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SimoleonSense Weekly Favorite:
Cartoon 1: Nash Meets Feynman (Via Financial Rounds)
Cartoon2: Dilbert On Consumer Confidence (Via Chart Porn)
Extensive Video Interviews With Top Minds Of Modern Finance! – Via AFAJOF -In 2004, The American Finance Association Board approved a project to record aspects of the History of Finance. Stephen Buser was appointed Historian with the mission to produce video interviews with important contributors to financial economic knowledge. Links to streaming videos of edited versions of interviews with Harry Markowitz, William Sharpe, Paul Samuelson, Robert Merton, Myron Scholes, Jack Treynor, Kenneth Arrow, Eugene Fama and Fred Weston are posted below. Transcripts of the full texts of these interviews are also available below. Additional interviews with other seminal scholars in the field are planned.The AFA thanks Dimensional Fund Advisors for their generous support of this project
Newton and the Counterfeiter: The Unknown Detective Career of the World’s Greatest Scientist - Via MIT World – Who knew that one of mankind’s greatest scientists also worked as a gumshoe on London’s mean streets, or that this same absent-minded professor helped England fix its monetary policy from an office in the Tower of London? Levenson brings all sorts of surprises to light in his own sleuthing of a little known but significant episode in British history involving Sir Isaac Newton — subject of his recent book, Newton and the Counterfeiter: The Unknown Detective Career of the World’s Greatest Scientist.
The Perils of Not Knowing that You Don’t Know - Via AidWatch -The moral of the story is that knowing how much uncertainty there is about a projection – that is, knowing how much the projector DOESN’T KNOW – is often more important than the projection. An “estimated departure time based on the best available information” is meaningless to an airline customer if the uncertainty is about DAYS rather than HOURS.
The Serendipity of Genius – Via StandPoint – What is economics? Is it a science? Haven’t all its failures of prediction and political guidance proved its lack of respectability? The current financial crisis also reveals a deep crisis of economics. We seem to be witnessing the dismantling of an approach that, at least in its shallow mainstream version, has to make a series of absurd assumptions in order to reach any conclusion — with both the assumptions and the conclusions being astonishingly out of touch with reality. Its scholars have come to use mathematical logic as some sort of l’art pour l’art, falling into the trap of technicality rather than aiming at the wider horizon of an all-encompassing social science.
Nial Ferguson: Wall Street’s New Gilded Age - Via Newsweek – A year after the crash, a few financial giants are back to making millions, while average Americans face foreclosure and unemployment. What’s wrong with this picture?
PFP Wealth Management’s Collections Of Market Wisdom - Via Price Of Everything
Podcast: Nobel Winner Elinor Ostrom Checks In With NPR - Ostrom explains her groundbreaking research into the public management of natural resources. The political scientist argues that people should be empowered to organize themselves in small ways that scale up to a global network. Government can be helpful in doing that, but people shouldn’t rely on it alone.
Transcript: George Soros interview – Via FT – Chrystia Freeland, US managing editor, interviewed George Soros, the fund manager, about the state of the world economy, relations between the US and China, his investment performance and regulating bankers’ compensation. This is a transcript of that interview.
How Basic Are Behavioral Biases? Evidence from Capuchin Monkey Trading Behavior - Via Yale – Behavioral economics has demonstrated systematic decision-making biases in both lab and field data. Do these biases extend across contexts, cultures, or even species? We investigate this question by introducing fiat currency and trade to a colony of capuchin monkeys and recovering their preferences over a range of goods and gambles. We show that capuchins react rationally to both price and wealth shocks but display several hallmark biases when faced with gambles, including reference dependence and loss aversion. Given our capuchins’ inexperience with money and trade, these results suggest that loss aversion extends beyond humans and may be innate rather than learned.
3 REASONS WHY MORE BLACK SWANS ARE IN STORE FOR THE U.S. ECONOMY - Via Pragmatic Capitalist – Central Banks and governments around the world have thrown everything they can muster at the financial crisis. And up until now, it appears as though they have succeeded. Equity markets are up 60%+ around the globe and investors are beginning to party like its 1999. But a look underneath the hood shows that shiny Cadillac might just be a clunker (don’t worry, the government will take out a loan so you can take out a loan to turn in your clunker for a new car you never needed to begin with). Unfortunately, as we’ve learned over the course of the Fed’s 20 year boom/bust experiment, sound economic growth cannot be built on the back of a printing press. This is most evident in three segments of the economy:
SEC response to Madoff failure – Via Jayanth Varma - After its dismal failure to detect the Madoff fraud despite plenty of warnings, the US SEC conducted a review by its own Inspector General of what went wrong. This report published in August was uninteresting as it explained it all away as incompetence and inexperience of the staff concerned. This explanation was not completely convincing given the detailed information that people like Markopolos provided to the SEC over several years. In any case, there is little point in a 450 page report that reaches a conclusion that could be arrived at simply by applying Hanlon’s Razor: “Never attribute to malice what can be adequately explained by stupidity.” At the end of September, however, the Inspector General released two more reports (totalling 130 pages) indicating that incompetence might not be the whole story. A survey carried out by the Inspector General found that 24 percent of the SEC enforcement staff felt that cases were improperly influenced or directed by management and 13% stated that they had observed lack of impartiality in performance of official duties.
Irrational exuberance behind recent stock gains, says finance expert - Via PhysOrg – A second straight week of stronger-than-expected third quarter earnings from a broad cross section of U.S. industries has held the nation’s Dow Jones Industrial Average above the psychological benchmark of 10,000 points for the week of Oct. 19, but the climb isn’t likely to last, says a finance expert at the University of Alabama at Birmingham (UAB).
Americans who believe in equality are more likely to buy on impulse - Via PhysOrg – A new study from Rice University’s Jones Graduate School of Business finds that Americans who believe in equality are more-impulsive shoppers. And it has implications for how to market products differently in countries where shoppers are more likely to buy on impulse.
Justin Fox: The Stimulus Spending Bill: Is It Working at All? - Via Time – The $787 billion American Recovery and Reinvestment Act that Congress approved last February was the first major legislative accomplishment of the Obama White House. Lately, it has also become one of Washington’s most frequently tossed political footballs.
Bogus Statistics: The Banking Industry’s Go-To Lobbying Tool - Via Credit Slips – Fake statistics have been a central feature of the banking industry’s lobbying strategy on every major consumer credit issue since the 2005 bankruptcy amendments. In 2005, there was the phantom $400 bankruptcy tax used to push through the BAPCPA. Then there was the Mortgage Bankers Association’s 200 basis point interest rate increase claim about cramdown. For credit cards, there was no fake statistic, but a pseudo-academic study funded by the American Bankers Association. (In retrospect, lack of a scare number was a major strategic mistake for the industry.)
Back to Chaos: Bifurcation and Predictable Unpredictability – Via Good Math Bad Math - So I’m trying to ease back into the chaos theory posts. I thought that one good way of doing that was to take a look at one of the class chaos examples, which demonstrates just how simple a chaotic system can be. It really doesn’t take much at all to push a system from being nice and smoothly predictable to being completely crazy. This example comes from mathematical biology, and it generates a graph commonly known as the logistical map. The question behind the graph is, how can I predict what the stable population of a particular species will be over time?
Do the Math: Cognitive Load Attenuates Negative Feelings – Via InMind – Last October (2008), a large email provider launched a new application, the so-called mail goggles, that requires people to quickly solve five moderately complex math problems before they are allowed to send out any email.
Risk, Uncertainty, & Economic Organization - Via Mises – Why can’t a central planning board mimic the operations of entrepreneurs? The key, for Mises, is that entrepreneurial appraisement is not a mechanical process of computing expected values using known probabilities
America’s public debt Tomorrow’s burden - Via Economist – AS AMERICA’S financial crisis recedes, the rumblings of its next crisis can be heard. The federal government has wrapped its guarantees around banks and the housing market. It has borrowed hundreds of billions of dollars to stimulate the enfeebled economy, while tax revenues crumble. And in the years to come the cost of retirees’ benefits will explode. “There is every reason to worry that the banking crisis has simply morphed into a long-term government-debt crisis,” says Kenneth Rogoff of Harvard University.
Infographic: Immigration & America – Via SimpleComplexity
Trading options before Black-Scholes: a study of the market in late seventeenth-century London. Economic History Review, 62/1: 8-30. – Via Economist History Blog – The ledger of the financial broker Charles Blunt contains the details of some 1,500 transactions realized between 1692 and 1695, about a third of which regard the then novel trade in equity options (p.9). The technique had arisen in the 1620s in the commodity market and was proving very useful in the decade following the Glorious Revolution, when some 100 joint-stock companies were floated in London (p.10). During the boom of the early 1690s, it is likely that “several thousand derivatives were transacted each year”.
Media (Audio, Videos, Etc):
James Dyson on Learning From Failure – Via WSJ - Innovative ideas often come out of flops, says British inventor James Dyson.
Willingham on Education, School, and Neuroscience - Via Russ Roberts – Daniel Willingham of the University of Virginia and author of the book Why Don’t Students Like School? talks with EconTalk host Russ Roberts about how the brain works and the implications for teaching, learning, and educational policy. Topics discussed include why we remember some things but not others (and what we can do about it), the central role of memory in problem solving and abstract reasoning, the current state of math education in America, and what makes a good teacher.
Fascinating Objects in Our Solar System - Via Fora.Tv – Imke de Pater is a professor in the Department of Astronomy at UC Berkeley, and a world-renowned planetary scientist. She is an authority on modeling and mapping the planets of our solar system, and led a worldwide campaign to observe the impact of comet Shoemaker-Levy 9 with Jupiter in 1994. A frequent user of the huge Keck telescopes in Hawaii, she has discovered methane drizzle on Saturn’s moon Titan, modeled Jupiter’s magnetic fields, and revealed the dynamic behavior of Neptune’s skies.
Steve Wynn: “See Simple Things Over a Long Period of Time” - Via Todd Sullivan – “Everything you need to know about business can be learned from the Three Little Pigs”. Please watch this.
Behavioral Problems Of Adhering To A Decision Policy By Paul Solvic - Via Decision Research – The need for an investment policy, carefully thought out and personalized to accommodate the investor’s particular objectsives, is widely acknowledged. once a policy is decided, the investor is advised to stick to it…Many investors have attributed their failures to their inability to adhere to predetermined plans.
How Law Affects Lending – Via SSRN – The paper explores how legal change affects lending behavior of banks in twelve transition economies of Central and Eastern Europe. In contrast to previous studies, we use bank level rather than aggregate data, which allows us to control for country level heterogeneity and analyze the effect of legal change on different types of lenders. Using a differences-in-differences methodology to analyze the within country variation of changes in creditor rights protection, we find that the credit supplied by banks increases subsequent to legal change. Further, we show that collateral law matters more for credit market development than bankruptcy law. We also show that entrants respond more strongly to legal change than incumbents. In particular, foreign-owned banks extend their lending volume substantially more than do domestic banks, be they private or state owned. The same holds when we use foreign greenfield banks as proxies for new entrants. These results are robust after controlling for a wide variety of possibilities.
“The Choice Architecture of Choice Architecture: Toward a Nonpaternalistic Nudge Policy” – Via Middlebury- The goal of nudge policy is generally presented as assisting people in finding their “true” preferences. Supporters argue that nudge policies meet a libertarian paternalism criterion. This claim has provoked complaints that nudge policies are unacceptably paternalistic. This paper suggests that by changing the explicit goal of nudge policy to a goal of making the choice of choice mechanism an explicit decision variable of the subgroup being affected by the nudge one can have a non-paternalistic nudge policy that better fits with the values inherent in Classical liberalism. The goal of non-paternalistic nudge policy is not to achieve a better result as seen by government or by behavioral economists. The goal of non-paternalistic nudge policy is to achieve a better result as seen by the agents being nudged as revealed through their choices of choice mechanisms. Examples are given of how nonpaternalistic nudge policy will and will not differ from paternalistic nudge policy.
Inferring the Joint Demographic History of Multiple Populations from Multidimensional SNP Frequency Data - Via PLOS – Demographic models built from genetic data play important roles in illuminating prehistorical events and serving as null models in genome scans for selection. We introduce an inference method based on the joint frequency spectrum of genetic variants within and between populations. For candidate models we numerically compute the expected spectrum using a diffusion approximation to the one-locus, two-allele Wright-Fisher process, involving up to three simultaneous populations. Our approach is a composite likelihood scheme, since linkage between neutral loci alters the variance but not the expectation of the frequency spectrum. We thus use bootstraps incorporating linkage to estimate uncertainties for parameters and significance values for hypothesis tests. Our method can also incorporate selection on single sites, predicting the joint distribution of selected alleles among populations experiencing a bevy of evolutionary forces, including expansions, contractions, migrations, and admixture. We model human expansion out of Africa and the settlement of the New World, using 5 Mb of noncoding DNA resequenced in 68 individuals from 4 populations (YRI, CHB, CEU, and MXL) by the Environmental Genome Project. We infer divergence between West African and Eurasian populations 140 thousand years ago (95% confidence interval: 40–270 kya).
Confidence, opinions of market efficiency, and investment behavior of finance professors - Via Science Direct – We identify finance professors’ opinions on the efficiency of the stock markets in the United States and assess whether their views on efficiency influence their investing behavior. Employing a survey distributed to over 4,000 professors, we obtain four main results. First, most professors believe the market is weak to semi-strong efficient. Second, twice as many professors passively invest than actively invest. Third, our respondents’ perceptions regarding market efficiency are almost entirely unrelated to their trading behavior. Fourth, the investment objectives of professors are, instead, largely driven by the same behavioral factor as for amateur investors–one’s confidence in his own abilities to beat the market, independent of his opinion of market efficiency.
Electronic Publication and the Narrowing of Science and Scholarship - Via AAAS – Online journals promise to serve more information to more dispersed audiences and are more efficiently searched and recalled. But because they are used differently than print—scientists and scholars tend to search electronically and follow hyperlinks rather than browse or peruse—electronically available journals may portend an ironic change for science. Using a database of 34 million articles, their citations (1945 to 2005), and online availability (1998 to 2005), I show that as more journal issues came online, the articles referenced tended to be more recent, fewer journals and articles were cited, and more of those citations were to fewer journals and articles. The forced browsing of print archives may have stretched scientists and scholars to anchor findings deeply into past and present scholarship. Searching online is more efficient and following hyperlinks quickly puts researchers in touch with prevailing opinion, but this may accelerate consensus and narrow the range of findings and ideas built upon.
Addressing potential interactions and feedback loops within the financial system – lessons learned and what can regulators do – Via BIS – The current global crisis, however, exposes another important dimension of systemic risk where interactions within the financial system, as opposed to interactions between the financial system and the macroeconomy, have played a critical role in amplifying the losses.
Possible Macroeconomic Consequences of Large Future Federal Government Deficits – Via SSRN – This paper uses a macroeconometric model of the U.S. economy to analyze possible macroeconomic consequences of large future federal government deficits. The analysis has the advantage of accounting for the endogeneity of the deficit. In the baseline run, which assumes no large tax increases or spending cuts and no bad dollar and stock market shocks, the debt/GDP ratio rises substantially through 2020. The estimates from this run are in line with other estimates. Various experiments off the baseline run are then done. If the dollar depreciates, inflation increases but the effect on the debt/GDP ratio is modest. It does not appear that the United States can inflate its way out of its deficit problem. If in addition U.S. stock prices fall, this makes matters worse by lowering output because of a negative wealth effect. Large personal tax increases or transfer payment decreases solve the deficit problem, but at a cost of considerable lost output over a decade. The Fed’s ability to offset these losses is modest according to the model. Introducing a national sales tax is more contractionary than is increasing personal income taxes or decreasing transfer payments.
Parametric Estimations of the World Distribution of Income - Via NBER – We use a parametric method to estimate the income distribution for 191 countries between 1970 and 2006. We estimate the World Distribution of Income and estimate poverty rates, poverty counts and various measures of income inequality and welfare. Using the official $1/day line, we estimate that world poverty rates have fallen by 80% from 0.268 in 1970 to 0.054 in 2006. The corresponding total number of poor has fallen from 403 million in 1970 to 152 million in 2006. Our estimates of the global poverty count in 2006 are much smaller than found by other researchers. We also find similar reductions in poverty if we use other poverty lines. We find that various measures of global inequality have declined substantially and measures of global welfare increased by somewhere between 128% and 145%. We analyze poverty in various regions. Finally, we show that our results are robust to a battery of sensitivity tests involving functional forms, data sources for the largest countries, methods of interpolating and extrapolating missing data, and dealing with survey misreporting.
Other Very Interesting Items:
A warm room makes people feel socially closer – Via BS Research – Last year, the psychologists Lawrence Williams and John Bargh gave participants a cup of coffee to hold and showed that the temperature of the coffee affected the way those participants rated a stranger’s character. A hot coffee led them to rate him as more good natured and generous, whilst holding an iced coffee had the opposite effect. The finding was touted as an example of embodied cognition – the idea that the way we think about the world is grounded in, and affected by, physical metaphors. Now Hans Ijzerman and Gun Semin have built on this work, showing not only that the ambient temperature of a room affects how socially close people feel to another, but also the type of language they use and the way they see relations between shapes.
What’s Wrong with Probability Notation? – Via LingPipe Blog – What’s wrong with the probability notation used in Bayesian stats papers? The triple whammy of overloading for every probability function,using bound variables named after random variables, and using the bound variable names to distinguish probability functions.
Time Travel Through the Brain – Via Tech Review – Over the last 100 years, the way we visualize and understand the complexity of the brain has evolved. Over the 100-year history of modern neuroscience, the way we think about the brain has evolved with the sophistication of the techniques available to study it. Improvements in microscope design and manufacture, together with the development of cell-staining techniques, afforded neuroscientists their first glimpse at the specialized cells that make up the nervous system. Microscopes with more magnifying power enabled them to probe nerve cells in greater detail, revealing distinct compartments. Newer techniques expose the connections between nerve cells, revealing the complex organization of the brain.
Just How ‘Blind’ Are You When Talking on a Cell Phone? - Via NeuroNarrative – That’s exactly what the authors of a new study published in the journal Applied Cognitive Psychology wanted to do. Researchers examined the effects of divided attention when people are either (1) walking while talking on a cell phone, (2) walking and listening to an MP3 player, (3) walking without any electronics, or (4) walking in a pair.
Friendship is mainly about ‘me, me and me’ - Young people mainly select their friends according to the image they have of another person, irrespective of whether the person concerned actually satisfies that image. Dutch researcher Maarten Selfhout has demonstrated that young people consider themselves to be the most important factor in a friendship. Nevertheless friendship can still exert a significant influence: boys become criminal and girls become depressed.
Us Treasuries: Risk Free For How Long? – Via Megan McArdle – At least since the end of World War II, sovereign debt risk has been a very real problem, but one confined mostly to the developing world. Sure, there was the risk that the government might decide to inflate away the value of your loan, that risk abated in most places. (Though obviously not all–I’m looking at you, Italy!) Places where it didn’t abate were increasingly forced to borrow in other currencies, leaving default as their main option–inflating away domestic denominated debt tended to make your dollar denominated debt problems worse.
Genetic Intelligence: Molecules of Memory – Via Al Fin – “Overexpression” of a gene means that more of the “gene’s protein” is expressed in the cytoplasm than would occur without intervention. If the gene in question causes the brain’s hippocampus to lay down new memories more efficiently, the animal will learn more and remember better
Your Brain on Context – Via Incidental Economist – Serendipitously I came upon the same psychological demonstration twice in a ten-day span. It appears in The Tipping Point by Malcolm Gladwell and is discussed by Paul Bloom in Yale’s intro psych course (which I reviewed). If you haven’t read Gladwell’s book or taken an intro psych course perhaps you have not seen this demonstration. It illustrates the powerful role of context in human cognition. The demo follows.
Why Did Latin America Do Better in This Crisis? The Benefits of Being Prepared – Via IMF – Although this time the external shocks were very strong in this year of global crisis, the Latin American and Caribbean (LAC) region has performed notably better than in the past, and also better than many other emerging market countries.
Economics Professors Push Safe Investing Strategies – Via Harvard Crimson – Like most of the investment community, Harvard’s vaunted economists were hit hard by the recent financial crisis and ensuing downturn. Textbook magnate N. Gregory Mankiw’s stock portfolio dipped. Economics department chair and hedge fund adviser John Y. Campbell got out too early. Even conservative investor Claudia Goldin suffered a drop in her retirement fund.
30 Superb Examples of Infographic Maps - Via Webdesigner Depot
20 Inspirational Infographics – Via DataVisualizatoin
Weekly Joke (Albert Einstein & IQS):
When Albert Einstein died, he met three New Zealanders in the queue outside the Pearly Gates. To pass the time, he asked what were their IQs. The first replied 190. “Wonderful,” exclaimed Einstein. “We can discuss the contribution made by Ernest Rutherford to atomic physics and my theory of general relativity”. The second answered 150. “Good,” said Einstein. “I look forward to discussing the role of New Zealand’s nuclear-free legislation in the quest for world peace”. The third New Zealander mumbled 50. Einstein paused, and then asked, “So what is your forecast for the budget deficit next year?” (Adapted from Economist June 13th 1992, p. 71).