Handpicked to satisfy your intellectual curiosity!
If you like this roundup or plan on linking to it (or from it) kindly include a reference to SimoleonSense.com Thanks.
“News Announcement: Today on the NYSE no shares exchanged hands, everyone finally has what they want.”
Must Read Articles for Weekly Visitors
Tamara Piety on Market Manipulation (Behavioral Economics & Persuasion Galore!) – via Situationist – To me, one of most offensive examples of this type of channeling is the price discrimination practice involved in rebate/coupon schemes. Rebates and coupons are used as a way to expand the customer base by attracting a few more customers by virtue of the illusion (for most) of a lower price point. We see it in electronics all the time – “Laptop $999 [with $250 rebate]” There are several things at work here at once. One is that the seller ( or whoever actually pays the rebate) has your money for some period of time ranging from 30 days to 6 months as an interest free loan. Second is the anchoring effect that makes $999 seem some how much less than $1,000. But the principle objection for me is that they are actually creating a staggered pricing program. Again, this might not be a problem if it simply involved selling to as many customers as possible on the basis of the price that they will want to buy. The problem is that in order to do this companies make the process of obtaining the lower price (i.e. the with the rebate price), much more onerous than it appears to be through a variety of devices that are intended to take advantage of the psychological effect of the lower price and then relying on consumer inertia, lack of attention, recalculation of the efforts and so forth to avoid actually making good on that promise. Getting the rebate usually involves fair amount of time and effort (filling out the rebate form, mailing it back, waiting for the check, etc.) and uncertainty (if you fail to observe deadline, miss a requirement in the fine print, fail to send in the original, etc.) you lose. None of these difficulties are simply bureaucratic obstacles which have the ancillary effect of depressing the number of rebates redeemed. They are intended to have this effect. And sometimes the rebate is “paid” in the form of a “gift card” rather than in a cash or check which further draws out the redemption process by providing an expiration date for the card, limitations on where it can be used, or even a restriction limiting its use to other products from the same seller.
Breaking Up Is Easy to Do: When Corporations Dump Consumers - via Situationist – Take a recent article by Detlef Schoder and Alex Talalayevsky in the Wall Street Journal’s Executive Adviser on how companies can regain control of pricing power on the Internet. What is fascinating about the piece is that Schoder and Talalayevsky portray consumers seeking to become well informed and exercising free choice as “taking advantage”—that is, not playing fair. And the authors offer specific tactics to limit choice and confuse or reduce the knowledge of potential buyers. For example, Schoder and Talalayevsky provide advice on decreasing “price transparency.” As they explain, “Packaging, or bundling, a product with other products and/or services, makes it difficult for buyers to ascertain the specific cost of each single item within the bundle.” Likewise, they recommend tracking online customers by delivery address and credit-card number and then banning “customers who repeatedly eat into [the] profit margin.”
Popularity has its pitfalls – the cool kids get the flu first – via Globe & Mail – A new report says the popular kids, on average get sick two weeks sooner than most others
Didier Sornette : Bubbles Everywhere in Human Affairs – via SSRN – We review the “social bubble” hypothesis, which holds that strong social interactions between enthusiastic supporters of new ventures weave a network of reinforcing feedbacks that lead to a widespread endorsement and extraordinary commitment by those involved in the projects, beyond what would be rationalized by a standard cost-benefit analysis in the presence of extraordinary uncertainties and risks. Starting with analyses of previous bubbles, in particular the famous “Tulip mania”, the social bubble hypothesis is illustrated by the example of the Apollo project. The social bubble hypothesis suggests novel mechanisms to catalyze longterm investments, innovations and risk-taking by the private sector, which otherwise would not be supported.
We Only Trust Experts If They Agree With Us - via SciAm – We only consider scientists to be experts when their argument is in line with our own previously held beliefs. Christie Nicholson reports
Downturn sees ‘boiler room’ share scams make a comeback - via BBC NEWS – “These people are quite young I believe. They’ve got time to rebuild their lives; I don’t. I’m coming up to retirement. I’m 64 years of age.
“They have destroyed my latter years and quite frankly I hope they rot in hell.” John (not his real name) speaks out angrily after falling victim to a so-called “boiler room” scam.
Why “Scientific Consensus” Fails to Persuade - via NSF – Suppose a close friend who is trying to figure out the facts about climate change asks whether you think a scientist who has written a book on the topic is a knowledgeable and trustworthy expert. You see from the dust jacket that the author received a Ph.D. in a pertinent field from a major university, is on the faculty at another one, and is a member of the National Academy of Sciences. Would you advise your friend that the scientist seems like an “expert”? If you are like most people, the answer is likely to be, “it depends.” What it depends on, a recent study found, is not whether the position that scientist takes is consistent with the one endorsed by a National Academy. Instead, it is likely to depend on whether the position the scientist takes is consistent with the one believed by most people who share your cultural values.
Battle of the Brains - via Steve hsu- a funny BBC program called Battle of the Brains in which he outperforms six other brainiacs on a variety of tests. When I asked him about it, he downplayed his success, noting that the kinds of puzzles he was asked to solve are similar to what theoretical physicists do every day. BBC: Horizon takes seven people who are some of the highest flyers in their field – a musical prodigy, a quantum physicist, an artist, a dramatist, an RAF fighter pilot, a chess grandmaster and a Wall Street trader. Each is put through a series of tests to discover who is the most intelligent.
When Fair Trade increases unfairness: The case of quinoa from Bolivia - via Ideas Repec – Fair Trade movement tackles the question of global justice. It is experiencing growing success. Fair Trade therefore sorts the beneficiaries, usually by means of certification. Numerous impact studies have assessed the beneficial effects of Fair Trade on the intended beneficiaries. Several studies have nevertheless called into question both the impact of certification and Fair trade. Following these studies this paper shows that Fair Trade in quinoa (Chenopodium quinoa Willd.) is actually increasing inequalities between Bolivian producers.
The Thriving Cult of Greed and Power – via Long Form – An investigation of Scientology.
Explaining the Spread of Urban Legends - via Influence People – You might be reading this with some embarrassment because you’ve passed on one or more of these stories in days gone by to others via email. I’ll make you feel a little better and ‘fess up that I forwarded some of these types of email in the early days of the Internet. I’d like to take a moment to explain some of the psychology about why these stories live on.
Podcast: Brendan Nyhan, on False Beliefs that Refuse to Die - via Rationally Speaking – Ever notice how some beliefs only seem to become stronger, even as they’re repeatedly debunked? For example, the belief that Barack Obama is a Muslim is held by at least 10 percent of the population, despite having been repeatedly denied and debunked for months in the national news. This issue is especially relevant to skeptics, who often find themselves in the tricky position of deciding whether or not to publicly debunk bogus claims like the vaccine-autism link or the efficacy of homeopathic remedies. Will the coverage clear up misconceptions? Or will it backfire, calling public attention to the claims and actually reinforcing belief in them?
A lesson in economics: How stock markets really work - via Mises- One of the most astonishing articles I have come across in a long time is a piece entitled “How the Stock Market and the Economy Really Work” by former Wall Street trader and research analyst Kel Kelly. For Kelly, while they have a role, consumer confidence and consumer spending are not the drivers of economic growth. What does drive economic growth, then? Simple. Increases in the money supply drive up prices, that’s it. That’s the whole story.
Miguel’s Weekly Favorites
Online as much as in the real world, people bunch together in mutually suspicious groups—and in both realms, peacemaking is an uphill struggle – via Economist – IN 2007 Danah Boyd heard a white American teenager describe MySpace, the social network, as “like ghetto or whatever”. At the time, Facebook was stealing members from MySpace, but most people thought it was just a fad: teenagers tired of networks, the theory went, just as they tired of shoes. But after hearing that youngster, Ms Boyd, a social-media researcher at Microsoft Research New England, felt that something more than whimsy might be at work. “Ghetto” in American speech suggests poor, unsophisticated and black. That led to her sad conclusion: in their online life, American teenagers were recreating what they knew from the physical world—separation by class and race.
ATM Banking + Game Theory = Profits – via AT Kearney – ATMs have saturated the world banking market, but there is still plenty to do to make them more profitable. By borrowing advanced methods such as game theory, banks can create ATM networks that generate more revenue and increase competitive advantage.
Video: Ted Talk – Our natural sleep cycle - In today’s world, balancing school, work, kids and more, most of us can only hope for the recommended eight hours of sleep. Examining the science behind our body’s internal clock, Jessa Gamble reveals the surprising and substantial program of rest we should be observing.
Wells Fargo, You Never Knew… - via Long Form – A just-barred Pakistani-American attorney attempts to save a young family’s home from foreclosure and glimpses the contradiction-rich bureaucracy that has emerged in response to the housing crisis.
Niall Ferguson: Empires on the Edge of Chaos – via Fora.Tv- Throughout history the rise and fall of empires isn’t slow or cyclical, as we like to think, but arrhythmic…it mostly happens very, very suddenly. America is a superpower on the edge of chaos, according to economic historian and author Niall Ferguson. U.S. debt levels, he says, and its unwillingness to address the problem, has put it in the same category as other great empires which have collapsed throughout the ages. Ferguson argues the world is changing. There’s the rise of authoritarian China as a super-power; a Keynesian president leading a weakened United States; the re-emergence of democratic India as a great power; the continued decline of Japan; and the probability of continued global economic instability ahead.
Kill Whitey Its The Right Thing To Do- via Wired- A trolley is running out of control down a track. In its path are 5 people who have been tied to the track by a mad philosopher. Fortunately, you can flip a switch, which will lead the trolley down a different track to safety. Unfortunately, there is a single person tied to that track. Should you flip the switch?
Nudging is not enough (redux) - via Herd – As regular readers will know, I’ve been arguing for a while that the insights into human behaviour being brought to the table by what’s widely known as Behavioural Economics are excellent and timely corrections to the rational choice models of behavior which themselves are rooted in classical economics in particular. They counter some of the sillier assumptions in this kind of model: that essentialy we don’t think nearly as much as we’ve been told we do and even when we do, there are all kind of quirks and ticks in our mental processes that lead us astray from the kind of rationality we aspire to.
Falling in love costs you friends (But I’m Skeptical)- via BBC – Oxford University researchers asked people about their inner core of friendships and how this number changed when romance entered the equation.They found the core, which numbers about five people, dropped by two as a new lover came to dominate daily life.
“People who are in romantic relationships – instead of having the typical five [individuals] on average, they only have four in that circle,” explained Robin Dunbar, a professor of evolutionary anthropology at Oxford.
The Prisoner’s Dilemma Makes a Reality TV Appearance - via Freakonomics – The recent season finale of ABC’s reality show The Bachelor Pad featured an interesting twist. When it came time to award the show’s final $250,000 prize, the two finalists, Dave and Natalie, “were forced to go into separate rooms and decide whether they wanted to ‘keep’ or ’share’ the final prize. If they both picked ’share’, the money would be split evenly between them ($125,000 each). If only one picked ’share’ and the other ‘keep,’ the keeper gets the entire prize ($250,000) and the other, we’ll call them the weeper, gets nothing. If they both pick ‘keep,’ then neither gets the cash and it is split among the other losing contestants (about $14,000 each).”
What is the difference between cognitive economics and behavioural finance? – via Knowing & Making – The first difference is between “economics” and “finance”. Economics is a broader field, including the trading of any kind of goods or services, whereas finance specifically focuses on investment and the value of financial instruments. Indeed I consider economics very broadly to be the study of how resources are allocated (by individuals, and across society). The more fundamental distinction is between “cognitive” and “behavioural”. In short, cognitive is about how we think, while behavioural is about what we do. Behavioural finance and economics focus on the phenomena of how people behave – for example what will they do (on average) when faced with a given choice between two ways of paying for something?
Ancient origins of the cerebral cortex - via Wiring The Brain – Just how special is the human brain? Compared to other mammals, the thing that stands out most is the size of the cerebral cortex – the thick sheet of cells on the outside of the brain, which is so expanded in humans that it has to be folded in on itself in order to fit inside the skull. The cortex is the seat of higher brain functions, the bit of the brain we see with, hear with, think with. In particular, one of its main functions is association – bringing sensory information together with information on internal states and motivation to enable flexible and context-dependent decisions to be taken, rather than simple reflexive actions in response to isolated stimuli. While undoubtedly vastly more developed in humans, a new study suggests the cerebral cortex may have much more ancient origins than previously suspected.
Video: Creativity – The Medium Doesn’t Matter - via MIT World – In an era of packaged toys and online games, have our children lost the knack of creative play? While American kids may never again prefer sticks and other found objects to the manufactured experience, Laura Seargeant Richardson of frog design believes children can still evolve from game consumers to game designers. In a talk that reveals the future look and feel of games, Richardson advocates making space in the physical and digital worlds to abet children’s inventiveness.
Aging – How alcohol is good for you – via Deric Bownds – Numerous studies have shown that non-drinkers tend to die before moderate drinkers.
Phys Ed: Can Exercise Make Kids Smarter? - via NYT- In an experiment published last month, researchers recruited schoolchildren, ages 9 and 10, who lived near the Champaign-Urbana campus of the University of Illinois and asked them to run on a treadmill. The researchers were hoping to learn more about how fitness affects the immature human brain. Animal studies had already established that, when given access to running wheels, baby rodents bulked up their brains, enlarging certain areas and subsequently outperforming sedentary pups on rodent intelligence tests. But studies of the effect of exercise on the actual shape and function of children’s brains had not yet been tried.
Behavioral economics humor on Conan: Anchoring on a reference point - via Nudge Blog -
Dan Ariely: Plagiarism and essay mills – via Predictably Irrational – The new school year is just starting, and as I decide what tasks to give my students, I can’t help but think about their potential to use essay mills. Essay mills are companies whose sole purpose is to generate essays for high school and college students (in exchange for a fee, of course). Sure, essay mills claim that the papers are meant just to help the students write their own original papers, but with names such as echeat.com, it’s pretty clear what their real purpose is.
Why Cellphone Talkers Are So Grating - via Wired- Cellphone users irritate so mightily because their background chatter forcibly yanks listeners’ attention away from whatever they’re doing, says psychology graduate student Lauren Emberson of Cornell University. Overhearing someone spewing intermittent exclamations into a handheld gadget lacks the predictability of hearing a two-way exchange and thus proves inherently unsettling, Emberson and her colleagues report in an upcoming Psychological Science.
3-D Printing Spurs a Manufacturing Revolution – via Uveal Blues – Businesses in the South Park district of San Francisco generally sell either Web technology or sandwiches and burritos. Bespoke Innovations plans to sell designer body parts. The company is using advances in a technology known as 3-D printing to create prosthetic limb casings wrapped in embroidered leather, shimmering metal or whatever else someone might want.
Sex Appeal, Exotic Setting Equal Satisfied Moviegoers - via Miller McCune – A new study of factors that contribute to a film’s popularity suggests the sex appeal of stars outweighs identification with the lead character.
Watch and learn: How music videos are triggering a literacy boom – via Boston.com – Tiny, sun-soaked Khodi on the western coast of India’s Gujarat state is the kind of village where cattle still plough the fields and women fill clay pots with water from the village well. In the past few years, however, the town has been changing: Thatched mud huts are slowly giving way to sturdy, single-story concrete blocks; farmers conduct their business on cellphones. The state buses, which until a decade ago were only filled with men, are now crammed with women. Enrollment in the local school has soared.
Financial Topics & Investing
The “lost decade” you should really be afraid of - via Pop Economics – But there’s another lost decade that was even more painful. And for those of you who are just starting out your careers, this one was a hell of a lot more important than the S&P 500′s storm. According to a recent Census report, between 2000 and 2009, the inflation-adjusted median income of American households dropped 4.8%.
The Illusion of Pension Savings – via NYT – Earlier this year, Illinois said it had found a way to save billions of dollars. It would slash the pensions of workers it had not yet hired. The real-world savings would not materialize for decades, of course, but thanks to an actuarial trick, the state could start counting the savings this year and use it to help balance its budget.
Why Students Should Learn Financial Literacy - via Blogspot- Students who hate economics and finance: If you think that the study of economics and finance is for uncreative people, and is evil and will only teach you to work on Wall Street and exploit poor people and poor countries, then you, too, should sign up for a basic economics or financial literacy course. In my experience, people who express disdain for economics tend to make poor and costly financial decisions. Take advantage of a chance to offset that tendency.
The Small Cap Trap- via PsyFi Blog- The theory is that small capitalization stocks offer great rewards. After all, as Jim Slater pointed out in The Zulu Principle: “elephants don’t gallop”. Well, apart from when they’re being chased by a psychopath, armed with an elephant gun, in a bulldozer. As the last few years have shown, even behemoth sized corporations can grow startlingly quickly if they’re priced to go bust and then get bailed out by obliging governments.
Quality Signalling for Quality Stocks – via PsyFi Blog – Making money from trading stocks should be ridiculously easy; after all,all you have to do is buy low and sell high. Which makes it a recurring mystery as to why so many people so often do the opposite. After all if you buy something at £5 and it drops to £4 it’s cheaper, right?
An Interview with Portfolio Managers Christopher C. Davis and Kenneth Charles Feinberg - via Value Investing World – Assessing a business’s durability and adaptability is the foundation of our investment research process at Davis Advisors. These assessments are complex and not based on rules or certainties but rather tendencies and probabilities. As in many complex problems, it is often useful to begin by first inverting the question, in this case by asking, What characteristics tend to lead to business failure or impairment? When asked in this inverted fashion, a number of answers seem immediately obvious. Generally, businesses fail or become impaired due to some combination nation of debt, low returns on capital, competition, obsolescence, over-concentration (by geography or product), ‘diworsification’ (a wonderful term coined by legendary portfolio manager Peter Lynch to describe foolish acquisitions), and hubris. If such characteristics are most often associated with failure or impairment, then we can turn back to the original question and conclude that those businesses without these traits will tend to be more durable and more adapt able. Therefore, in the face of inherent uncertainty, investors should look for businesses with strong balance sheets, satisfactory returns, sustainable competitive advantages, products with low risk of obsolescence, geographic and/or product diversification, a skeptical view of mergers and acquisitions, and a healthy fear of arrogance and complacency.
Shadow Banking and Financial Regulation - via Harvard – Without a safety net, banking is unstable. This proposition finds support in economic theory. In an influential analysis, Douglas Diamond and Philip H. Dybvig showed that banks without deposit insurance exhibit multiple equilibria—one of which is a bank run.  And financial history confirms this hypothesis. Banking panics were common in the U.S. before the enactment of deposit insurance, but nonexistent thereafter.
The two key housing problems - via Stingy News- I think there are two key problems for the housing market: 1) the excess supply of existing housing units, and 2) negative equity. The excess supply is keeping pressure on residential investment, and therefore on employment and economic growth. As new households are formed, the excess supply will be absorbed – but this is happening very slowly.
Past performance is no guarantee of future performance… but is anyone listening? - via Musings ON Markets & Aswath Damodaran – Most mutual funds end their advertisements with this statement: “past performance is no guarantee of future results”. I don’t know why they bother because investors don’t seem to act like they care. In fact, one phenomenon that we know characterizes investors is that many of them try to invest in whatever asset class, fund or stock has done well in the past.
How to raise government revenue: tax bling bling, but subsidize hip hop? - via Economic Logic -
Lost in the debate on how governments could be raising much needed revenue in our difficult times is that there are some goods that are just begging to be taxed: diamond goods. These goods are valued solely because they are expensive. The money spent on these goods is independent of their price. Thus taxing them all the way to infinity makes them even more attractive, as very little of the diamond good needs to be produced for the same satisfaction. Thus, everybody should agree diamond goods must be taxed heavily: the buyers because of the prestige of the high sticker price, the others for the tax revenue.
A New Historical Database For The NYSE 1815 To 1925: Performance And Predictability - via SSRN – In this paper, we collect individual stock prices for NYSE stocks over the period 1815 to 1925 and individual dividend data over the period 1825 to 1870. We use monthly price and dividend information on more than 600 individual securities over the period to estimate a stock price index and total return series that extends virtually to the beginning of the New York Stock Exchange. We use this data to estimate the power of past returns and dividend yields to forecast future long-horizon returns. We find some evidence of predictabiity in sub-periods but little predictability over the long term. We estimate the time-varying volatility of the U.S. market over the period 1815 to 1925 and find evidence of a leverage effect on risk. This new database will allow future researchers to test a broad range of hypotheses about the U.S. capital markets in a rich, untouched sample.
Teaching practical wisdom in medicine through clinical judgement, goals of care, and ethical reasoning – via Wisdom Research – Clinical decision making is a challenging task that requires practical wisdom—the practised ability to help patients choose wisely among available diagnostic and treatment options. But practical wisdom is not a concept one typically hears mentioned in medical training and practice. Instead, emphasis is placed on clinical judgement. The author draws from Aristotle and Aquinas to describe the virtue of practical wisdom and compare it with clinical judgement. From this comparison, the author suggests that a more complete understanding of clinical judgement requires its explicit integration with goals of care and ethical values. Although clinicians may be justified in assuming that goals of care and ethical values are implicit in routine decision making, it remains important for training purposes to encourage habits of clinical judgement that are consciously goal-directed and ethically informed. By connecting clinical judgement to patients’ goals and values, clinical decisions are more likely to stay focused on the particular interests of individual patients. To cultivate wise clinical judgement among trainees, educational efforts should aim at the integration of clinical judgement, communication with patients about goals of care, and ethical reasoning. But ultimately, training in wise clinical judgement will take years of practice in the company of experienced clinicians who are able to demonstrate practical wisdom by example. By helping trainees develop clinical judgement that incorporates patients’ goals of care and ethical reasoning, we may help lessen the risk that ‘clinical judgement’ will merely express ‘the clinician’s judgement.’
The Dark Side of Outside Directors: Do They Quit When They are Most Needed? – via SSRN – Outside directors have incentives to resign to protect their reputation or to avoid an increase in their workload when they anticipate that the firm on whose board they sit will perform poorly or disclose adverse news. We call these incentives the dark side of outside directors. We find strong support for the existence of this dark side. Following surprise director departures, affected firms have worse stock and operating performance, are more likely to suffer from an extreme negative return event, are more likely to restate earnings, and have a higher likelihood of being named in a federal class action securities fraud lawsuit.