Monday, November 30, 2009

The Science of Saving | Big Think

The Science of Saving | Big Think: "Dan Ariely gives tips on how we can learn to compare each dollar we spend to a trip to the Bahamas, or a latte."

I think some of my own problems is that I just assume this was how everyone thinks. Opportunity costs matter. Not sure why some people seemingly ignore them.

HT to Freaknomics

News from 11/30/09 That is 1909 not 2009!

TimesMachine - New York Times

11/30/09--that is Monday November 30, 1909 (100 years ago.)

From the NY Times Timemachine:

Who was speaking? Senator Nelson Aldrich (R of NY).
"...until human nature is changed, it will be impossible to prevent, either by legislation of otherwise, periods of overspeculation with undue inflation of values and overextension of credit."

Wow. 100 years later and it sounds the exact same. Interestingly the article goes on to discuss what became the Fed.

Friday, November 27, 2009

Warren Buffett's Secrets To Success

Warren Buffett's Secrets To Success:
Video from the Business Insider (Alice Schroeder the author of Snowball is interviewed by Henry Blodget)

The Harvard Law School Forum on Corporate Governance and Financial Regulation » Internal Governance of Firms

I really like this insight. It is from Raghuram Rajan's discussion of The Internal Governance of Firms by Acharya and Myers. It will definitely be added to class notes.

The simple version is that when junior level managers want to climb to the top, they have a vest interest in monitoring senior level managers.

The Harvard Law School Forum on Corporate Governance and Financial Regulation » Internal Governance of Firms:
"The basic intuition behind the model is as follows. Think of a partnership run by an old CEO who is about to retire.....The CEO can appropriate everything else: he can tunnel cash out of the firm, consume perks, or convert cash to leisure by shirking. Because the CEO has a short horizon, he could simply decide to take all of the cash flow, investing nothing for the future. But he needs the young manager’s effort in order to generate the cash flow. If the manager sees that the CEO will leave nothing behind, she has scant incentive to exert effort, and cash flow falls significantly."

It would be interesting to see how this changes depending on whether firms have a reputation for hiring from within. Continually hiring external CEOs could lead to reduced internal monitoring.

Wednesday, November 25, 2009

How Hershey Can Thread the Cadbury Needle - Deal Journal - WSJ

How Hershey Can Thread the Cadbury Needle - Deal Journal - WSJ:
"Hershey must secure majority economic control of the combined entity while trying to minimize its total leverage. At the same time, it ideally wants to preserve its own dual-class structure so that the Trust that controls Hershey retains an economic interest above a 15% threshold as well as significant voting control."

Interesting look on how leverage, control, and valuation all come together in takeover. This is a great case study for a corporate finance class!

Tuesday, November 24, 2009

Google Trends: Gold

Google Trends: Gold: "Scale is based on the average worldwide traffic of gold in all years"

I am surprised by this given the seemingly endless talk about gold prices. Looking at Google trends on Gold, there is no apparent relationship between volume of searches and changes in gold prices. At least at first pass. In other words I did not check my work at all!

The Dependent variable is Absolute Value of percentage weekly Change in price of GLD, independent variable is the percentage change in searches.

R squared 0.005
N = 260

Coef Stand Error t stat p-value
Intercept 0.023508 0.001184 19.8475 7.44E-54
X Variable 1 0.009991 0.025956 0.384915 0.700618


Regression Statistics

Multiple R 0.023957

R Square 0.000574

Adjusted R Square -0.0033

Standard Error 0.019088

YouTube - Behavioral Economics: How Do People Evaluate Risk in Everyday Situations?

YouTube - Behavioral Economics: How Do People Evaluate Risk in Everyday Situations?:

Mood and how much control you beleive you have influence risk perceptions. The following video is from the Barcelona Graduate School of Economics (GSE):

"Professor Robin Hogarth uses a novel new methodology to demonstrate that even relatively simple measures of mood state can have a significant effect on perception of risk"

Monday, November 23, 2009

SEC's expansion of Sarbanes-Oxley Act could mean big costs for smaller companies | News for Dallas, Texas | Dallas Morning News | Will Deener | Business Columnist | Dallas Morning News

We've always known SOX adds significantly to compliance costs, but wow. No wonder my chairman Jeff Peterson calls it the "no accountant left behind act".

SEC's expansion of Sarbanes-Oxley Act could mean big costs for smaller companies | News for Dallas, Texas | Dallas Morning News | Will Deener | Business Columnist | Dallas Morning News:
"Professor Peter Iliev said he nailed down the cost of Section 404 compliance by examining companies with market caps just above $75 million and those just below it. Those below that cap have not had to comply until now.

'We needed a control group that didn't have to comply,' Iliev said. 'This allowed us to look at those who did comply and attribute any differences to the new regulation.'

What he found was that there were some rim-rocking costs associated with auditing internal controls. These smaller firms had to pay an additional $697,890 in audit fees in 2004 – the year he examined – which amounted to a 98 percent increase over the companies not in compliance."

BTW here is Iliev's paper which is forthcoming in the Journal of Finance.

Sunday, November 22, 2009

Kevin Volpp: Behavioral Economics and Healthy Behaviors :: The Daily Gazette

Kevin Volpp: Behavioral Economics and Healthy Behaviors :: The Daily Gazette:
"Volpp concluded by noting three major questions in this field individual behavior and health: First, are there built-in default benefits to be had? Second, in what ways can we make information provision more precise? Third, how can we shape incentives to get people to behave in a healthy manner?"

UC Davis News & Information :: Workshop on Economics, Neuroscience and Hormones

Well we missed the conference, but I will look for info from it

UC Davis News & Information :: Workshop on Economics, Neuroscience and Hormones:
"Another new area -- endocrinological economics -- studies how hormones such as testosterone and estradiol affect economic behavior. At the workshop, Coren Apicella, research fellow at Harvard University, will discuss how testosterone levels affect risk-taking tasks. Schipper will talk about his recent work on how the menstrual cycle influences risk-taking in an auction-bidding game.

Workshop participants will also address how genetics contribute to economic decision-making, including a presentation by graduate student David Cesarini, of the Massachusetts Institute of Technology, on pension investments by identical and non-identical twins."

Friday, November 20, 2009

Exposure to luxury goods

Along the lines of the priming video we saw a few days ago, here is more on "priming" from Chua and Zou. Very interesting.

The Devil Wears Prada?
from the abstract :
"This paper demonstrates that mere exposure to luxury goods increases individuals’ propensity to prioritize self-interests over others’ interests, influencing the decisions they make. Experiment 1 found that participants primed with luxury goods were more likely than those primed with non-luxury goods to endorse business decisions that benefit themselves but could potentially harm others. Using a word recognition task, Experiment 2 further demonstrates that exposure to luxury is likely to activate self-interest but not necessarily the tendency to harm others."

BTW I had to look up the word prada. I know there was a movie about it but that was it.

Science Friday Archives: The Science of Decision-Making

Science Friday Archives: The Science of Decision-Making: "
Paper or plastic? Steak or salmon? Stay or go? Every day, we make thousands of decisions, most minor, some major. But how does your brain make the choice? In this hour, we'll take a look at the science of decision making. Can your genes influence split second decisions? And how do your emotions influence the way you decide?"

From July, but I had not heard it all before. Very good. Have been listening to as I do laundry today. Good stuff!

: Warren Buffett and Bill Gates: Keeping America Great

From Columbia Unviversity. WOW.

Public Offering : Warren Buffett and Bill Gates: Keeping America Great:
"On November 12, 2009, Warren Buffett, MS ’51, and Bill Gates met with more than 700 students, faculty members and alumni from Columbia Business School in a town hall event, which was filmed for global broadcast by CNBC. Buffett and Gates responded to questions from the student body about the economic crisis, capitalism and areas of economic growth in the United States. They also gave career advice and discussed the mentors and habits that played a role in their success."

Has videos on leadership, value investing, and the current economic crisis. GOOD!

YouTube - Other People's Money speech by Danny DeVito

YouTube - Other People's Money speech by Danny DeVito: "Other People's Money speech by Danny DeVito"

If you want to feel old, mention this movie in class, virtually no one has heard of it. Fortunately some of it is still online. Here is Jorgy's speech, and here is Danny Devito's

Hulu - The Office: Shareholder Meeting - Watch the full episode now.

Hulu - The Office: Shareholder Meeting - Watch the full episode now.

HT to Nminow

Thursday, November 19, 2009

Is It Possible To Invent An Investment Product Too Stupid To Find Buyers?

Is It Possible To Invent An Investment Product Too Stupid To Find Buyers?:
"Last Friday, he posted a satirical article called First 100x Leveraged ETFs. It made fun of the trend toward higher leverage among ETF products....he was deluged with emails. Many people got the joke. But a full 65% expressed interest in some form or another in owning SOAR and SINK."
mmm, Does any one else remember Sidd Finch?

Delayed Economic Reform Killed 14.5 Million Children | Swaminathan S. Anklesaria Aiyar | Cato Institute: Commentary

Delayed Economic Reform Killed 14.5 Million Children | Swaminathan S. Anklesaria Aiyar | Cato Institute: Commentary:
"Had reforms started in 1970 rather than 1980, India would have grown faster. In this fast-growth scenario, i assume that per capita income growth in the 1970s would have been what was actually achieved in the 1980s: growth in the 1980s would have been what was actually achieved in the 1990s: and growth in the 1990s would have been what was achieved in 2001-08.

I calculate the rate of change of infant mortality, literacy and poverty with GDP since 1971. I then apply this rate of change to the fast-growth scenario. This reveals what infant mortality, literacy and poverty would have been with faster growth.

In a fast-growth scenario, infant mortality would have been less every year, and in 2008 would have been 27 deaths per thousand births, against the actual 54 per thousand. The cumulative number of 'missing children' turns out to be a massive 14.5 million."

Very sad and something that deserves to be remembered. Could do the same calculation on any of a number of countries.

Wednesday, November 18, 2009

Islamic Finance: Lower Risk, But at What Cost? - BusinessWeek

Islamic Finance: Lower Risk, But at What Cost? - BusinessWeek:
"Financial products based on 8th-century religious laws may seem an unlikely haven during a global crisis. But Islamic banking and financial services, based on traditional Muslim laws known as Sharia, are enjoying a major resurgence.

A survey released on Nov. 5 by The Banker magazine found that assets held by Sharia-compliant banks rose 28.6% in 2009 to $822 billion, while assets held by conventional banks grew only 6.8%.

True, Islamic finance still accounts for only about 1% of the global financial-services market."

Here is my page on Islamic Finance that I have not updated in a VERY long time.

SSRN-In Search of Attention by Zhi Da, Joseph Engelberg, Pengjie Gao

From the AFA program:
SSRN-In Search of Attention by Zhi Da, Joseph Engelberg, Pengjie Gao:
Turnover, extreme returns, news and advertising expense are indirect proxies of investor attention. In contrast, we propose a direct measure of investor demand for attention -- active attention -- using search frequency in Google (SVI). In a sample of Russell 3000 stocks from 2004 to 2008, we find SVI to be correlated with but different from existing proxies of investor attention. In addition, SVI captures investor attention on a more timely basis. SVI allows us to shed new light on how retail investor attention affects the returns to IPO stocks and price momentum strategies. Using retail order execution in SEC Rule 11Ac1-5 reports, we establish a strong and direct link between SVI changes and trading by less sophisticated individual investors. Increased retail attention as measured by SVI during the IPO contributes to the large first-day return and long-run underperformance of IPO stocks. We also document stronger price momentum among stocks with higher levels of SVI, consistent with the explanation of momentum proposed by Daniel, Hirshleifer and Subrahmanyam (1998)."

This one will definitley make it to several classes (Behavioral and IPO class discussion in Corporate Finance ).

Why China Hates The Carry Trade

I had a student ask about this...

Why China Hates The Carry Trade:
"A carry trade is when you borrow from a currency with a low interest rate, and then invest in a currency with a higher interest rate. Say the US interest rate is 3%, and the Chinese interest rate is 5%. Borrow at 3%, invest at 5%, make 2%, because the Chinese yuan is pegged to the dollar at a fixed rate. "
In international finance one learns that as this happens, what should happen is that the currencies and interest rates adjust to end this opportunity. But in this case the Yuan is pegged (more or less) to the Dollar. So that does not happen.

However, the student asked why don't the interest rates adjust?

The question was why don't US rates go up? The best answer I could give was that they will but currently "under priced" because the US Fed would like to stimulate the economy. In a global world you can not stimulate one part of the world's economy without it having effects elsewhere (and similarly, let's suppose the US Fed decides to raise rates. If other countries do not raise, then this carry trade can work in reverse which is exactly whatis happening to China right now:

"The chairman of the China Banking Regulatory Commission complained to Obama that the carry trade was destabilizing the Chinese economy, but this really means the capital inflows are making it hard to keep the currency peg at its low current level. China has a higher interest rate than the US, and though the US dollar is falling worldwide, the yuan remains at its old peg against the greenback. China could float it, and let the market decide, but like most politicians, he does not trust the market. More importantly, there are worried it will hurt exports because a stronger yuan would increase the price of their exports to the rest of the world."

Thoughts? A better answer? I have not given it a great deal of thought and did no research on it and it is definitely not my specialty.

Bill Billicheuck in the class room.

Hubris or sound economics? Either way it is a great example of why managers often "go with the Crowd."

If you care about football (American style, not soccer) you no doubt have seen the story from a few weeks ago. Short version- New England was leading and had a fourth and two on their own 28 yard line. The standard prescription at this time is to punt the ball away. But instead they went for it and did not make it. (Here is a video of it).

Since then Belichick (who is incidentally the most successful coach in the league), has been criticized repeatedly for the highly unusual call. He has been called arrogant. He has been accused of losing the game. And ESPN even went so far as to make it one of their "Top Ten Bonehead Plays of all time."

As a teaching lesson, much can be learned from this case.

For instance, what if a normal coach (ie not a super star coach) had done this? Chances are his job would be in jeopardy. So going with the crowd (i.e. not stickingout may be little more than an agency cost story. This would help to explain momentum investing as well, since if you do not go along with the Joneses, you may lose your job.

But before he is criticized too much, consider, he may have made the right choice.

Greg Mankiw's Blog: A Rational Loss for Bill Belichick:
"David Romer's work on 4th down strategies in football. One fan of this work is Patriots' coach bill Belichick, who recently applied Romer's analysis.
Click here to see Romer's paper which says punting is almost always a bad idea.

So let's look at the decision this time.

By ESPN's tally when the Patriots have Fourth and Two or less they make it an almost staggering 70% of the time.

So given that, lets try the numbers.

Let a win = 1, a loss = 0, and lets make some assumptions.

So we see that going for it may not have been that bad of decision

Oh and BTW, the same weekend the same decion was made in a CFL game, but it worked...and? nothing. No coverage.

Tuesday, November 17, 2009

Do Stockholders Really Know Best? - News Analysis -

Great article by Andrew Ross Sorkin at the NY Times:

DealBook Column - Do Stockholders Really Know Best? - News Analysis -
"British takeover law essentially handcuffs the board of a target company from doing anything to block a deal. No poison pills. No staggered boards. No changing the shareholder vote date. The potential for a C.E.O. or entrenched board to block a deal — or otherwise act in its own self- interest — is virtually nil. In other words, England is as close as any country gets to a true shareholder democracy. Any bid gets put to a vote, and all the board can do is offer an opinion.

To many people, this is how the rest of the world should work."
It should be noted that I include myself in this camp.

That said, the other side does have some merits. The article quotes some who believe this democratic system can lead to too much of a short term orientation. For instance professors at Yale (Jeffrey Sonnenfeld) and Stanford (Joseph Grundfest) point out that this can lead to chasing short-term profits as longer term investors sell out to hedge funds and others that merely want to get a fast profit.

This sets the stage for the best explanation (apology?) as to why we (in the US) tend to give boards (management) so much power to block takeovers.

"That’s been the argument of people like Martin Lipton, the takeover lawyer who invented the poison pill. He has long argued that shareholders don’t necessarily know what’s good for them, and that companies need someone looking out for their best interests. That best interest may include holding out for a higher offer, or even roping in other bidders.
Which is clearly true, but it can also entrench management.

Who is right? We really do not know. The evidence is very mixed.

Middle ground? I would come down on letting shareholders have more (but not all) power. Giving the management too many tools to fight takeovers entrenches them and hurts the firm.

BTW I can not help but think back to Constitutional times (possibly a Freudian slip? I meant when the Constitution was being written, HONEST), when the idea of a pure democracy was seen as too fluid and hence the US went with a republic as a means of checking what could amount to "short-termism."

SSRN-The Real Effects of Financial Constraints: Evidence from a Financial Crisis by Murillo Campello, John Graham, Campbell Harvey

Here is the paper we were talking about yesterday in class when we relaxed the Modigliani and Miller assumptions of no transaction costs and allowed there to be market imperfections. The conclusion was that financial slack may be more valuable than we used to think.

SSRN-The Real Effects of Financial Constraints: Evidence from a Financial Crisis by Murillo Campello, John Graham, Campbell Harvey:
"Our evidence shows that the impact of the financial crisis is severe on credit constrained firms, leading to deeper cuts in planned R&D, employment, and capital spending. These firms also burn through more cash, draw more heavily on lines of credit for fear banks will restrict access in the future, and sell more assets to fund their operations. Using our direct measure of constraints, we also find that the inability to borrow externally causes many firms to bypass attractive investment projects, with 86% of constrained U.S. CFOs saying their investment in attractive projects has been restricted during the credit crisis of 2008 and more than half outright cancelling or postponing their investment plans."

Monday, November 16, 2009

Love And Envy Linked By Same Hormone, Oxytocin

Love And Envy Linked By Same Hormone, Oxytocin:
"A new study carried out at the University of Haifa has found that the hormone oxytocin, the 'love hormone,' which affects behaviors such as trust, empathy and generosity, also affects opposite behaviors, such as jealousy and gloating."

Morgan Stanley: Blame Market Consolidation For The Soaring Cost Of Beer

Finally a finance article that students will care about!

Clusterstocks's Business Insider posts on the price of beer in various countries as tied to market power of the top beer producers.

Morgan Stanley: Blame Market Consolidation For The Soaring Cost Of Beer:
"Morgan Stanley
shows pretty convincingly that beer costs more in countries where the top 3 market players hold a higher-than-average share of the market."

Saturday, November 14, 2009

UPDATE: Some Retailers Could Follow Wal-Mart's Credit Program -

UPDATE: Some Retailers Could Follow Wal-Mart's Credit Program - "While companies with very strong credit are considered the most likely to be able to follow Wal-Mart if they choose, there are others that could supply their credit rating in certain cases for the supplier to obtain bank financing.

'The issue is not how sound the retailer is, it's are they more sound than the vendor,' O'Shea said. 'Even Toy's R Us [which carries a junk credit rating from Moody's] could potentially make a case if it is a vendor with a product it feels will sell very well.'

The program is a twist on traditional funding for vendors that includes going directly to their banks for capital. There is also traditional factoring, in which lenders give manufacturers cash for their receivables and collect on their invoices from retailers."

Friday, November 13, 2009

YouTube - Nice Guys Finish First (1/5) - Richard Dawkins

YouTube - Nice Guys Finish First (1/5) - Richard Dawkins: "First (of five) part of the 1986 documentary from the BBC Horizon series. In this video Richard Dawkins explains how natural selection can favour co-operation in nature, so long as it is of benefit to the selfish their attempts to earn real money, players must wrestle with a dilemma - whether to follow their natural instincts of co-operation or the dictates of reason and behave selfishly."

Interesting. Surprisingly (to me) this aired in 1986.

Thursday, November 12, 2009

Priming, Money and their Effect On Us

YouTube - Priming, Money and their Effect On Us:
"An interesting experiment conducted by the BBC's 'Bang Goes The Theory Team' regarding a psychological phenomenon called 'Priming'. It is a phenomenon that may well change your understanding about the way we are all affected by what we see, and so, how we perceive our environment" makes us hungry, more self-reliant, and better able to handle pain. Fascinating. So, does that mean that financeprofessors eat more? or that CEOs can take more pain? and maybe the self-reliance factor might be the reason people are so surprised that I am the leader of BonaResponds.

The Psy-Fi Blog: Anchoring, The Mother of Behavioral Biases

The Psy-Fi Blog: Anchoring, The Mother of Behavioral Biases:

"Anchoring is an easy-to-demonstrate, hard-to-eradicate behavioural bias that has all sorts of nasty implications for investors, many of them not obvious. In fact, along with availability, it has the claim to be the mother of all biases.

The fundamental investment problem lies in the difficulty in deciding what something is intrinsically worth. A skilled negotiator will start from an extreme position, such as a very high price, in order to frame the subsequent discussions. Anywhere and anytime someone presents us with a number in order to start negotiations we’re being anchored. So if it really matters then you need to start from your own number or walk away."

Great article which more or less sums up our entire behavioral finance class of last night and adds better examples etc. Class, consider this one mandatory!

SSRN-How Do Family Ownership, Control and Management Affect Firm Value? by Belen Villalonga, Raphael Amit

As my advanced corporate finance class tacks into capital structure and governance, we will be going over this article by Villalonga and Amit that finds that there to be a positive affect of family ownership/management.

SSRN-How Do Family Ownership, Control and Management Affect Firm Value? by Belen Villalonga, Raphael Amit:
"Analysis of the data indicates that family ownership creates value for all of the firm's shareholders only when it is combined with certain forms of family control and management. Family control in excess of ownership often results in multiple share classes, pyramids, cross, holdings, and votingagreements, all of which reduce shareholder value. Family management adds value when the founder serves as the CEO; when descendants assume the office of CEO, however, firm value decreases. Still,minority shareholders are likely to be no worse off in a family firm than they would have been in a non-family firm. In fact, founder-CEO firms withcontrol-enhancing mechanisms are about 25 percent more valuable than non-familyfirms."

SSRN-The Cross-Section of Expected Stock Returns: What Have We Learnt from the Past Twenty-Five Years of Research? by Avanidhar Subrahmanyam

VERY good review article on the ability of financial models (CAPM, APT, Fama-French, etc) to predict and explain cross sectional stock returns).

Super short version: While we have progressed, we have done so down different paths and there needs to be some standardization, testing for robustness, and checks for correlations across the many variables that have been used in past models.

SSRN-The Cross-Section of Expected Stock Returns: What Have We Learnt from the Past Twenty-Five Years of Research? by Avanidhar Subrahmanyam:

"Predictive variables used emanate from informal arguments, alternative tests of risk-return models, behavioral biases, and frictions. More than fifty variables have been used to predict returns. The overall picture, however, remains murky, because more needs to be done to consider the correlational structure amongst the variables, use a comprehensive set of controls, and discern whether the results survive simple variations in methodology."

From Introduction:
"The predictive variables are motivated principally in one of four ways. These are:
• Informal Wall Street wisdom (such as “value-investing”)
• Theoretical motivation based on risk-return (RR) model variants
• Behavioral biases or misreaction by cognitively challenged investors
• Frictions such as illiquidity or arbitrage constraints"

Cite: Subrahmanyam, Avanidhar, The Cross-Section of Expected Stock Returns: What Have We Learnt from the Past Twenty-Five Years of Research? (August 24, 2009). European Financial Management, Forthcoming . Available at SSRN:


Wednesday, November 11, 2009

The Christian Finance Faculty Association

Remember a few weeks ago I uploaded a video from the new Christian Finance Faculty Association? Well now they not only have their new website up, but also have announced they will be having a session at the AFA conference in January. Stay tuned.

The new web site is: The Christian Finance Faculty Association:
"Next Meeting
Atlanta, Georgia

Informal breakfast meeting

Date, Time TBA

Contact: Shane Underwood"

How To Trade In Stocks (1940 original)

How To Trade In Stocks (1940 original)

A true classic. Has value (no pun intended) from both an investment perspective and an historical one.

How To Trade In Stocks (1940 original)

Thanks to derekhernquist and FinanceTrends for this!

American Wages Are Out of Balance -

A friend of mine would claim that there are no coincidences. Maybe she is right, but it sure seems it when two articles (one from the NY Times and an academic piece both come across my laptop within minutes of each other and each saying roughly the same thing: that the US work force (a group to which I am a part), better get ready for paycuts since currently the world economy is out of whack.

First from the academic paper: Why are We in a Recession? The Financial Crisis is the Symptom Not the Disease! by Jaganathan, Kapoor, and Schaumburg
"Globalization has brought a sharp increase in the developed world's labor supply. Labor in developing countries – countries with vast pools of underemployed people – can now more easily augment labor in the developed world, without having to relocate, in ways not thought possible only a few decades ago. We argue that the large increase in the developed world's labor supply, triggered by geo-political events and technological innovations, is the major underlying cause of the global macro economic imbalances that led to the great recession. The inability of existing institutions in the US and the rest of the world to cope with this shock set the stage for the great recession...."

then from the NY Times piece: - American Wages Are Out of Balance -
"One explanation for the attractive prices of imported goods is that American workers are paid too much relative to their foreign peers.

Global wage convergence is great for the poor but tough on the overpaid. It’s possible to run the numbers to show that American manufacturing workers should take average real wage cuts of as much as 20 percent to get into global balance.

....if American wages get stuck above global market-clearing levels, as in the 1930s, the result could well be something approaching Depression-era levels of unemployment."
Two points on the NY Times piece: I do not claim to know the exact details (as in how exactly do we measure productivity) but empirically, if manufacturing jobs are going overseas, there is a simple economic fact that US workers must be being paid too much. Which obviously is not going to be popular, but it is something that we have all known for years. And yes when it points this price disadvantage out, is does so on a productivity standardized metric, which is to say that US wages are too high for relative productivity advantages.

Minimum wage laws and unions are two things that could force American wages to "get stuck" at such high levels.

Thanks to Robert Bruner for pointing the first one out.

Update: a reader over at SeekingAlpha (which picked up the blog post) correctly pointed out that the falling US dollar is cutting our wages (and standard) of living.

Tuesday, November 10, 2009

Does overconfidence led to more firms being started?

Two somewhat competing papers were recently posted on SSRN. The Hayward, Shaperd, and Griffin paper suggests that hubris (overcondi

SSRN-A Hubris Theory of Entrepreneurship by Mathew Hayward, Dean Shepherd, Dale Griffin:
"Although data from the U.S. Census Bureau's Business Information Tracking Series show that 60 percent of the businesses launched between 1989 and 1992 did not survive six years, founders overconfidently believe that they can beat the odds of failure. The hubris theory offered here incorporates three separate psychological processes: overconfidence in knowledge, overconfidence in prediction, and overconfidence in personal abilities. A detailed discussion of the hubris theory leads to a series of propositions. According to the first two propositions, founders are most overconfident when faced with highly complex,dynamic tasks related to the new venture. Another proposition suggests that experienced firm founders become more overconfident when launching a firm that differs from previous ventures..."
On the other hand, Lowe and Ziedonis find little support for this:
"Following a discussion of recent studies of university technology licensing to entrepreneurial firms and the literature on managerial cognitive bias, it is hypothesized that entrepreneurial startups are less likely than established firms to terminate development efforts and to commercialize inventions successfully. The last hypothesis proposes that inventions licensed by startups generate lower economic returns than do inventions licensed by established firms. Data on 734 inventions disclosed to the University of California from 1981to 1999 and licensed exclusively to a firm are used to test the hypotheses. The data indicate that startups actually generate greater levels of licensing revenues for similar technologies than do established firms. However,entrepreneurs appear to hold on longer to technologies that do not achieve commercial success. The latter finding suggests entrepreneurs may be in denial about the unpromising futures of these inventions. As a whole, the results offer little support for the idea that excessive optimism is a driving force in the decision to found a firm"

Mishkin: It's Cool That The Fed Is Blowing Another Bubble Because This Kind Of Bubble Is Harmless

Mishkin: It's Cool That The Fed Is Blowing Another Bubble Because This Kind Of Bubble Is Harmless

While Mishkin is clearly a smart guy, I have to disagree with him on this. First of all you can argue that leverage (this time by governments and not individuals) is funding the bubble. Secondly (and probably more importantly), bubbles, of any type, lead to allocational errors (too much investment in industries that are overvalued, too little in those that are undervalued). And finally, bubbles, when burst, cause pain, just ask those who lost jobs in the burst.

Wolves have their own social security issues

Wolves Lose Their Predatory Edge In Mid-life, Study Shows:
"When older wolves can no longer hunt successfully, younger wolves share their kill with them, in what MacNulty describes as a lupine version of Social Security. While a high ratio of old-to-young wolves may benefit elk, it could strain the wolf population because there aren't enough workers to support retirees."

Identifying PTSD: Light Shed On Brain's Response To Distress, Unexpected Events

I wonder if the same holds true for portfolio losses? If so, then how do we get people to expect, or at least realize, that asset prices do take large price swings.

Identifying PTSD: Light Shed On Brain's Response To Distress, Unexpected Events:
"'When the noise is unexpected, the brain's response is larger,' said UAB psychologist David Knight, Ph.D., principal investigator on the study, which is currently in press online and will appear in the January 2010 issue of the journal NeuroImage. 'But when participants are able to predict when they are going to hear the unpleasant static noise, you can see the regions of the brain quiet down so that a smaller emotional response is produced.

'While past studies have looked at this startle phenomenon behaviorally, this is the first look at what is actually happening in these regions of the brain when someone is exposed to an unpleasant, unpredictable event,' Knight said."

Dr. Steve Horan talks about Portfolio Benchmarking - SBUBusinessTV on

Dr. Steve Horan talks about Portfolio Benchmarking and measuring returns with cash inflows and outflows- SBUBusinessTV on

This is the second part of the lecture Steve Horan gave to my students on Friday at the School of Business sponsored breakfast.

Q6 Fall 2009: Do you need a nudge?

Q6 Fall 2009: Do you need a nudge?:
"Richard Thaler outlines how principles from behavioral economics can help policymakers — and managers — achieve better outcomes.

Q: Could you explain some of the key ideas in Nudge: nudges, choice architecture, and libertarian paternalism?
'Libertarian paternalism' suggests that these two seemingly contradictory terms can actually define a non-contradictory and attractive policy alternative. ...So we would like to create environments where people are more likely to choose things that they, themselves, think are good for them."

The abover Thaler interview is part of an interesting series of articles in the Yale School of Management's Q6 which has a series of articles on behavioral aspects of economics and finance. For instance James Choi asks Are we good at making choices?, Christine Jolls tackles the question Can behavioral economics improve law?, Katleen D Vohs ponders Does money change your thinking? Andrew Lo questions whether Risk is Rational? and then the series concludes with What does a choice look like? which looks at brain scans to better understand decision making.

Monday, November 09, 2009

Dr. Steve Horan discusses Exchange Traded Funds - SBUBusinessTV on

Dr. Steve Horan discusses Exchange Traded Funds - SBUBusinessTV on

This is the first of three parts.
  1. On ETFs
  2. On calculating portfolio returns in and out cash flows
  3. On the value of a CFA.

The Harvard Law School Forum on Corporate Governance and Financial Regulation » Is Delaware’s Antitakeover Statute Unconstitutional?

The Harvard Law School Forum on Corporate Governance and Financial Regulation » Is Delaware’s Antitakeover Statute Unconstitutional?:
" bidder in the past nineteen years has been able to achieve 85% in a hostile tender offer against a Delaware target. "

Which implies that it is possible that the super-majority provisions are in fact unconstitutional since the courts at the time (1988) said that the takeover laws must allow bidders a fighting chance (ok, in their words "'a meaningful opportunity for success."'

BonaResponds videos

Ok, so this was a mistake...I was trying to post it on the BonaResponds blog, but oh well....and who knows, maybe someone out there will like it and come volunteer with us. (I would rather you do that than donate money to us, but if you want to we do accept donations ;) )

YouTube - Machias video Nov 8:
"Video from our work with the Christian Youth Corps in Machias on the Eisenhardt project. The two boys (Dalton and Wyatt) have a rare genetic problem. But that does not stop them from helping us help them!"

Kraft Makes $16.3 Billion Hostile Bid for Cadbury - DealBook Blog -

A week early for class, but close enough:

Kraft Makes $16.3 Billion Hostile Bid for Cadbury - DealBook Blog -
"Kraft on Monday formally made a £9.8 billion ($16.3 billion) hostile bid for Cadbury, making official its effort to create an international food giant. Cadbury quickly rejected the new proposal, setting up a potentially bruising fight for control of the British confectioner.

Kraft’s bid came just before a 5 p.m. deadline in London imposed by Britain’s Takeover Panel, which had given the American food company until Monday to make a formal offer. If Kraft did not do so, it would have been barred from making another bid for Cadbury for six months.

Now Kraft will take its proposal, comprised of 300 pence a share in cash and .2589 of a newly issued Kraft share for each Cadbury share, directly to the British company’s shareholders"

Friday, November 06, 2009

Steve Horan on ETFs, measuring returns, and importance of the CFA

Yesterday Steve Horan spoke to my classes. Here are the slides of his presentation. The video will be uploaded soon.

SBU CFA 1 From Steve

Joel Benington's presentation (PDF) to my Bahaviorial Finance class

The basic idea of the talk was that as social animals, we have evolved to be trusting and helpful. It was a great presentation. Next time we will have to video it (hint hint!)

YouTube - Bob Brooks and Jonathan Godbey of the Christian Finance Faculty Association

YouTube - Bob Brooks and Jonathan Godbey of the Christian Finance Faculty Association: "A short video interview with Bob Brooks and Jonathan Godbey two of the founders of the Christian Finance Faculty Association from their inaugural meeting at the 2009 FMA conference in Reno."

Here is the link to the web site and presentation the speakers refer to in the interview. .

SSRN-Who Selected Adjustable-Rate Mortgages? Evidence from the 1989-2007 Surveys of Consumer Finances by John Beshears, Daniel Bergstresser

SSRN-Who Selected Adjustable-Rate Mortgages? Evidence from the 1989-2007 Surveys of Consumer Finances by John Beshears, Daniel Bergstresser: "Who Selected Adjustable-Rate Mortgages? Evidence from the 1989-2007 Surveys of Consumer Finances"

Interesting and important, but not all that surprising.

From the introduction:
"...a lack of financial sophistication may have made a subset of households more likely to take up of inappropriately risky mortgage products. In the 1992-2007 Surveys of Consumer Finances (SCF), interviewers rated both the ability of respondents to comprehend the financial questions in the survey and the degree to which respondents were suspicious of the interview....We find that in the 2004-2007 period, mortgage borrowers who exhibited lower comprehension and less suspicion in the SCF interview were more likely to have adjustable-rate mortgages (ARMs). The fact that these patterns are only present in 2004 and 2007 accords with the popular notion that the period immediately preceding the financial crisis witnessed an expansion of mortgage credit on terms that were not always fully understood by borrowers."

SSRN-Do Hedge Fund Managers Identify and Share Profitable Ideas? by Wesley Gray

To share or not to share that is the question. Shakespeare it is not), but when and if to share ideas is an important question.

How so? Suppose you have a great idea. It is an idea that you think could make you much money. You are not sure however. On one hand it could be a bad idea. But to gauge how good of idea (or to brag about it?), you have to tell others. But if you tell others, someone may take your idea.

So what do you do? Interesting question to say the least.

Wesley Gray examined this with respect to hedge fund trading. Now I must confess I am not entirely convinced of the metrics but a very interesting finding none-the-less.

SSRN-Do Hedge Fund Managers Identify and Share Profitable Ideas? by Wesley Gray:
".... Interestingly, these skilled investors share their profitable ideas with their competition. I test various private information exchange theories in the context of my data and determine the investors in my sample share ideas to receive constructive feedback, gain access to a broader set of profitable ideas, and to attract additional arbitragers to their asset market."

Wednesday, November 04, 2009

Behavioral Corporate Finance

Behavioral Corporate Finance is the main topic in class tonight. Here are some of the links we will be discussing:

Musings on Markets: Behavioral Corporate Finance 1: The Objective in Decision Making:: "When stock prices go up or down on the announcement of an action, there is some aspect of that action that is pleasing or troubling to investors. All too often, markets turn out to be right and managers to be wrong in the long term. In fact, managers who are convinced that their decisions will increase firm value are often operating under some of the same behavioral quirks that affect investors - they are over confident and systematically over estimate their abilities."

SSRN-Behavioral Corporate Finance by Hersh Shefrin:
"Managers and corporate directors need to recognize two key behavioral impediments that obstruct the process of value maximization, one internal to the firm and the other external. I call the first obstruction behavioral costs. Behavioral costs, like agency costs, tend to prevent value creation. Behavioral costs are the costs associated with errors that people make because of cognitive imperfections and emotional influences. The second obstruction stems from behavioral errors on the part of analysts and investors. These errors can create gaps between fundamental values and market prices. When they do, managers may find themselves conflicted, unsure of how to factor the errors of analysts and investors into their own decisions."

Behavioral Corporate Finance: A survey by Baker, Ruback and Wugler:
"Research in behavioral corporate finance takes two distinct approaches. The first emphasizes that investors are less than fully rational. It views managerial financing and investment decisions as rational responses to securities market mispricing. The second approach emphasizes that
managers are less than fully rational. It studies the effect of nonstandard preferences and
judgmental biases on managerial decisions. This survey reviews the theory, empirical challenges,
and current evidence pertaining to each approach. Overall, the behavioral approaches help to
explain a number of important financing and investment patterns."

From FinanceProfessor:
Loughran and Ritter (2002, RFS) suggested that CEOs may not be concerned
about leaving money on the table in IPOs because the losses are netted
against the rises in stock price in the secondary market. Ljunqvist and
Wilhelm now test this and find that CEOs who are happy with the IPO are
less likely to switch investment bankers for the firm's SEO. Which does
fit the initial story. It should probably be noted that this line of
research (behavioral finance in a corporate setting) is really still in its
infancy. Stay tuned!

Q&A: Is Market Efficiency the Culprit? - Fama/French Forum

Q&A: Is Market Efficiency the Culprit? - Fama/French Forum:
"Most investing is done by active managers who don't believe markets are efficient. For example, despite my taunts of the last 45 years about the poor performance of active managers, about 80% of mutual fund wealth is actively managed. Hedge funds, private equity, and other alternative asset classes, which have attracted big fund inflows in recent years, are built on the proposition that markets are inefficient. The recent problems of commercial and investment banks trace mostly to their trading desks and their proprietary portfolios, and these are always built on the assumption that markets are inefficient. Indeed, if banks and investment banks took market efficiency more seriously, they might have avoided lots of their recent problems."

and later:

"Fox concludes that passive investing is the right choice for almost all investors. My academic friends in behavioral finance (for example, Richard Thaler) almost always end up with a similar conclusion. In my view, this is an admission that the EMH provides a good view of the world for almost all practical purposes. At which point, I say I won."

The Hubris of Economics | The Big Picture

The Hubris of Economics | The Big Picture:

Barry Ritholtz
discussing a WSJ piece ( Crisis Compels Economists To Reach for New Paradigm.)

" intriguing look at the problems of the the field of economics. It went, however, way too easy on both the profession and its practitioners. The article fails to ask some very basic questions about the soft science, and does not discuss the fundamental incompetency of many economists.

Given the failures of the profession — failing to anticipate the worst recession in decades, missing the warping effect of the housing boom, not recognizing the credit collapse until too late — a damning indictment of the dismal science might have been more appropriate"
He goes on to lay out many things that are wrong with the field (from politics, to over-reliance on assumptions, and over reliance on mathematical models, and good old fashioned over confidence.

Is he right? Unfortunately, yes. Maybe not completely, but to a degree he is.
How can it be that the political tilt of the so-called scientist influences the findings? How can basic assumptions (rationality and complete markets) be so often counter to empirical fact?

But in defense of the field, most economists I know always admit up front that the models are just that, models. Those that placed too much reliance in the models are nearly as much to blame.

I would definitely recommend reading the entire thing. While I am not in total agreement (possibly due to my own biases), he is pretty close to the truth which is very troubling.

Sidenote: Do I see an essay coming? Students, you have been warned ;)

Tuesday, November 03, 2009

Buffett Takeover Reduces Successor’s Need for ‘Amazing Insight’ -

Interesting take on Berhshire's takeover of Burlington Northern. I confess I did not consider this at all, but it makes sense. Buffett may be concerned that his successor would be left with a large cash holding that would have to be invested. This purchase, which fits his value investing mantra, effectively does away with the cash in one fast swoop.

Buffett Takeover Reduces Successor’s Need for ‘Amazing Insight’ -
"“It’s kind of like dumbing down the asset base,” said Jeff Matthews, author of “Pilgrimage to Warren Buffett’s Omaha” and founder of the hedge fund Ram Partners LP in Greenwich, Connecticut. “It suggests that the long-term opportunities have changed, and going forward Berkshire is not much more than a general call on the American economy, whereas in the past it was a call on Buffett’s investment acumen.”

The deal culminates a search by Buffett that sent him to Europe looking for possible acquisitions and lamenting in letters to shareholders that he and Vice Chairman Charles Munger couldn’t find companies they considered large enough to meaningfully add to annual earnings."

From the NY Times' Deal book:
"Mr. Buffett’s move on Tuesday to acquire the rest 77.4 percent of Burlington Northern that he did not already own is a major step for this relatively new railroad investor. But railroads fit Mr. Buffett’s value investing thesis as they possess strong competitive advantages and significant barriers to entry."

For more on the deal see The Wall Street Journals' Deal Blog, especially good is their diagram summarizing the deal.

Predictably Irrational: heursitics and coffee shops

Predictably Irrational:
"...what do we do when we need to make decisions but making them “correctly” is too time consuming and difficult? We adopt simplifying rules, which academics call heuristics, and these heuristics provide us with actionable outcomes that might not be ideal but they help us to reach a decision. In the case of coffee and other, similar decisions, one of the heuristics we often use is to look at our own past behaviors and if we find evidence of relevant past decisions, we simply repeat those"

In many ways this is yet another form of anchoring. BTW I highly recommend the Predictably Irrational Blog. It is predictably wonderful.

Food for Grooming - Freakonomics Blog -

Food for Grooming - Freakonomics Blog -
"New research indicates that in addition to exchanging goods and services, monkeys adjust exchange rates as supply changes. Ronald Noe, a primate ethnologist, measured the grooming behavior of vervet monkeys in southern and eastern Africa. Among these monkeys, grooming is a hot commodity and is viewed by scientists as a form of “payment” for services. Noe found that when the number of food providers increased, each individual food provider received less grooming."

Common Objections to Capitalism - Art Carden - Mises Institute

Common Objections to Capitalism - Art Carden - Mises Institute:
"This article is based on Professor Carden's lecture 'Common Objections to Capitalism,' given at the 2009 Mises University Summer Program on July 30, 2009, and available as an MP3 download.

A lot of people object to what they call "capitalism," but their objections hold little or no water once they are examined critically. Let's consider some of the most common objections in turn."

This piece should be required reading (or ristening) for everyone who has ever doubted capitalism. It covers such topics as whether capitalism exploits the poor, encourages racism/sexism, is bad for the soul, encourages boom and busts, and hurts the environment. Good stuff.

Monday, November 02, 2009

Active Management Loses in Risk Study -

Active Management Loses in Risk Study -
"The study by Morningstar Inc. found that, over the past three years, while about half of actively managed funds outperformed their respective Morningstar indexes -- which cover the nine different Morningstar investment styles -- only 37% did on a risk-, size- and style-adjusted basis. The numbers are similar for five and 10-year returns.

'It's not enough to beat an index in a way that [assumes more risk],' said Travis Pascavis, director of equity indexes at Morningstar. A riskier fund should provide greater returns, he added"
Gee, we just talked about this today in class.

HT to KimSnider the author of the Family CFO book we used last year in Finance 402.

(Lots of) Cash for Clunkers - Freakonomics Blog -

(Lots of) Cash for Clunkers - Freakonomics Blog -
" reports that its statistical analysis of the Cash for Clunkers program finds that the program generated only 125,000 extra new vehicle sales, meaning that the cost to the U.S. government was $24,000 for each of those new cars.

The reason the cost per incremental car is so high is that, according to’s modeling, 82 percent of the vehicles purchased under the program would have been bought this year anyway, even without the subsidy"

Is anyone surprised?