Weekly Roundup 53: A Curated Linkfest For The Smartest People On The Web
It takes a while to put this together, if you post these articles on your website(s) I ask that you kindly include a reference to this post. Thanks
Weekly Cartoon (Via Chart Porn)
Future Of Finance: Major Changes & Crisis In The History of Finance Since 1914
Dan Ariely: Sex Shaving & Bad Underwear Or how to trick yourself into exerting self-control – Via Predictably Irrational – Recently, I gave a lecture on the problem of self-control. You know the one: At time X you decide that you’re done acting a certain way (No more smoking! No more spending! No more unprotected sex!), but then when temptation strikes, you go back on your word.
Richard Thaler:Paying a Price for the Thrill of the Hunt – Via NYT – IF a business school professor is running short on cash, there is a sure-fire solution: run a dollar auction game in class. To start, the professor offers to sell the class a $20 bill. Bidding starts at $1 and goes up in $1 increments. The winner pays the professor whatever the high bid was, and gets the $20. Here’s the catch: the second-highest bidder also has to pay, but gets nothing in return. Typically, a few brave or stupid students — nearly always male — open the bidding but fairly quickly only two bidders remain and they discover they are in a war of attrition. The bidding slows when someone bids $20, but then resumes with neither wanting to “lose.” If the two students are particularly stubborn, prices can go over $50. (The professor typically gives the money to charity, or claims to.)
Why Aren’t Academic Economists Bayesians? – Econlib – Almost all economic models assume that human beings are Bayesians: They start with some prior beliefs about how the world works, and update those beliefs using Bayes’ Theorem as new information arrives. Behavioral economists often question whether people are in fact Bayesians, but they agree that we should be. (See e.g. the epilogue to The Winner’s Curse). It is striking, then, to realize that academic economists are not Bayesians. And they’re proud of it!
Correlation and Causation – Via Psych Files – Looking for examples of correlation and causation? You’ve heard it a million times: correlation doesn’t mean causation. Still need help? Well, here’s a humorous look at this topic that I think drives home the point. The Psych Files “Breaking News” explores whether satisfied workers are more productive and whether living together causes divorce. I hope you enjoy this unique video episode of The Psych Files.
Brands leave their mark on children’s brains – Via Research Digest Blog – The idea may be “unpalatable”, but companies seeking an edge over their rivals should ensure that children are exposed to their brands as early in life as possible. That’s according to Andrew Ellis and colleagues, whose new research shows that the classic “age-of-acquisition” effect in psychology applies to brand names as much as it does to everyday words.
False Alarms and Copy Cats – Via Everyday Sociology Blog – MoBull Messenger is the University of South Florida (USF) emergency text messaging system that faculty, staff, and students can register for, in order to receive emergency notices. As I mentioned in a previous post, on the principle of not wishing to further enrich my cell phone provider, I do not have a texting plan. Yet, on October 5 I received 7 MoBull texts on my cell phone.I received the following text at 1:47 pm: “Alert Tampa Campus- EMERGENCY: Armed intruder on campus. Stay inside. Lock doors. Emergency personnel responding.” About 20 minutes later, the alert gave the location of the armed person as the library and warned to “avoid the area”.
Travels with dopamine – the chemical that affects how much pleasure we expect – Via Science Blogs – How would you fancy a holiday to Greece or Thailand? Would you like to buy an iPhone or a new pair of shoes? Would you be keen to accept that enticing job offer? Our lives are riddled with choices that force us to imagine our future state of mind. The decisions we make hinge upon this act of time travel and a new study suggests that our mental simulations of our future happiness are strongly affected by the chemical dopamine.
WSJ on Wine: A Taste of Illusion – Via True Slant – he bottom line is that if people believe what they’re drinking is supposed to be good, most of them will think it tastes good. Even the most sophisticated oenophiles in the world are subject to their cognitive biases, just like the rest of us.
Implications of Past Forecasting Errors Often Underestimated – Via Physorg – When managers issue a forecast of their firm’s earnings, they do not always take into account prior forecasting errors, according to research in the current issue of the Journal of Business Finance & Accounting.
Did financial globalisation make the US crisis worse? – Via Voxeu – Can we blame financial globalisation for the severity of the current crisis? This column says that financial integration spread the negative banking shock that originated in the US across countries, thereby making the US better off at others’ expense.
Ten statisticians every psychologist should know about – Via Reseach Digest Blog – As psychology students past and present will be only too aware, statistics are a key part of every psychology undergrad course and they also appear in nearly every published journal article. And yet have we ever stopped to recognise the statisticians who have brought us these wonderful mathematical tools? As psychologist Daniel Wright puts it: “Statistical techniques are often taught as if they were brought down from some statistical mount only to magically appear in [the software package] SPSS.”
Love and Envy Linked by Same Hormone, Oxytocin – Via Science Daily – A new study carried out at the University of Haifa has found that the hormone oxytocin, the “love hormone,” which affects behaviors such as trust, empathy and generosity, also affects opposite behaviors, such as jealousy and gloating. “Subsequent to these findings, we assume that the hormone is an overall trigger for social sentiments: when the person’s association is positive, oxytocin bolsters pro-social behaviors; when the association is negative, the hormone increases negative sentiments,” explains Simone Shamay-Tsoory who carried out the research.
Management Lessons from Airplane Crashes – Via NeuroMarketing – Airplane crashes don’t happen often, and when they do they are no doubt among the most-studied failures in any industry. Most bad business decisions, by contrast, are pushed into the past as quickly as possible. That may be one lesson – studying why a business strategy proved to be a failure might prevent similar failures in the future. But the lesson I want to talk about today is more specific: how Cockpit Resource Management (CRM) strategies have direct application to business management issues.
Counterintuition – The superb Abnormal Returns has a post “Investing by the seat of their pants,” which, among other things, discusses William Bernstein’s conjecture that “only a tiny fraction, 1 in 1000, investors have the skills to become truly competent investors.” In the preface of his new book, Bernstein suggests four abilities successful investors must enjoy (via Information Processing).
Eleven Myths of De-Cluttering – Via Slate – One of my great realizations about happiness (and a point oddly underemphasized by positive psychologists) is that outer order contributes to inner calm.But as much as most of us want to keep our home, office, car, etc., in reasonable order, it’s tough. Here’s a list of some myths of de-cluttering that make it harder to get rid of stuff.
The Worst is yet to Come: Unemployed Americans Should Hunker Down for More Job Losses – Via RGE Monitor -Think the worst is over? Wrong. Conditions in the U.S. labor markets are awful and worsening. While the official unemployment rate is already 10.2% and another 200,000 jobs were lost in October, when you include discouraged workers and partially employed workers the figure is a whopping 17.5%. While losing 200,000 jobs per month is better than the 700,000 jobs lost in January, current job losses still average more than the per month rate of 150,000 during the last recession.
When God Is Watching, People Are More Generous. – Via Psychology Today – That said I recently came across a paper by Azim F. Shariff and Ara Norenzayan published in Psychological Science that suggests that when individuals are primed about God, they behave more generously in the dictator game. For those of you who might be unfamiliar with this economic game, it works as follows: Individual A is given a fixed amount of money (say $20) and is asked to split the money with individual B, who has no veto power over the offer. In other words, if individual A decides to keep $18 and only offer $2 to individual B, this is the manner in which the money will be split. From a classical economic perspective, one should not offer anything to individual B although perhaps not surprisingly for all people other than economists, people do offer some amount greater than zero (e.g., because of reputational concerns).
A math puzzle about splitting land – Via Mind Your Decisions – A father is splitting up land among his two sons in estate planning. How can he divide the land fairly?
Media (Audio, Videos, Etc):
How advertising really works – Via Lucid Thoughts – Derren Brown is a British “mentalist” and entertainer. He has a number of fascinating videos over on You Tube, including this classic – quite simply, the most persuasive illustration of nonconscious processing I have ever seen. When you click on the video below, you may have to follow the link over to You Tube to watch it. Please do so, then come back to discuss. Be sure to watch to the end – it’s worth the investment.
Richard Dawkins Nice Guys Finish First: – Via Finance Professor – “First (of five) part of the 1986 documentary from the BBC Horizon series. In this video Richard Dawkins explains how natural selection can favour co-operation in nature, so long as it is of benefit to the selfish gene….in their attempts to earn real money, players must wrestle with a dilemma – whether to follow their natural instincts of co-operation or the dictates of reason and behave selfishly.
Priming, Money and their Effect On Us: – Via Finance Professor – “An interesting experiment conducted by the BBC’s ‘Bang Goes The Theory Team’ regarding a psychological phenomenon called ‘Priming’. It is a phenomenon that may well change your understanding about the way we are all affected by what we see, and so, how we perceive our environment”
University of the Future – Via BIL – We finish high-school and know more about math than we do of ourselves. Yet knowing ourselves is more important than algebra. Current education does not create free, creative and wise individuals, but workers for the requirements of the market. Most universities give you an education that will supply you with a career – not a good life. But careers, as the etymology of the word betrays, are roads for carts – not for human beings
Credit crisis, debt load a double whammy for investment – Via PhysOrg – The findings show that even seemingly minor financing decisions such as debt maturity deadlines can put firms at risk when the economy sours, carving into investments that seed future growth, hiring and profits, the study says. “Our message is that firms should sweat the small stuff,” said Scott Weisbenner, a U. of I. finance professor and researcher for the study. “These companies suffered profoundly, putting them at a disadvantage compared to firms that were just lucky enough to have debt due just a couple of years earlier or a few years later.”
Mamas Don’t Let Your Babies Grow Up To Be…Lawyers – Via SSRN – This essay treats a legal education as an investment, and asks the question of whether, based on known costs and expected benefits, such investment should be undertaken. The inquiry will necessarily differ from one potential law student to another. But for three posited “typical students,” the investment is shown to be a bad one.
What Works in Securities Laws? – Via Harvard – We study asset prices in an economy where some investors categorize risky assets into different styles and move funds among these styles depending on their relative performance. In our economy, assets in the same style comove too much, assets in different styles comove too little, and reclassifying an asset into a new style raises its correlation withth at style. We also predict that style returns exhibit a rich pattern of own- and cross-autocorrelations and that while asset-level momentum and value strategies are profitable, their style-level counterparts are even more so. We use the model to shed light on several style-related empirical anomalies.
Equity Risk Premiums (ERP): Determinants, Estimation and Implications – Via SSRN – Equity risk premiums are a central component of every risk and return model in finance and are a key input into estimating costs of equity and capital in both corporate finance and valuation. Given their importance, it is surprising how haphazard the estimation of equity risk premiums remains in practice. In the standard approach to estimating equity risk premiums, historical returns are used, with the difference in annual returns on stocks versus bonds over a long time period comprising the expected risk premium. We note the limitations of this approach, even in markets like the United States, which have long periods of historical data available, and its complete failure in emerging markets, where the historical data tends to be limited and volatile. We look at two other approaches to estimating equity risk premiums – the survey approach, where investors and managers ar asked to assess the risk premium and the implied approach, where a forward-looking estimate of the premium is estimated using either current equity prices or risk premiums in non-equity markets. We close the paper by examining why different approaches yield different values for the equity risk premium, and how to choose the “right” number to use in analysis. (In an addendum, we also look at equity risk premiums during the market crisis, starting on September 12, 2008 through October 16, 2008.)
Other Very Interesting Items:
This is Your Brain. This is Your Brain on…Air? – Via Plant Green – Air pollution has an obvious and powerful effect on our health. Asthma, heart disease, and even appendicitis have been linked to poor air quality. What has not been obvious is the effect low air quality has on the health of our brains. A number of recent reports, based on research conducted around the world, have suggested that some of the most common pollutants, including black carbon, particulate matter and ozone, can inhibit vocabulary development, reduce reaction time, and even influence overall intelligence.
Discretion and financial regulation – Via Interfluidity – An enduring truth about financial regulation is this: Given the discretion to do so, financial regulators will always do the wrong thing. It’s easy to explain why. In good times, regulators have every incentive to take banks at their optimistic word on asset valuations, and therefore on bank capitalization. It is almost impossible for bank regulators to be “tough” in good times, for the same reason it is almost impossible for mutual fund managers to be bearish through a bubble. A “conservative” bank examiner who lowballs valuation estimates will inevitably face angry pushback from the regulated bank. Moreover, the examiner will be “proven wrong”, again and again, until she loses her job. Her fuddy duddy theories about cash flow and credit analysis will not withstand empirical scrutiny, as crappy credits continually perform while asset prices rise. Valuations can remain irrational much longer than a regulator can remain employed.
Manhattan Institute Says “New York must declare a financial emergency” – Via Mish’s & Naked Capitalism – New York state’s huge and growing budget gap requires government to take drastic actions to correct it, said E.J. McMahon, director of the Empire Center for New York State Policy at the Manhattan Institute. McMahon spoke to the Council of Industry, a regional trade group, Friday at the Powelton Club. He charted flat revenues against expected spending if nothing is changed and showed a $20 billion gap looming by 2012-13. McMahon said the state must declare a financial emergency and enact a statutory freeze on public-sector wages for at least three years. State law allows this and enables contracts to be voided, he said. It would save at the rate of $2 billion a year for state, local and school taxpayers.
Energy Agency: financial crisis an unprecedented opportunity – Via Ars Technica – The International Energy Agency has come out with its World Energy Outlook for 2009, finding that the financial crisis has caused an unusual drop in both energy use and greenhouse gas emissions. It’s also caused a big drop in the development of fossil fuel sources, which the IEA considers a rare opportunity to start limiting their use.
Kass: Market Ignorance Is Bliss – Via The Street – The message of the markets over the past few weeks is that, with increased certainty, investors are growing more comfortable with the forecast of a smooth and self-sustaining economic recovery in 2010 and beyond. Many now have even adopted the view that the current cycle is the start of a normal multiyear recovery that could resemble the average 45-month expansionary phases that have typically followed a recession.The previous consensus forecast of a shallow recovery has now been displaced by a far more optimistic projection. Aggressive fixed and variable corporate cost cuts (and the productivity gains and margin expansion that follow) are now being seen as providing the underpinning to a leveraged and positive impact on 2010 corporate profits. Next year’s S&P 500 earnings forecasts are now moving toward $80 a share (as UBS estimated yesterday), a level that was unimaginable three to five months ago.
What Intelligence Tests Miss– Via Times Higher Education – We all know what Keith Stanovich is talking about in this book, and we all have our anecdotal examples: the economics professor who repeatedly bounces cheques; the theoretical physicist who is convinced her house is haunted; or the surgeon who goes out for fish and chips right after completing a heart bypass. And of course, there’s that recent US President who can’t seem to express a coherent thought yet reportedly has an IQ of 120. Intelligence tests don’t seem to pick up either good judgment or the ability to think clearly and consistently, and people with high IQs often do very stupid things.
Weekly Joke: (Value Of Human Capital)
Engineers and scientists will never make as much money as business executives. Now a rigorous mathematical proof that explains why this is true:
Postulate 1: Knowledge is Power.
Postulate 2: Time is Money.
As every engineer knows,
———- = Power
Since Knowledge = Power, and Time =Money, we have
——— = Knowledge
Solving for Money, we get:
———– = Money
Thus, as Knowledge approaches zero, Money approaches infinity regardless of the Work done.
Conclusion: The Less you Know, the more money you Make.