-I’d like to dedicate this week’s roundup to Paul Kedrosky.
I spend 8 hours every Sunday putting this together…If you like this roundup kindly include a reference to SimoleonSense.com Thanks!
Weekly Cartoon (Via Econosseur & New Yorker)
Joke Of The Week (Via II Magazine)
Assuming they can laugh about such things, pension fund accountants might consider telling a joke that goes like this:
What’s the difference between General Motors and California?
California hasn’t gone bankrupt. At least, not yet.
Most Important Articles of The Week
An Expert on Choice Chooses - via NYT – SHEENA IYENGAR, the S. T. Lee professor of business at Columbia University, was home from work the other day, dressed in a cream-colored twin set and a sparkly gold pencil skirt. She was seated at the head of a long cherry dining table she designed with her husband, Garud Iyengar, a financial engineer who is also a professor at Columbia, in the living room the two had decorated in earthy colors with a mix of furniture found at auction, in India and at a store in downtown Manhattan. There was a clear point of view — a consistent style or discernible taste, if you will — that linked all the objects in the room, including Dr. Iyengar’s outfit.
Diversification, Schmversification: All Correlations to 1.0(-ish) – via Paul Kedrosky – Good set of graphs in a new paper showing how correlations have increased across equity markets in recent decades. In each graph the top line is the correlation with developed markets, the middle line is with developed & emerging combined, and the bottom line is correlation with emerging markets alone. The trend is steadily higher for most countries, with a few seeing serious spikes toward unity.
Market Reaction to Corporate News and the Influence of the Financial Crisis - via SSRN -Having obtained a comprehensive dataset of corporate press releases issued between April 2006 and August 2009, we classify it into various news categories and then analyze the corresponding stock price reactions. In addition to confirming earlier findings regarding the market reaction to financial news, we document strong responses to news about corporate strategy, customers and partners, products and services, management changes, as well as legal developments. We show that return volatility increases and liquidity decreases following most news announcements. Furthermore, we find that the market response to certain types of news changed during the period of the financial crisis. For example, news that are likely to result in higher and less volatile future cash flows (i.e., announcements of corporate reorganization, new customers and partners, new products, FDA and European drug approvals, as well as legal settlements) led to more positive price reactions; announced plans to raise funds through equity or debt offerings were perceived less negatively; and the market reaction to announcements of share repurchases became even more positive than during the pre-crisis period.
You Are How You Eat : Fast Food and Impatience - via Psych Science – Based on recent advancements in the behavioral priming literature, three experiments investigated how incidental exposure to fast food can induce impatient behaviors and choices outside of the eating domain. We found that even an unconscious
exposure to fast-food symbols can automatically increase participants’ reading speed when they are under no time pressure and that thinking about fast food increases preferences for time-saving products while there are potentially many other product dimensions to consider. More strikingly, we found that mere exposure to fast-food symbols reduced people’s willingness to save and led them to prefer immediate gain over greater future return, ultimately harming their economic interest. Thus, the way people eat has far-reaching (often unconscious) influences on behaviors and choices unrelated to eating.
Rational Decision Making: Myth or Reality? – via Columbia – How do we make decisions? If you believe classical economic models, decision making is a process of choosing the most rational and self-serving option. But, as Professor Stephan Meier’s research shows, many people’s decisions substantially deviate from this ideal. In fact, some individuals make consistently suboptimal choices, which can have an enormous effect on public policy and corporate strategy.
What can policymakers learn from happiness research? – via The New Yorker – In 1978, a trio of psychologists curious about happiness assembled two groups of subjects. In the first were winners of the Illinois state lottery. These men and women had received jackpots of between fifty thousand and a million dollars. In the second group were victims of devastating accidents. Some had been left paralyzed from the waist down. For the others, paralysis started at the neck.
What Makes A Bad Apple – Emotions by the roomful- via APS- I have a friend who sucks the air out of the room whenever he comes around. He is so blustery and self-absorbed that people don’t interact with him; they capitulate. I also have friends who by their mere presence light up the room, raising the spirits of everyone gathered. I know people who cast a pall over the group and drag it down; others who have a calming effect on gatherings
The Economics of Cheating - via True Slant – In recent weeks, New Yorkers have been shocked, shocked to find out that taxi drivers have been taking them for a ride in both the literal and figurative sense. Using GPS technology installed in cabs a couple years ago, New York City’s Taxi and Limousine Commission discovered nearly two million trips over a 26-month period where passengers were illegally charged a higher out-of-city rate (80 cents per fifth of a mile as opposed to 40 cents per fifth of a mile) for trips within the five boroughs. The overcharges totaled more than $8 million, averaging out to $4.45 per trip.
Miguel’s Weekly Favorites
Are Too Many Choices a Hindrance? - via Social Psych Eye – One reason for achieving goals is that people are motivated by self-gratification that may occur consciously or unconsciously (Aarts, 2007). Addressing needs, or accomplishing a task etc. are examples of goal achievement that occur on a regular basis. Some tasks however require more thought process and perhaps may involve more choices. While more choices are what society may strive for, it is arguably a positive outcome.
Researcher finds people will forgo luxury for green products when status is on mind - via Phys ORg – Environmentally friendly products are everywhere one looks. Energy efficient dishwashers, bamboo towels, the paperless Kindle and, of course, the ubiquitous Prius are all around. But why do people buy these “green” products? Do they care about the environment or is there something else at play? “Green purchases are often motivated by status,” says Vladas Griskevicius, assistant professor of marketing at the University of Minnesota’s Carlson School of Management. “People want to be seen as being altruistic. Nothing communicates that better than by buying green products that often cost more and are of lower quality but benefit the environment for everyone.”
The Unproductive Situation of Picking Underdogs in the NCAA Tournament - via The Situationist – Today we bring your attention to a New York Times piece by Nicholas Bakalar on a study titled, Match Madness: Probability Matching in Prediction of the NCAA Basketball Tournament. The study’s authors, Professors Sean McCrea and Edward Hirt, conclude that while betting on the underdogs may make a fan feel good, the decision often proves regrettable. We excerpt Bakalar’s piece below.
The determined self-accuser: – via Mind Hacks – While we tend to think that the recognition of false confessions is a relatively new development but The Lancet discussed the phenomenon of ‘auto-accusation’ as far back as 1902.
Physics Envy May Be Hazardous To Your Wealth - via MoneyScience- The quantitative aspirations of economists and financial analysts have for many years been based on the belief that it should be possible to build models of economic systems – and financial markets in particular – that are as predictive as those in physics. While this perspective has led to a number of important breakthroughs in economics, “physics envy” has also created a false sense of mathematical precision in some cases. We speculate on the origins of physics envy, and then describe an alternate perspective of economic behavior based on a new taxonomy of uncertainty. We illustrate the relevance of this taxonomy with two concrete examples: the classical harmonic oscillator with some new twists that make physics look more like economics, and a quantitative equity market-neutral strategy. We conclude by offering a new interpretation of tail events, proposing an “uncertainty checklist” with which our taxonomy can be implemented, and considering the role that quants played in the current financial crisis.
Alan Greenspan: The Crisis - via My Investing Notebook – This is a great paper. It presents one of the best comprehensive narratives about what went wrong over the past several years that I have read. If you want to assign your students only one paper to read about the recent financial crisis, this would be a good choice.
Volatility, the Last Anomaly – via PsyFi Blog – As we’ve previously seen many of the strange anomalies that affect investors have a nasty habit of disappearing, just as soon as people recognise that they exist. This wantonly random behaviour gives fuel to the last remaining adherents of the efficient markets hypothesis who can point out that despite the best attempts of behavioural financiers the evidence keeps on vanishing.
Believing Is Seeing : Using Mindlessness (Mindfully) to Improve Visual Acuity - via Pysch Science – These experiments show that vision can be improved by manipulating mind-sets. In Study 1, participants were primed with the mind-set that pilots have excellent vision. Vision improved for participants who experientially became pilots (by flying a realistic flight simulator) compared with control participants (who performed the same task in an ostensibly broken flight simulator). Participants in an eye-exercise condition (primed with the mind-set that improvement occurs with practice) and a motivation condition (primed with the mind-set “try and you will succeed”) demonstrated visual improvement relative to the control group. In Study 2, participants were primed with the mind-set that athletes have better vision than nonathletes. Controlling for arousal, doing jumping jacks resulted in greater visual acuity than skipping (perceived to be a less athletic activity than jumping jacks). Study 3 took advantage of the mind-set primed by the traditional eye chart: Because letters get progressively smaller on successive lines, people expect that they will be able to read the first few lines only. When participants viewed a reversed chart and a shifted chart, they were able to see letters they could not see before. Thus, mind-set manipulation can counteract physiological limits imposed on vision
The power of gratitude – via APS – Like most parents, I drilled my young kids on the importance of saying “thank you” to others. Nagged them, really. After all, words of gratitude are an important social convention, a way of letting others know you value and appreciate them and their support. Plus saying “thank you” is the right thing to do.
Do people know how much power and status they have? - via Hardest Science – o you know how much power and status you have in the important social situations in your life? Cameron Anderson and I have a chapter coming out in a few months looking at that question. The chapter is titled “Accurate When It Counts: Perceiving Power and Status in Social Groups.” (It draws in part on an earlier empirical paper we did together.) The part before the colon probably gives away a little bit of the answer. We present a case that most people, much of the time, are pretty good at perceiving their own and others’ power and status. (Better than they are at perceiving likability or personality trait.
What Makes Men So Reckless? Women, Study Confirms - via Scientific Blogging – If the idea was ever in doubt, psychologists writing in Social Psychological and Personality Science say they have confirmed that pretty girls make boys do dumb things. Specifically, they say the presence of an attractive woman elevates testosterone levels and physical risk taking in young men.
Investing Basics: Six Ways to Outsmart Your Ape Brain - via Miyanville – Let’s face it, it’s impossible to override innate human instincts when making investing decisions. Talking about money, deciding how to spend it, anticipating reward, or suffering financial losses all activate different emotional centers in our brain, a phenomenon now illustrated by experiments using MRI technology. Scientists at Duke University have even found that just by analyzing which areas of the brain light up in reaction to risks or rewards, they could predict who among their subjects would be most likely to employ specific money strategies.
Exclusive Features (The Must Reads)
The country’s pension system faces trillions of dollars in unfunded liabilities. H/T Paul Kedrosky - via IImagazine - General Motors Corp. did go bankrupt, of course, in a historic Chapter 11 filing orchestrated by the federal government last June. A similar fate for California isn’t out of the question, though it is unlikely. No U.S. state has ever gone bankrupt, although California’s Orange County back in 1994 and, more recently, the City of Vallejo did take the plunge. California’s $20 billion financial crisis — just the latest in a series, like a Hollywood horror movie with endless sequels — makes it Exhibit A of the pension funding predicaments looming over many state and local governments in the U.S. And as it happens, these crises have a lot in common with the pension overhang that helped sink General Motors last year.
Interview With Eike BatistaH/T Paul Kedrosky- Via Forbes – In Brazil, perhaps the only thing that’s bigger than Eike Fuhrken Batista is Pão de Açúcar, the peak that dominates Guanabara Bay in Rio de Janeiro. “Sugarloaf” mountain stares across to his tenth-floor office in the Praia do Flamengo building. Six years ago Batista swore he’d become Brazil’s richest man. Now he is: With a net worth of $27 billion, two-thirds of that gained over the last 12 months, he’s on his way to arriving at his latest boastful goal, becoming the world’s wealthiest guy. His Facebook page mentions how rich he is three times.
Three Vacancies at the Fed – via NYT – With three of seven seats to fill on the Federal Reserve’s Board of Governors, President Obama has an opportunity to put the economy in the hands of experts untainted by the failures that led to the financial crisis. In the process, he can help restore public confidence in the Fed as steward of the economy.
Dan Ariely: Emotional influences - via Wired – The heat of the moment is a powerful, dangerous thing. We all know this. If we’re happy we may be overly generous. Maybe we leave a big tip, or buy a boat. If we’re irritated, we may snap. Maybe we rifle off that nasty email to the boss or punch someone. And for a fleeting second, we feel great. But the regret — and the consequences — may last years or even a lifetime. At least the regret will serve us well, right? Lesson learned? Maybe. Maybe not.
Bill Gross: Failure Is OK, As Long As It’s Quick, Inexpensive & You Learn - via Earth 2 Tech – Bill Gross, founder and CEO of incubator Idealab, (who is speaking at our Green:Net conference on April 29) tells Business Insider in a fascinating 30-minute video interview, that failure is OK, as long as it’s fast, inexpensive and you learn from it. Gross, who has had a decent amount of failed dot com investments, says he looks at his smaller failures as a relatively expensive class he’s taken (see full video embedded below).
Finance & Investing
The Bears Are Dead Wrong – via WSJ- Every day my in-box gets clogged up with research reports from “strategists” who remind me how bad things are even though the market is 70% higher than its lows, the economy is strengthening and the worst of the Great Recession can only be seen in the distance through a rearview mirror.
Roubini – States of Risk- Via RGE – The Great Recession of 2008-2009 was triggered by excessive debt accumulation and leverage on the part of households, financial institutions, and even the corporate sector in many advanced economies. While there is much talk about de-leveraging as the crisis wanes, the reality is that private-sector debt ratios have stabilized at very high levels.
Repo 105’s antecedents: Ken Lewis - via Bronte Capital – I agree with Felix Salmon that the former Lehman staffers who defend Repo 105 are psychopaths – certifiably insane.
Financial Accounting and Decency - via NYT -
As health care reform has become a cliffhanger, it may be therapeutic to take a little vacation elsewhere — in this case financial accounting, also known as fiduciary accounting.
The Wrong Fix for Foreclosures - via Wilson Quarterly – One solution to the recent surge of foreclosures has gained a lot of currency: Rewrite the lousy mortgages that are the source of this mess. It’s a win-win plan: Borrowers would keep their homes, and banks would save money they would have lost in foreclosure. Sheila Bair, chairwoman of the Federal Deposit Insurance Corporation, has estimated that this strategy could prevent 1.5 million foreclosures. Since each foreclosure is estimated to cost the lender an average of $120,000, total savings could be as much as $180 billion. At the end of September, 14 percent of the nation’s borrowers were either delinquent or in foreclosure. But loan modifications just aren’t happening at the rate one would expect. Why not?
Envisioning the Good Life: An Online Course – via Stanford Continuing Education – In Plato’s Apology, Socrates accepts a death sentence, unafraid of the end of his life because he has lived it according to his philosophical principles. In the Socratic good life, death costs little compared to betraying one’s beliefs, and is in fact a kind of triumph for the life well lived. More than 2,000 years later, Rainer Maria Rilke’s Sonnets to Orpheus offer a contrasting vision of triumph over death, this time in the name of poetic art: poetry’s power is stronger than death itself, and the good life accordingly entails a commitment to the pursuit of transcendent art. Art and philosophy both present us with visions of the good life and how to live it. These visions can inspire, challenge, and sometimes even shock us. How can we learn from these portraits of the good life, especially when they appear in opposition to the world as we encounter it? Who do they ask us to become?
Mit: Carbon and Energy Efficient Supply Chains - via MIT WORLD – Consumers will soon be able to quantify the carbon footprint of products they consume, and that could begin to change consumer behavior. The common banana you buy, say organic or not, is probably labeled by the country or origin. Increasingly, you might see a second sticker adorning your beloved yellow fruit – it will be a tally of the banana’s total carbon emissions as it moved from farm to table. That single number is not a simple one. If the bananas you bought this week were transported from Indonesia by boat––they have a different carbon footprint than the bunch you consumed last month grown, say in Mexico, and moved by rail. Behind this labeling system are a complex supply chain, logistics, and transportation considerations. And behind the measurement of this network is the research of Edgar Blanco and his colleagues at MIT. He begins with a consumer perspective.
Video: Consuelo Mack Interviews: Niall Ferguson - via Wealth track – Best selling author and historian Niall Ferguson tells Consuelo what the seismic global economic and market shifts of recent years mean for our future, particularly the longer term implications of America’s exploding debt.
The Risk of Beta – Investor Learning and Prospect Theory - via SSRN – Investors show different behaviour in falling markets and in rising markets. This paper demonstrates that the beta of individual stocks varies across the entire return distribution and that the variation depends on the frequency of the returns. While there is a symmetric u-shape increase for extreme daily returns, there is an asymmetric effect with an increased beta for extreme negative returns for weekly and monthly data. We use all constituents of the EUROSTOXX600 index over the period of 1979 until 2009, and estimate the impact of the index on the constituents for different firm-specific return regimes. The regime-dependent role of systematic risks on individual stocks is explained with investor learning for daily and weekly data and prospect theory for monthly data. The results demonstrate that the risk of a stock can be underestimated or overestimated significantly if conditional means are used and the existence of regimes is ignored.
The Effects of Executives on Corporate Tax Avoidance - via HLS – In the paper, The Effects of Executives on Corporate Tax Avoidance, which is forthcoming in the Accounting Review, we investigate whether individual executives have an effect on their firm’s tax avoidance that cannot be explained by characteristics of the firm. Despite decades of empirical research in corporate taxation, little attention has been focused on whether individual executives have an effect on their firm’s tax avoidance. Until recently, most empirical tax research focused on the role of firm characteristics in tax avoidance. In this prior literature, executives were either ignored or treated as homogenous inputs to the tax avoidance process. In contrast, our paper considers the possibility that individual top executives are partially responsible for variation in tax avoidance across firms, not necessarily through direct involvement in the tax function, but by setting the “tone at the top.”
Return on Capital (ROC), Return on Invested Capital (ROIC) and Return on Equity (ROE): Measurement and Implications - via SSRN – If there has been a shift in corporate finance and valuation in recent years, it has been towards giving excess returns a more central role in determining the value of a business. While early valuation models emphasized the relationship between growth and value – higher growth firms were assigned higher values – more recent iterations of these models have noted that growth unaccompanied by excess returns creates no value. With this shift towards excess returns has come an increased focus on measuring and forecasting returns earned by businesses on both investments made in the past and expected future investments. In this paper, we examine accounting and cash flow measures of these returns and how best to forecast these numbers for any given business for the future.
Other Very Interesting Articles
The Fishing Lobby Wins Again – via NYT – By a depressingly lopsided margin, countries meeting in Doha at the United Nations Convention on International Trade in Endangered Species rejected a proposal by Monaco and the United States to ban international trade in Atlantic bluefin tuna, which is spiraling toward extinction. The convention had earlier rejected, also by a wide margin, a softer motion by the Europeans that would have placed the tuna high on the international list of endangered species but delayed a trading ban for one year.
Driving by the Numbers - via NYT – In the wake of the Congressional hearings on the Toyota recalls, we have heard various proposals for countering unintended acceleration in automobiles.
Are philosophers super-duper-expert intuiters? – via Experimental Philosophy – n the course of my regular blog-reading today, I came across two items in fairly close succession, and it helped crystallize a line of thought I’ve been having concerning the “expertise defense” as a response to the restrictionist x-phi arguments.
Five Myths About Electric Cars - via Good – Despite how many times they’re told differently, some Americans persist in their belief that there were weapons of mass destruction in Iraq. Sorry, nope. And almost as enduring are the myths about the forthcoming electric vehicles. So let me use my bully pulpit here to dispel some of the more common rumors, half-truths and innuendos.