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Weekly Cartoon (via Eli Stein)
Why accountants don’t read novels? Because the only numbers in them are page numbers.
Must Read Articles For All Weekly Visitors!!!
The Next Financial Crisis - via Yochann Shachmurove – The examination of U.S. crises reveals that the current financial crisis follows past patterns. An investment bubble creates excess demand for new financing instruments. During the railroadbubbles of the nineteenth century loans were issued at a pace higher than many companies could pay back. The current housing bubble originated from issuing sub-prime mortgages that assume that housing prices would only rise. The increased demand for credit induces financial innovations and instruments that circumvent existing regulations. Inevitably, the bubble bursts. The history of financial crises teaches that policy reforms and new regulations cannot prevent future financial crises.
CEO Narcissim & The Take Over Process - via UCLA – We examine the influence of both acquirer and target CEO narcissism on the takeover process. We measure CEO narcissism using patterns of personal pronoun usage in more than 1,700 transcripts of CEO speech. Information on the private part of the takeover process is collected in Security and Exchange Commission (SEC) filings. Our main findings are that (1) Higher levels of acquirer CEO narcissism make it more likely that the buying firm initiates the deal; (2) More narcissistic acquiring CEOs are associated with a shorter the private takeover process from the initiation of the transaction to the public announcement of the agreement; (3) Higher levels of target CEO narcissism are linked to higher bid premiums; and (4) Acquiring firm shareholders react less favorably to a takeover announcement when the target CEO is more narcissistic. Our results make a strong case for the impact of CEO psychological characteristics on many dimensions of the takeover process.
Plane Money Interviews Nassim Taleb (The Black Swan Guy) - via NPR – Today, we hear from Nassim Taleb, the former Wall Street trader who published a book called the Black Swan back in 2007. The book was re-issued earlier this year, with a long new section called “On Robustness & Fragility.”
Hidden Skewness - via IZA – We provide laboratory evidence that people neglect skewness resulting from compound shocks.
In Striking Shift, Small Investors Flee Stock Market - via NYT – Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to the Investment Company Institute, the mutual fund industry trade group. Now many are choosing investments they deem safer, like bonds. If that pace continues, more money will be pulled out of these mutual funds in 2010 than in any year since the 1980s, with the exception of 2008, when the global financial crisis peaked.
Chris Anderson: The Web Is Dead. Long Live the Internet – via Wired – Two decades after its birth, the World Wide Web is in decline, as simpler, sleeker services think apps are less about the searching and more about the getting. Chris Anderson explains how this new paradigm reflects the inevitable course of capitalism. And Michael Wolff explains why the new breed of media titan is forsaking the Web for more promising (and profitable) pastures.
Miguel’s Weekly Favorites
Psychology of Property: An intuitive sense of property - via PsychScience – Americans like to own their homes, and the rules and conventions for ownership are generally well understood. So it’s easy to forget that in many corners of the globe the rules are more ambiguous—and more open to challenge. Indeed, there are an estimated one billion squatters in the world today—people who, mostly out of necessity, are living on property they do not own and cannot afford.
Gambling & Why the House Always Wins – via Neuronarrative – I dislike the lottery, and frequently (and, I admit, obnoxiously) call it the “stupid tax” in a pointless effort to persuade lottery playing friends and family to call it quits. By now I should know better, because it never works. The usual response is that they win enough small amounts to offset their ongoing loses, so it’s worth it. The logic of the argument looks like this:
How can you easily increase your ambition? How can you easily increase your satisfaction? - via Bakadesuyo – The authors propose that a focus on remaining (vs. completed) actions increases the motivation to move up to a more advanced level, whereas the focus on completed (vs. remaining) actions increases the satisfaction derived from the present level.
Article & Video: Leonard Bernstein and the Anatomy of Music - via Dan Colman @ Brain Pickings – Bernstein was a master of breaking down music for lay audiences, and if you really want to watch him at work, we highly recommend revisiting his appearances on a 1950’s TV show called Omnibus. During his several visits to the program, a young Bernstein engagingly deconstructed Beethoven’s Fifth Symphony (and also pieces by Bach) but then brought audiences into the world of jazz, opera, American musicals, and the conductor’s craft. Bernstein’s seven appearances, which anticipate his later Harvard lectures, have been collected in a newly released DVD collection available now on Amazon.
So, you want to make something timeless? – via Nick Gogerty – Art history is all about studying narrative and context, cultural leftovers. Here is an excerpt from Simon Shama’s Power of Art Series on Bernini. I would highly recommend watching the series on Netflix etc. Amazing stuff, makes me miss my Art History classes.
Data mining the heart: How do we choose a mate? What scientists are learning from online dating - via Boston- To be single these days is to face a sea of advice about how to attract a partner. Men are attracted to youth and beauty; women are attracted to wealth and prestige. Or are they? There’s no shortage of impassioned opinion about what men and women want, yet there is little real evidence to support it. Even though finding love is one of our primary preoccupations, it has always been shrouded in mystery and guesswork. Adages like “opposites attract” feel comforting, but it would be even better to know what qualities actually entice potential partners in the real world
It is not Product-Market Fit, it is Segment-Version Fit - via Iterative Path – The need must exist for a product. No amount of marketing can create a need for a product. While this statement may read like a gross generalization, if you consider the fact that ultimately we end up hiring a product to do something with it, it is easier to see the pre-existence of need. Not all our needs have to be rational – even someone buying a $5000 shower-head, however irrational it may sound, have a need to fill.
Managing uncertainty: a review of food system scenario analysis and modelling - via royal Society – Complex socio-ecological systems like the food system are unpredictable, especially to long-term horizons such as 2050. In order to manage this uncertainty, scenario analysis has been used in conjunction with food system models to explore plausible future outcomes. Food system scenarios use a diversity of scenario types and modelling approaches determined by the purpose of the exercise and by technical, methodological and epistemological constraints. Our case studies do not suggest Malthusian futures for a projected global population of 9 billion in 2050; but international trade will be a crucial determinant of outcomes; and the concept of sustainability across the dimensions of the food system has been inadequately explored so far. The impact of scenario analysis at a global scale could be strengthened with participatory processes involving key actors at other geographical scales. Food system models are valuable in managing existing knowledge on system behaviour and ensuring the credibility of qualitative stories but they are limited by current datasets for global crop production and trade, land use and hydrology. Climate change is likely to challenge the adaptive capacity of agricultural production and there are important knowledge gaps for modelling research to address.
Can you change people’s behavior by giving them accurate information on how rampant a problem is? - via Bakadesuyo – In addition, the messages conveyed information either about descriptive norms (the levels of others’ behaviour) or injunctive norms (the levels of others’ disapproval) regarding such thievery. Results showed that focusing message recipients on descriptive normative information was most likely to increase theft, whereas focusing them on injunctive normative information was most likely to suppress it.
The psychology of spending - via Mind Your Decisions – Why do we buy things we don’t need? What factors cause us to buy irrationally? These are a couple of the main questions of behavioral economics. Lately I’ve been writing about this topic over at the money site Bundle.com, where I am a community editor.
The first ambassadors: How ancient kings invented a powerful idea: diplomacy – via boston.com – In 2300 B.C., on the other hand, diplomacy was a good bit trickier. Meeting someone face to face took weeks of travel, across strange lands, on foot. A king not pleased with what the visiting ambassador had to say might be inclined to detain him for awhile, forcing the other kingdom to send yet another messenger to find out what happened to the first. Closing the loop on a simple conversation might take three months — or longer. And there were other issues, too. The Mesopotamian kings doing the corresponding, for example, were almost always illiterate.
Video: Ted Talk – The game layer on top of the world - Via Ted – By now, we’re used to letting Facebook and Twitter capture our social lives on the web — building a “social layer” on top of the real world. At TEDxBoston, Seth Priebatsch looks at the next layer in progress: the “game layer,” a pervasive net of behavior-steering game dynamics that will reshape education and commerce.
Video: Packing for Mars: Psychology of Space - Via Fora.Tv -She took us into the world of cadavers and examined the anatomy, physiology and psychology behind sex. Now, Mary Roach discovers the surreality and weirdness of space. For example, what happens when you’ve been in space for a year? And is it possible for a human body to survive a bailout at 17,000 miles per hour? From the space shuttle training toilet to NASA’s crash simulation tests, Roach explores the strange universe.
Stereotypes can prevent perceptual learning- via Deric Bownds – Some interesting observations from Rydell et al, who find that simply reminding women about the negative stereotype about women’s math and visual processing performance inhibits their performance on a visual search task…
Evaluating the credibility of endorsers and doubters of climate change- via Decision Science News – In science, you are not supposed to believe something simply because other people believe it, even if those other people are really smart. Like the Hollywood narrator, we can think of examples where “one man (1), in a world of doubters, stands up for what he knows to be true”. Galileo was sent before the Roman Inquisition for his views, and mainstream physicists rejected Einstein’s theory of relativity; one Nobel Laureate referred to it as “a Jewish fraud” (2). Thank goodness they didn’t let the prevailing views keep them from publishing what they found. However, despite what makes a good Hollywood story, the inconvenient truth is that if you think one thing and a lot of smarter and more knowledgeable people think you are wrong, you probably are wrong.
Trends in environmental concern as revealed by Google searches: The chilling effect of recession - via Voxeu – Is concern for the environment a luxury good? This column presents data from Google searches for the words “unemployment” and “global warming” by US users. It argues that recessions increase concerns about unemployment at the expense of people’s interest in climate change – in some cases leading them to deny its existence.
Financial Topics & Investing
Derivatives & Clearing Houses: The Sausage Making Begins. I’m Sure It Will Turn Out Swell - via Streetwise professor – I’ve been writing for some time that Frank-N-Dodd will open a battle over derivatives market structure. This battle will be waged in the markets, and in the political and regulatory arenas. In particular, clearing mandates will lead to a protracted conflict. The nature of the clearing business, with its strong scale and scope economies and the myriad competitive implications of alternative configurations of the clearing business will make this battle particularly intense. And the stakes will be particularly high given the importance of clearing in the new financial architecture.
Inside trading….no…it’s all about…Inside Debt - via HLS – Three decades of theoretical research on CEO pay have focused almost exclusively on justifying compensating CEOs with equity-like instruments alone, such as stock and options. This has likely been driven by the long-standing belief that, empirically, executives don’t hold debt. However, this belief arose not because CEOs actually don’t hold debt, but because disclosure of debt compensation was extremely limited and so researchers missed this component of compensation. New disclosures mandated by the SEC from March 2007 show that CEOs hold substantial debt in their own firms (known as “inside debt”) in the form of deferred compensation and defined benefit pensions. Indeed, in some cases, CEOs hold even more debt than they do equity. Since the use of debt sharply contrasts with existing theories which advocate only equity, some commentators have argued that it must be inefficient. By contrast, we show that inside debt can be optimal, and that it should be used in the types of firms in which they are indeed used in reality.
MERS’ Role in the Financial Crisis - via War of Debt – MERS is, according to its website, “an innovative process that simplifies the way mortgage ownership and servicing rights are originated, sold and tracked. Created by the real estate finance industry, MERS eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans.” Or as Karl Denninger puts it, “MERS’ own website claims that it exists for the purpose of circumventing assignments and documenting ownership!”
Strengthening the financial system: The benefits outweigh the costs - via Voxeu- The extent of the damage from the global crisis has forced policymakers to rethink how they regulate finance. This column first examines the long-term impact of stronger capital and liquidity requirements and then estimates the transitional economic impact as the new standards are phased in. It argues that, while such reforms may come at a short-term cost, the benefits of a stronger and healthier financial system will be around for years to come.
Inside the Knockoff-Tennis-Shoe Factory – via NYT – A shopkeeper in Italy placed an order with a Chinese sneaker factory in Putian for 3,000 pairs of white Nike Tiempo indoor soccer shoes. It was early February, and the shopkeeper wanted the Tiempos pronto. Neither he nor Lin, the factory manager, were authorized to make Nikes. They would have no blueprints or instructions to follow. But Lin didn’t mind. He was used to working from scratch. A week later, Lin, who asked that I only use his first name, received a pair of authentic Tiempos, took them apart, studied their stitching and molding, drew up his own design and oversaw the production of 3,000 Nike clones. A month later, he shipped the shoes to Italy. “He’ll order more when there’s none left,” Lin told me recently, with confidence.
Sexism and the City - via psyfi – It’s long been known that women make better investors than men, although frankly that’s not a particularly difficult thing to do as most of us males have the patience of a small child with a full bladder and a tendency to hair-trigger trading for all sorts of behaviourally induced reasons. However, what’s a bit more surprising is that this difference is seen in professional investment circles as well while at the same time biases against female fund managers ensure they have less money to manage more wisely.
Academic Research Worth Reading
Ignorance Is Not Always Bliss - via UVT.nl – In this paper we study the effects of providing additional feedback about individual contributions and earnings on the dynamics of contributions in a repeated public good game. We include treatments where subjects can freely choose whether to obtain additional information about individual contributions or individual earnings. We find that, in the aggregate, contributions decline less fast when additional information about contributions and earnings is provided on top of aggregate information. We also find that there exist substantial but intuitively appealing differences in the way individuals react to feedback. Particularly, individuals with a high propensity to contribute tend to imitate the highest contributor more often and are more inclined to obtain feedback about individual contributions than about individual earnings than individuals with a lower propensity to contribute.
Teams Make You Smarter: Learning and Knowledge Transfer in Auctions and Markets by Teams and Individuals - via IZA – We study the impact of team decision making on market behavior and its consequences for subsequent individual performance in the Wason selection task, the single-most studied reasoning task. We reformulated the task in terms of “assets” in a market context. Teams of traders learn the task’s solution faster than individuals and achieve this with weaker, less specific, performance feedback. Some teams even perform better than the best individuals. The experience of team decision-making in the market also creates positive knowledge spillovers for post-market individual performance in solving new Wason tasks, implying that team experiences enhance individual problem-solving skills.