Handpicked to satisfy your intellectual curiosity!
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A Martian lands to plunder, pillage and burn. He goes up to the owner of the first house he sees and says, “I m a Martian just arrived from the other side of the galaxy. We re here to destroy your civilisation, pillage and burn. What do you think about that?” The owner replies, “I don’t have an opinion. I m a chartered accountant.”
Must Read Articles for Weekly Visitors
Lee Kuan Yew: Days of Reflection for Man Who Defined Singapore - via NY Times – “SO, when is the last leaf falling?” asked Lee Kuan Yew, the man who made Singapore in his own stern and unsentimental image, nearing his 87th birthday and contemplating age, infirmity and loss. “I can feel the gradual decline of energy and vitality,” said Mr. Lee, whose “Singapore model” of economic growth and tight social control made him one of the most influential political figures of Asia. “And I mean generally, every year, when you know you are not on the same level as last year. But that’s life.”
To rate a return, think of what you’re missing – via John Kay – Internal rates of return conflate rewards for risk with returns for patience. That is why they are often misleading indicators of the profitability of alternative investments.
Overconfidence is a Social Signaling Bias - via SSRN – Evidence from psychology and economics indicates that many individuals overestimate their ability, both absolutely and relatively. We test three different theories about observed relative overconfidence. The first theory notes that simple statistical comparisons (for example, whether the fraction of individuals rating own skill above the median value is larger than half) are compatible (Benoît and Dubra, 2007) with a Bayesian model of updating from a common prior and truthful statements. We show that such model imposes testable restrictions on relative ability judgments, and we test the restrictions. Data on 1,016 individuals’ relative ability judgments about two cognitive tests rejects the Bayesian model. The second theory suggests that self-image concerns asymmetrically affect the choice to get new information about one’s abilities, and this asymmetry produces overconfidence (Kőszegi, 2006; Weinberg, 2006). We test an important specific prediction of these models: individuals with a higher belief will be less likely to search for further information about their skill, because this information might make this belief worse. Our data also reject this prediction. The third theory is that overconfidence is induced by the desire to send positive signals to others about one’s own skill; this suggests a either a bias in judgment, strategic lying, or both. We provide evidence that personality traits strongly affect relative ability judgments in a pattern that is consistent with this third theory. Our results together suggest that overconfidence in statements is most likely to be induced by social concerns than by either of the other two factors.
Video: Tricks of the Trade: Outsmarting Investment Fraud - via Save & Invest.org- Investment fraud does happen … and it can happen to you. “Tricks of the Trade: Outsmarting Investment Fraud” is an hour-long documentary on preventing investment fraud. Utilizing compelling stories of victims and perpetrators, the video uncovers the persuasion tactics that con artists use to defraud their victims and the basic tools investors can use to defend against fraud.
Tragedy of The Commons—Garrett James Hardin (Says Dallas 1915 is like Santa Barbara 2003) – via American Scientist- Hardin’s greatest service was presenting this notion in the form of a captivating parable about an overgrazed pasture and expressing it in precise, resonant language that left no room for appealing the initial verdict. He wrote: “Ruin is the destination toward which all men rush, each pursuing his own interest in a society that believes in the freedom of the commons.” (Today’s editors would, of course, have tried to force Hardin to change “men” to “people” or some other politically correct choice—probably to no avail.) He realized that this ruinous dynamic operates in any number of cases involving environmental pollution and the degradation of ecosystems. These instances include three of the leading concerns of our generation: extensive and drastic commercial overfishing of the oceans, continuing deforestation of the humid tropics and rising emissions of greenhouse gases, which may cause serious global warming during the latter half of this century.
In Value Investing: Risk is Not Reward - via PsyFi Blog- In looking for a free lunch many long-term investors gravitate towards value investing where the evidence is that so-called value stocks offer excess returns over medium term periods. This approach, however, brings with it a range of issues of mental discipline that can cause all sorts of strange behaviours, including an unreasoning attachment to stocks that have no merits whatsoever, apart from their consistent appearance on stock filters of a certain kind.
Capital Structure: Optimal or Opportunisitic? - via Aswath Damodaran – Contrary to the prediction of doomsayers during the banking crisis of 2008, firms seem to be returning with a vengeance to the debt markets. Today’s story in the Wall Street Journal provides some details:
Credit Bubbles and Land Bubbles – via IdeasRepec- In modern macroeconomic models it is difficult to obtain explosive price bubbles on assets with positive net supply. This paper shows that it is possible to obtain explosive bubbles in certain situations when assets such as land are used as collateral and lenders are willing to lend freely against it. As land prices rise, collateral constraints become relaxed, and households wish to borrow more. If the financial sector or government is willing to accommodate this by issuing credit indefinitely, this can lead to self-fulfilling equilibria where land has a positive, purely speculative, value. Furthermore, such bubbles need not affect real allocations in the absence of other market imperfections, even when land is a factor in production
Spam Works: Evidence from Stock Touts and Corresponding Market Activity - via SSRN – We assess the impact of spam that touts stocks upon the trading activity of those stocks and sketch how profitable such spamming might be for spammers and how harmful it is to those who heed advice in stock-touting e-mails. We find convincing evidence that stock prices are being manipulated through spam. We suggest that the effectiveness of spammed stock touting calls into question prevailing models of securities regulation that rely principally on the proper labeling of information and disclosure of conflicts of interest as means of protecting consumers, and we propose several regulatory and industry interventions. Based on a large sample of touted stocks listed on the Pink Sheets quotation system and a large sample of spam emails touting stocks, we find that stocks experience a significantly positive return on days prior to heavy touting via spam. Volume of trading responds positively and significantly to heavy touting. For a stock that is touted at some point during our sample period, the probability of it being the most actively traded stock in our sample jumps from 4% on a day when there is no touting activity to 70% on a day when there is touting activity. Returns in the days following touting are significantly negative. The evidence accords with a hypothesis that spammers “buy low and spam high,” purchasing penny stocks with comparatively low liquidity, then touting them – perhaps immediately after an independently occurring upward tick in price, or after having caused the uptick themselves by engaging in preparatory purchasing – in order to increase or maintain trading activity and price enough to unload their positions at a profit. We find that prolific spamming greatly affects the trading volume of a targeted stock, drumming up buyers to prevent the spammer’s initial selling from depressing the stock’s price. Subsequent selling by the spammer (or others) while this buying pressure subsides results in negative returns following touting. Before brokerage fees, the average investor who buys a stock on the day it is most heavily touted and sells it 2 days after the touting ends will lose close to 5.5%. For those touted stocks with above-average levels of touting, a spammer who buys on the day before unleashing touts and sells on the day his or her touting is the heaviest, on average, will earn 4.29% before transaction costs. The underlying data and interactive charts showing price and volume changes are also made available.
Overweighting Private Information: Three Measures, One Bias? - via Jena – Overweighting private information is often used to explain various detrimental decisions. In behavioral economics and finance, it is usually modeled as a direct consequence of misperceiving signal reliability. This bias is typically dubbed overconfidence and linked to the judgment literature in psychology. Empirical tests of the models often fail to find evidence for the predicted effects of overconfidence. These studies assume, however, that a specific type of overconfidence, i.e., “miscalibration,” captures the underlying trait. We challenge this assumption and borrow the psychological methodology of single-cue probability learning to obtain a direct measure for overweighting private information. We find that overweighting private information and measures of “miscalibration” are unrelated, indicating that different kinds of misperceptions are at work. Thus, in order to test the theoretical predictions of the overconfidence literature in economics and finance, one cannot rely on the well-established “miscalibration” bias. We find no gender differences in overconfidence for our measures except for one, where women are more overconfident than men.
Large Shareholder Diversification And Corporate Risktaking - via Prudue – Using new data for the universe of firms covered in Amadeus, we reconstruct the portfolios of shareholders who hold equity stakes in private and publicly-traded European firms. We find great heterogeneity in the degree of portfolio diversification across large shareholders. Exploiting this heterogeneity, we document that firms controlled by diversified large shareholders undertake riskier investments than firms controlled by non-diversified large shareholders. The impact of large shareholder diversification on corporate risk-taking is both economically and statistically significant. Our results have important implications at the policy level because they identify one channel through which policy changes aimed at improving capital market development can improve economic welfare.
A trust-driven financial crisis. Implications for the future of financial markets. – The financial crisis has brought to light diffuse opportunistic behaviour and some serious frauds. Because of this trust towards banks, bankers, brokers and the stock market has collapsed to unprecedented levels and there are so far no signs of recovery. This paper uses survey-based information to document the collapse of trust, show its link to the emergence of frauds in the financial industry and discuss its consequences for the demand of financial instruments, investors portfolios and more generally investors reliance on financial markets. It argues that unless serious changes happen in the behaviour of the financial industry, the move towards safer portfolios and away from ambiguous securities that lack of trust entails, will have adverse effects on the availability and cost of equity financing. Accordingly a number of proposals to restore trust are discussed. Their common feature is to restore trust – a belief – by limiting the scope for opportunistic behaviour through a transfer of power from financial intermediaries to investors.
Trust, Truth, Status, & Identity – In an experiment involving a standard trust game and a costless signalling
game, it is demonstrated that economically relevant norm-based behaviors (trust, reciprocity and truth-telling) vary with social identity. The experimental procedure induced two trivial social identities. In one version, a status difference was induced. The results permitted a succinct description of identity effects: subjects held own-group members to a higher standard; and high status subjects held everyone, including themselves, to a higher standard. To illustrate the “high status/high standards” phenomenon, subjects’ “standards” were estimated from a simple identity model for a subset of the data.
Finding the prime number in the seven ages of man- via FT- Simonton’s work suggests that each field tends to have an optimum age. Poets peak in their late twenties, novelists and historians in their forties. But this is not universally accepted. The economist David Galenson argues that most fields have two distinct kinds of approach, with two characteristic age profiles. Conceptual artists peak early, while more experimental artists peak much later. The conceptual artist suddenly leaps to new insights, while the experimental artist is a craftsman, gradually perfecting his or her technique over a lifetime. Cézanne, a late developer, said: “I seek in painting”; Picasso, on the other hand, said: “I don’t seek, I find.”
Miguel’s Weekly Favorites
Mind-Reading Tools Go Commercial - via SciAm- The tools used by the commercial industry to detect our thoughts and brain states are very different, and somewhat limited, compared to those used in the research lab. Christie Nicholson reports
How the Mind Counteracts Offensive Ideas – via PsyBlog- The human mind is always searching for meaning in the world. It’s one of the reasons we love stories so much: they give meaning to what might otherwise be random events. From stories emerge characters, context, hopes and dreams, morals even. Using simple structures, stories can communicate complex ideas about the author’s view of the world and how it works, often without the reader’s knowledge.
People learn new information more effectively when brain activity is consistent - via Eureka Alert – People are more likely to remember specific information such as faces or words if the pattern of activity in their brain is similar each time they study that information, according to new research from a University of Texas at Austin psychologist and his colleagues. The findings by Russell Poldrack, published online today in the journal Science, challenge psychologists’ long-held belief that people retain information more effectively when they study it several times under different contexts and, thus, give their brains multiple cues to remember it.
Why it’s so hard to change your mind, and anyone else’s - via PopEcon- One of the more fascinating areas I’ve studied is “self-affirmation.” We all think of ourselves as good people. But in turn, when something challenges that identity, we put up psychological roadblocks to combat the threat. That makes it really hard to change your beliefs. This is important to pretty much any arena you enter—personal finance, economics, politics, who should wash the dishes. We’ve all argued with someone who stuck to his guns in the face of mounting evidence against his or her position. And yet, I bet we’ve all been on the other side of that argument too.
1939 Alfred Hitchcock Lecture - via Mystery man on film – When I am given a subject, probably a book, play, or an original, I like to see it on one sheet of foolscap. That is to say, have the story, in its barest bones, just laid out on a sheet of foolscap paper. You might call it the steelwork, or just the barest bones, as I said before. Now you do not have to write down very much, maybe just that a man meets a woman at a certain place, and something else happens. In the briefest possible way, this thing should be laid out on a piece of paper.
Sorry, you cannot buy happiness with a $75,000 salary - via Mind Your Decisions- The study was headed by Princeton University’s Daniel Kahneman, a 2002 Nobel economics laureate, and colleague Angus Deaton. It was published in the prestigious Proceedings of the National Academy of Sciences, the official journal of the United States Academy of Sciences. In my eyes, this is as credible as a study can get.
Betting on Yourself - via Freakonomics – Commitment devices are an increasingly popular weight-loss method, especially among economists. However, new research from Nicholas Burger and John Lynham indicates that betting on your own ability to lose weight may not be a sure thing. “Despite payoffs of as high as $7,350, approximately 80 percent of people who spend money to bet on their own behavior end up losing their bets.” Does the problem lie with the commitment device? Are there more effective devices than money?
From Consumers, To Shoppers - via Savage Minds – Instead, our consumer culture is currently shifting where and how it gets shaped. Consider some of the following statistics, which may mark a shift in the consumer landscape, particularly as it relates to grocery stores and big box retailers, my central sites of interest: According to a 2009 Nielsen report, 50% of consumers are becoming aware of products for the first time inside of a store, while 71% are becoming aware simply by seeing them on the shelf, not in commercial ads.
The REAL ‘Stuff White People Like’ - via OK Trends – We selected 526,000 OkCupid users at random and divided them into groups by their (self-stated) race. We then took all these people’s profile essays (280 million words in total!) and isolated the words and phrases that made each racial group’s essays statistically distinct from the others’.
Positive and Negative Networks: Lessons from Ecology? – via Permut – The interesting results in the Science article are that networks of “antagonistic” relations in ecology tend to have a characteristic form of largely separated and rather densely connected clusters – something akin to “communities”. Mutualistic networks, on the other hand have a characteristic form composed of “generalists” (nodes with high degree) and “specialists” (nodes with low degree) of the species in each mode, in a nested “hierarchy”. Networks of individual humans, groups, roles, organizations, or populations often have “antagonistic” relations — “A” dominates “B”. But, human networks are also connected by mutually beneficial ties (e.g. emotional support and identity confirmation).
Priming, Consistency, Cheating, and Being a Jerk - via Psych of Video Games – How can developers of multiplayer games get their players to behave, cooperate, play their role, and not be such incredible jerks? I have an idea. Psychology is involved. You probably guessed this. One of my favorite little experiments in psychology was done by John Bargh, Mark Chen, and Lara Burrows1 who were interested in how stereotypes were triggered. In one experiment, they had participants unscramble sentences that made heavy use of words like Florida, old, bingo, wrinkle, ancient and the like. A control group did the same thing, but with words not reminiscent of the elderly. That wasn’t the real experiment, though.
Don’t hold that thought - via Boston.com – At some point, you’ve probably heard (or even uttered) the phrase “try not to think about…” Unfortunately, a recent study suggests that this is likely to backfire. Researchers asked regular smokers to spend a week either suppressing or promoting thoughts about smoking, without changing their actual smoking habits. Those who had tried to suppress their thoughts ended up smoking more the following week. The researchers also found that smokers who tended to suppress thoughts in their everyday lives reported having tried and failed to quit smoking more times than other smokers.
How animals made us human - via Boston- Who among us is invulnerable to the puppy in the pet store window? Not everyone is a dog person, of course; some people are cat people or horse people or parakeet people or albino ferret people. But human beings are a distinctly pet-loving bunch. In no other species do adults regularly and knowingly rear the young of other species and support them into old age; in our species it is commonplace. In almost every human culture, people own pets. In the United States, there are more households with pets than with children.
Are Scanners Worth the Risk? - via NYT- The new screening measures have been hotly debated, but mostly in theory. Now that there are nearly 200 body scanning machines in about 50 domestic airports, with 800 more on the way, passengers are facing real-life decisions about what to do. Here’s some information to help you choose.
The Future of Reading - via Wired- I think it’s pretty clear that the future of books is digital. I’m sure we’ll always have deckle-edge hardcovers and mass market paperbacks, but I imagine the physical version of books will soon assume a cultural place analogous to that of FM radio. Although the radio is always there (and isn’t that nice?), I really only use it when I’m stuck in a rental car and forgot my auxilliary input cord. The rest of the time I’m relying on shuffle and podcasts.
Lottery Kiosk Choice Architecture – via JephMayStruck – At Superstore on Rochdale blvd. the lottery kiosk offers a small incentive to come check lottery tickets there. Usually when you check a lottery ticket and it isn’t a winner you throw it in the trash. At the Superstore lottery kiosk you put your name on the back of it and enter a draw for a prize. Doesn’t seem like much does it? But would you rather have no chance at winning the draw or at least a small chance? I know I’d take the latter.
Unemployment and Well-Being - via Geary Behavior Center – I am currently reading through detailed transcripts of 13 focus group interviews with 100 or so people claiming unemployment benefits interviewed by Michael Egan and others as part of our IRCHSS-funded wellbeing study. I am not going to go in detail through the results as we are coding them up (along with Nicola O’Connell who works in Geary also) to present and publish them in Autumn. It is not surprising perhaps that a sense of despair hangs over many of the interviews. In general, the link between wellbeing and unemployment is one of the great puzzles of behavioural economics. The effects are, always and everywhere, enormous and poorly explained by any standard economic measures. To the very best of my knowledge, no paper has offered a convincing explanation based on financial variables alone as to why unemployment generates such substantial negative effects on well-being.
Happiness Is on the Rise. Thanks, Freedom- via MM- Despite the belief that happiness has remained constant in modern societies, recent research says otherwise, citing rising democracy and increased basic freedoms as the cause.
Network-Driven Transportation - via MIT World – Today, cell phones are a menace to safe driving, as they distract operators who should otherwise focus on the road. Tomorrow, cell phones could actually improve our driving, and help drivers avoid traffic congestion, use the road system more effectively, and manage the parking supply. Li-Shiuan Peh says that the key to these services are future mobile devices that will have the computer power equivalent to today’s large servers in data centers. Combined with rapid advances in wireless networking, these mobile devices will be harnessed to provide new apps, like next generation transportation programs.
Put Down the Diet Soda or Your Brain Will Make You Pay – via NeuroNarrative- Diet soda is a consistently fun target for psychology and neurobiology researchers. Past studies have linked drinking it to a plethora of badness, most ironically: weight gain (though I doubt those studies made a dent in sales. Coke Zero came out shortly after the weight gain findings were released and last I checked it was outselling Diet Coke). A recent study in the journal Psychological Science continues the tradition by investigating whether drinking diet soda makes people more impulsive.
The naming of things - via Citation Needed – Let’s suppose you were charged with the important task of naming all the various subdisciplines of neuroscience that have anything to do with the field of research we now know as psychology. You might come up with some or all of the following terms, in no particular order:
The Trouble with the View from Above - via Cato- Intervention in society (or nature) for whatever purpose (e.g. delivering welfare benefits to those with particular disability or keeping watch on political enemies) requires creating the mapping or optics necessary to legibility. In Seeing Like a State, and as a student of politics, I concentrate on state-making and government. Nevertheless, as I endeavor to make clear, large-scale capitalism is just as much an agency of homogenization, uniformity, grids, and heroic simplification as the state, with the difference that, for capitalists, simplification must pay. The profit motive compels a level of simplification and tunnel vision that, if anything, is more heroic that the early scientific forest of Germany. In this respect, the conclusions I draw from the failures of modern social engineering are as applicable to market-driven standardization as they are to bureaucratic homogeneity.
You’re (Brain Is) So Immature- via Neuro Skeptic – It’s like how when you’re a kid, you play with the kids next door, but when you grow up you spend all your time on the internet talking to people thousands of miles away, and never speak to your neighbours.
Does it matter where we live?: The urban psychology of character strengths. – via PsycNet- Psychology has neglected the study of variation across cities. An urban psychology is needed that takes seriously such variation and focuses on strengths and assets contributing to the good life as much as on problems of urbanization. To illustrate the value of an urban psychology, we describe studies of character strengths among residents in the 50 largest U.S. cities (N = 47,369). Differences in character strengths were found to exist across cities, were robustly related to important city-level outcomes such as entrepreneurship and 2008 presidential election voting, and were associated in theoretically predicted ways with city-level features. We propose a framework that distinguishes between strengths of the “head,” which are intellectual and self-oriented, and strengths of the “heart,” which are emotional and interpersonal. Cities whose residents had higher levels of head strengths were those rated as creative and innovative. Head strengths predicted the likelihood of a city voting for Barack Obama, whereas heart strengths predicted voting for John McCain. More than half of the world’s population now resides in cities, and urban psychology deserves greater attention.
THE LIMITS OF SCIENCE - via Intelligent Life – Good sense is the most fairly distributed commodity in the world, Descartes once quipped, because nobody thinks he needs any more of it than he already has. A neat illustration of the fact that gullibility seems to be a disease of other people was provided by Martin Gardner, a great American debunker of pseudoscience, who died this year. In the second edition of his “Fads and Fallacies in the Name of Science” (1957), Gardner reported that most of the irate letters he received in response to the first edition criticised only one of its 26 chapters and found the rest to be fine. Needless to say, readers disagreed about which chapter was the faulty one. Homeopaths objected to the treatment meted out to themselves, but thought that the exposé of chiropractors was spot on, and vice versa.
Financial Topics & Investing
Jason Zweig – Inflation? Deflation? It’s All About ‘Meflation’ - via WSJ- Pick your poison, says Wall Street. Either Uncle Sam’s borrowing binge will flood the system with money, leading to a replay of the 1970s as inflation eats away at your purchasing power. Or all that debt and the liquidation of distressed financial assets will paralyze the economy and send prices falling, like the deflation Japan has suffered for the past 20 years
Distressed Debt Investing interviews Mark Berman - via DDI – We are very excited to bring you an interview with Mark Berman, founder and Managing Partner of MB Family Advisors, LLC and the MB Dislocation Opportunity Fund, L.P., a dislocation / distressed credit fund-of-funds. MB Family Advisors, LLC is a multi-family office investment firm founded in 2008 to manage investment portfolios for ultra-high net worth families across asset class, with a particular focus on alternative investments and investing in inefficient markets.
Is this your grandfather’s mortgage crisis? - via Voxeu- Was the subprime crisis inevitable? This column looks at how the last mortgage crisis in the 1930s shaped the policy landscape in the US, arguing that it eventually led to the emergence of private securitisation in the 1990s, a surge in homebuilding and homeownership, and a second great mortgage crisis that was just around the corner.
Using Cash-Settled Derivatives to Hide Corporate Ownership – via Harvard Law – Derivatives are an important class of financial instruments that has taken center stage in today’s capital markets. The reason for their increasing popularity is that they offer risk protection while also allowing innovative investment strategies. In particular, in a regulatory environment where disclosure requirements are triggered by voting rights rather than economic interest, derivatives can be used to conceal equity ownership of a public company—a practice generally known as “hidden ownership.” The new report by The Conference Board cites anecdotal evidence—including the most notable recent cases regarding Continental, Fiat, and Volkswagen-Porsche—that cash-settled derivatives are increasingly being used by investors and strategic bidders to discretely expand their ownership positions in business corporations listed on European stock exchanges.
The case against aid - via Boston.com- The world’s humanitarian aid organizations may do more harm than good, argues Linda Polman. In 1859, a Swiss businessman named Henry Dunant took a business trip to Italy, where he happened upon the aftermath of a particularly bloody battle in the Austro-Sardinian War. Tens of thousands of soldiers were left dead or wounded on the battlefield, with no medical attention. He was so shaken by the experience that he went on to found what is known today as the International Committee of the Red Cross.