Weekly Roundup 13: A Curated Linkfest For The Smartest People On The Web
Attention: There are some pretty high quality links today, particularly the videos and radio shows. Enjoy!
Here are some links to articles that didn’t make our front page. Several of the articles are very insightful I highly recommend reading them. As always, the articles are from different fields but should make you a more well rounded investor. Take Care.
(Click on the titles to access the articles)
0. Lecture On Judgement & Heuristics And Biases – Via Geary Behavior Centre- Below is a recent lecture on judgment, heuristics and biases. It gives a brief overview on the relationship of this topic to textbook models of choice under uncertainty and value. The lecture: outlines what is meant by heuristics; discusses theories of why they may be adaptive; outlines the idea of bias and how this relates to heuristics; examines the main Kahneman and Tversky literature; outlines experimental literature on availability, representativeness and anchoring; examines overconfidence and planning fallacy; examines the role of emotions in guiding probability judgments and risk perception; discusses limitations of the literature on heuristics and biases; discusses of implications of use of heuristics for economic theory and policy.
1. Three Common Errors About Adam Smith – VIa Adam Smith Lost Legacy- Arthur Foulkes, a Terre Haute native and longtime resident, writes in Tribune Star “Many people misunderstand free trade, and so they don’t trust it” “Adam Smith gave us an excellent metaphor when he compared free market forces to an “invisible hand” that guides each of us — in the pursuit of our own interests — to promote the interests of others. But Smith, in some ways, set economic thinking back by embracing some mistaken ideas. For example, Smith believed that the value of a thing sprang from the amount of labor that went into its making. Before Smith, several economic thinkers realized that a thing’s value was in the eye of the beholder, but Smith stepped into this mistake nonetheless.
2. Models Vs Reality – Via CFA Pubs – To confuse the mode with the world is to embrace a future disaster driven by the belief that humans obey mathematical rules. Scientific models are different from models of airplanes. Resemblance is not enough. Scientific models aim at divination—foretelling the future and controlling it—and physicists use two different approaches in creating such models.
3. Camile’s Reclining Declining – Via Cassandra Does Tokyo -Contrary to momentum investor hopes, buying high, or recent highs, can be perilous to your financial well-being for a very very long time, in nominal terms but more acutely in real and relative terms. Such an emblematic example was reported in Bloomberg yesterday
4. Reading The Stimulus Fine Print – Via Economic Policy Review – Ever wonder what exactly is going into the stimulus bill? Taxpayers and legislative voyeurs are strongly encouraged to visit and contribute t an admirable effort to engage the public and shine some light into this massive spending effort. As of this morning, it appears that the swing-vote trifecta of Sens. Olympia Snowe, Susan Collins and Arlen Specter have leveraged their new-found power and crafted a legislative compromise that will allow passage of the stimulus package.
5. The Economics Of Structured Finance – Via Farmboyeric – The essence of structured finance activities is the pooling of economic assets (e.g. loans, bonds, mortgages) and subsequent issuance of a prioritized capital structure of claims, known as tranches, against these collateral pools. As a result of the prioritization scheme used in structuring claims, many of the manufactured tranches are far safer than the average asset in the underlying pool. This ability of structured finance to repackage risks and create “safe” assets from otherwise risky collateral led to a dramatic expansion in the issuance of structured securities, most of which were viewed by investors to be virtually risk-free and certified as such by the rating agencies. At the core of the recent financial market crisis has been the discovery that these securities are actually far riskier than originally advertised.
6. It’s No Time For Protectionism – Via Economic View @ NYT- What approach will the Obama administration and the Democratic majority in Congress take on international economic policy? It is too early to say for sure, but the signs so far are worrying. Just before his confirmation as Treasury secretary, Timothy F. Geithner turned up the heat on the Chinese regarding the dollar-yuan exchange rate. President Obama, he said, “believes that China is manipulating its currency. Countries like China cannot continue to get a free pass for undermining fair-trade principles.”
7. Radio Show: Cochrane On The Financial Crisis– John Cochrane, of the University of Chicago, talks with EconTalk host Russ Roberts about the financial crisis. He talks about the origins of the crisis, why the Troubled Assets Relief Program (TARP) was flawed from the beginning, why mark-to-market accounting isn’t the cause of the problem, argues for letting banks fail, and makes the case against the large increases in government spending.
8. Los Angeles Transportation Facts & Fiction – Via Freakonomics- We at U.C.L.A. hear from reporters a lot, and they are often looking for a few quotes to help write a familiar script. In it, Los Angeles is cast in the role of the nation’s transportation dystopia: a sprawling, smog-choked, auto-obsessed spaghetti bowl of freeways which meander from one bland suburban destination to the next. The heroes of the picture are cities like San Francisco, or especially New York, which are said to have created vastly more livable urban forms based on density and mass transit.
9. Financial Crisis In Historical Perspective – Via Brad Delong – A syllabus for a class on Financial Crisis, this is worth looking into.
10. Video: Can We Anticipate Future Correlations – Via Blog University – Fun watch for the inner quant in you!
11. Assorted Weekend Links On Economics – Via Mostly Economics – Very Good Weekly Roundup
12. Hazardous Materials – Via The New Yorker – n the course of the ongoing financial crisis, we’ve been ceaselessly reminded of the dangers of moral hazard—the idea that if people are insulated from the negative effects of their gambles they are more likely to act rashly. When Bear Stearns was bailed out, last spring, the move was attacked for exacerbating the threat of moral hazard. When Lehman Brothers was allowed to go bankrupt, in mid-September, the decision was praised by some for reducing the risk of moral hazard. These days, moral-hazard concerns are making policymakers cautious about stemming the rise in foreclosures, and about dealing with ailing banks: if we bail out banks or homeowners, we’re told, it will only encourage more recklessness.
13. Video: The Big Rich– Via Fora TV- Great Documentary on Bryan Burrough, author of Barbarians at the Gate and a Texan himself, traces the accumulation of almost unimaginable wealth by four Texas families during the 1920s. The families then used their fortunes to influence commerce, culture, and politics — most notably, by financing the modern conservative movement.
14. Video: Steven Pinker: On Absolutes & Relatives – Via Big Think
15. Video: Nurturing A Vibrant culture To Drive Innovation – Via MIT World – W.L. Gore’s products alone, such as the eponymous GORE-TEX® water- and windproof fabrics, and a multitude of unique medical, electronic and industrial materials, might seem to assure the company’s success. But Terrie Kelly attributes the 50-year-old company’s achievements not just to engineering prowess, but to its singular culture.
This privately held company, with $2.5 billion in revenue and 8500 staff worldwide, began as an electronics company in Bill and Vieve Gore’s basement. In 1969, their son, Bob, discovered a polymer that was strong, chemically inert, biocompatible and water repellant, with nearly infinite applications. But as Kelly recounts, the Gore family determined not just to develop technology but to grow their company around a set of fundamental beliefs. This philosophy underlies Gore’s flow of innovations and sterling business results, says Kelly.
16. Video: Food For Thoughts – Via Nudge – Food and behavioral economics. A video filmed at Cornell. Runs about an hour.
17. The Coloring Situation – Via The Situationist – In the International Herald Tribune, Pam Belluck has a nice summary of recent research indicating that colors matter in ways we probably don’t imagine. Her article, titled Accurate red, creative blue: Color counts, study says ,” is excerpted below.Trying to improve your performance at work or kick-start that novel you want to write? Maybe it’s time to consider the color of your walls, or your screen saver. If a new study is any guide, the color red can make people’s work more accurate, but blue can make them more creative. In the study, published Thursday in the online edition of Science magazine, researchers at the University of British Columbia conducted tests with 600 participants to see how cognitive performance varies when people see red or blue. Participants performed tasks in which words or images were displayed against red, blue or neutral backgrounds on computer screens. Red groups did better on tests of recall and attention to detail, like remembering words or checking spelling and punctuation. Blue groups did better on tests requiring invention and imagination: coming up with creative uses for a brick or creating toys from collections of shapes.
18. Video: An Imperfect Hedge: The Case Of Metallgesellschaft – Via Finance Professor -If you have had me for MBA 610 you know in the “what can go wrong” with derivatives part of the class we usually discuss Metallgesellschaft. It is a classic case of when an imperfect hedge can really hurt you. I just stumbled upon this six minute explanation of what caused their problems that is very good.
19. More On Administrations Compensation Guidelines – Via Harvard Law School Corp Governance Blog – Related to the recent op-ed piece from Professor Bebchuk regarding the new Treasury executive guidelines, here are key fixes to those new guidelines recommended by Jesse Brill, Chair of CompensationStandards: One key aspect of the Obama Adminstration’s new $500,000 cap that has not gotten sufficient attention is the unlimited amount of restricted stock and stock options that still can be granted under the latest “restrictions.” Equity compensation is the pay component that has gotten most out-of-line over the past 20 years. It (as well as severance/retirement/ golden parachutes) has caused the greatest disparity between CEO compensation and that of the next tier of executives (and employees generally).
20. Reflexive modeling: Profiting From Financial Models Without Being Trapped In Them – Via Socializing Finance – The credit crisis has imposed on Americans a crash course on the risks of financial models. If derivatives, as Warren Buffet famously put it, are “financial weapons of mass destruction,” models are now seen as the nuclear physics that gave rise to the bomb — powerful, incomprehensible and potentially lethal. Given their dangers, what should Wall Street do with its models? At one extreme, skeptics have attacked models for their unrealism, lack of transparency, and limited accountability. Models, they charge, are black boxes that even expert users fail to understand. Models become dangerously inaccurate when the world changes. And whenever a bad model fails, it is all too easy for traders to conjure up the “perfect storm” excuse. Wall Street, the skeptics conclude, needs to curtail its addiction to models.
21. Why The Economy Failed – Via Thinking Things Through – Conventional wisdom says that the recession was caused by the bursting of the housing bubble. That indeed appears to be the proximate cause, but some people have tried to look deeper for an underlying cause. Many, including yours truly, have argued that the underlying cause was too much debt. That still seems true to me, but it is not a satisfying answer. Human nature does not change, so why should we suddenly decide to become heavily in debt? Perhaps the onion needs to be peeled further. Robert Bryce has a suggestion:
22. Glocal: Immense Collaborative Image Explorer – Via Infosthetics – Glocal [glocal.ca] (short for global + local) is an “immense, collaborative and multifaceted” digital art project that examines the making, sharing and exhibiting of digital images. Thousands of individuals, including artists, non-artists and youth, are invited to participate to collaborate in the making of what promises to be Canada’s largest “contributive” digital artwork.
23. How Do You Like Them Free Markets– Via Baseline Scenario – By now everyone knows about this past year’s Wall Street bonuses: $18.4 billion total, the fifth-highest total ever; the $4 billion in bonuses rushed through by Merrill Lynch before its acquisition by Bank of America; and John Thain’s demand for a personal $10 million bonus (which was initially a demand for $30-40 million, according to Felix Salmon). This has, not surprisingly, unleashed a torrent of rage against Wall Street, up to and including Barack Obama, who called the bonuses “shameful.”
24. Bank Run Prevention 101 – Via Zero Hedge – A few days ago the Fed had to (was forced to) postpone the expiration date of virtually all liquidity facilities designed to stop and prevent the mother of all bank runs, which followed the Reserve Fund’s breaking the buck after Lehman’s collapse. As few people pointed out, the removal of these contingencies would likely have brought the liquidity crisis back with a vicious bang. Furthermore, it reminds us once again of the truly bad shape the liquidity component of the U.S. economy is right now (in addition to all the other crutches the government is using to make sure the financial system does not collapse).
25. Neil deGrasse Tyson: Astrophysicist & Communicator Extraordinaire – Via Presentation Zen – If you do not know who Neil deGrasse Tyson is then you’re in for a treat. Dr. Tyson is an American astrophysicist with a degree in physics from Harvard and a Ph.D in astrophysics from Columbia University. In addition to hosting Nova Science Now on PBS and appearing on numerous TV talk shows in the US, his day job is serving as Director of the Hayden Planetarium at the American Museum of Natural History. You might think that such an intelligent, highly educated scientist would be a bit dry — you’d be wrong. Out-of-this-universe wrong. Tyson is an extraordinary communicator.
26. Can We Transform The Auto Industrial Society – Via NY Review Of Books – The cataclysm of the American automobile industry has been an odd combination, so far, of immediate and historical anxieties. The government loan of $13.4 billion to General Motors and Chrysler in December 2008 was presented by the outgoing administration as an unsolicited gift, lest a “disorderly liquidation of American auto companies” should “leave the next President to confront the demise of a major American industry in his first days of office.” It was restricted explicitly to the very short term: “The firms must use these funds to become financially viable…. In the event that firms have not attained viability by March 31, 2009, the loan will be called.”
27. Was God A Mathematician: The Structure Of Everything – Via Washington Post – ….Those are just the start of a remarkable number of magical patterns, coincidences and constants in mathematics. No wonder philosophers and mathematicians have been arguing for centuries over whether math is a system that humans invented or a cosmic — possibly divine — order that we simply discovered. That’s the fundamental question Mario Livio probes in his engrossing book Is God a Mathematician?
28. Free Book: Discoverers & Explorers – Via Librivox– Tales of the brave and daring explorers that ventured into the unknown “Sea of Darkness” where it was thought monsters and angry gods lived. They dared to sail near the equator which was thought to have such intense heat that it would boil the ocean water. It was also commonly thought at the time that the world was flat, and the ships would fall off the face of the earth. These men overcame these fears to explore and discover new lands.
(Summary by Laura Caldwell)
29. Charles Darwin: Unfinished Business – Via The Economist – THE miracles of nature are everywhere: on landing, a beetle folds its wings like an origami master; a lotus leaf sheds muddy water as if it were quicksilver; a spider spins a web to entrap her prey, but somehow evades entrapment herself. Since the beginning of time, people who have thought about such things have seen these marvels as examples of the wisdom of God; even as evidence for his existence. But 200 years ago, on February 12th 1809, a man was born who would challenge all that. The book that issued the challenge, published half a century later, in 1859, offered a radical new view of the living world and, most radical of all, of humanity’s origins. The man was Charles Robert Darwin. The book was “On the Origin of Species”. And the challenge was the theory of evolution by natural selection.
30. Zero Hedge’s Weekend Financial & Economy Reading Links – Via Zero Hedge
31. Naked Capitalism’s Weekly Economic Links – Via Naked Capitalism
32. Google & Amazon To Put More Books On Cell Phones – Via NYT – In a move that could bolster the growing popularity of e-books, Google said Thursday that the 1.5 million public domain books it had scanned and made available free on PCs were now accessible on mobile devices like the iPhone and the T-Mobile G1.
33. Thoughts on Banking Crisis, Invisible Hands, & Risk Aversion – Via Adam Smith’s Lost Legacy – It strikes me that the current banking crisis provides a useful illustration of the behaviour which Adam Smith noted in his famous chapter 2 in Book IV in Wealth Of Nations. I have quoted this chapter many times here when discussing Smith’s use if the 18th century popular literary metaphor of ‘an invisible hand’, which modern economists since the 1950s elevated into a ‘theory’, ‘concept’, ‘principle’ and even a ‘paradigm’ of how markets work.
34. Adam Smith On Selfishness & Public Spirit– Via Adam Smith’s Lost Legacy – If your are going to quote from Adam Smith(or, indeed, anybody) you ought to get the quotation correct. Slipping in the word ‘selfish’ before interests is, er, naughty. There is quite a lot of difference between ‘self interest’ and ‘selfish interest’. You may be selfish as your fancy takes you, but that’s no way to engaged with other people. Selfishness begets selfishness. But in exchange transactions, especially when bargaining for something, Adam Smith made it clear exactly what is involved:
35. Video Collection: World Economic Forum Videos Entire Collection – Via Youtube – The World Economic Forum is an independent international organization committed to improving the state of the world by engaging leaders in partnerships to shape global, regional and industry agendas. Incorporated as a foundation in 1971, and based in Geneva, Switzerland, the World Economic Forum is impartial and not-for-profit; it is tied to no political, partisan or national interests.