Weekly Roundup 51: A Curated Linkfest For The Smartest People On The Web

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Exclusive Features:

The George Soros Lectures ! - Via FT – George Soros unveils his latest thinking on economics and politics during a lecture series hosted by the Central European University (CEU) from Oct 26-30, 2009. These lectures are the culmination of a lifetime of practical and philosophical reflection. Mr Soros discusses his general theory of reflexivity and its application to financial markets, providing insights into the recent financial crisis. The third and fourth lectures examine the concept of open society, which has guided Mr Soros’s global philanthropy, as well as the potential for conflict between capitalism and open society. The closing lecture focuses on the way ahead, closely examining the increasingly important economic and political role that China will play in the future

Shlomo Benartzi – Leading Authority on Behavioural Finance - Via Finance Professor – Professor Shlomo Benartzi is a leading authority on behavioural finance with special interests in retirement planning, investor behaviour and behavioural wealth management.”

Niall Ferguson and Kenneth Rogoff on Bloomberg Radio – Via Value Investing World

James Galbraith Interviewed By Bill Moyers - BILL MOYERS: How does this last year compare with what happened after the Great Crash in ’29?  JAMES GALBRAITH: It’s similar in important respects and different in others. If you look at the trends in world trade and manufacturing, they’re very similar. There’s been a massive collapse, a collapse which is comparable in scale to 1930. The overall economy hasn’t come down nearly as much, and the reason for that is that we have the institutions that were created in the New Deal and the Great Society, institutions of the welfare state, social security. And, of course, there has been the influence of John Maynard Keynes, which gave us the very quick reaction in the form of the expansion bill of the stimulus package. And that also has kept the damage from being as large as it was in 1930 to ’32.

Video: Jim Grant on WealthTrack – Via Vlaue Investing World

Dan Ariely: The psychology of money and habits - Via Predictably Irrational Blog  – Money is an integral part of modern life. We constantly make decisions about whether we’re willing to pay for different products and, if so, how much we are willing to pay. In fact, we make decisions about money so often that we consider money to be a natural part of our environment.

Free Harvard Course : The Emergence of Modern Economic Growth: A Comparative and Historical Analysis – Via Harvard – This course is an overview and analysis of comparative economic development during the last half millennia. It examines the emergence of modern economic growth in Europe after 1500, and the forces that led to the great divergence in prosperity in the nineteenth century. Also considered: colonialism, communism, fascism, and revolution.

Feature:

Janet Tavakoli Recommends : Can Citigroup Carry Its Own Weight? – Via NYT -The answer to that question concerns not only the 276,000 employees who work at what was once the world’s largest bank, but the nation’s taxpayers as well. Even as Citigroup’s stock has soared from a low of $1.02 to its current $4.09 — and the company has eked out a $101 million profit in the third quarter along the way — it’s still unclear whether it can climb out of the hole that its former leaders dug before and during the mortgage mania. If Citigroup remains stuck, taxpayers will be on the hook for outsize losses.

Prem Watsa: Smartest guy in the room on markets - Via National Post – Property and casualty insurer Fairfax Financial Holdings Ltd. of Toronto not only weathered the greatest financial storm since the Depression, but profited mightily and continues to do so. Its 2009 third-quarter results, released Thursday — it earned US$562.4-million, up from US$467.6-million a year ago, while revenue increased to US$2.21 billion from US$2.16 billion — reflected its steady hand at the helm. Yesterday, founder, chairman and CEO Prem Watsa talked with me about the results and future financial conditions.

David Dreman: Is Recession Normal? No - Via Forbes – The pundits on CNBC are telling us that a stock market correction is overdue. The reason a pullback is supposedly imminent: The economy is going to need a long time to heal. Unemployment advances toward 10%, and consumer spending, as a percentage of income, is at its lowest level in decades. Economic pessimists include such notable commentators as forbes columnists A. Gary Shilling and the libertarian congressman Ron Paul (see “On My Mind”). And then, say the bears, stock prices are already pretty high. The S&P 500 index is at 133 times bottom-line earnings for the 12 months through September.

The Daily Show – More on how to reform Wall Street….  - Via WSF

Visualizing Poverty In America - Via Flickr

Infographic: Who is filing Bankruptcy? - Via Fancy Stats

Governance and regulation of the financial sector – post meltdown: what has changed? – Via BIS – Even basic questions about who should have responsibility for regulation and whether the lender of last resort function should be separated from the regulatory function are now becoming important issues on the table. In the UK it now has political dimensions. The breath of responsibilities of the regulator are now also being revamped, particularly in the US, as is the question of how much should be left to the market and how much should be directly regulated. The age of deregulation may well be about to witness some fundamental changes and reversals.

Functions Of A Family Office Part 1 - Via Journal Of Wealth Mangement  & Alden International

Inside A Family Office Part 2 - Via Alden International

“The Definition of Inflation According to Mises: Implications for the Debate on Free Banking” - Via Libretarian Papers – The discussion of what is and what is not inflation has become central among the Austrian economists in their debate between free banking with fractional reserves versus banking with 100-percent reserve. Many Austrians also turn to the writings of Mises to find out what the dean of Austrian Economics thought about inflation, but there is no agreement on the interpretation of his writings either. This article tries to contribute to the interpretation of Mises’ concept of inflation.

The Magic of Financing Health Care Reform – Via Eocnomix -  Suppose I walk through an upscale department store and buy a fine Italian suit. The suit is regularly priced at $1,300, but it happens to be on sale now for only $900. Is the $400 discount the equivalent of cash in hand, money that I can now spend on a nice watch and still remain “budget neutral,” as the jargon goes?

Improving financial regulation and supervision - Via EconBrowser – There were some other very interesting presentations at the conference hosted by the Federal Reserve Bank of Boston last week. Fed Chair Ben Bernanke spoke on Financial Regulation and Supervision after the Crisis while Princeton Professor Alan Blinder’s message was It’s Broke, Let’s Fix It: Rethinking Financial Regulation. Here I summarize four key reforms these speakers addressed.

Media (Audio, Videos, Etc):

Chris Martenson’s Crash CourseVia Value Investing World – The Crash Course seeks to provide you with a baseline understanding of the economy so that you can better appreciate the risks that we all face. The Intro below is separated from the rest of the sections because you’ll only need to see it once…it tells you about how theCrash Course came to be.

Social Neuroscience A New Field? - Via Psych Central – A recent release from the excellent RSA Vision lecture series: the leading expert in social neuroscience explains the subdiscipline.


Academic Papers:

The coexistence of overestimation and underweighting of rare events and the contingent recency effect – Via SJDM- Previous research demonstrates overestimation of rare events in judgment tasks, and underweighting of rare events in decisions from experience. The current paper presents three laboratory experiments and a field study that explore this pattern. The results suggest that the overestimation and underweighting pattern can emerge in parallel. Part of the difference between the two tendencies can be explained as a product of a contingent recency effect: Although the estimations reflect negative recency, choice behavior reflects positive recency. A similar pattern is observed in the field study: Immediately following an aversive rare-event (i.e., a suicide bombing) people believe the risk decreases (negative recency) but at the same time exhibit more cautious behavior (positive recency). The rest of the difference is consistent with two well established mechanisms: judgment error and the use of small samples in choice. Implications for the two-stage choice model are discussed.

From group diffusion to ratio bias: Effects of denominator and numerator salience on intuitive risk and likelihood judgments – Via SJDM – The group-diffusion effect is the tendency for people to judge themselves to be less likely to experience a negative outcome as the total number of people exposed to the threat increases — even when the probability of the outcome is explicitly presented (Yamaguchi, 1998). In Experiment 1 we replicated this effect for two health threat scenarios using a variant of Yamaguchi’s original experimental paradigm. In Experiment 2, we showed that people also judge themselves to be less likely to be selected in a lottery as the number of people playing the lottery increases. In Experiment 3 , we showed that explicitly presenting the number of people expected to be selected eliminates the group-diffusion effect, and in Experiment 4 we showed that presenting the number expected to be affected by a health threat without presenting the total number exposed to the threat produces a reverse effect. We propose, therefore, that the group-diffusion effect is related to the ratio bias. Both effects occur when people make risk or likelihood judgments based on information presented as a ratio. The difference is that the group-diffusion effect occurs when the denominator of the relevant ratio is more salient than the numerator, while the ratio bias occurs when the numerator is more salient than the denominator.

Estimating the Effects of Large Shareholders Using a Geographic Instrument - Via Harvard Working Knowledge – Are large shareholders good monitors of management? A public firm’s shareholders have extensive legal control rights in the corporation, but in practice much of this control is delegated to managers. In companies with small, dispersed shareholders, owners may find it costly to coordinate and exercise monitoring and control, leaving management with considerable discretion. Large shareholders, however—by concentrating a block of shares in the hands of a single decision-maker—may play a beneficial role in facilitating effective owner control. Yet large shareholders are not without their costs. HBS professor Bo Becker and coauthors develop and test a framework to quantify the impact of large owners (individual non-managerial blockholders, not mutual funds or other institutions) on several key aspects of firm behavior. They show that such shareholders play an important role for corporate governance in sizable U.S. public firms, and can affect several firm policies.

Bailouts, Bonuses, And The Return Of Unjust Gains - Via Harvard Law School – n March 2009, ailing insurance giant American International Group (AIG) triggered a national outcry when it paid out $165 million in government bailout funds for employee bonus incentives. [1] President Obama called the bonus payments an “outrage” and promised that his administration would “pursue every single legal avenue to block these bonuses and make the taxpayers whole.” [2] He chastised the firm for its audacity of using borrowed taxpayer monies to reward financial recklessness and greed. This was the same company, of course, who within days of receiving its first infusion of government cash in September 2008, sent its executives on a half-million dollar boondoggle retreat at a fancy desert spa. [3] And just several months after the initial fiasco, AIG tried to award $265 million in further bonuses, [4] adding to performance bonuses of $454 million paid to employees and executives in 2008. [5] It was just over a year ago when AIG turned to the government for its survival. The government stepped in to assist AIG when the company faced imminent death from its risky financial derivative products that were backed by precarious mortgages. [6] Fearful that the toppling giant would trigger a cataclysmic domino effect, the government authorized the bailout funds to keep AIG, and the entire U.S. financial sector, afloat. [7] The government agreed to loan AIG the money, now totaling over $173 billion, collateralized with AIG’s assets and an 80% equity ownership of the company. [8] The first infusion of cash to AIG was authorized by the Federal Reserve in September 2008, supplemented with funds authorized in October by Congress in the $700 billion bailout bill, the Emergency Economic Stabilization Act (EESA), which established the Troubled Assets Relief Program (TARP).

Risk Aversion, the Labor Margin, and Asset Pricing in DSGE Models - Via FRBSF – In dynamic stochastic general equilibrium (DSGE) models, the household’s labor margin as well as consumption margin affects Arrow-Pratt risk aversion. This paper derives simple, closed-form expressions for risk aversion that take into account the household’s labor margin. Ignoring the labor margin can lead to wildly inaccurate measures of the household’s true attitudes toward risk. We show that risk premia on assets computed using the stochastic discount factor are proportional to Arrow-Pratt risk aversion, so that measuring risk aversion correctly is crucial for understanding asset prices. Closed-form expressions for risk aversion in DSGE models with generalized recursive preferences and internal and external habits are also derived.

Do Wealth Fluctuations Generate Time-Varying Risk Aversion? Micro-Evidence on Individuals Asset Allocation – Via Stanford GSB – We use data from the PSID to investigate how households portfolio alloca- tions change in response to wealth Fuctuations. Persistent habits, consumption commitments, and subsistence levels can generate time-varying risk aversion with the consequence that when the level of liquid wealth changes, the proportion a household invests in risky assets should also change in the same direction. In contrast, our analysis shows that the share of liquid assets that households invest in risky assets is not a¤ected by wealth changes. Instead, one of the major drivers of households’ portfolio allocation seems to be inertia: households rebalance only very slowly following infows and outfows or capital gains and losses.

Self-Affirmation Enhances Attentional Bias Toward Threatening Components of a Persuasive Message - Via Psychological Science -We explored whether self-affirmation enhances attentional bias toward threatening elements of a persuasive message. Female alcohol consumers read an article linking alcohol to breast cancer and were then exposed supraliminally to threat and nonthreat words from the article (as well as threat and nonthreat words that did not appear in the article). Among moderately heavy drinkers who were not self-affirmed, there emerged an attentional bias away from the threatening words in the article—a result suggesting an avoidant response. However, among moderately heavy drinkers who were self-affirmed, there was a bias toward the threatening words. No attentional biases appeared for threat words not in the message, which suggested that the effect was threat specific. Moreover, no attentional biases were found among the heaviest drinkers. Self-affirmation may facilitate targeted implicit processing of threatening messages, although the effects could attenuate among individuals engaging in high levels of the behavior featured in the message.

The Restraint Bias: How the Illusion of Self-Restraint Promotes Impulsive Behavior - Via Psychlogical Science – Four studies examined how impulse-control beliefs—beliefs regarding one’s ability to regulate visceral impulses, such as hunger, drug craving, and sexual arousal—influence the self-control process. The findings provide evidence for a restraint bias: a tendency for people to overestimate their capacity for impulse control. This biased perception of restraint had important consequences for people’s self-control strategies. Inflated impulse-control beliefs led people to overexpose themselves to temptation, thereby promoting impulsive behavior. In Study 4, for example, the impulse-control beliefs of recovering smokers predicted their exposure to situations in which they would be tempted to smoke. Recovering smokers with more inflated impulse-control beliefs exposed themselves to more temptation, which led to higher rates of relapse 4 months later. The restraint bias offers unique insight into how erroneous beliefs about self-restraint promote impulsive behavior.

The motivated use of moral principles - Via SJDM – Five studies demonstrated that people selectively use general moral principles to rationalize preferred moral conclusions. In Studies 1a and 1b, college students and community respondents were presented with variations on a traditional moral scenario that asked whether it was permissible to sacrifice one innocent man in order to save a greater number of people. Political liberals, but not relatively more conservative participants, were more likely to endorse consequentialism when the victim had a stereotypically White American name than when the victim had a stereotypically Black American name. Study 2 found evidence suggesting participants believe that the moral principles they are endorsing are general in nature: when presented sequentially with both versions of the scenario, liberals again showed a bias in their judgments to the initial scenario, but demonstrated consistency thereafter. Study 3 found conservatives were more likely to endorse the unintended killing of innocent civilians when Iraqis civilians were killed than when Americans civilians were killed, while liberals showed no significant effect. In Study 4, participants primed with patriotism were more likely to endorse consequentialism when Iraqi civilians were killed by American forces than were participants primed with multiculturalism. However, this was not the case when American civilians were killed by Iraqi forces. Implications for the role of reason in moral judgment are discussed.

Do Investors Overweight Personal Experience? Evidence from IPO Subscriptions - Via SSRN – We find a strong positive link between past IPO returns and future subscriptions at the investor level in Finland. Our setting allows tracing this effect to the returns personally experienced by investors. The effect is not explained by patterns related to the IPO cycle, or wealth effects. This behavior is consistent with reinforcement learning, in which personally experienced outcomes are overweighted compared to rational Bayesian learning. The results provide a microfoundation for the argument that investor sentiment drives IPO demand. The paper also contributes to understanding how popular investment styles develop, and has implications for the marketing of financial products.

Other Very Interesting Items:

Intelligence vs. Judgment: Is Dysrationalia Leading to the Downfall of Modern Civilisation? – Via Alfin – U. of Toronto Psychologist Keith Stanovich has spent many years looking at “rational thought”, and how IQ tests fail to measure the essence of human “rationality.”  Stanovich uses the label “dysrationalia” for persons who have high IQ, but who exhibit faulty judgment.  He says that modern society is top-heavy with dysrational individuals of high intelligence, but low “rationality.”

Sunday Schloss: 65 years of investing a la Graham- Via Mr. Market Blog

Joseph Stiglitz – Death Cometh for the Greenback - Via National Interest – THE DOLLAR is in trouble. That’s clear, and it’s been true for a while. The cornerstone of the global economic system has long been the greenback. In the aftermath of the Vietnam War and the oil shocks that brought on inflation, the value of the dollar relative to other currencies could not be maintained, so countries moved away from pegging their currencies to America’s. But still, the almighty dollar was used by countries all over the world for their reserves. The reserves provided backing for the currency and the country. They were a bank account that could be drawn upon in times of need. If oil prices shot up, a crop failed or lenders demanded their money back, there was a stockpile of money that could be used.

Unintended Consequences? Food Ads Automatically Prime Eating in Children and Adults - Via Lucid Thoughts – A really fascinating, and in several ways disturbing study crossed my desk a couple of weeks ago. Authored by Jennifer Harris, the legendary John Bargh, and Kelly Brownwell, the article is called “Priming Effects of Television Food Advertising on Eating Behavior”. It was published earlier this this year in Health Psychology.  Abstract and online access are available here.

How the ‘fame motive’ makes you want to be a star - Via CNN -In the era of reality TV, YouTube, and social media “friends” and “followers,” it seems that everyone wants to be a star. People will perform outrageous acts on camera and revel in the attention of strangers. But what, then, is driving this need for attention from thousands — or even millions — of spectators?

Who Will Be the Green VC Giant? – Via Business Week – For nearly two decades, John Doerr and Vinod Khosla worked together at Kleiner Perkins Caufield & Byers, forging one of the most lucrative partnerships in the venture capital business. The gravel-voiced Doerr scored the high-profile hits, including Netscape Communications, Amazon.com (AMZN), and Google (GOOG), while the confrontational Khosla backed little-known communications equipment startups such as Juniper Networks (JNPR) and Cerent (CSCO), with similarly explosive returns.

Weekly Joke (3 Economists & A Pilot):

Three leading economists took a small plane to the wilderness in northern Canada to hunt moose over the weekend. The last thing the pilot said was, remember this is a very small plane and you will only be able to bring ONE moose back.

But of course, they killed one each and come Sunday, they talked the pilot into letting them bring all three dead moose onboard. So just after takeoff, the plane stalled and crashed. In the wreckage, one of the economists woke up, looked around and said. Where the hell are we. Oh, just about a hundred yards east of the place there we crashed last year.

About Miguel Barbosa

I run this site.

01. November 2003 by Miguel Barbosa
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