Weekly Roundup 88: A Curated Linkfest For The Smartest People On The Web
I spend 8 hours every Sunday putting this together. If you like this roundup or plan on linking to it (or from it) kindly include a reference to SimoleonSense.com Thanks!
Weekly Cartoon (Via CFO Humor)
Weekly Joke (Via Julian Rubin)
What is the difference between a psychiatrist and a psychologist?
If you say to a psychiatrist “I hate my mother,” he will ask “Why do you say that?” while a psychologist will say “Thank you for sharing that with us.”
Must Read Articles For All Weekly Visitors!!!
Overconfidence, Under-Reaction, and Warren Buffett’s Investments – via SSRN – Warren Buffett is a long-term investor, but is required by law to disclose his trades on a quarterly basis. The market seems to under-react to the revelation of his trades. From 1980 to 2006, it has been possible to achieve investment results similar to Buffett’s own simply by following his trades disclosed by Berkshire Hathaway. We consider overconfidence by sophisticated market participants as a contributing factor to the apparent under reaction to information contained in public disclosures of changes in Berkshire Hathaway’s holdings of stocks. Net sales of corporate insiders of stocks held by Berkshire Hathaway tend to decrease when those holdings increase consistent with shared private information. However, financial analysts’ recommendations tend to downgrade and institutions tend to sell at those times. This behavior by analysts and fund managers is consistent with pejorative experts displaying overconfidence by over estimating their stock picking abilities or precision of their independent private information and, as a consequence, underweighting public information in making their decisions.
WHY ALMOST ALL INVESTORS FAIL: Idleness aversion and the need for justifiable busyness. – via PubMed- There are many apparent reasons why people engage in activity, such as to earn money, to become famous, or to advance science. In this report, however, we suggest a potentially deeper reason: People dread idleness, yet they need a reason to be busy. Accordingly, we show in two experiments that without a justification, people choose to be idle; that even a specious justification can motivate people to be busy; and that people who are busy are happier than people who are idle. Curiously, this last effect is true even if people are forced to be busy. Our research suggests that many purported goals that people pursue may be merely justifications to keep themselves busy.
Famous VC & Angel Investor Paul Graham on Focus & Multitasking : The Top Idea in Your Mind - via Paul Graham – I realized recently that what one thinks about in the shower in the morning is more important than I’d thought. I knew it was a good time to have ideas. Now I’d go further: now I’d say it’s hard to do a really good job on anything you don’t think about in the shower. Everyone who’s worked on difficult problems is probably familiar with the phenomenon of working hard to figure something out, failing, and then suddenly seeing the answer a bit later while doing something else. There’s a kind of thinking you do without trying to. I’m increasingly convinced this type of thinking is not merely helpful in solving hard problems, but necessary. The tricky part is, you can only control it indirectly.
U.S. goes from leading to lagging in young college graduates - via Uveal Blues – Canada is now the global leader in higher education among young adults, with 55.8 percent of that population holding an associate degree or better as of 2007, the year of the latest international ranking. The United States sits 11 places back, with 40.4 percent of young adults holding postsecondary credentials.
James Montier: On the price of insurance and the bull market in tail risk - via Behavioural Investing – From the people who bought you such wonderful ideas as CDOs, now comes the bull market in tail risk products. Deutsche are launching a long equity volatilty index, Citi has come up with a crisis index (mixing equity and bond vols, swap spreads and structured credit spreads). Bloomberg reports that PIMCO is planning a fund that will protect investors in the event of a decline greater than 15%. The CBOE is planning a new index based on the skew in the S&P500.
Into the Abyss: What If Nothing is Risk Free? - via Damodaran – In corporate finance and investment analysis, we assume that there is an investment with a guaranteed return that offers both firms and investors a “risk free” choice. This assumption, innocuous though it may seem, is a critical component of both risk and return models and corporate financial theory. But what if there is no risk free investment? During the banking crisis of 2008, this question came to the fore, as investors began questioning the credit worthiness of US treasuries, UK gilts and Germans bonds. In effect, the fear that governments can default, hitherto restricted to risky, emerging markets, had seeped into developed markets as well. In this paper, we examine why governments may default, even on local currency bonds, and the consequences. We also look at how best to estimate a risk free rate, when no default free entity exists, and the effects on both investors and firms. In particular, we argue that the absence of a risk free investment will make investors collectively more risk averse, thus reducing the prices of all risky assets, and induce firms to borrow less money and pay out lower dividends.
Language Influences Culture - Via WSJ – Do the languages we speak shape the way we think? Do they merely express thoughts, or do the structures in languages (without our knowledge or consent) shape the very thoughts we wish to express?
A New Data Base For: Historical Financial Statistics - via Marginal Revolution – Welcome to Historical Financial Statistics, a free, noncommercial data set that went online in July 2010. We aim to be a source of comprehensive, authoritative, easy-to-use macroeconomic data stretching back several centuries. Our target range of coverage is from 1492 to the present, with special emphasis on the years before 1950, which few databases cover in detail.
James Chanos: “Hedge Fund Strategies and Market Participation” & James Chanos on the Tragic Enron Story
Risk panics: When markets crash for no apparent reason - via Voxeu – Why did the world economy plunge into the worst recession since the Great Depression? This column argues that economic fundamentals do not explain the global crisis. But they did play a role. Events such as the fall of Lehman Brothers can become focal points for investors’ risk perceptions, changing the way the fundamentals are interpreted. This can lead to “risk panics” – self-fulfilling spikes in risk and a collapse in asset prices.
Social Security Benefits Formula 101: A Practical Primer - via SSRN – Despite the broad and deep reliance on Social Security benefits, very few of the hundreds of millions of current and future beneficiaries understand how the program works. This article presents through a hypothetical couple some of the basic concepts of the Social Security benefits formula.
Miguel’s Weekly Favorites
How The illusion of progress lights a fire - via MindHacks -Psychologists have longed talked about ‘goal gradient’ which describes how we work harder to achieve a goal as we get closer to it. I just came across a fantastic study published in the Journal of Marketing Research which shows that we can be convinced to shift into a higher gear of work and spending, even when the perception of progress is a complete illusion.
Richard Thaler: Level Playing Fields, in Soccer and Finance - via NYT – OVER the last month, one question seemed to be on everyone’s mind at the economic conferences I attended in Europe: How did referees miss a goal that England scored against Germany in their World Cup match? The goal in question struck the crossbar, bounced down and landed a full yard inside the goal, then flew out onto the field, all in the blink of an eye.
Dopamine, Time, and Impulsivity in Humans - via Neuroscience – Disordered dopamine neurotransmission is implicated in mediating impulsiveness across a range of behaviors and disorders including addiction, compulsive gambling, attention-deficit/hyperactivity disorder, and dopamine dysregulation syndrome. Whereas existing theories of dopamine function highlight mechanisms based on aberrant reward learning or behavioral disinhibition, they do not offer an adequate account of the pathological hypersensitivity to temporal delay that forms a crucial behavioral phenotype seen in these disorders. Here we provide evidence that a role for dopamine in controlling the relationship between the timing of future rewards and their subjective value can bridge this explanatory gap. Using an intertemporal choice task, we demonstrate that pharmacologically enhancing dopamine activity increases impulsivity by enhancing the diminutive influence of increasing delay on reward value (temporal discounting) and its corresponding neural representation in the striatum. This leads to a state of excessive discounting of temporally distant, relative to sooner, rewards. Thus our findings reveal a novel mechanism by which dopamine influences human decision-making that can account for behavioral aberrations associated with a hyperfunctioning dopamine system.
New Book: How Religion Shaped Commerce in Puritan America - via Princeton -eavenly Merchandize offers a critical reexamination of religion’s role in the creation of a market economy in early America. Focusing on the economic culture of New England, it views commerce through the eyes of four generations of Boston merchants, drawing upon their personal letters, diaries, business records, and sermon notes to reveal how merchants built a modern form of exchange out of profound transitions in the puritan understanding of discipline, providence, and the meaning of New England.
The Impact Of Rude Behavior On A Business - via Sciam – New research shows that rudeness between employees can have a far worse impact on a business than rudeness directed toward customers, or even employee incompetence. Christie Nicholson reports
What If Your GPS Could Tell You What Would Have Happend If You Took An Alternate? – via Decision Science News – Not long ago, your Decision Science News editor was planning a trip to a book group meeting along with another member. The monthly book group takes place in Cove Neck Long Island, about an hour East of Manhattan. Given the starting point (see map), the two had an email exchange about the best route. Your editor preferred to take the Southern route (above), as suggested by multiple Web sites, which gave time estimates under average conditions as well as under heavy traffic. These sites suggested that under the worst possible traffic, the trip would take as long as 1 hour 30 minutes.
The Demographics of Web Search – via Yahoo- How does the web search behavior of “rich” and “poor” people differ? Do men and women tend to click on different results for the same query? What are some queries almost exclusively issued by African Americans? These are some of the questions we address in this study.
Docs for Sale: The FDA Advisory Panel on Avandia – via Hooked: Ethics Medicine & Pharma – It appears this story has kept investigative reporter Mundy quite busy in the wake of last week’s FDA advisory committee hearings on Avandia. Most of you know from the popular press that the committee voted 20-12 to keep Avandia on the market, though 17 of the 20 favored stronger warning labels or other measures to restrict use of the drug.
Edge Course: A New Science Of Morality - via Edge – Something radically new is in the air: new ways of understanding physical systems, new ways of thinking about thinking that call into question many of our basic assumptions. A realistic biology of the mind, advances in evolutionary biology, physics, information technology, genetics, neurobiology, psychology, engineering, the chemistry of materials: all are questions of critical importance with respect to what it means to be human. For the first time, we have the tools and the will to undertake the scientific study of human nature.
Doctors’ Conspiracy of Silence? - via Situationist – Many professional medical organizations ethically require doctors to report other doctors who are incompetent or impaired by substance abuse or mental health problems, but as one recent survey found, more than a third of doctors don’t turn in their colleagues.
The Beauty Advantage: How Looks Affect Your Work, Your Career, Your Life- via Newsweek – In 2010, when Heidi Montag’s bloated lips plaster every magazine in town, when little girls lust after an airbrushed, unattainable body ideal, there’s a growing bundle of research to show that our bias against the unattractive is more pervasive than ever. And when it comes to the workplace, it’s looks, not merit, that all too often rule.
Behavioral economics version on why prices are sticky… - via Mostly Economics – In many real-life situations before we make our own decisions, we find that it is useful to look at what others have done when they were facing similar choices. For instance, when considering a job offer we might consult others who recently accepted or rejected a related job offer. When purchasing an apartment we might seek information about what prices were paid recently for similar apartments, especially for those transactions taking place in the same neighborhood or even in the same building.
Why Is The Universe Complex? Broken Symmetries, Information, Energy, Work – via NPR – The universe is vastly complex. In my previous blog I pointed out that the fine tuning of the 23 constants of nature in the Standard Model and General Relativity were, perhaps, a necessary, but not a sufficient condition for our universe to have become complex. We have no adequate theory for why our universe is complex. Indeed, I will say that we can have no such complete theory. But we can link fragments that may grow in time to a more integrated web of theory and observation.
Solar Airplane Braves The Night Sky, And Wins – via Big Think – Last week, in a history book moment, an airplane was flown straight through a day-night cycle running on nothing – nothing – but the sun’s rays. Imagine the quiet, up there, as Solar Impulse CEO and co-founder Andres Borschberg soared through the skies in his one-man cockpit, collecting and storing solar energy all day, then crossed over into darkness, and finally watched a new day break on the other side. Borschberg brought his plane, the HB-SIA, down to land in the mid-morning light of July 8th.
Whitening Cities’ Roofs Is Environmental Equivalent of Taking 300 Million Cars Off the Road, DoE Study Says - via PopSci – Overall, installing lighter-colored roofs and pavement can cancel the heat effect of two years of global carbon dioxide emissions, Berkeley Lab says. It’s the first roof-cooling study to use a global model to examine the issue.
Rational expectations – is it real? – via Leigh Caldwell – One of the big divisions in macroeconomics is the idea of rational expectations theory. This is the proposition that people behave as if they have a perfect prediction of the economy’s future path, and therefore they collectively fulfil that prediction. This idea is used by some to claim that government borrowing cannot boost the economy because people will reduce spending to pay the future taxes they expect to incur; and by others to propose that price or NGDP level targeting must work, because people will act as if the target will be met and therefore – in a self-fulfilling equilibrium – the target will be met!
Satisficing Stockpicking - via PsyFi Blog – When we make decisions we nearly always do so in the context of something or other. In fact about the only time we’re asked to make contextless choices is in academic exams and laboratory based psychology experiments. As these are the two most familiar situations faced by the academics generating the theories that underpin most of modern finance we shouldn’t be awfully surprised if their great ideas are somewhat lacking in any understanding of … well, anything, really.
How prayer prevents drinking – via Boston.com – A recent study supports an interesting approach to curbing alcohol consumption: regular prayer. In surveys, people who reported praying more often also reported less alcohol consumption and fewer alcohol-related problems, and more prayer was associated with less consumption and fewer problems over the next several months. Of course, people who pray a lot may be less prone to drink anyway, so the researchers randomly assigned people to regular prayer or nonprayer tasks and then asked them to report their alcohol consumption after four weeks. Those who were assigned to pray drank significantly less than those who weren’t.
Why Public Schools Need a Bailout - via Good – Veteran teacher, counselor, advocate, and community activist Steve Zimmer (PDF) has called Los Angeles home since he arrived in 1992 as a neophyte Teach For America teacher. Eighteen years later, 40 year-old Zimmer is completing his first year as an elected school board member for the Los Angeles Unified School District, the second largest district in the United States. Serving LAUSD’s 680,000 racially, ethnically, and economically diverse students at a time when the Obama administration is raising performance expectations—while more than $1.5 billion’s been cut from the district budget and more than 6,000 positions eliminated—is no easy task. We talked with him about why he still believes in public education despite all the challenges.
Who Killed the Climate Bill? - via Foreign Policy – This is how a climate bill dies. On Thursday, Senate Majority Leader Harry Reid announced the bad news: “We don’t have the votes.” Without a single Republican backing the Clean Energy Jobs and American Power Act, the Senate’s version of a comprehensive energy bill, there was no point taking it to the floor, he explained. For now, there was no way to move forward.
Financial Topics & Investing
Malone Is Fired Up by Cable and Ready to Buy - via WSJ – Liberty Media Chairman John Malone is fired up about cable again, believing its high speeds will give it an edge over satellite as consumers devour more entertainment digitally. The compulsive deal maker says he is looking for new investments, especially overseas, in cable, which he helped build over more than two decades as chief executive of Tele-Communications Inc. before it was sold to AT&T in 1999.
Brookfield Asset Management: A perfect predator - via BWB – Bruce Flatt just dissed Warren Buffett. Realizing his blunder, he practically lunges at the tape recorder and extracts a promise that he won’t be quoted. Flatt greatly admires the investing oracle—he wants that clear—and doesn’t want to seem arrogant.
Housing Bubble Leaves $4 Trillion Hangover: Chart of the Day – via Bloomberg – The bursting of the U.S. housing bubble has left homeowners buried under about $4 trillion of excess mortgage debt, according to Dhaval Joshi, the chief strategist at RAB Capital.The CHART OF THE DAY compares the total amount of home loans outstanding with the value of residential real estate, as compiled by the Federal Reserve, for the past two decades. The latter is adjusted to reflect the average 40 percent debt-to- value ratio that prevailed from 1990 to 2005.
Why Are CEOs Rarely Fired? – via Harvard Law – CEO entrenchment is bad for shareholders ex post, because it means that boards retain some CEOs whom shareholders would rather see fired. The model says nothing about whether this entrenchment is bad for shareholders ex ante. For instance, shareholders may rationally allow some degree of entrenchment, e.g. by appointing a CEO-friendly board, in order to attract a talented CEO. To understand what level of entrenchment is optimal ex ante, we need to extend the model to include the initial choice of governance structures.
Economics: A Good Choice of Major for Future CEOs – via It is often suggested that Economics is a good major for individuals interested in becoming business leaders. Despite this widespread assertion, little research has been conducted on this topic. Using the Standard and Poor (S&P) 500 companies, this paper examines the validity of such a claim. We find evidence that Economics is a good choice of major for those aspiring to become a CEO. Economics ranked third with 9% of the CEOs of the S&P 500 companies in 2004 being undergraduate Economics majors, behind Business Administration and Engineering majors, each of which accounted for 20% of the CEOs. When adjusting for size of the pool of graduates, those with undergraduate degrees in Economics are shown to have had a greater likelihood of becoming an S&P 500 CEO than any other major. That is, the share of graduates who were Economics majors who were CEOs in 2004 was greater than that for any other major, including Business Administration and Engineering. The findings also show that a higher percentage of CEOs who were Economics majors subsequently completed a graduate degree – often an MBA – than did their counterparts with Business Administration and Engineering degrees. The paper demonstrates that while women now comprise over half of all bachelors and masters degrees awarded, they remain a minority in terms of undergraduate degrees awarded in Economics and in MBA degrees conferred. Economics programs may try to appeal to more women students as a stepping stone to becoming a CEO, especially as women continue to account for less than 2 percent of the S&P 500 CEOs.
Emanuel Derman on Fischer Black - via Quant Network – I have been working for the last few months on a book about the way people are compelled to theorize and to build models of the natural and the social world, and somehow this led me to think about Fischer Black again, even before I received an invitation to speak here tonight. Fischer is, of course, most famous for the Black-Scholes model. But Fischer understood very well the qualities of models and their limitations. Among my three favorite sentences of Fischer’s are
Who Ultimately Pays the Corporate Income Tax? - via Economix – I ended last week’s post by asking whether anyone knows which human beings ultimately pay the corporate income tax.An intuitively appealing answer is that the tax is levied on profits, which are a return on capital invested in a corporation. Therefore, those who made that investment — the shareholders — absorb the tax fully in the form of a lower after-tax return on their investments.
Interview with Jon Heller of Cheap Stocks - via Investors Questions Podcast
Is the British middle class an endangered species? - via Guardian .co.uk – In fact, being middle class has always been a slippery business. Having servants, renting a good property, owning a good property, owning a business, being employed in one of “the professions”, how you speak, how you use cutlery – at different times, all these have been regarded as essentials of middle-class life. In the 19th century, an identity was created which emphasised ambition, inventiveness, effort – “You work like stink,” as Ogden-Newton puts it – and the middle class presented as a confident, outward-looking Britain’s driving force. Yet mixed with this triumphalism has always been envy and insecurity: seeing yourself as the middle group in society can leave you feeling either smug or beleaguered.
The Culture of Speculation And The Failure of Financial Reform – via Havard – Even as President Obama signs the mammoth financial regulation legislation designed to prevent another economy-busting meltdown, banks are already gaming the proposed regulations to generate new profits. For any business or nonprofit seeking to make serious changes in organization, the financial reform legislation is an abject lesson in what not to do. It is doomed to failure.
Leaving the euro: What’s in the box? Learning From Argentina - via Voxeu – Rumours of Eurozone break-up are mounting. This column argues that exiting a strong currency for a weak one poses almost unthinkable challenges, from the redenomination of contracts and the imposition of bank restrictions to the restructuring of external debt and limiting of capital mobility. Lessons from Argentina illustrate just how radical the changes would need to be.
Saving money on a plumber – game theory in practice – via Mind Your Decisions – The other day I called a new plumber for a non-urgent job. He came to my house, and after inspecting said, “It’ll be $150 and I can do it today. What do you want to do?” I had no idea how much the job should cost, so I had to make an informed guess. Which of the following scenarios was most likely?
Academic Research Worth Reading
Money and Liquidity in Financial Markets - via CEPR – We argue that there is a connection between the interbank market for liquidity and the broader financial markets, which has its basis in demand for liquidity by banks. Tightness in the interbank market for liquidity leads banks to engage in what we term “liquidity pull-back,” which involves selling financial assets either by banks directly or by levered investors. Empirical tests support this hypothesis. While our data covers part of the recent crisis period, our results are not driven by the crisis. Our general point is that money matters in financial markets. Different financial assets have different degrees of moneyness (liquidity) and, as a result, there are systematic cross-sectional variations in trading activity as the price of liquidity, or the level of tightness, in the interbank market fluctuates.
Resolution of Banking Crises: The Good, the Bad, and the Ugly – via IMF – This paper presents a new database of systemic banking crises for the period 1970-2009. While there are many commonalities between recent and past crises, both in terms of underlying causes and policy responses, there are some important differences in terms of the scale and scope of interventions. Direct fiscal costs to support the financial sector were smaller this time as a consequence of swift policy action and significant indirect support from expansionary monetary and fiscal policy, the widespread use of guarantees on liabilities, and direct purchases of assets. While these policies have reduced the real impact of the current crisis, they have increased the burden of public debt and the size of government contingent liabilities, raising concerns about fiscal sustainability in some countries.