Weekly Roundup 69: A Curated Linkfest For The Smartest People On The Web

I spend 8 hours every Sunday putting this together…If you like this roundup kindly include a reference to SimoleonSense.com .Thanks!

Weekly Cartoon


Joke Of The Week – via Net Funny

These two women were walking through the forest when they hear this voice from under a log. Investigating, the women discovered the voice was coming from a frog:

“Help me, ladies! I am an investment banker who, through an evil witch’s curse, has been transformed into a frog. If one of you will kiss me, I’ll be returned to my former state!”

The first woman took out her purse, grabbed the frog, and stuffed it inside her handbag. The second woman, aghast, screamed, “Didn’t you hear him? If you kiss him, he’ll turn into an investment banker?”

The second woman replied, “Sure, but these days a talking frog is worth more than an investment banker!”

Most Important Articles of The Week

Choice Overload: How Humans Cognitively Manage an Abundance of Mate Options – via PsychScience – To contribute to researchers’ understanding of how humans choose mates, we examined how the number of mate options influenced the dating decisions made by 1,868 women and 1,870 men across 84 speed-dating events. Multilevel modeling of these decisions revealed that when faced with abundant choice, choosers paid less attention to characteristics requiring more time to elicit and evaluate (e.g., occupational status and educational attainment) and more attention to characteristics that are quickly and easily assessed (e.g., height and weight). Human mate choice sits squarely within the domain of general cognition, as this study shows it to be constrained by bounds on cognitive resources.

Words of wisdom from Seth Klarman & How Lehman Screwed Up – via Barrons – HOCUS-POCUS. THAT, IT EMERGES, SANK LEHMAN Brothers and damn near the entire financial system, to say nothing of the economy as a whole. So charged a court-appointed examiner named Anton Valukas, may his tribe increase, in a 2,200-page bombshell of a report made public on Thursday by U.S. Bankruptcy Judge James Peck.

Much of U.S. Water Safe, But Problems Remain – via NSF – The United States has benefitted from centuries of improvements in drinking water safety, and most Americans can trust that clean water comes from their taps. Yet, closer inspection is showing that on a house-by-house basis, water quality is not guaranteed–even in communities with high marks for water safety.

Do higher cigarette prices deter smoking?
via Voxeu- Do higher cigarette prices deter smoking? This column finds that policymakers in developing countries could reduce cigarette consumption by youths by raising taxes. A 10% increase in the price will reduce youth cigarette demand by 18.3%

What do Quants have to do with Bernard Madoff?
– via Money Sciene – The collapse of the phenomenal Ponzi scheme perpetrated by Bernard Madoff will hurt those who were gullible enough to trust him. It should be noted, however, that many investors were directed to Bernard Madoff Investment Securities by intermediaries – the so-called funds of hedge funds — who now will have to answer for not doing proper due diligence on behalf of their clients.

Group Think: How many minutes does it take for social norms to inhibit survival instinct?- via Cognition & Culture – This study explores the interaction of natural survival instincts and internalized social norms using data on the sinking of the Titanic and the Lusitania. We show that time pressure appears to be crucial when explaining behavior under extreme conditions of life and death. Even though the two vessels and the composition of their passengers were quite similar, the behavior of the individuals on board was dramatically different. On the Lusitania, selfish behavior dominated (which corresponds to the classical homo economicus); on the Titanic, social norms and social status (class) dominated, which contradicts standard economics. This difference could be attributed to the fact that the Lusitania sank in 18 min, creating a situation in which the short-run flight impulse dominated behavior. On the slowly sinking Titanic (2 h, 40 min), there was time for socially determined behavioral patterns to reemerge. Maritime disasters are traditionally not analyzed in a comparative manner with advanced statistical (econometric) techniques using individual data of the passengers and crew. Knowing human behavior under extreme conditions provides insight into how widely human behavior can vary, depending on differing external conditions.”

People do not pay much attention to more than three results on a Google search result page – via Mulley – Also that the ads on the right hand side of the results page are barely looked at.

Miguel’s Weekly Favorites

Africa’s Gift to Silicon Valley: How to Track a Crisis – via NYT – Imagine if any Pakistani could send an anonymous text message to the authorities suggesting where to look. Each location could be plotted on a map. The dots would be scattered widely, perhaps, with promising leads indistinguishable from rubbish. But on a given day, a surge of dots might point to the same village, in what could not be coincidence. Troops could be ordered in.

What Alcohol Does to Your Mind: Attentional Myopia – via PsyBlog – Similarly psychologists have found that alcohol can have all sorts of counter-intuitive effects. Studies have even shown that after drinking people can become less aggressive and less likely to engage in risky sexual behaviours. Doesn’t sound like alcohol does it? So, how can we understand and explain all these different states?

Performance of Darwin’s darlings – via Greenbackd – Yesterday I highlighted an investment strategy I first read about in a Spring 1999 research report called Wall Street’s Endangered Species by Daniel J. Donoghue, Michael R. Murphy and Mark Buckley, then at Piper Jaffray and now at Discovery Group, a firm founded by Donoghue and Murphy. The premise, simply stated, is to identify undervalued small capitalization stocks where a catalyst in the form of a merger or buy-out might emerge to close the value gap. I believe the strategy is a natural extension for Greenbackd, and so I’m going to explore it in some depth over the next few weeks.

Video: Bob Thurman says we can be Buddhas – via Value Investing World –

Self-Control Without a ”Self”? : Common Self-Control Processes in Humans and Dogs – via Psych Science – Self-control constitutes a fundamental aspect of human nature. Yet there is reason to believe that human and nonhuman selfcontrol processes rely on the same biological mechanism—the availability of glucose in the bloodstream. Two experiments tested this hypothesis by examining the effect of available blood glucose on the ability of dogs to exert self-control. Experiment 1 showed that dogs that were required to exert self-control on an initial task persisted for a shorter time on a subsequent unsolvable task than did dogs that were not previously required to exert self-control. Experiment 2 demonstrated that providing dogs with a boost of glucose eliminated the negative effects of prior exertion of self-control on persistence; this finding parallels a similar effect in humans. These findings provide the first evidence that self-control relies on the same limited energy resource among humans and nonhumans. Our results have broad implications for the study of self-control processes in human and nonhuman species.

Hunting endangered species via Greenbackd – Back in the spring of 1999, when the world was enamored of dot coms and not much else, three guys at Piper Jaffray, Daniel J. Donoghue, Michael R. Murphy and Mark Buckley*, produced a superb research report called Wall Street’s Endangered Species. The thesis of the paper was that there were a large number of undervalued companies with strong fundamentals and solid growth prospects in the small cap sector (defined as stocks with a market capitalization between $50M and $250M) lacking a competitive auction for their shares. Donoghue, Murphy and Buckley argued that the phenomenon was secular, and only mergers or buy-outs would ”close their value gap:”

Why my valuation model assumes a business will only have profitable asset growth for five years – via Fallible Investor – I think the most difficult part of valuing a business is deciding what value, if any, to attach to the business’s earnings growth prospects. In this post, I discuss how I value a business’s potential growth. This post is unavoidably quite technical.

Trajectory of risky decision making for potential gains and losses from ages 5 to 85 via JBDM – The ability to make advantageous decisions in the face of uncertainty is an essential human skill, yet the development of such abilities over the lifespan is still not well understood. In the current study, from childhood through older adulthood, we tracked the developmental trajectory of risk taking for gains and losses, and expected value (EV) sensitivity in risky choices. In the gain domain, risk-taking decreased consistently across the lifespan. In the loss domain, risk-taking was relatively constant across ages, a result we attribute to the pervasiveness of loss aversion. EV sensitivity showed an inverted-U-shaped function, increasing from childhood to adulthood but then decreasing for the elderly, which occurred for both risky gains and risky losses. This finding is consistent with neuropsychological and neuroanatomical evidence concerning the role of the frontal lobe in decision making, which is relatively late to develop during childhood but may degrade earlier in the later years

Exclusive Features (The Must Reads)

Posting calories in restaurants is Pareto improving via Economi Logic – With increasing frequency, it is proposed that restaurants should post on their menus nutritional information. The restaurants resist this because they think it may shoo customers away, or at least make them eat less (assuming they underestimated the calories, which may not be always true). But if they eat less, why not make portions smaller and thus reduce costs and possibly increase profits?

The Rules: Government’s proper role in the market Eliot Spitzer
– via Boston Review – Every day we read the headlines, feel the tensions, observe the consequences of the recent failures of market and government. Having a serious conversation about how to remedy these failures lies at the heart of current American politics.

Thoughts of randomness enhance supernatural beliefs. – via Deric Bownds – They take their data to suggest:
…that belief in supernatural sources of control, such as God and karma, may function, in part, to defend against distress associated with randomness, even when the perception of randomness is not related to traumatic events.

Moneyball, Geeks, and the New Era of Human Performance Analytics – via Harvard – Even if you loathe sports and think pro-athletes are selfish morons, you couldn’t find a better discussion about what it really takes to get the best out of competitive, highly-paid high performers than the “What Geeks Don’t Get: The Limits of Moneyball” all-star panel at this past weekend’s MIT Sloan’s Sports Analytics conference. Management committees at Goldman Sachs, General Electric, and Toyota could do worse than snag a transcript of the spirited session for their own personnel policy and planning efforts. For people owning, leading, or managing talented teams of temperamental super-performers, the future of hiring, on-boarding, pay-for-performance, and firing will look shockingly similar to what confronts the NFL, NBA, MLB, and Champions League soccer. Just win, baby.

Patinformatics – An Emerging Scientific Discipline
– via SSRN – Patinformatics is the application of informatics methods to provide the solution to the patent information and the analysis related problems. Although this term was introduced only a few years ago, but its applications can be in a wide range of scientific and business related fields. Method and techniques of different origins have now merged into one discipline that is full of interesting and informative activities. This paper primarily focuses on presenting a general overview of patinformatics and their application in business and various scientific fields including chemicals and pharmaceuticals with special reference to India. Although all the areas of science and technology can benefit from patinformatics methods, still there are many challenging patent information and analysis related problems waiting for solutions through further development of patinformatics.

How to Become an Insta-Expert: A Confession – via Freakonomics – It’s time for me to confess: I’ve barely seen any movies this year, and know little about the industry. But I didn’t want to get left out of the water-cooler conversations about the Oscars. And so these forecasts were simply a fun application of prediction markets. By quickly scanning the latest market prices, I managed to become an insta-expert. In fact, I managed to become such an insta-expert that I’ll be returning to the water cooler today to gloat about my successful picks in all the major award categories.

Where Wall Street and Hollywood Collide – via The Atlantic – Are you a film buff who can’t seem to find a way to put your excessive knowledge of movies to good use? Do you think: “Gosh, if I knew as much about stocks as I do about Hollywood, I’d be rich!”? Well, your time may have finally come. Investment firm Cantor Fitzgerald will be starting an online service in April that will allow users to bet on the success (or failure) of movies.

Corporate Candidates Running For Office? Campaign stunt launches a corporate ‘candidate’ for Congress
via Washington Post – Murray Hill might be the perfect candidate for this political moment: young, bold, media-savvy, a Washington outsider eager to reshape the way things are done in the nation’s capital. And if these are cynical times, well, then, it’s safe to say Murray Hill is by far the most cynical.

The Second-Mortgage Conundrum – via The New Yorker – Since putting up my last post, I’ve been doing some more research into the vexed question of whether big banks are hiding enormous losses on home equity loans and other second mortgages. The Roosevelt Institute’s Mike Konczal reckons that is what is happening. He argues that this practice makes a mockery of last year’s “stress tests,” which the Treasury and Fed carried out to assure investors of banks’ solvency. Finding reliable data on this issue isn’t easy, but after speaking to industry experts and government officials, as well as reading various reports, this is what I’ve found out.

Finance & Investing

Financial Middlemen Can Cost Up To 6% Annually
– via Manual Of Ideas – Financial Middlemen Can Cost Up To 6% Annually

Video: Michael Lewis on 60 Minutes
– Writer Michael Lewis got a bonanza of press for his new book this weekend. The television show 60 Minutes profiled him and his “The Big Short” in a piece called “Inside the Collapse”.

It’s time to end the FASB (and shake up the SEC)via Information Arbitrage – Recent “revelations” concerning the Lehman debacle highlighted a very important point: media and regulators alike have had their heads in the sand for decades. The headline of a recent New York Times article plainly makes the point: “Findings on Lehman Take Even Experts by Surprise.” If this is really true, it is quite an indictment on either the lack of intelligence or truthfulness of our regulators. Sadly, either one could be the case.

How important was the worldwide use of wholesale funds for the international transmission of the US subprime crisis? – via Voxeu- How did a seemingly small shock to the US financial markets manage to spread so far, so quickly? This column argues that the heavy reliance on short-term wholesale funding is to blame. It follows that the discussions of regulatory reform should focus on the risks associated with the liability structure of banks.

Bain’s Global Private Equity Report 2010 – via MOI – Bain & Company has released an interesting report for those with an interest in private equity.

Marco Avellaneda – Risk Magazine’s Quant of the Year 2010 – via MoneyScience
– His paper, “A dynamic model for hard to borrow stocks”, co-authored with Mike Lipkin of Katama Trading, was published in Risk in June last year (pages 92–97), and has quickly become a classic of market microstructure literature. “Marco addresses complicated issues in his characteristic style, with simplicity and clarity,” says Alex Lipton, co-head of the global quantitative group at Bank of America Merrill Lynch and visiting professor of mathematics at Imperial College London.

Shareholder Activism and Distressed Debt via DDI – Earlier in the week, I discussed some interesting details and facets about the bankruptcy of Visteon. Well today, Davidson Kempner, Brigade, and Plainfield Asset Management (all places I thoroughly respect and where I know analysts) filed a 13D on Visteon. According to the document, shares were bought between 2/26/2010 and 3/8/2010 meaning some of the lots were purchased in mid 20 cent range.

Frank Partnoy: Lehman Examiner Punted on Valuation – via Naked Capitalism – The buzz on the Lehman bankruptcy examiner’s report has focused on Repo 105, for good reason. That scheme is one powerful example of how the balance sheets of major Wall Street banks are fiction. It also shows why Congress must include real accounting reform in its financial legislation, or risk another collapse. (If you have 8 minutes to kill, here is my recent talk on the off-balance sheet problem, from the Roosevelt Institute financial conference.)

Roubini: The Rise of Sovereign Risk in Advanced Economies – via RGE – The Great Recession of 2008-09 was triggered by the excessive debt accumulation and leverage of private agents – households, financial institutions and even a fat tail of the corporate sector – in many advanced economies. And while there is a lot of talk about deleveraging, the reality is that private sector debt ratios have stabilized at very high levels while, as a consequence of the fiscal stimulus to get economies out of a severe recession and the socialization of part of private losses, there is now a massive re-leveraging of the public sector with deficits in excess of 10% of GDP in many advanced economies and debt to GDP ratios expected to sharply rise and in some cases double in the next few years.

Videos & Media

Gary Vaynerchuk: Do what you love (no excuses!) via TED – At the Web 2.0 Expo, entrepreneur Gary Vaynerchuk gives a shot in the arm to dreamers and up-and-comers who face self-doubt. The Internet has made the formula for success simpler than ever, he argues. So there’s now no excuse not to do what makes you happy.

Academic Papers

Equity Risk Premiums (ERP): Determinants, Estimation and Implications – The 2010 Edition – 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. We begin this paper by looking at the economic determinants of equity risk premiums, including investor risk aversion, information uncertainty and perceptions of macroeconomic risk. 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 are 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 also look at the relationship between the equity risk premium and risk premiums in the bond market (default spreads) and in real estate (cap rates) and how that relationship can be mined to generated expected equity risk premiums. 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.

Quantum Dating Market – via Arxiv – We consider the dating market decision problem under the quantum mechanics point of view. Quantum states whose associated amplitudes are modified by men strategies are used to represent women. Grover quantum search algorithm is used as a playing strategy. Success is more frequently obtained by playing quantum than playing classic.

Brief history of the Reserve Bank of Australia – via BIS – Fifty years ago, the Reserve Bank of Australia commenced operations as Australia’s central bank. That occasion, though, was the end of a long journey.

Other Very Interesting Articles

Are You REALLY Listening? Sanford Meisner, Acting and Psychology – via Psych Files – A lot of people get into psychology because they think they have good listening skills, but are you really a good listener? What does it mean to be a good listener? In this episode I look at a fascinating acting exercise created by Sanford Meisner called the “repetition exercise” which trains actors how to truly listen. Are you as good a listener as these trained actors?

Keeping Love Alive: Scientific American Does Its Part – via SciAm – With half of all first marriages ending in divorce, how can we build lasting relationships? A Scientific American event explores the science of love.

Ancestor Worship is Efficient – via Overcoming Bias – Maybe not “worship” exactly, but at least great respect and deference. By “efficient” I mean that it increases economists’ standard “cost-benefit” concept of welfare. That is: as usually estimated, the benefits of deferring greatly to distant ancestors far outweigh its costs. And while this does suggest that we should defer more to ancestors, it also shows just how much distorted prices can break economists’ favorite tools.

Drinking and studying: they don’t mix – via Geary Behavior Center – This paper examines the effect of alcohol consumption on student achievement by exploiting the discontinuity in drinking at age 21 at a college in which the minimum legal drinking age is strictly enforced. We find that drinking causes significant reductions in academic performance, particularly for the highest-performing students. This suggests that the negative consequences of alcohol consumption extend beyond the narrow segment of the population at risk of more severe, low-frequency, outcomes. Thus, our results indicate policies that combat drinking—particularly binge drinking that occurs around age 21—may well have large positive effects that are broader than previously known.

Infographics (Click On Images For Larger Versions)

Understand Health Reform – via Chart Porn

About Miguel Barbosa

I run this site.

14. March 2004 by Miguel Barbosa
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