Weekly Roundup 86: A Curated Linkfest For The Smartest People On The Web
I spend 8 hours every Sunday putting this together. If you link this roundup or plan on linking to it (or from it) kindly include a reference to SimoleonSense.com Thanks!
What’s the difference between a dead possum and a dead statistician lying in the road?
Answer: There are skid marks in front of the possum.
Must Read Articles For All Weekly Visitors!!!
When groups are wrong and deviants are right - via Wiley Interscience – How do group members respond when their group wrongfully punishes a group member? In two experiments, participants were presented with an ingroup member who argued for group change on moral (Experiment 1, N = 73) or scientific grounds (Experiment 2, N = 94). Despite being right, the member was treated as deviant by the group. We manipulated whether the group retained its former opinion or adopted the deviant’s position, and whether the deviant’s punishment was ongoing or whether the deviant was reinstated. We tested opposing predictions about how these group actions would affect group members’ negativity towards the deviant. Both studies showed that negativity towards the deviant was highest when the group opinion was unchanged and the deviant was not reinstated. Further, opinion change or reintegration defused negativity towards the deviant. Implications of groups rejecting or embracing change, and their effects on the evaluation of wrongfully accused deviants are discussed.
Chronicles of Currency Collapses: 1960-2006 – via Paul Kedrosky – Our main finding is that currency collapses are associated with a permanent output loss relative to trend, which is estimated to range between 2% and 6% of GDP. However, we show that such losses tend to materialise before the drop in the value of the currency…
Interview with Seth Hamot of Roark, Rearden, & Hamot Capital Management - via Selected Financials – Seth Hamot, 48, is the founder and managing partner of Roark, Rearden, & Hamot Capital Management. His fund has over $150 Million under management, has performed well through 2-3 recessions, and returned an annualized 17% to investors net of fees.
Consuelo Mack Interviews Loews’s James Tisch - via Guru Focus – On this week’s : is Loews Corporation another Berkshire Hathaway? We’ll ask second generation “Great Investor” James Tisch where he is finding value now in Loew’s portfolio of investments in companies ranging from insurance to hotels to oil drillers.
Rationality and Fragility in Financial Markets – via Rajiv Sethi – In a recent paper on financial innovation and fragility, Gennaioli, Shleifer and Vishny argue that investors (and often also financial intermediaries) are hobbled by certain systematic cognitive biases that cause them to neglect unlikely events when assessing asset values. They argue that such “local thinking” results in the creation and excessive issuance of engineered securities that are widely believed to be close substitutes for more traditional safe assets, but turn out to be much riskier than initially anticipated. This psychological regularity, they believe, accounts for a number of historical episodes of financial instability
What the Dunning-Kruger effect is and isn’t - Via Citation Needed – If you regularly read cognitive science or psychology blogs (or even just the lowly New York Times!), you’ve probably heard of something called the Dunning-Kruger effect. The Dunning-Kruger effect refers to the seemingly pervasive tendency of poor performers to overestimate their abilities relative to other people–and, to a lesser extent, for high performers to underestimate their abilities. The explanation for this, according to Kruger and Dunning, who first reported the effect in an extremely influential 1999 article in the Journal of Personality and Social Psychology, is that incompetent people by lack the skills they’d need in order to be able to distinguish good performers from bad performers:
Why Is It So Hard to Apologize Well? - via NYT – All this apologizing should be good for our collective soul, allowing those who are wrong a chance to repent and those who have been wronged a change to forgive, right? Apologies, says Dr. Aaron Lazare, the former chancellor of the University of Massachusetts Medical School and author of the book “On Apology,” are “the most profound of human interactions.” When used well, the words can heal humiliation — by lifting anger and guilt and allowing splintered bonds to mend.
Life by a Thousand Cuts - via FP – The United States’ defense-spending habit has been out of control for years. Will it ever change?
Sequoia funds – Sticking to What Works – via WSJ – This month Sequoia Fund marks its 40th anniversary. It’s a milestone rarely achieved in an industry where three years is considered long term.Even more remarkable is that Sequoia is being run pretty much the same as it was when Warren Buffett’s friend and stockbroker, the late Bill Ruane, launched the fund in 1970. It’s still a concentrated portfolio with two or three dozen stocks, all heavily researched and bought with the idea that the market is valuing them at less than their true worth. Co-managing the fund is Robert Goldfarb, whose tenure at the New York firm dates back to 1971.
Miguel’s Weekly Favorites
Are Risk Aversion and Impatience Related to Cognitive Ability? – via Unimass – This paper investigates whether risk aversion and impatience are correlated with cognitive ability. We conduct incentive compatible choice experiments measuring risk aversion, and impatience over an annual time horizon, for a representative sample of roughly 1,000 German adults. A measure of cognitive ability is provided by two submodules of one of the most widely used IQ tests. Interviews are conducted in subjects’ own homes. We find that lower cognitive ability is associated with greater risk aversion, and more pronounced impatience. These relationships are statistically and economically significant, and robust to controlling for personal characteristics, educational attainment, income, and measures of liquidity constraints. We perform a series of additional robustness checks, which help rule out other possible confounds
Sex Battles in the Brain - via MIT World – The expression of certain genes depends on whether they were inherited from the mother or the father, a phenomenon known as imprinting. Catherine Dulac has discovered that a surprisingly large number of brain genes are imprinted, often in complex ways. Her findings have broad implications for understanding the inheritance of behavioral traits and disease susceptibility.
The effects of background music and sound in economic decision making: Evidence from a laboratory experiment – via MPRA – This paper experimentally studies the effects of background music and sound on the preference of the decision makers for rewards in pairwise intertemporal choice tasks and lottery choice tasks. The participants took part in the current experiment, involving four treatments: (1) the familiar music treatment; (2) the unfamiliar music treatment; (3) the noise treatment and (4) the no music treatment. The experimental results confirm that background noise affects human performance in decision making under risk and intertemporal decision making, though the results do not indicate the significant familiarity effect that is a change of the preference in the presence of familiar background music and sound.
Protection from hurt feelings - via Boston.com – Everyone has experienced pain and sickness at some point in their lives. For such physical ailments, one of the first things we do–or are instructed to do by medical providers–is take a pain reliever, like acetaminophen (a.k.a., Tylenol). But physical pain isn’t the only kind of pain. Our feelings can also be hurt. So researchers wondered whether acetaminophen, which acts on the central nervous system, could blunt social pain, too. In one experiment, healthy college students were randomly assigned to take acetaminophen or a placebo twice a day for three weeks. Those who took acetaminophen reported experiencing significantly fewer hurt feelings. In a second experiment, another set of healthy college students was randomly assigned to take acetaminophen or a placebo twice a day for three weeks. At the end of the three weeks, the students were scanned in an MRI machine while playing a virtual ball-tossing game with two other players. After a while, the other players stopped tossing the ball to the subject. Those who had taken the acetaminophen exhibited significantly less neural activity in areas of the brain previously associated with experiencing social and physical pain.
We agree it’s WEIRD, but is it WEIRD enough? – via Neuroanthropology – The most recent edition of Behavioral and Brain Sciences carries a remarkable review article by Joseph Henrich, Steven J. Heine and Ara Norenzayan, ‘The weirdest people in the world?’ The article outlines two central propositions; first, that most behavioural science theory is built upon research that examines intensely a narrow sample of human variation (disproportionately US university undergraduates who are, as the authors write, Western, Educated, Industrialized, Rich, and Democratic, or ‘WEIRD’).
I’m Happy as Long as I Make More Than You – via Miller McCune – New research acknowledges that money doesn’t buy happiness all on its own purchasing power, but rather happiness comes indirectly from the higher status money provides.
Video: Ted Talk – Obesity + Hunger = 1 global food issue - Co-creator of the philanthropic FEED bags, Ellen Gustafson says hunger and obesity are two sides of the same coin. At TEDxEast, she launches The 30 Project — a way to change how we farm and eat in the next 30 years, and solve the global food inequalities behind both epidemics.
The political economy of the subprime mortgage credit expansion - via Voxeu- Is the US government to blame for the subprime crisis and by extension the global crisis? This column presents a unique study of how vested interests, measured by campaign contributions from the mortgage industry and the share of subprime borrowers in a congressional district, influenced US government policy during in the build up to the subprime crisis and subsequent global crisis.
Beyond Bayes: causality vs correlation – via Steve Hsu – A draft paper by Harvard graduate student James Lee (student of Steve Pinker; I’d love to post the paper here but don’t know yet if that’s OK) got me interested in the work of statistical learning pioneer Judea Pearl. I found the essay Bayesianism and Causality, or, why I am only a half-Bayesian (excerpted below) a concise, and provocative, introduction to his ideas.
Rising inequality between countries in adult length of life - via Voxeu – In the least 30 years, the difference in life expectancy at birth across the globe has fallen dramatically. This column presents new data on life expectancy within and between countries for the period 1970 to 2000. Controlling for infant mortality, it finds that while within-country inequality in life expectancy fell, between-country inequality rose, leaving total inequality unchanged.
Does materialism lead to unhappiness? If so, why? – via Bakadesuyo – Previous research has established an inverse relationship between materialism and psychological well-being. To test the hypothesis that the link between materialism and well-being is due in part to an individual’s feelings of personal control,
Your Brain on Exercise - via Uveal Blues – What goes on inside your brain when you exercise? That question has preoccupied a growing number of scientists in recent years, as well as many of us who exercise.
Charlie Rose Interviews: Jerry Bruckheimer - via Charlie rose -Jerry Bruckheimer is a Hollywood Producer. During the 1980s and 1990s, he was a co-producer with the late Don Simpson of a string of highly successful Hollywood films for Paramount Pictures. His first big hit was with 1983’s “Flashdance,” and he had a number of others including the “Beverly Hills Cop” films, “Top Gun,” and “Days of Thunder,” “Remember the Titans,” “Black Hawk Down” and “Pirates of the Caribbean.”
Broken heart syndrome and the flagellated heart - via Science Blogs – This is another one of those unlikely situations that insist on existing. Could a very strong emotion cause a cardiac alteration so severe capable of causing someone’s death? I’m not talking about arrhythmia. Electric alterations in the heart could make it lose its regular rhythm and, possibly, create a situation where there is, in fact, a cardiac arrest. Arrhythmias may be caused by a number of factors, including electrolytic disorders, traumas, drugs, as well as emotions.
What I am talking about are anatomical alterations, detectable by examination, like echocardiogram or ventriculography done during catheterization. Is it possible for a strong emotion to cause a heart failure?
Dan Ariely: Three questions on Behavioral Economics - via Predictably Irrational- In general, both standard and behavioral economics are interested in the same questions and topics. The choices people make, the effects on incentives, the role of information etc. However, unlike standard economics, behavioral economics does not assume that people are rational. Instead, behavioral economists start by figuring out how people actually behave, often in a controlled lab environment in which we can understand behavior better, and use this as a starting point for building our understanding of human nature. As a consequence of this different starting point, behavioral economists usually come to different conclusions about the logic and efficacy of almost anything, ranging from mortgages to savings to healthcare in both the personal and business realms.
Will we get brain scans of fund managers in the future – A Neuroscientist Uncovers A Dark Secret- via Finance Professor – but Fallon says the orbital cortex puts a brake on another part of the brain called the amygdala, which is involved with aggression and appetites. But in some people, there’s an imbalance — the orbital cortex isn’t doing its job — perhaps because the person had a brain injury or was born that way.
The Situation of Psychopaths - via Situationist – NPR’s Morning Edition had a three-part series, called “Inside the Criminal Brain” (hosted by Renee Montagne and Barbara Hagerty) at the end of June. The first in the of the series, “Neuroscientist Uncovers A Dark Secret” (which you can listen to here) tells the story of neuroscientist James Fallon. Here are some excerpts from the transcript.
An Age of Miracles and Wonders - via Psyfi Blog – Stretch your arms out to either side and imagine you’re looking at the economic growth of the human race over its entire four thousand year documented history. From the fingertip on your right hand to the first wrinkle on its index ftinger more or less covers the first three thousand eight hundred years. From there to the end of the index finger on your left hand represents growth over the nineteenth and twentieth centuries.
5,000 Years in 90 Seconds - via Openculture
Poor Suburbia: Rethinking the geography of American poverty - via U Chicago – For decades, suburban living has been synonymous with America’s upper middle class, a stereotype that emerged from the “Leave it to Beaver” era and morphed into today’s gated communities, mega-malls, and million-dollar mansions. But even before the recession, which continues to hit every pressure point of the nation’s economy, Elizabeth Kneebone, MPP’03, says that idyllic American Dream was only one side of the suburban coin.
The 21st Century Grid - via National Geographic – We are creatures of the grid. We are embedded in it and empowered by it. The sun used to govern our lives, but now, thanks to the grid, darkness falls at our convenience. During the Depression, when power lines first electrified rural America, a farmer in Tennessee rose in church one Sunday and said—power companies love this story—”The greatest thing on earth is to have the love of God in your heart, and the next greatest thing is to have electricity in your house.” He was talking about a few lightbulbs and maybe a radio. He had no idea.
What Would the Earth Look Like if it Stopped Spinning? – via Discovery – What would happen if the Earth stopped spinning? We don’t have any reason to think it will in the next few million millennia, but Witold Fraczek, an employee of geographic imaging software company ESRI, was curious. He used ArcGIS, the company’s flagship software, to build a virtual model of the planet in the absence of centrifugal force.
Exclusive Picks + Financial Topics
Life and death of Microsoft Kin: the inside story - via Engadget – Since our piece on Wednesday, we’ve had more trusted sources step forward to fill in some blanks and clarify the story behind the amazingly swift fall from grace that Microsoft’s Kin phones have experienced since their launch just a few weeks ago. It’s a fascinating tale, and we wanted to share everything we’ve learned.
The Higher Costs of Bribery in China – via Bloomberg – In late June, more than 150 executives from Siemens (SI), the German industrial giant, met in Beijing to discuss compliance with Chinese and U.S. anticorruption laws. That a multinational would spend millions to strategize about avoiding bribery charges in a country where bribery is rampant shows how much business is changing in China.
Financial Innovation and Financial Fragility - via NBER – We present a standard model of financial innovation, in which intermediaries engineer securities with cash flows that investors seek, but modify two assumptions. First, investors (and possibly intermediaries) neglect certain unlikely risks. Second, investors demand securities with safe cash flows. Financial intermediaries cater to these preferences and beliefs by engineering securities perceived to be safe but exposed to neglected risks. Because the risks are neglected, security issuance is excessive. As investors eventually recognize these risks, they fly back to safety of traditional securities and markets become fragile, even without leverage, precisely because the volume of new claims is excessive.
‘Hollywood Accounting’ Losing In The Courts – via Tech Dirt – If you follow the entertainment business at all, you’re probably well aware of “Hollywood accounting,” whereby very, very, very few entertainment products are technically “profitable,” even as they earn studios millions of dollars. A couple months ago, the Planet Money folks did a great episode explaining how this works in very simple terms. The really, really, really simplified version is that Hollywood sets up a separate corporation for each movie with the intent that this corporation will take on losses. The studio then charges the “film corporation” a huge fee (which creates a large part of the “expense” that leads to the loss). The end result is that the studio still rakes in the cash, but for accounting purposes the film is a money “loser” — which matters quite a bit for anyone who is supposed to get a cut of any profits.
Team Coordination Is Key in Businesses- via Fast Company – At the 2008 Beijing Olympics, the American men’s 4×100 relay team was a strong medal contender. During the four previous Games, the American men had medaled every time. The qualifying heats in 2008 — the first step on the road to gold — should have been a cakewalk.
Psychological test can help predict whether the love will last – via LA Times – Just think of how much emotional pain could be avoided if humans knew just when to exit a romantic relationship? Knowing whether to break up or stay together is a wrenching question that often lacks an easy answer.
Finance spread its own risks but left ours alone- via John Kay – The risks that the financial sector has devised techniques to manage are not the everyday risks of an uncertain world: they are risks almost entirely created within the financial sector itself.
Academic Research Worth Reading
Coarse Thinking, Implied Volatility, and the Price of Call and Put Options by Hammad Siddiqi- via Finance Professor & SSRN – We derive a new option pricing formula based on the notion that the market consists of coarse thinkers as well as rational investors. The new formula, called the behavioral option pricing formula is a generalization of the Black-Scholes formula. The new formula not only provides explanations for the implied volatility skew and term structure puzzles in equity index options but is also consistent with the observed negative relationship between contemporaneous equity price shocks and implied volatility.
A Salience Theory of Choice Errors - via MZRA – We study a psychologically based foundation for choice errors. The decision maker applies a preference ranking after forming a ‘consideration set’ prior to choosing an alternative. Membership of the consideration set is determined both by the alternative specific salience and by the rationality of the agent (his general propensity to consider all alternatives). The model turns out to include a logit formulation as a special case. In general, it has a rich set of implications both for exogenous parameters and for a situation in which alternatives can affect their own salience (salience games). Such implications are relevant to assess the link between ‘revealed’ preferences and ‘true’ preferences: for example, less rational agents may paradoxically express their preference through choice more truthfully than more rational agents.
Do Powerful Politicians Cause Corporate Downsizing? – via SSRN – This paper employs a new empirical approach for identifying the impact of government spending on the private sector. Our key innovation is to use changes in congressional committee chairmanship as a source of exogenous variation in state-level federal expenditures. In doing so, we show that fiscal spending shocks appear to significantly dampen corporate sector investment and employment activity. These corporate behaviors follow both Senate and House committee chair changes, are partially reversed when the congressman resigns, and are most pronounced among geographically-concentrated firms. The effects are economically meaningful and the mechanism – entirely distinct from the more traditional interest rate and tax channels – suggests new considerations in assessing the impact of government spending on private sector economic activity.