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SimoleonSense Weekly Favorite:
Video: George Soros: Markets, Reflexivity, & The Future - Via BlueMatter
Are You a Liar? – Via PsyBlog – Do people really lie 3 times within 10 minutes of meeting someone new?
How are people’s judgments affected when they learn of shocking news? – Via Predictably Irrational
Understanding the Anxious Mind - Via NYT – Jerome Kagan’s “Aha!” moment came with Baby 19. It was 1989, and Kagan, a professor of psychology at Harvard, had just begun a major longitudinal study of temperament and its effects. Temperament is a complex, multilayered thing, and for the sake of clarity, Kagan was tracking it along a single dimension: whether babies were easily upset when exposed to new things. He chose this characteristic both because it could be measured and because it seemed to explain much of normal human variation. He suspected, extrapolating from a study he had just completed on toddlers, that the most edgy infants were more likely to grow up to be inhibited, shy and anxious. Eager to take a peek at the early results, he grabbed the videotapes of the first babies in the study, looking for the irritable behavior he would later call high-reactive.
Does Falling in Love Make Us More Creative? - Via SA – A new study demonstrates that thinking about love–but not about sex–causes us to think more “globally,” making it easier to come up with new ideas
A Brilliant Lecture On Emotion & Decision Making - Via Geary – As well as judgment biases, identity and prosocial motivations emotions also exert a powerful influence on economic decision making. This lecture overviews the literature on the role of a diverse range of emotions on economic decision making.
The surprising ways that metaphors shape your world – Via Boston.com – WHEN WE SAY someone is a warm person, we do not mean that they are running a fever. When we describe an issue as weighty, we have not actually used a scale to determine this. And when we say a piece of news is hard to swallow, no one assumes we have tried unsuccessfully to eat it.
Report on Special Purpose Entities – Via BIS – The number and complexity of special purpose entity (SPE) structures increased significantly over the prior several years through 2007 in conjunction with the growth of markets for securitisation and structured finance products, but have declined since then. It must be emphasised that the usage of SPE structures is not inherently problematic in and of itself. SPEs have been used for many years and have contributed to the efficient operation of the global financial markets by providing financing opportunities for a wide range of securities to meet investor demand. In instances where parties to an SPE possess a comprehensive understanding of the associated risks and possible structural behaviors of these entities under various scenarios, they can effectively engage in and benefit from using SPEs. The current market crisis that began in mid-2007, however, essentially “stress tested” these vehicles. As a result, serious deficiencies in the understanding and risk management of these SPEs were identified. While recent market events have resulted in a dramatic reduction in issuance of securities using SPEs, we expect that SPEs will continue to be used for financial intermediation and disintermediation going forward. These structures provide institutions and investors with a variety of uses and benefits.
Satyajit Das…Still The Masters of the Universe - Via Wilmott - The ability to earn high rewards only becomes a problem where the promise of a share of profits encourages excessive risk taking and a focus on short-term earnings. It also becomes a problem where the basic measure of performance is ambiguous and can be systematically manipulated. Unfortunately, ‘earnings’ proved to be the result of wildly inaccurate models, accounting tricks and risks that had not been accurately captured. Finance is also problematic when it comes to dominate the economy. In the U.S.A., financial services’ share of total corporate profits increased from 10% in the early 1980s to 40% in 2007. The combined stock market value of these firms grew from 6% to 23% over the same period.
How Much Money Do Insurance Companies Make? A Primer - Via Economix – In this week’s post, I shall walk the reader through the most recent income statement of WellPoint Inc. Before proceeding, readers may wish to click on this link shown above and print out the income statement. That statement is fairly typical of a large insurer selling mainly group-insurance policies to relatively large employers.
Negative subliminal messages work – Via BBC – People can perceive subliminal messages, particularly if the message is negative, according to a UK study.
From Black Scholes to Black Holes – Via Dude Wheres The Dharma – The intent of the book From Black Scholes to Black Holes, to cloak these securities in an aura of cool, is quite ironic in its, apparently unintended, prescience. Black Holes are singularities in Einstein’s space-time continuum which swallow, for want of a better term, everything that comes near. They are the Charybdis-es of space. Derivatives are the Charybdis-es of finance. They are creating their own ever stronger gravitational field that has already swallowed 3 of the 8 major US players since 1998. The 5 banks which remain are increasingly linked together.
In Defense of Forecasting - Via Economix – Current actions often beg for forecasts of things that we will know more about later. But making projections based on imperfect information can often result in imperfect — and sometimes, downright wrong — forecasts, a fact that has not made economists terribly popular during the current financial crisis.
Seduced by a Model - Via Economix – Economic and financial models have come in for a lot of criticism in the context of the global financial crisis, much of it deserved. Among the primary targets are models that financial institutions widely used to (mis)estimate risk, like “value at risk” (VAR) models for measuring risk exposures (which we’ve discussed elsewhere) or the “Gaussian copula function” for quantifying the risk of a pool of assets.
Six Things that didn’t cause the Crisis – But really ought to have - Via Social Europe – Experts, soothsayers and pundits have been falling over themselves to list the factors that combined to produce the worst economic downturn since the Great Depression. . A partial consensus has emerged on some issues (excessive deregulation of the financial sector, current account imbalances) while debate continues to rage on others (such as the role played by central banks, China, and growing inequality).
How Renaissance Technologies Avoided Madoff – Via IIamhd – A short while back, I blogged about the OIG report on the SEC investigation of Madoff. One of the interesting nuggets in this report is about how the leading hedge fund, Renaissance Technologies, analysed and dealt with their Madoff exposure way back in 2003. It struck me as a good example of prudent risk management.
Author Ray Kurzweil on the Web Within Us : When Minds and Machines Become One.- Via NeuroNarrative
The Myth of the Rational Market – Via Tracking The Economy
Oracle CEO Larry Ellison Unscripted - Via Fora.Tv
Value Versus Growth: The International Evidence - Via SSRN – Value stocks have higher returns than growth stocks in markets around the world. For 1975-95, the difference between the average returns on global portfolios of high and low book-to-market stocks is 7.60% per year, and value stocks outperform growth stocks in 12 of 13 major markets. An international CAPM cannot explain the value premium, but a two-factor model that includes a risk factor for relative distress captures the value premium in international returns.
Taxes, Financing Decisions, and Firm Value - Via SSRN -We use cross-section regressions to study how a firm’s value is related to dividends and debt. With a good control for profitability, the regressions can measure how the taxation of dividends and debt affects firm value. Simple tax hypotheses say that value is negatively related to dividends and positively related to debt. We find the opposite. We infer that dividends and debt convey information about profitability (expected net cash flows) missed by a wide range of control variables. This information about profitability obscures any tax effects of financing decisions.
Searching for international contagion in the 2008 financial crisis - Via Vox.eu – The 2008 financial crisis is sometimes characterised as one where financial difficulties in the US spread to the rest of the world. But is there clear evidence of such international contagion? This column reports research indicating that neither financial nor trade linkages to the US help explain the cross-country incidence of the crisis. If anything, countries more exposed to the US seem to have fared better.
Monetary Policy Response to Oil Price Shocks - Via San Fran Fed – How should monetary authorities react to an oil price shock? The New Keynesian literature has concluded that ensuring complete price stability is the optimal thing to do. In contrast, this paper argues that a meaningful trade-off between stabilizing inflation and the welfare relevant output gap arises in a distorted economy once one recognizes (i ) that oil (energy) cannot be easily substituted by other factors in the short-run, (ii ) that there is no fiscal transfer available to policymakers to neutralize the steady-state distortion due to monopolistic competition, and (iii ) that increases in oil prices also directly affect consumption by raising the price of fuel, heating oil, and other energy sources. While the first two conditions are necessary to introduce a microfounded monetary policy trade-off, the third one makes it quantitatively significant. The optimal precommitment monetary policy relies on unobservables and is therefore hard to implement. To address this concern, I derive a simple interest rate feedback rule that mimics the optimal plan in all relevant dimensions but that depends only on observables, namely core inflation, oil price inflation, and the growth rate of output.
The Economic Consequences of IPO Spinning - Via Harvard Law – In our paper, which was recently accepted for we investigate the practice of spinning using a sample of 56 companies that went public during the period 1996-2000. Spinning is the allocation by underwriters of the shares of hot initial public offerings (IPOs) to company executives in order to influence their decisions in the hiring of investment bankers and/or the pricing of their own company’s initial public offering. The term spinning refers to the fact that the shares are often immediately sold in the aftermarket, or “spun,” for a quick profit, and an IPO is termed “hot” if it is expected to jump in price as soon as it starts trading.
Narcissism can make politicians leaders … and cheaters – Via USA Today – The list of philandering politicians and their wronged wives continues to get longer — and now there’s even a TV show about them.
Those who watch the headlines or the new drama The Good Wife, about a politician caught up in a sex scandal, will recognize what social scientists have already observed: that politicians are a different breed. They say a thread of narcissism makes these political animals feel invincible and willing to take risks.
Warren Buffett’s Recommended Reading List – Via Market Folly
A Smarter (and Cost-Efficient) Way to Fight Crime – Via NYT – Mark Kleiman, a professor of public policy at the University of California, Los Angeles, says there is a better way. In a new book, “When Brute Force Fails,” he argues that instead of making punishments more severe, the authorities should increase the odds that lawbreakers will be apprehended and punished quickly.
The IMF warns about surplus countries and global imbalances - Via China Financial Markets – As Beijing slowly unlocks from its 60th anniversary celebrations – the streets are still relatively empty but more and more people are going out, although my local Starbucks still hasn’t reopened, forcing me to go elsewhere for my hardcore caffeine fix – a lot is still going on in the rest of the world. Both the US and the IMF have come out with releases that help us to pick through the problems that China and the world are facing.
Algorithm and Blues - Via NYT – Well, this is unexpected — a comic book about the quest for logical certainty in mathematics. The story spans the decades from the late 19th century to World War II, a period when the nature of mathematical truth was being furiously debated. The stellar cast, headed up by Bertrand Russell, includes the greatest philosophers, logicians and mathematicians of the era, along with sundry wives and mistresses, plus a couple of homicidal maniacs, an apocryphal barber and Adolf Hitler.
‘Sorry I Haven’t Written’: A Scientific Explanation - Via Time – If you’re like most people, you do a lot of routine things in any given day — running errands, say, or e-mailing or doing laundry. And like most people, you’ve probably never stopped to wonder whether the pattern of your routine behavior fits into some sort of universal mathematical law.
U.S. Job Losses May Be Even Larger, Model Breaks Down – Via Bloomberg – The U.S. economic slump earlier this year was so severe it short-circuited the government’s model for calculating payrolls, raising the risk that today’s jobs report may be too optimistic.About 824,000 more jobs may be subtracted from the payroll count for the 12 months through last March when the figures are officially revised early next year, a Labor Department report showed today. The revision would be the biggest since at least 1991.
Inflation and the Fall of the Roman Empire - Via Mises – Monetary policy therefore always serves, even if it serves badly, the perceived needs of the rulers of the state. If it also happens to enhance the prosperity and progress of the masses of the people, that is a secondary benefit; but its first aim is to serve the needs of the rulers, not the ruled. This point is central, I believe, to an understanding of the course of monetary policy in the late Roman Empire.
When to pay attention to Case-Shiller and when not to - Via Curious Capitalist – One positive byproduct of this real estate/financial crisis has been the elevation of the S&P/Case-Shiller Home Price Indices to the status of standard measure of housing prices and the relegation of the National Association of Realtors’ average and median sales price numbers to sideshow. This is mostly a good thing, because the NAR numbers are skewed by what kind of houses are selling. If lots of high-price homes sell in a month and few low-price ones do, the average and the median price go up for the month even if all those houses are selling for less than they would have a month before.
Weekly Joke: (Game Theory & Telling The Truth)
“Bless me Father, for I have sinned. I have been with a loose girl”.
The priest asks, “Is that you, little Joey Pagano ?”
“Yes, Father, it is.”
“And who was the girl you were with?”
“I can’t tell you, Father, I don’t want to ruin her reputation”.
“Well, Joey, I’m sure to find out her name sooner or later so you may as well tell me now. Was it Tina Minetti?”
“I cannot say.”
“Was it Teresa Mazzarelli?”
“I’ll never tell.”
“Was it Nina Capelli?”
“I’m sorry, but I cannot name her.”
“Was it Cathy Piriano?”
“My lips are sealed.”
“Was it Rosa DiAngelo, then?”
“Please, Father, I cannot tell you.”
The priest sighs in frustration.
“You’re very tight lipped, and I admire that. But you’ve sinned and have to atone. You cannot be an altar boy now for 4 months. Now you go and behave yourself.”
Joey walks back to his pew, and his friend Franco slides over and whispers, “What’d you get?”
“Four months vacation and five good leads.”