Weekly Roundup 42: A Curated Linkfest For The Smartest People On The Web
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Trailer: Michael Moore’s Latest Moovie: Capitalism ” A Love Story” – Via michaelcovel.com
Exclusive Feature: Eric Sprott- Gold the Ultimate Triple-A Asset– Via Pragmatic Capitalist
Exclusive Feature: Megan McArdle article, “ What Would Warren Do?”.
Exclusive Feature: Why the Austrian, Keynesian, Marxist, Monetarist, and Neo-Liberal Economists Are All Wrong – Via Naked Capitalism – The Supply side idealists (cash rich bosses, Austrians, neo-liberal, monetarist, and deflationist theorists) would like to see this happen at a lower level through a deflationary spiral. The Keynesians and neo-classicals wish to see it driven through the Demand side, with higher wages rising to meet the demands of profit in an inflationary expansion. Both believe that market forces alone can achieve this equilibrium. Across both groups runs a sub-category of statism vs. individualism. Unfortunately both groups are wrong.
Exclusive Feature: The New American Dream: Renting – Via WSJ & Joe Koster – It’s time to accept that home ownership is not a realistic goal for many people and to curtail the enormous government programs fueling this ambition.
Feature: Portfolio Manager’s Review — The Superinvestor Issue, August 21, 2009, by The Manual of Ideas – Via Manual Of Ideas
Feature: Robert Shiller Interviewed By VoxEu – Robert Shiller of Yale University talks to Romesh Vaitilingam about his book, co-authored with George Akerlof, Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism. The interview was recorded in London in May 2009.
Feature: Study Demonstrates How We Support Our False Beliefs – Via PhysOrg – In a study published in the most recent issue of the journal Sociological Inquiry, sociologists from four major research institutions focus on one of the most curious aspects of the 2004 presidential election: the strength and resilience of the belief among many Americans that Saddam Hussein was linked to the terrorist attacks of 9/11.
Feature: Dan Ariely: Are We More Rational Than Our Fellow Animals? – Via Predictably Irrational – We usually accept without argument the notion that man is at the top of the animal hierarchy. After all, only mammals have a neocortex – the most recently evolved part of the brain and the center of higher mental functions – and ours is the most advanced variation, so it makes sense that we’d be at a higher stage of development. But is this true? Does the neocortex always make us more rational than other animals?
Feature: A Crash Course In Investing – Via Dah Hui Lau – Can skilled investors outperform the market? What’s the best way to achieve long-term investment success? The answers to these age-old questions become clear after taking a close look at how markets work, exploring the dynamics of group decisionmaking, and examining how the simple concept behind Google’s search engine relates to personal investing.
Feature: When financial innovation’s good for the economy – Via Economic History Blog – The United Provinces suffered from what Adam Smith termed the “small state” problem: it was awash in foreign coin and had little control over their quality, thus suffered from their constant debasement (p.1). Debtors always have an incentive to pay their due with debased coins. But this practice is only viable if the seigniorage he pays to the mint is lower than the amount of silver he saves in the operation. De facto, there is collusion between the mint and the debtor against the creditor
Feature: Cameron rides a Black Swan – Via Standard – David Cameron was ‘in conversation’ with Black Swan author Nassim Nicholas Taleb at the RSA think tank today. Taleb’s book has tickled the commentariat’s G-spot ever since the financial crash appeared to prove his central thesis: that we have to make our economies and governments more robust to cope with “low-probability, high-impact events”. As Cameron said today, he liked the book partly because it confirmed many of his own prejudices about the need for people-based rather than rules-based regulation.
Feature: Arthur Levitt On HFT: Don’t Set Speed Limits on Trading – Via WSJ – The debate over high-frequency trading may seem remote and irrelevant to small investors. After all, they may think, if you’re only buying and selling stocks and mutual funds occasionally, what difference does it make whether some traders are able to move quickly in and out of those same stocks, squeezing an extra penny or two of profit here and there?
Feature: Video —Journalist Matt Taibbi On Health Care Reform: Sick and Wrong – Via RollingStone – Taibbi breaks down the five steps Congress took to be sure no bill would pass — aiming low, gutting the public option, packing it with loopholes, providing no leadership and blowing the math — in his story, which is available on stands now. In a series of video interviews for RollingStone.com, Taibbi explores one of our system’s most severe flaws, explains how the government wedged itself into an awkwardly damning position, and looks at how the proposed bill would change the ordinary American’s life.
0. A Decision-Making Perspective to Negotiation: A Review of the Past and a Look into the Future – Via HBSWK – The art and science of negotiation has evolved greatly over the past three decades, thanks to advances in the social sciences in collaboration with other disciplines and in tandem with the practical application of new ideas. In this paper, HBS doctoral student Chia-Jung Tsay and professor Max H. Bazerman review the recent past and highlight promising trends for the future of negotiation research. In the early 1980s, Cambridge, Massachusetts, was a hot spot on the negotiations front, as scholars from different disciplines began interacting in the exploration of exciting new concepts. The field took a big leap forward with the creation of the Program on Negotiation, an interdisciplinary, multicollege research center based at Harvard University. At the same time, Roger Fisher and William Ury’s popular book Getting to Yes (1981) had a pronounced impact on how practitioners think about negotiations. On a more scholarly front, a related, yet profoundly different change began with the publication of HBS professor emeritus Howard Raiffa’s book The Art and Science of Negotiation (1982), which for years to come transformed how researchers would think about and conduct empirical research.
1. Game Theory Tuesday: How to improve health care using game theory: the Prisoner’s Dilemma – Via Mind Your Decisions Blog – How can we improve trust between doctors and patients? One answer lies in using game theory to understand the interaction better. There is a great introductory article on the subject in a 2004 issue of Quality and Safety in Health Care called “Models of the medical consultation: opportunities and limitations from a game theory perspective.” The authors C Tarrant, T Stokes, and A M Colman explain how game theory is a useful tool for understanding strategic interaction and creating better outcomes in medical care.
2. Encoding of marginal utility across time in the human brain. – Via DLPFC – A paper published last month in The Journal of Neuroscience, however, reveals subtle signals in the brain regions previously known to drive economic choice that correspond to the computation of marginal value.
3. Smart Defaults: From Hidden Persuaders to Adaptive Helpers – Via SSRN – Defaults have such powerful, pervasive and unrecognized effects on consumer behavior that in some settings they may be considered ‘hidden persuaders’. Looking at defaults from the perspective of consumer welfare, consumer autonomy and marketing ethics, this paper shows that ignoring defaults is not an option. It identifies three theoretical causes of default effects-implied endorsement, cognitive biases, and effort-to guide thought on the appropriate marketer response to the issues posed for consumer autonomy and welfare. We propose the concepts of “smart defaults” and “adaptive defaults” as welfare-enhancing and market-oriented alternatives to the current practice of generally ignoring default effects, in addition to other remedies. Our analysis highlights how an ethical market orientation would consider the process of consumer decision making as well as its outcomes: marketers bear responsibility for consumer buying mistakes arising from the marketer’s inept neglect or misuse of defaults. As well as recommendations for marketing practice, we also identify policymaker and research implications of defaults and consider, more broadly, the ethics of using techniques that influence consumer choice without consumer awareness.
4. Real Interest Rates, Expected Inflation, and Real Estate Returns – Via UCLA – In the United States, but not in Canada, nominal interest on residential housing mortgages
is a deductible expense for the personal income tax. This suggests that changes in nominal interest rates could conceivably have differing impacts on real estate values in the two countries. The inflation component of nominal interest should have a negative impact on Canadian real estate, but its effect should be strictly less negative in the US and could even be positive. Using real estate investment trusts along with expected inflation imputed from inflation-indexed bonds in both countries, we find empirical support for a material and significant difference. In Canada, increases in nominal interest rates driven by inflation have a negative impact. The US impact is minimal and ambiguous in sign.
5. Has Mortgage Modification failed? – Via Baseline Scenario – Obama’s mortgage modification plan, HAMP (Home Afforable Modification Program), isn’t working very well. Designed to help prevent foreclosures by incentivizing and giving legal protection to previously indifferent middle-men servicers it isn’t producing anywhere near the number of modifications that were anticipated. Is it likely to work in the future? My guess is no. Let’s discuss some reasons why.
6. On Systemically Important Financial Institutions and Progressive Systemic Mitigation – Via Cleveland Fed – One of the most important issues in the regulatory reform debate is that of systemically important financial institutions. This paper proposes a framework for identifying and supervising such institutions; the framework is designed to remove the advantages they derive from becoming systemically important and to give them more time-consistent incentives. It defines criteria for classifying firms as systemically important: size (the classic doctrine of too big to let fail) and the four C’s of systemic importance (contagion, concentration, correlation, and conditions); it also discusses the concept of progressive systemic mitigation.
7. Don’t blame it on VaR – Via Funds Europe – VaR is simply a financial weather forecast. A high VaR suggests stormy weather and the risk of big losses, while a low VaR indicates a balmy day and rain, in the form of big losses, is not likely. But VaR, using its full name, has a misleading description. ‘Value at risk’ sounds like it is communicating the maximum rainfall rather than just an idea of whether a rainstorm is likely. Indeed, in a recent speech, the FSA’s Lord Turner implied that even he had been mislead when he said: “We know that [VaR ..is] praised as a mathematically precise measure of risk.” But no professional statistician would describe VaR that way.
8. Executive Compensation Is Often Skewed by Comparisons – Via WSJ – That comparison may be extreme, but new academic studies suggest many companies include bigger and more complex rivals in compensation peer groups used as a factor in setting pay, helping to boost executive paychecks. Critics long have said that directors and compensation consultants skew these comparisons to push pay higher. But the extent of the phenomenon was unknown until the Securities and Exchange Commission in 2006 began requiring companies to disclose the members of such groups.One study, led by University of Maryland Prof. Michael Faulkender, found that companies tend to select peers with highly paid executives. The study, of 657 companies, suggests “that firms are gaming the selection of peers for the purposes of gaming executive compensation,” Mr. Faulkender says.
9. The retaliation of Black Swan man – Via FT -It’s not every day that I’m accused of “incompetent journalism in its most insidious form” by a (more) famous author*. But it seems thatNassim Nicholas Taleb is unhappy with the way his comments from yesterday have been reported by the British press.
10. Infographic: Foreclosure Breakdown – Via Chart Porn
11. Infographic: American attitudes towards different industries. – Via Chart Porn
12. Judgments Get Heavy When Weight is on Your Mind – Via NueroNarrative – For a bit of theoretical context, consider how many ways in which weight—or facilitators of weight—overtly affect our judgments. In English, we use the term “weighty” to signify something substantial and important. We also use the term “gravitas” to connote seriousness, an elaboration on our understanding of gravity as a force exerting the power of weight over everything around us (and us). We also think of weight as the arbiter of physical strength: the more someone can lift—or looks as if he or she can lift—the more impressive. Weight is even a socioeconomic force, as in the size of someone’s car or SUV. I recall when the Hummer first arrived on the scene, we heard a lot about it being a “six-ton SUV,” as if that specification made it more noteworthy than any other SUV.
13. Managerial Methods to Control the Downside Risk of Derivatives – Via Money Science & SSRN – Derivatives are at the very heart of the recent financial disasters, and the surveillance of their downside risk is of paramount importance both to practitioners and regulators. We survey and present original managerial methods to efficiently control the downside risk of derivatives portfolios. We first describe the managerial methods currently used in practice and their relative cost, and we then show that the most common methods actually aggravate this downside risk. We then argue that selecting appropriate underlyings satisfying some specific statistical and easily identifiable properties is a natural way to significantly reduce the downside risk without involving costly managerial interventions.
14. High Frequency Trading Roundtable – Via Zero Hedge – Yet another good introduction for the novices in the field. Keep in mind the various participants have extensive interests so read between the lines.
15. Bad News Bears: The Travails of Journalists Turned Financiers – Via Money Science & WSJ – Sure, it’s tough being a journalist these days. But if you think the news business is in trouble, try being a journalist turned financier. Some of the reporters who have left their ink-stained professions for the high-paying world of finance haven’t had it easy either.