Soros Launches Effort to Battle Free-Market Zeal | Newsweek Voices - Michael Hirsh | Newsweek.com

Soros Launches Effort to Battle Free-Market Zeal | Newsweek Voices - Michael Hirsh | Newsweek.com:

"...financier George Soros is announcing a $50 million effort to speed things along. This week Soros is gathering some of the leading practitioners of the market-skeptic school, who were marginalized during the era of 'free-market fundamentalism,' among them Nobelists Joseph Stiglitz, George Akerlof, Michael Spence, and Sir James Mirrlees. He's also creating an 'Institute for New Economic Thinking' to make research grants, convene symposiums, and establish a journal, all in an effort to take back the economics profession from the champions of free-market zealotry who have dominated it for decades"

First of all I love the sentence "...those marginalized....include Nobelists Joseph Stiglitz, George Akerlof, Michael Spence, and Sir James Mirrlees" Marginalized nobelists. Great! LOL.


But seriously, Soros has yet to convince me.

Do we need regulation? Yes. Free markets are not perfect and people do have an incentive to hide the truth, to create information asymmetries. However too much regulation and intervention is worse than too little. A free market system where people can take chances will win out over a centrally controlled system where who you know matters more than what you know.

Sure any free system will have painful excesses and bubbles, but these problems, as painful in the short run as they may be, must be weighed against the corruption and politics of any regulatory system. I am confident that if a proper accounting is done, the advantage will lie closer to the free market camp than the so called new economists believe.

George Soros, your success has earned you the right to say what you want and I respect your ideas, but in this case, I think history will show that you are on the wrong side of the market on this one.

Financial Bubbles: Why Do Fools Fall in Love? at SmartMoney.com

Financial Bubbles: Why Do Fools Fall in Love? at SmartMoney.com

Before we get to finance, consider these two common occurrences:

1. Imagine it is Friday Night. You do not have to work until Monday. In fact you have no commitments. You just finished all of your tests, papers, etc. You are home alone. All of your friends are out. You imagine them having great time "out" frequenting local "watering-holes" or at parties, sporting events, or plays (incidentally whether they really are having a great time is quite irrelevant, that you think they are is what counts here). Even though you went out last weekend and really did not have much fun, you think that this time will be different and you head out.

2. You just have a first date (or your first day on a new job or even the start of a new sports season). You are excited. Things seem to be going well. And you instantly think they will keep going well.

What do these scenarios have to do with finance? Possibly a lot.

Financial Bubbles: Why Do Fools Fall in Love? at SmartMoney.com:

"Paul Zak, founding director of the Center for Neuroeconomics Studies at Claremont Graduate University, points to a number of quirks in our brains that might be responsible. One is that over-stimulation of the “reward” centers of our brains appears to steer us toward more risk. For instance, it’s been shown in laboratory experiments that men in a state of sexual arousal are more likely to make risky financial decisions.

Similar arousal has been speculated on as being created by the competition in the market. Missing out on the fun that you think others is having creates a sense of regret that makes you want to participate. Additionally, it is a monkey-see, monkey-do world.

Again from the article:

"Another factor is how our brains experience regret when we see the money we could be making in, say, a rising stock market. In one experiment, subjects were imaged in an MRI machine while playing a stock-market investment game. If a person saw the stock market go up when they didn’t have much money invested in it, the scientists were actually able to see the “regret” signal in the subject’s brain. And the more regret a person felt, the more he or she invested in the market as the game went on. While this kind of “fictive learning” can be useful in other contexts, in asset markets it’s a recipe for disaster."

Monkey see, monkey do?

"Lastly, Zak points to our basic evolutionary nature: “We’re a herd species. When the rest of the herd’s doing something, they’re all running in formation, it really seems like we ought to do that, too.”"

Nightly Business Report . Your Mind and Your Money | PBS

Nightly Business Report . Your Mind and Your Money | PBS:

"Behavioral finance teaches us few people always make logical investment decisions. Psychological and emotional biases get in the way. NBR's year-long 'Your Mind and Your Money' series aims to help investors understand those biases and make more rational decisions.

Reports and interviews will appear in the NBR program on select Mondays, and additional information -- including companion articles from Kiplinger's Personal Finance -- will appear here regularly."

A graph of why you should not hold levered ETF's long term

DO you remember last week when I tweeted from the FMA conference about the luncheon speaker who pointed out the fact that levered ETF's that regularly relever are good at mirroring the market on a daily basis, but in the long term are bad bets since they are short an embedded option on Gamma which makes it very likely that the levered fund will be a money loser?


To show this, let's look at two levered funds that are designed to be bets on the Russell 1000 financial index.

I pulled the following two charts from for the Direxion Daily Financial Bull 3x (FAS) and Bear 3X shares FAZ). Both of these levered ETF's track the same index but the Bull fund is designed to move with the with the index (albeit 3Xs faster) while the Bear fund is designed to go in the opposite direction of the index at the same warp speed.

MSN describes the two funds as follows: The Bull Fund (FAS) as

"The investment seeks to replicate, net of expenses, 300% of the daily performance of the Russell 1000 Financial Services Index The fund will invest at least 80% of assets in securities that comprise the index. It will also utilize financial instruments that, in combination, provide leveraged and unleveraged exposure to the index. The fund is nondiversified."

and the same forthe Bear fund (FAZ) as :

"The investment seeks to replicate, net of expenses, 300% of the inverse daily performance of the Russell 1000 Financial Services Index The fund will invest at least 80% of assets in securities that comprise the index. It will also utilize financial instruments that, in combination, provide leveraged and unleveraged exposure to the index. The fund is nondiversified."

So "common sense" would suggest that if you bought each the overall returns (ignoring transaction costs) would be zero. BUT that is not the case, in fact, you would lose money long term not only in the combined position, but on both the Bear and the Bull funds individually as well!

Let's take it to the charts:

Here is the Five day chart of the underlying Russell 1000 Financial Services Index, the FAS and FAZ. Note how they move in almost exactly as we would expect. That is the bull fund moves, albeit more sharply, the index and the bear fund moves opposite direction.

Now the One year chart: of FAS and FAZ from Yahoo. Note how they both decline. That is why you do not want to be long levered funds in the long run.

WGBH American Experience - The Crash of 1929

WGBH American Experience - The Crash of 1929

Good video of the crash from PBS. I can not figure out how to embed it.

Seeds of adult dishonesty are sown in youth, study finds -- latimes.com

Seeds of adult dishonesty are sown in youth, study finds -- latimes.com:

"A new study claims there is truth to the adage: People who cheated on exams in high school are considerably more likely to be dishonest later in life, according to a report to be released today by the Josephson Institute of Ethics.

The study, which surveyed nearly 7,000 people in various age groups nationwide, offers a sobering assessment of today's youth as cynics who are aware that their behavior crosses boundaries but believe it is necessary to succeed.

And the findings suggest that habits formed in childhood persist: Those who cheated in high school are more likely as adults to lie to a customer, inflate an insurance or expense claim, cheat on taxes and lie to their spouses."

An Experiment in Hedging With ETFs - WSJ.com

Remember what I mentioned last week? Holding leveraged ETF's log term is generally a losing game.

An Experiment in Hedging With ETFs - WSJ.com:

"ProShares warns investors that it aims to have the funds' movements correspond to the inverse of the relevant market indicator on a daily basis. Over more time, the effects of compounding can (and generally will) dilute or enhance the results. For the second quarter, when the S&P 500 gained 15.93%, the Short S&P500 lost 16.03%. Year-to-date the total return for the S&P 500 is up 20.10%, but the short fund is down 22.63%."

and again, it is much worse for leveraged funds.

Nightly Business Report . Your Mind and Your Money | PBS

Nightly Business Report . Your Mind and Your Money | PBS:

"Behavioral finance teaches us few people always make logical investment decisions. Psychological and emotional biases get in the way. NBR's year-long 'Your Mind and Your Money' series aims to help investors understand those biases and make more rational decisions.

Reports and interviews will appear in the NBR program on select Mondays,

YouTube - Shlomo Benartzi - Leading Authority on Behavioural Finance

YouTube - Shlomo Benartzi - Leading Authority on Behavioural Finance: "Professor Shlomo Benartzi is a leading authority on behavioural finance with special interests in retirement planning, investor behaviour and behavioural wealth management."



His discussion is just an introduction but he definitely hits some good points. For instance, I know I am guilty of not refinancing nearly enough. And how many of us know someone who buys items based on "how much he can afford" based off of payments etc. Or anyone who buys lottery tickets regularly.

Take away? We all are susceptible to these behavioral biases.

GMAC seeking third round of bailout funds - WSJ - Oct. 28, 2009

GMAC seeking third round of bailout funds - WSJ - Oct. 28, 2009:

"GMAC Financial Services is seeking a third round of bailout funds from the U.S. Treasury Department, according to a report in the Wall Street Journal....the U.S. government could provide an additional $2.8 billion to $5.6 billion to the lender....The U.S. has already injected $12.5 billion in the lender since December 2008 and owns a 35.4% stake in the firm, which is the primary lender to customers of General Motors and Chrysler."

One of the things that the capital market is reasonably good at is knowing when to say when and to cut off a dying firm from new capital. Politics make this a much more difficult task to taxpayer owned firms.

Why Sleeping On It Helps | World of Psychology

WOW. This one has some major ramifications.

The short version is that the authors found that sometimes we really do think too much and when we do, out biases interfere with our knowledge and ability and our decision making actually gets worse. On the other hand sleeping (and I would venture yoga, meditation, and exercise) seems to clear the brain so that it (we) can make a better decision.

Why Sleeping On It Helps | World of Psychology:




If this study is right, you can think yourself into the wrong decision.

"...to emphasize this finding — if you’re an expert and you had extra time to think about your decision in the area of your expertise (conscious thinker) or had to make a quick decision, you made worse decisions than those who were unconscious thinkers. The researcher hypothesize that conscious thought can lead to poor weighting in decision-making — the more you think about something, the more your biases interfere with good decision-making.

Unconscious thinkers in this experiment appear to weight the relative importance of diagnostic information more accurately than conscious thinkers did."

Naissance Capital to Invest in Firms With Women as Directors - NYTimes.com

Naissance Capital to Invest in Firms With Women as Directors - NYTimes.com:

"Naissance Capital, based in Zurich, will start the Women’s Leadership Fund in January, which will invest in companies whose boards include women. It also plans to take minority stakes in companies without women on their boards and to use its ownership to encourage changes.

R. James Breiding, a co-founder of Naissance Capital and a former director of Rothschild Corporate Finance, said the fund was created after several studies showed a correlation between the number of female directors and a company’s performance."

What studies?

One is by Adams and Ferreira and finds better monitoring since women directors are more apt to be in attendance and take a more active position in monitoring.

Another paper is by de Cabo, Gimeno, and Nieto that looks at EU firms and finds a similar story: that women are better at monitoring.

I will leave all nagging comments and jokes to the reader.

White House mulls unwinding too big to fail firms | Politics | Reuters

White House mulls unwinding too big to fail firms | Politics | Reuters:

"A council that includes the U.S. Treasury Secretary would help set policy for dealing with troubled financial firms under White House plans to deal with the 'too big to fail' problem, CNBC television said on Monday citing sources.

The Obama administration would give the Federal Deposit Insurance Corp authority to unwind large firms whose failure could threaten the overall economy."

CHART OF THE DAY: The iPod And Big Mac Indexes Just Don't Work

CHART OF THE DAY: The iPod And Big Mac Indexes Just Don't Work: "...a side-by-side comparison of the Big Mac Index and the iPod Nano Index suggests that these might not really be good metrics for measuring currency valuations. As you can see, the two indexes result in wildly uncorrelated results. If it were really a matter of currency valuation, you’d expect both to show similar valuation problems. Instead, the pattern just seems random"

Challenging Modern Portfolio Theory greenfaucet

We will be discussing this in class soon!

Challenging Modern Portfolio Theory greenfaucet:

"The costs of getting in financial stress are high, much less when a firm is teetering on the edge of insolvency. The cost of financing assets goes up dramatically when a company needs financing in bad times.

But the fair weather use of the M-M theorems is still useful, in my opinion. The cost of the combination of debt, equity and other instruments used to finance depends on the assets involved, and not the composition of the financing."

Galleon insider trading: 8 trades they allegedly made - Oct. 19, 2009

Examples of the specific alleged insider trades:

Galleon insider trading: 8 trades they allegedly made - Oct. 19, 2009:

"The government's case in what it is calling the largest insider trading case involving a U.S. hedge fund contains a detailed list of trades involving household-name companies.

Investigators have pieced together a case that alleges more than $25 million in illegal gains based on trading in 2006-09 on companies"

Finance clubs manage millions, segue into future Wall Street jobs on CollegiateTimes.com

This is of special interest to SIMM students. It is about Virginia Tech's programs.

Finance clubs manage millions, segue into future Wall Street jobs on CollegiateTimes.com:

"“They’ve given us the money for two reasons,” said Eric Eichelberger, BASIS co-CEO and senior engineering major. “One is to produce competitive returns for the university and use that money toward scholarships and programs. The other is to push education, to take kids’ classroom skills and move them into a more real world setting so when they come out of school, they’re a step ahead of everyone else.”

Modeled after financial firms, both SEED and BASIS are headed by two co-CEOs and have departments broken down into sectors that are led by managers with an industry specialty. Below the managers are analysts who conduct the research for future investment buy and sell recommendations.

During their information sessions, both organizations stressed the importance of a 20-hour weekly time commitment."

Instant herding?

KaChing Lets Investors See and Mirror Experts’ Trades - NYTimes.com:

"KaChing, a Web site where 400,000 amateur and professional investors manage virtual portfolios. Others have logged on to see what the investors on the site are doing and make the same trades in their own real portfolios.

On Monday, KaChing is to add a new twist. Customers can set up brokerage accounts that automatically mirror the trades of a money manager, some of them professionals.

“The idea of an asset manager showing all his research, his holdings — it’s unheard-of,”"

Wall Street's Naked Swindle : Rolling Stone

Interesting articles do appear in Rolling Stone. So now you can say you read it for the finance. :)

Wall Street's Naked Swindle : Rolling Stone:

"On Tuesday, March 11th, 2008, somebody — nobody knows who — made one of the craziest bets Wall Street has ever seen. The mystery figure spent $1.7 million on a series of options, gambling that shares in the venerable investment bank Bear Stearns would lose more than half their value in nine days or less. It was madness — 'like buying 1.7 million lottery tickets,' according to one financial analyst. But what's even crazier is that the bet paid."

Ground floor and Christian Finance Faculty Association

Want to get in on the Ground floor of a new group? Here is your chance..

"The inaugural meeting of The Christian Finance Faculty Association will be held at the Financial Management Association meeting in Reno, Nevada in the Alpine Room of the Nugget Hotel on Friday, October 23, 2009 from 7:00 - 9:00 AM. The theme of this meeting will be exploring intersections between a Christian worldview and academic finance. For us to adequately prepare, please send an email to rbrooks@TheCFFA.org indicating your plans to attend."

Jonathan Godbey and Bob Brooks are the founders and both are great guys so I am sure it will be good.

Interview of Jason Zweig on Neuroeconomics -- GuruFocus.com

Interview of Jason Zweig on Neuroeconomics -- GuruFocus.com:

"'There was a beautiful study that was published in the The Journal of Finance a couple of years ago about the selection of institutional money managers. It basically found that the professionals who pick money managers, in this case it was pension funds, tend to buy high and fire low. They invest in whichever managers have the best trailing three-year performance and then sell whichever have the worst trailing three-year performance. The study showed that if they had flipped their decisions--if they had bought the ones with the worst three-year performance and sold the ones with the best--they actually would have gotten better returns.'"

Billionaire among 6 nabbed in inside trading case - Yahoo! Finance

Billionaire among 6 nabbed in inside trading case - Yahoo! Finance:

"Raj Rajaratnam, a portfolio manager for Galleon Group, a hedge fund with up to $7 billion in assets under management, was accused of conspiring with others to use insider information to trade securities in several publicly traded companies, including Google Inc.

U.S. Magistrate Judge Douglas F. Eaton set bail at $100 million to be secured by $20 million in collateral despite a request by prosecutors to deny bail. He also ordered Rajaratnam, who has both U.S. and Sri Lankan citizenship, to stay within 110 miles of New York City."

A look back to Dow 10000-1999 style

Interesting look at the first time the Dow hit 10,000 back in 1999.

Visit msnbc.com for Breaking News, World News, and News about the Economy

Guilty As Charged: Chase Mortgage Ad From 2005 Proves Subprime Culpability (JPM)

Check out the 2005 ad they have replicated. Wow. In hindsight looks beyond stupid.


Guilty As Charged: Chase Mortgage Ad From 2005 Proves Subprime Culpability (JPM):

Reducing Incentives for Risk-Taking - DealBook Blog - NYTimes.com

Shareholders are the most important party in the nexus of contracts largely because as residucal claimants they are in the best position to monitor the firm. So it is generally well accepted that managers should manage to maximize shareholder wealth. But to what extent does this mean executives can totally forget about other stakeholders.

In the traditional view, if executives do not "take care" of other stakeholders, the managers will eventually be punished by market forces. (for instance if management takes excessive risks and can not pay back depositors, your shareholders would lose and take out their anger on the management by demanding their dismissal.)

But the pendulum swings back and forth and the debate as to what level managers should be compelled to worry about other stakeholders is never clear cut.

In the NY Times, Lucian Bebcuck and Holger Spamann advocate on behalf of other stakeholders to a degree in this thought-provoking article.

Reducing Incentives for Risk-Taking - DealBook Blog - NYTimes.com:

"Equity-based awards, coupled with the capital structure of banks, tie executives’ compensation to a highly levered bet on the value of banks’ assets. Bank executives expect to share in any gains that might flow to common shareholders, but they are insulated from losses that the realization of risks could impose on preferred shareholders, bondholders, depositors or the government as a guarantor of deposits. This gives executives incentives to give insufficient weight to the possibility of large losses and therefore provides them with incentives to take excessive risks.

How could pay arrangements be redesigned to address this distortion? To the extent that executive pay is tied to the value of specified securities, such pay could be tied to a broader basket of securities, not only common shares."

Stock Whizzes Born Not Made, With Right Dopamine Gene (Update1) - Bloomberg.com

We will definitely be talking about this one when classes start up again on Wedneday!


Stock Whizzes Born Not Made, With Right Dopamine Gene (Update1) - Bloomberg.com: "

People who excel at making snap decisions and learn quickly from their mistakes, skills tied to successful stock traders, may share a genetic secret, according to a study by German neuroscientists.

These talents have been linked in research to people who carry two copies of a gene variant, called VAL, that influences the actions of the brain chemical dopamine, according to scientists at the Max Planck Institute for Human Development in Berlin. Their report was published today in the Proceedings of the National Academy of Sciences."

BBC NEWS | Business | Bloomberg acquires BusinessWeek

BBC NEWS | Business | Bloomberg acquires BusinessWeek:

"The financial news and data provider Bloomberg has agreed to buy BusinessWeek magazine."

Dealbook Column - Don’t Fail, or Reward Success - NYTimes.com

First the standard textbook, academic speal: When dealing with pay issues, there are two things to keep in mind: Level of pay and form of pay.

The level of pay (how much) is what generally draws criticism and anger (caused in some part by jealousy) and is what "gets people in the door". Form of pay (straight salary, options, etc) is what motivates people.

The problem can be that there is interaction between the two. For instance suppose the FORM of pay has magically been corrected to not reward excessive risk taking. That is fewer stock options. This would not be welcomed by managers who would expect (some say demand), a higher LEVEL of compensation (i.e. a high current state, both are controversial and are getting attention.

This is what is playing out at Goldman Sachs right now.

Dealbook Column - Don’t Fail, or Reward Success - NYTimes.com:

The form of pay, especially at firms that accepted taxpayer money, is drawing ire as being too high. Case in point is this from todays NY Times:

Form of pay:

"...it is actually hard to argue with Goldman’s compensation scheme. Goldman’s executives are paid mostly in stock, which vests over three years starting at the end of the next year, so it is more like a four-year period...no Goldman Sachs executive made more than $225,000 in cash last year. Mr. Blankfein and the rest of his management team...waived their compensation completely.

So even though many of Goldman’s executives may make tens of millions of dollars, it is only on paper so far. And Goldman may impose a clawback provision that would require employees to give up some of their compensation if trades go the wrong way....That’s the good news."

Level of Pay

"To put that $23 billion bonus pool number in perspective, it is the most Goldman Sachs has accumulated for bonuses in its history — twice as much as in 2008. And it is doing so while memories are still fresh that just a year ago taxpayers had to step in when Wall Street, and even Goldman, were facing a run on the bank.

So should we be upset about the bonuses? Is this a problem? Viscerally, it can be infuriating to watch Goldman executives gobble up piles of money"

Add to this the fact that the standard defense (we will lose our best people) is not as strong an argument now as in the past and you have the potential for quite a controversy. Stay tuned.

New ways of measuring market risk tolerance - Yahoo! Finance

New ways of measuring market risk tolerance - Yahoo! Finance:

"The asset-allocation tools you'll find online or that an adviser will employ when working with you routinely recommend stock allocations of 70% or more if you're younger than 55 or so. Target-date retirement funds that are the default investments in most 401(k) plans similarly have high stock concentrations, as do planner recommendations you'll typically see in the pages of Money. That's because, over the long run, stocks return more than bonds, so odds are (notwithstanding the past decade's lousy returns) that a heavier stock allocation will give you more money in the end.

Rational, yes. But some of the best work done in the study of risk tolerance concludes that many people can't handle the swings that come with such big stock weightings. As a result, they'll frequently sell at or near market bottoms.

FinaMetrica, an Australian company that has developed a respected risk questionnaire used more than 250,000 times by financial planners, has found that only 7% of investors can stand to have more than 75% of their total investments in stock, and only 1% can handle more than 87%. 'The investment industry tends to encourage people to take on more risk than they're emotionally equipped to handle,' says FinaMetrica co-founder Geoff Davey."

They even have a section that can be used for classes. I think I will do it next semester.

Bear Stearns trader thought funds could "blow up" - Telegraph

Bear Stearns trader thought funds could "blow up" - Telegraph:

"In a series of emails he sent to his personal Google Mail account in diary, Mr Tannin wrote that he was worried one of the funds 'was going to subject investors to 'blow up risk.' 'I was worried that this would all end badly and that I would have to look for work,' the same email continues."

Book Review: 'This Time Is Different' - WSJ.com

Book Review: 'This Time Is Different' - WSJ.com:

I am definitely getting this book! This Time is Different: Eight Centuries of Financial Folly by Carmen Reinhart and Kenneth Rogoff.

The WSJ reviews it. Here is the most important part:

"19th-century British journalist Walter Bagehot claimed that during each speculative upturn merchants and bankers 'fancy the prosperity they see will last always, that it is only the beginning of a greater prosperity.' A boom in U.S. stocks in the early 1900s was remembered by Alexander Dana Noyes, the financial editor of the New York Times in the 1920s, as 'the first of such speculative demonstrations in history which based its ideas and conduct on the assumption that we were living in a New Era; that old rules and principles and precedents of finance were obsolete; that things could be done safely to-day which had been dangerous and impossible in the past.' This mode of wishful thinking has continued up to the present day."

We were talking about this exact phenomena in class the other day. Our conclusion was that we are probably "wired" to think this way.

Why? Consider the caveperson who went out looking for food and did not find any. The next day had to be optimistic that "things would be different this time". Or with dating, or any of a million things that often deal with failures. (Neuroeconomists have any thoughts?)

A Guided Tour Of The NYC Commercial Real Estate Wreckage

A Guided Tour Of The NYC Commercial Real Estate Wreckage: "Last night's PBS NewsHour took a look at the bearish obsession du jour, the commercial real estate market. Real estate analyst Bob White took them around to show some of the ugliest cases out there"

Video on common investment mistakes

Interesting look at 8 common investment mistakes that uses Big Brown (the horse, not the delivery company).




(Overly optimistic, ignoring data, etc)

Good for behavioral finance!

Mind - How Nonsense Sharpens the Intellect - NYTimes.com

Mind - How Nonsense Sharpens the Intellect - NYTimes.com:

"Researchers have long known that people cling to their personal biases more tightly when feeling threatened. After thinking about their own inevitable death, they become more patriotic, more religious and less tolerant of outsiders, studies find. When insulted, they profess more loyalty to friends — and when told they’ve done poorly on a trivia test, they even identify more strongly with their school’s winning teams.

In a series of new papers, Dr. Proulx and Steven J. Heine, a professor of psychology at the University of British Columbia, argue that these findings are variations on the same process: maintaining meaning, or coherence. The brain evolved to predict, and it does so by identifying patterns."

We spoke of this in Behavioral Finance class last night. It melds well with the findings that we seek confirmation of our choices and ignore things that do not fit our "world view".

Caltech Scientists Develop Novel Use of Neurotechnology to Solve Classic Social Problem - Caltech

Caltech Scientists Develop Novel Use of Neurotechnology to Solve Classic Social Problem - Caltech:

"...providing public goods optimally and fairly is difficult, Rangel notes, because the group leadership doesn't have the necessary information. And when people are asked how much they value a particular public good—with that value measured in terms of how many of their own tax dollars, for instance, they’d be willing to put into it—their tendency is to lowball.

Why? “People can enjoy the good even if they don’t pay for it,” explains Rangel. 'Underreporting its value to you will have a small effect on the final decision by the group on whether to buy the good, but it can have a large effect on how much you pay for it.'

In other words, he says, “There’s an incentive for you to lie about how much the good is worth to you"

but now with new technology there are ways to determine what you really are thinking:

"In their series of experiments, the scientists tried to determine whether functional magnetic resonance imaging (fMRI) could allow them to construct informative measures of the value a person assigns to one or another public good. Once they’d determined that fMRI images—analyzed using pattern-classification techniques—can confer at least some information (albeit "noisy" and imprecise) about what a person values, they went on to test whether that information could help them solve the free-rider problem."

Wow. Talk about a game changer! Imagine what would happen if people actually correctly valued commonly held goods. For instance, would spending on national parks go up or down?

Interesting to say the least.

Merrill Lynch’s Compensation Plan Is Lesson for Pay Czar - NYTimes.com

Merrill Lynch’s Compensation Plan Is Lesson for Pay Czar - NYTimes.com:

"Merrill program, which was supposed to align its top employees’ pay with the company’s long-term performance, did not keep workers from taking risks that nearly sank the brokerage giant. And some of its senior executives still stand to collect millions of dollars in stock under the plan.

As the Obama administration’s pay czar, Kenneth R. Feinberg, contemplates curbing compensation for the top 100 executives at each of the seven companies that received big bailouts — including Bank of America — the Merrill experience raises some sobering questions."

and later:

"Under the 2006 plan, top Merrill executives contributed a part of their bonuses from the prior year to an incentive plan that was then converted into stock. If Merrill did well, the firm doled out more shares to the employees at the end of each year. The plan was repeated over three years, and employees could not sell their stock until 2010."

My tew cents. People are REMMS. They will find ways to get around any regulation/pay plan we put in place.

Handicapping the 2009 Economics Nobel - Real Time Economics - WSJ

Handicapping the 2009 Economics Nobel - Real Time Economics - WSJ: "

Adherents of the efficient-markets hypothesis might say that University of Chicago Booth School of Business economist Eugene Fama has an excellent chance of winning the Nobel Prize in economics. Then again, recent events have thrown the idea that markets accurately reflect information available to investors — the efficient-markets hypothesis the Mr. Fama first proposed in the 1960s — into doubt.

Mr. Fama is once again the frontrunner for the Nobel — which is really “The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel” — for British betting firm Ladbrokes, garnering two-to-one odds. That seems rich coming in the wake of a world-wide economic crisis that is being pinned, in part, on economists, policymakers and investors putting too much faith in markets. One suspects that the disconnect comes because Ladbrokes clientele includes a lot of traders — and Mr. Fama is the one economist whose work they know best."

The article lists many other potentials. I hope Fama does win, I have been hoping that for several years. Other choices I would not be surprised by include Tirole, Jensen, and Thaler.

My guess is an economist. Probably Taylor. Stay tuned :)

Monkey cooperation and fairness

FASCINATING!

YouTube - Monkey cooperation and fairness:

"A pair of capuchin monkeys (Cebus apella) show very compelling signs of cooperation and a sense of fairness, by working together to solve a problem using tools, and then sharing the reward."

John Kay - Markets after the age of efficiency

A good article on market efficiency. Remember markets are good, not perfect.

FT.com / Columnists / John Kay - Markets after the age of efficiency:

"Market efficiency is a hypothesis about the way markets react to information and does not necessarily imply that markets promote economic efficiency in a wider sense. But there is a relationship between the two concepts of efficiency. It has long suited market practitioners and rightwing ideologues to encourage such confusion. Since markets are efficient, they argue, interference in markets is counter-productive and more markets mean more efficiency.....Economic models are illustrations and metaphors, and cannot be comprehensive descriptions even of the part of the world they describe. There is plenty to be learnt from the theory if you do not take it too seriously – and, like Mr Buffett, focus on the infrequent inefficiency rather than the frequent efficiency."

2nd UPDATE: Prison Terms Upheld For Adelphia Founder, Son - WSJ.com

2nd UPDATE: Prison Terms Upheld For Adelphia Founder, Son - WSJ.com:

"-A federal appeals court on Monday upheld the prison sentences of Adelphia Communications Corp. founder John Rigas and his son Timothy after they were convicted in 2004 in a massive accounting scandal at the telecommunications company.

In an opinion Monday, the U.S. Second Circuit Court of Appeals denied a bid by the Rigases to have their sentences reduced"

Lo thinks FDIC could fail - Pensions & Investments

Lo thinks FDIC could fail - Pensions & Investments:

"The FDIC might fail, requiring a federal bailout, dragged down by the failure of regional banks with substantial commercial mortgage debt, Andrew W. Lo warned.

Mr. Lo, founder and chief investment strategist of AlphaSimplex Group and a finance professor at the Massachusetts Institute of Technology, said that a failure to restructure debt on Stuyvesant Town-Peter Cooper Village — the vast New York apartment complex — could cause New York banks holding its debt to collapse. The value of the property reportedly has dropped more than $3.2 billion since it was acquired in 2006 for $5.4 billion by Tishman Speyer Properties and partners."

While a bailout is assured, this would be enormous news!

Nearly 200 stocks could be delisted from NYSE, Nasdaq - USATODAY.com

Nearly 200 stocks could be delisted from NYSE, Nasdaq - USATODAY.com:

"There's something other than just shame facing stocks struggling to stay above $1: getting booted from their stock market. After months of suspending requirements that stocks stay above $1, both the Nasdaq and New York Stock Exchange are cracking down. On Aug. 3 both reinstituted the rule, saying stocks that don't trade above $1 for 30 consecutive days will begin the delisting process."

Private Equity Buy-Outs Are Struggling

Private Equity Buy-Outs Are Struggling:

"The New York Times explains how PE firms managed to find profits on deals, even when they badly miscalculated and drove the firm into bankruptcy."

Eugene F. Fama: Economist - Fama/French Forum

Eugene F. Fama: Economist - Fama/French Forum:

"In an interview conducted by Professor Richard Roll, famed University of Chicago economist Eugene F. Fama discusses his life, research, and contributions to the field of finance. Produced by Dimensional in conjunction with the American Finance Association. Directed and edited by Gene Fama Jr."

Thanks to Mark P for pointing this out to me!

Introducing DealBook Dialogue - DealBook Blog - NYTimes.com

Be sure to follow this! A roundtable on the impact of the financial crisis. LOOKS VERY INTERESTING!

Introducing DealBook Dialogue - DealBook Blog - NYTimes.com:

"DealBook want to challenge or confirm the emerging consensus about the financial crisis. To bring together 12 top academics, market participants and regulators with Professor Davidoff to write something original that really makes us think. To inform the public at this critical time in our history about where things are, how they got this way and where we, as a country, should go.

Beginning Monday, we will have a weeklong round table discussing this topic. The participants will post articles to DealBook throughout the week. They will also be posting responses to the articles of other participants and to commentators."

The Harvard Law School Forum on Corporate Governance and Financial Regulation » Patterns in Corporate Events

While the market efficiency debate continues (that it is really a degree of market efficiency not an either or discussion is often forgotten), it seems more and more that the independence of investment and financing decisions has been scuttled.

From Private equity firms to corporations it seems that there are definite hot cold financing times and that these influence activities from takeovers to investments and buybacks etc. The following is from Rau and Stouraitis

The Harvard Law School Forum on Corporate Governance and Financial Regulation » Patterns in Corporate Events:

"Our analysis focuses on the timing of five different types of corporate events (new issues – both IPOs and SEOs, mergers – both stock and cash-financed, and share repurchases) using a comprehensive dataset of corporate transactions over the 25-year period 1980-2004.

The starting point in our analysis is the observation that most corporate events are combinations of two activities that have been central to corporate finance: financing decisions and investment decisions. The academic literature has traditionally argued that financing and investment decisions are driven by one of two hypotheses: (1) The neoclassical efficiency hypothesis which suggests that managers undertake corporate transactions for efficiency reasons, issuing equity or buying targets to take advantage of growth opportunities or to invest in positive NPV projects, and (2) the market misvaluation hypothesis which suggests that rational managers take advantage of irrational market misvaluations by issuing stock in exchange for cash or other firms.

...Our analysis suggests that waves are driven by both neoclassical and misvaluation factors and the relative importance of these factors changes in different periods,"

What do marshmallows have to do with self-control? « Nudge blog

What great timing, we just discussed this in class on Wed.

What do marshmallows have to do with self-control? « Nudge blog: "

Psychology professor Walter Mischel’s 1960s experiment involving children, sugary sweets, and self-control has become a classic. The set-up is simple. A researcher lets a child pick a favorite food from a tray of cookies, marshmallows, candies, pretzels, and other sweets. The researcher puts that treat on the table in front of the child and makes an offer. The child can eat it now. Or the child can wait a few minutes while the researcher goes to check on something else, and get two treats when the researcher returns. If the child loses patience, she can ring a bell, the researcher will come right back, and the child can eat the treat right away. She does not get another one, of course.

How children behaved in the Mischel experiment turned out to be a good predictor of other behaviors later in life."

Charlie Rose - Paul Volcker, Former Federal Reserve Chairman

Charlie Rose - Paul Volcker, Former Federal Reserve Chairman:

"Part I of Paul Volcker, former chairman of the Federal Reserve, one of the wisest men on the economy. In part one of this conversation, he sheds light on the global economic crisis, how we got here, where we are, and what is next for us"

Mandelbrot Interview

FT.com / FT Markets News-GREAT! Interview with Benoit Madelbrot. HIGHLY Recommended. Required for my classes. On Market efficiency, non normality, history of finance, and price dicontinuities. Fascinating.

Video is here.

HT to pkedrosky

Neuroeconomics from MIT

Neuroeconomics | MIT World:

"Drazen Prelec peers into the human brain while it makes decisions. In his corner of the new field of neuroeconomics, Prelec uses a functional magnetic resonance imaging (fMRI) machine to scan minds pondering the pros and cons of purchasing and selling products like Godiva chocolate and flash drives.

Prelec first provides a brief background on the emergence of his discipline, made possible by technological advances in measuring brain activity, and the recent introduction of psychology into economics. The convergence (or perhaps collision) of behavioral approaches and economics has led to a “sustained criticism of the rationality assumption in economics,....”"