information Processing – This book is a novelization of the events surrounding the credit crisis, as viewed by a junior banker on the rise. In addition to simple introductions to securitization, CDOs, CDS, SIVs, etc. (including figures that might have been drawn on Cristal-stained cocktail napkins) there is plenty of insight into the psychology of bankers and the sometimes tawdry client-banker relationship on the sell side. Amazon: US edition , UK edition (more reviews).
What everyday things tell us about the universe – via Information Processing -An atom, according to our theory of matter, is a tiny, localised thing like a microscopic billiard ball. Light, on the other hand, is a spread-out thing like a ripple on a pond. Take visible light. A convenient measure of its size is its wavelength – the distance it travels during a complete up-and-down oscillation, or double the separation of successive wave crests. The wavelength of visible light is about 5000 times bigger than atom. Imagine you have a matchbox. You open it and out drives a 40-tonne truck. Or say a 40-tonne truck is driving towards you, you open your matchbox and the truck disappears inside. Ridiculous? But this is precisely the paradox that exists at the interface where light meets matter
John Allen Paulous Our Obsession With Measuring Things: And How We Can’t Always Count On The Numbers – via NYT – In the realm of public policy, we live in an age of numbers. To hold teachers accountable, we examine their students’ test scores. To improve medical care, we quantify the effectiveness of different treatments. There is much to be said for such efforts, which are often backed by cutting-edge reformers. But do wehold an outsize belief in our ability to gauge complex phenomena, measure outcomes and come up with compelling numerical evidence? A well-known quotation usually attributed to Einstein is “Not everything that can be counted counts, and not everything that counts can be counted.” I’d amend it to a less eloquent, more prosaic statement: Unless we know how things are counted, we don’t know if it’s wise to count on the numbers.
Elizabeth Warren-Twelve things the world should toss out, Fine Print Is One Of Them – All of life is in the fine print — and that’s precisely the problem. Contract law is based on the idea that two people can come together and strike a deal, knowing that the courts will enforce their agreement if something goes wrong. I teach contract law, and I firmly believe that it is the foundation of our free-market economy and critical to personal liberty. My proposal is simple: no more fine print. If you can’t explain something in simple, straightforward terms, it shouldn’t be part of the agreement.
Miguel’s Weekly Favorites
Are we tricked by easy math when it comes to prices? – via Bakadesuyo – Consumers’ judgments of the magnitude of numerical differences are influenced by the ease of mental computations. The results from a set of experiments show that ease of computation can affect judgments of the magnitude of price differences, discount magnitudes, and brand choices. Participants seem to believe that it is easier to judge the size of a larger difference than that of a smaller difference. In the absence of appropriate corrective steps, this naive belief can lead to systematic biases in judgments. For example, when presented with two pairs of numbers, participants incorrectly judged the magnitude of the difference to be smaller for pairs with difficult computations (e.g., 4.97 – 3.96, an arithmetic difference of 1.01) than for pairs with easy computations (e.g., 5.00 – 4.00, an arithmetic difference of 1.00). The effect does not manifest when judgments do not entail mental computations or when participants are made aware that the ease or difficulty is caused by computational complexity. Furthermore, this effect is mitigated when participants’ prior experience is manipulated in a learning phase of the experiment. The results have implications for buyers and sellers and for understanding the role of metacognitive experiences in numerical judgments.
What makes us happiest: work, love or leisure? – via Bakadesuyo – Work, family/partnership, and leisure form the most important domains in most peoples’ lives. The present study investigated patterns of fulfilment in these domains among 1,974 German respondents. Eight groups were formed based on the combination of having experienced career progress (yes/no), having a satisfying intimate relationship (yes/no), and perceiving high levels of flow (Csikszentmihalyi 1997) during leisure activities (yes/no). Socioeconomic resources (educational attainment and income) as well as psychosocial resources differed between the success patterns, with most resources showing domain-specific positive associations with the criteria of success in life. Individuals with high levels of flow during leisure reported the highest levels of positive affect, whereas success in the field of work and intimate relationship added little. However, lowest levels of depressive symptoms were found in respondents who fulfilled at least two criteria of success. Further longitudinal research is needed for testing causal relationships between change in life success and change in aspects of psychological well-being.
Robert Shiller: Fear of a Double Dip Could Cause One – via NYT -THE risk of a double-dip recession hasn’t abated, even after news of the huge European bailout in response to the Greek debt crisis.World markets soared initially on the announcement of the nearly $1 trillion rescue plan, and then declined. But as the economist John Maynard Keynes cautioned long ago, such market reactions are basically a “beauty contest” — with investors trying to predict the short-term reaction that other investors think still other investors will have.
David Cameron in conversation with Nassim Taleb – via MoneyScience – Our new Prime Minister, David Cameron met with Nassim Taleb at the Royal Society in August of last year. Here is their conversation.
A Woman’s Touch Can Be Risky – via Pysch Central – A new study finds that physical contact, such as a pat on the back by a woman, increases a man’s risk tolerance. Investigators discovered that men would risk more money if a female experimenter patted them on the back, than if she just talked to them or if a man did the patting. The researchers think this comes from the way that mothers use touch to make their babies feel secure.
How to Save the News – via The Atlantic – Plummeting newspaper circulation, disappearing classified ads, “unbundling” of content—the list of what’s killing journalism is long. But high on that list, many would say, is Google, the biggest unbundler of them all. Now, having helped break the news business, the company wants to fix it—for commercial as well as civic reasons: if news organizations stop producing great journalism, says one Google executive, the search engine will no longer have interesting content to link to. So some of the smartest minds at the company are thinking about this, and working with publishers, and peering ahead to see what the future of journalism looks like. Guess what? It’s bright.
Bill Clinton talks game theory – via Mind Your Decisions – I recently finished the book Nonzero by Robert Wright. The book was very informative and suggests cultural evolution has an arrow towards larger positive sum interactions.
Q&A: Teaching Kids To Take Healthy Risks – via NPR – Part of raising a child is helping him or her define boundaries. It’s a balancing act that requires knowing when to let a child take risks in safe environments versus taking risks in a situation where they could endanger themselves or others.
How Our Brains Make Memories – via Simthsonian – Surprising new research about the act of remembering may help people with post-traumatic stress disorder:
Digging Deeper Into The Entire Brain – via Scientific America – A recent paper in the journal Nature finally brings some vindication to fMRI, one of the most popular methods used to study the brain. Christie Nicholson reports – But a study published today in Nature has finally brought vindication. Using a technique called optogenetics they were able to turn on genetically engineered brain cells in rats using a blue light delivered directly to those cells via an optic fiber. And then they put the rats in an fMRI and saw that the blood flow indeed matched precisely those excited cells. This shows that neural excitation is what produces the fMRI images of active brain areas.
Childhood psychological problems create long-term economic losses, study finds – via Phys Org – A first-of-its-kind study examining the long-term economic consequences of childhood psychological disorders finds the conditions diminish people’s ability to work and earn as adults, costing $2.1 trillion over the lifetimes of all affected Americans.
Fatty foods can be addictive like crack—at least for rats – via Ars Technica – Obesity may be a result of a reduced sensitivity to the “rewards” of calorically dense food, fostered by eating too much of the stuff too often, according study published in Nature Neuroscience this week. A group of researchers gave some rats different levels of access to tasty and highly caloric “cafeteria” foods, while training them to respond to aversive stimuli. Rats who had been given the most access to the good stuff ignored any indications of negative consequences and kept right on eating.
It’s Not Too Late for You to Be a Genius – via Big Think – The word genius tends to get thrown around pretty liberally these days, especially when everyone from Bob Dylan to Mike Myers has been tagged with the superlative. But in an age where academics and researchers are looking to decode the genius myth, we’re learning more and more about what quantifies genius and where it comes from. Turns out you could have been a real genius at some point.
Exclusive Picks + Financial Topics
Bank Liability Insurance Schemes Before 1865 – via Minneapolis Fed – Prior to the Civil War several states established bank liability insurance schemes of two basic types. One was an insurance fund, in which member banks paid into a state-run fund that would pay losses of bank creditors. The other was a mutual guarantee system, in which survivor banks were legally responsible the liabilities of any bank that became insolvent. Both schemes did well at insuring bank creditors, but neither prevented bank panics. Bank failure rates were somewhat higher for banks that were part of these schemes. The experience with these schemes shows that regulatory incentives matter for controlling moral hazard. The schemes that provided the most control of moral hazard were those that had a high degree of mutuality of losses borne by all banks participating in the scheme.
Financial Market Shocks during the Great Depression – via FRB – This study examines the effect of shocks observed in financial markets on output and employment during the Great Depression. We present three main findings. First, an adverse financial shock leads to a decline in the manufacturing sector’s output and employment that peaks about 11 months afterward. Next, this shock has a much greater impact on the durables sector than the nondurables sector. Last, continuing financial market weakness in 1933 and 1934 may have restrained the recovery from the Great Depression. The findings suggest that financial market weakness contributed to the length and depth of the Great Depression, and that this occurred mainly through the investment channel. In addition, we use the estimates from the Great Depression data to evaluate the effect of recent financial market disruptions.
Complexity in Financial Systems – via PsyFi Blog – We can probably all agree that modern day financial systems are complex, but what that actually means isn’t something that everyone agrees on. Typically, though, a system characterised by complexity isn’t something that anyone’s designed – it emerges, it adapts spontaneously and it produces stunningly unexpected outcomes when no one’s expecting them.
Fiscal Adjustments Ahead Around the World, A Graphical Look – via Paul Kedrosky – The size of the sovereign fiscal adjustments ahead around the world, based on the latest IMF figures, assuming countries want to stabilize debt as a percentage of GDP. The numbers represent required contraction in domestic spending (in the cyclically adjusted primary balance) between 2010 and 2030 as a percentage of GDP. Click for a larger version.
Howard Marks Memo: Warning Flags – via Value Investing World – For about a year, I’ve been sharing my realization that there are two main risks in the investment world: the risk of losing money and the risk of missing opportunity. You can completely avoid one or the other, or you can compromise between the two, but you can’t eliminate both. One of the prominent features of investor psychology is that few people are able to (a) always balance the two risks or (b) emphasize the right one at the right time. Rather, at the extremes they usually obsess about the wrong one . . . and in so doing make the other the one deserving attention.
Company Alert: The Genius of QVC – via How the shopping network became one of the most effective retailing machines ever invented
The Wall Street Takeover and the Next Financial Meltdown: Problems and Solutions – via HLS – In my opinion, however, the call to break up megabanks is not the central point of the book. Breaking up big banks is a solution, and one that I favor, but the more important goal of the book is to get people to agree on how to think about the problem–the financial system must be seen through the lens of politics–and on what the problem is: a financial system that is too big, too concentrated, and too politically powerful. And this is a message that, while certainly not one that we invented (it is far too obvious for anyone to claim ownership), has resonated widely.
Cass Sunstein Wants to Nudge Us – via NYT – The professors in Hyde Park believe in something called the University of Chicago mind. It runs cold and analytical when the rest of the culture runs hot. Chicago scholars tend to be social scientists at heart, contrarian but empirical, following evidence to logical extremes. They are centrally interested not in what it is like to be an individual within society but in how society washes over individuals, making and remaking them. During the campaign, when his former Chicago colleagues were asked to detail Barack Obama’s intellectual evolution, many of them described him in these terms. But they knew Obama, at best, only partly exhibited this tradition. His friend Cass Sunstein, who is certainly the most productive and probably the most influential liberal legal scholar of his generation, inherited it in full. “Cass has,” says Saul Levmore, a former dean of the law school, “the quintessential University of Chicago habit of mind.”
The Dark Magic of Structured Finance – via Marginal Revolution – Suppose we have 100 mortgages that pay $1 or $0. The probability of default is 0.05 (assume independence). We pool the mortgages and then prioritize them into tranches such that tranche 1 pays out $1 if no mortgage defaults and $0 otherwise, tranche 2 pays out $1 if 1 or fewer mortgages defaults, $0 otherwise. Tranche 10 then pays out $1 if 9 or fewer mortgages default and $0 otherwise. Tranche 10 has a probability of defaulting of 2.82 percent. A fortiori tranches 11 and higher all have lower probabilities of defaulting. Thus, we have transformed 100 securities each with a default of 5% into 9 with probabilities of default greater than 5% and 91 with probabilities of default less than 5%.
U.S. Companies Dodge $60 Billion in Taxes With Global Odyssey – via Bloomberg – Tyler Hurst swiped his debit card at a Walgreens pharmacy in central Phoenix and kicked off an international odyssey of corporate tax avoidance. Hurst went home with an amber bottle of Lexapro, the world’s third-best selling antidepressant. The profits from his $99 purchase began a 9,400-mile journey that would lead across the Atlantic Ocean and more than halfway back again, to a grassy industrial park in Dublin, a glass skyscraper in Amsterdam and a law office in Bermuda surrounded by palm trees.
Academic Research Worth Reading
Social Comparison and Risky Choices – via Tinbergen – This study attempts to combine two traditional fields in microeconomics: individual decision making under risk and decision making in an interpersonal context. The influence of social comparison on risky choices is explored in an experiment in which participants make a series of choices between lotteries with only positive outcomes. Three kinds of choice situations are employed. In the loss and gain context the social referent receives a fixed payoff that is respectively higher and lower than all possible payoffs of the decision maker. In the neutral context social referent and decision maker will always earn the same amount. In the gain and loss contexts the decision maker has no influence on the earnings of the social referent so strategic behavior or social preferences can play no role. We find that decision makers are more risk-averse in the loss context than in the gain context, with the behavior in the neutral context in between. This result is in opposition to the predictions of prospect theory extrapolated to a social context.
The Consequences of Entrepreneurial Finance – via HLS – I document the role of angel funding for the growth, survival, and access to follow-on funding of high-growth start-up firms. We use a regression discontinuity approach to control for unobserved heterogeneity between firms that obtain funding and those that do not. This technique exploits that a small change in the collective interest levels of the angels can lead to a discrete change in the probability of funding for otherwise comparable ventures.
Kyrgyzstan: The Land of Perpetual Revolution – via FP – Sometime in the seventh or eighth century — the exact dates are obscure in the foggy confluence of history and myth — a warrior named Manas united the Kyrgyz tribes in a rebellion against China. The Central Asian nation of Kyrgyzstan hasn’t been the same ever since.
Bubble, Bubble, China’s in Trouble– via FP – The Chinese dream, like the American dream, has taken shape around the promise that each new generation will live better than the one before it. In recent years, that has meant more job options, more material comforts, and increasingly, home ownership. Last fall 80 percent of respondents to a China Youth Daily online poll said that home ownership was a prerequisite for happiness.
Dangers of Worst-Case Thinking – via Bruce Sheneier – At a security conference recently, the moderator asked the panel of distinguished cybersecurity leaders what their nightmare scenario was. The answers were the predictable array of large-scale attacks: against our communications infrastructure, against the power grid, against the financial system, in combination with a physical attack. I didn’t get to give my answer until the afternoon, which was: “My nightmare scenario is that people keep talking about their nightmare scenarios.”
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Banking Gone Wild – via Fast company – But then, one single thing leaps off the page: The GINORMOUS size of the banking industry–followed by insurance, “diversified financials,” and…drum roll please!…oil and gas: