Thursday, December 30, 2010

Invisible Gorilla and more from Authors at Google

I often find myself wishing I worked at Google.  They get the best speakers.  Here is Chris Chabris of Invisible Gorilla Fame.  The book is excellent and HIGHLY recommended. 

Why is the book so good?  It may be the best I have ever read at showing our rational (and sensory) limitations and the extent we go to persuade ourselves otherwise. 

Wednesday, December 29, 2010

Pope plans bank rules for more financial transparency -

Pope plans bank rules for more financial transparency -
"The Vatican will issue rules Thursday designed to make its financial transactions more transparent after a money laundering probe resulted in the seizure of 23 million euros ($30.2 million) from a Vatican account.

A Vatican decree will create a compliance authority to oversee all Vatican finances, as required by EU and other international organizations involved in the fight against money laundering and terror financing, the Vatican said Wednesday in a statement..."
Even teh catholic church is moving towards transparency. Impressive.

Making fear and greed pay in investing - Business - NZ Herald News

Nick Smith: Making fear and greed pay in investing - Business - NZ Herald News:
"Research showing men and women are slaves to biological destiny are ubiquitous. This year, several studies showed how testosterone levels surge in men working on financial trading floors. This may explain why male traders took unbelievable risks before the global crisis.

But women are also hooked on the hormones, if the University of California economics department paper, Menstrual Cycle and Competitive Bidding, is to be believed.

'We show that on average women bid significantly higher than men during menstruation and the premenstrual phase and that there are no significant differences of bidding between men and women in the other phases of the menstrual cycle,' Professors Matthew Pearson and Burkhard Schipper report."

Sunday, December 26, 2010

There is a lot more to ETFs than meets the eye -

There is a lot more to ETFs than meets the eye -
"For every dollar in an ETF, U.S. investors have $12 in mutual funds.

Still, at nearly $900 billion, ETFs are growing faster than funds, their assets doubling over the past four years.....

On a typical day, ETFs make up about one-third of the trading volume on U.S. stock exchanges. Mostly, it's market pros such as managers of mutual and hedge funds trading ETFs to stay agile in fast-moving markets. Say a fund manager has lots of cash and wants to put it to work quickly without committing to specific stocks."

Wednesday, December 22, 2010

Trader Holds $3 Billion of LME Copper -

Trader Holds $3 Billion of LME Copper -

"... the ability of a few traders to hold huge swaths of the world's stockpiles is coming under scrutiny.

The latest example is in the copper market, where a single trader has reported it owns 80% to 90% of the copper sitting in London Metal Exchange warehouses, equal to about half of the world's exchange-registered copper stockpile and worth about $3 billion.

Single traders also own large holdings of other metals. One trader holds as much as 90% of the exchange's aluminum stocks. In the nickel, zinc and aluminum alloy markets, single traders own between 50% to 80% of those metals and one firm has 40% to 50% of the LME's tin stockpiles.

While commodities exchanges scrutinize all holdings to ensure a single player isn't trying to corner the market, and many of the positions are owned by big firms on behalf of clients, the large holdings do result in a concentration of ownership that could skew prices."

I had no idea such concentrations were regularly common. And before we all panic, remember that a firm may own if for many many clients.

Tuesday, December 21, 2010

Odds Skew Against Investors in Bets on Strangers' Lives -

Life Settlement contracts arise when a person has an insurance policy that pays off in the event of his/her death. But for any number of reasons, no longer wants/needs the policy. So rather than just quit paying on it, they person can sell it to someone who agrees to make the rest of the payments in return for getting the money when the insured dies.

As unusual as this investment is, it can be priced relatively easily: figure out life expectancy and payments, take present values, and voila, you have a price.

To the purchaser, the contract is essentially a bet that that the insured will die earlier than expected. If the person lives longer, then not only does the buyer have to make more payments, but the present value of the payoff is reduced.  So at best such a contract makes one party wish for fewer birthday parties. 

To the seller, it is a way to get some money upfront prior to death.  

Life Partners is the largest player in this market and the Wall Street Journal has done an investigation and (not surprisingly) reports that people are living longer than Life Partners is forecasting. The WSJ article:

Odds Skew Against Investors in Bets on Strangers' Lives -
"Life Partners, a fast-growing company in Waco, Texas, has made large fees from its life-insurance transactions while often significantly underestimating the life expectancies of people whose policies its customers invest in, a Wall Street Journal investigation found.....

According to the WSJ a  startling 81% of the people investigated are living longer than expected.  While this is great news for the people who sold the contract (they are alive), it is not good news for the buyers.  For instance:
" Jacqueline Keller of Colorado Springs, Colo., said she is still paying premiums on pieces of two policies she bought in 1996 on AIDS patients. She said she had invested, in part, thinking this would help the original owners in their final months, but now, "every time I get a bill in the mail, I get ticked off."

Pretty interesting stuff.   Now the cause of this health elixir is unknown.  Is it overly optimistic (i.e. pessimistic) forecasts by the Life Partners, a lack of diligence by the buyers of teh contracts 9maybe a behaivoral story here as well), or wather knowing people are betting your death makes the person work oin health more) is unclear.r 

Fascinating on many levels.  For instance, consider the potentiallymessed up incentives are also worth mentioning (imagine for a second you find out that your doctor just bought a one of these on you!), the significant information asymmetry problems that arise (the seller will say in poor health to get more money), and the potential of changed behaviors brought about by knowing someone is betting you die(I am going to live longer than expected just to show those betting against me).

Interesting stuff! BTW this article was pointed out to me by RJ, who just successfully finished my Behavioral Finance class.
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Be a Better-Than-Average Investor - CBS

Be a Better-Than-Average Investor - CBS
" his book, What Investors Really Want, Meir Statman shows how the desire to be above average leads investors to trade too much, and how costly a mistake that can be. The trading records of thousands of investors at a American brokerage firm showed that the returns of the heaviest traders trailed those of index investors by more than 7 percent a year, while the lightest traders trailed by only 0.25 percent per year. That means that the heavy traders were taking the risks of stocks while earning Treasury bill-like returns."

Really a good book that is full of great research presented in a format that reads well.  Definitely recommend.  Will be using it for a supplemental (required) reading next time in Behavioral Finance.

Now that finals and grading is over I will work on posting an interview I did with Dr. Statman.

Monday, December 20, 2010

Ernst & Young Faces Fraud Charges -

Ernst & Young Faces Fraud Charges -
"New York prosecutors are poised to file civil fraud charges against Ernst & Young for its alleged role in the collapse of Lehman Brothers, saying the Big Four accounting firm stood by while the investment bank misled investors about its financial health, people familiar with the matter said.

State Attorney General Andrew Cuomo is close to filing the case, which would mark the first time a major accounting firm was targeted for its role in the financial crisis. The suit stems from transactions Lehman allegedly carried out to make its risk appear lower than it actually was."

Sunday, December 19, 2010

Cash Cow Disease: The Cognitive Decline of Microsoft and Google

Cash Cow Disease: The Cognitive Decline of Microsoft and Google:
"Cash cow disease arises when a public company has a small number of products that generate the lion's share of profits, but lacks the discipline to return those profits to the shareholders. The disease can progress for years or even decades, simply because the cash cow products produce enough massive revenues to distract shareholders from the smaller (but still massive) amounts of waste...."
Nice! Jensen's Free cash flow Problem, dividends, and we could even tied Behavioral finance (managers have overconfidence in finding positive NPV projects. Great stuff....oh, and here was a very similar story from April 2009.

Thursday, December 09, 2010

Charlie Rose - All about gold with John Hathaway, Peter Munk, & James Grant

Charlie Rose - All about gold with John Hathaway, Peter Munk, & James Grant:
"John Hathaway of Tocqueville Asset Management, Peter Munk, chairman and founder of Barrick Gold & James Grant, editor of Grant's Interest Rate Observer"

Interesting interview by Charlie Rose.

Tuesday, December 07, 2010

Bills Bonds Idea Receives Some Praise, Some Laughs - Buffalo Rising

I like it...a subsidy that comes not from all, but from those who wish to pay it. Great idea. BTW here is the original Buffalo News piece.

Bills Bonds Idea Receives Some Praise, Some Laughs - Buffalo Rising:
"...proposed by Stevens Brady a 25-year-old investment banker and lifelong Bills fan, involves fans loaning money to the next owner of the Buffalo Bills by purchasing low-interest bonds called Bills Bonds. These bonds would help a new owner cover the purchase of Bills franchise (which Forbes estimates to be near $800 million) and would ease the often onerous interest payments owners face when borrowing money to buy a franchise.

The idea, tweaks the Green Bay Packers community ownership model to comply with the current bylaws of the National Football League, which prevent public ownership. In 1923, with the Green Bay Packers on the brink of bankruptcy, fans bought the team by purchasing shares of Packers stock. NFL Bylaws now prevent Bills fans from replicating this idea, but with a twist, Bills fans could still use the concept.

Indeed this even has a behavioral flavor to it as fans would pay more (accept lower interest rates).

Monday, December 06, 2010

The Costs of Intense Board Monitoring — The Harvard Law School Forum on Corporate Governance and Financial Regulation


The Costs of Intense Board Monitoring — The Harvard Law School Forum on Corporate Governance and Financial Regulation:
"Editor’s Note: The following post comes to us from Olubunmi Faleye of the Finance Department at Northeastern University, Rani Hoitash of the Department of Accountancy at Bentley University, and Udi Hoitash of the Accounting Department at Northeastern University.
In our paper The Costs of Intense Board Monitoring, forthcoming in the Journal of Financial Economics,First, we examine whether the quality of board monitoring is enhanced when the board is more focused on monitoring. Second, we examine whether intense monitoring is associated with weaker advising. Third, we examine how this potential tradeoff between the quality of board monitoring and advising affects overall firm value, emphasizing the role of the firm’s advising requirements in the process.

Takeaway: More active monitoring is a two edged sword. Yes it increases CEO turnover and reduces executive pay, BUT it also reduces the quality of advising and overall (as measured by Tobin's Q) seems to be detrimental to the firm.

Definitely an I^3 paper!

Madoff Trustee Sues HSBC Over Servicing a Fraud -

Two Madoff stories of note:

Madoff Trustee Sues HSBC Over Servicing a Fraud -
"The latest lawsuit contends that the Madoff fraud “could not have been accomplished or perpetuated unless the HSBC defendants agreed to look the other way and to pretend that they were ensuring the existence of assets and trades when, in fact, they did no such thing.”

It asserts that HSBC and a dozen of its subsidiaries “aided, enabled and sustained” Mr. Madoff’s fraud in two important ways: by lending the bank’s prestige and performing services for hedge funds that raised money for Mr. Madoff; and by developing complex derivative products that provided additional sources of cash for the Ponzi scheme."

and wait
Wait, so the Mets came out ahead? Even ignoring opportunity costs, a win for the Mets is noteworthy!

Madoff Case Lingers as a Menace to Mets -

"Although there had been widespread speculation that the Wilpons lost money in the Ponzi scheme, an account called Mets Limited Partnership put a total of $522.7 million into Madoff accounts and withdrew $570.5, a profit of $47.8 million, according to a 2009 bankruptcy court filing made by Picard in New York that detailed the “net winners.”

With the Wilpons said to be emerging as net winners, they remain a target for Picard, who has until midnight Saturday to file lawsuits to recover money that was withdrawn from Madoff accounts before the scheme’s collapse or to seek punitive damages from those involved in the withdrawals."
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Saturday, December 04, 2010

Despite success on field, Michael Vick still faces massive debt - Shutdown Corner - NFL  - Yahoo! Sports

'Despite success on field, Michael Vick still faces massive debt - Shutdown Corner - NFL - Yahoo! Sports:
"Despite earning $4.1 million since signing with the Philadelphia Eagles, Vick lives on a shoestring budget set for him by a court-appointed trustee. Most of his salary goes toward paying back creditors Vick owed before entering federal prison. Those creditors, which include banks, former business colleagues and former endorsement partners, were protected because of Vick's 2008 filing for Chapter 11 bankruptcy.
And a more complete article from ESPN:
"...Vick is now governed by a monthly budget that is buried deep in the thousands of documents filed in his bankruptcy case. It is part of a court-approved "reorganization plan" for his finances, a remarkably complex arrangement that is described in a dense, often impenetrable 112 pages.
Under the terms of the budget, he is permitted to spend $3,500 each month for rent in Philadelphia, with another $750 for "utilities and miscellaneous."

The ESPN article goes on to describe the thousand of pages of documents that are created for every transaction and how Vick had gone on a pre-bankruptcy asset distribution scheme.

Also here is a remarkably thorough description of bankruptcy through history (fascinating) and around the world from Wikipedia.

Interesting case for class.

Friday, December 03, 2010

A Dying Banker’s Last Financial Instructions - Your Money -

A Dying Banker’s Last Financial Instructions - Your Money -
"...when his death sentence arrived, Mr. Murray knew he had to work quickly and resolved to get the word out to as many everyday investors as he could.

“This is one of the true benefits of having a brain tumor,” Mr. Murray said, laughing. “Everyone wants to hear what you have to say.”

He and Mr. Goldie have managed to beat the clock, finishing and printing the book themselves while Mr. Murray is still alive. It is plenty useful for anyone who isn’t already investing in a collection of index or similar funds and dutifully rebalancing every so often.

But the mere fact that Mr. Murray felt compelled to write it is itself a remarkable story of an almost willful ignorance of the futility of active money management — and how he finally stumbled upon a better way of investing. Mr. Murray now stands as one the highest-ranking Wall Street veterans to take back much of what he and his colleagues worked for during their careers."
HT to Nate

Too Big to Succeed -

Too Big to Succeed -
"In spite of the public assistance required to sustain the industry, little has changed on Wall Street. Two years later, the largest firms are again operating with bonus and compensation schemes that reflect success, not the reality of recent failures. Contrast this with the hundreds of smaller banks and businesses that failed and the millions of people who lost their jobs during the Wall Street-fueled recession.

There is an old saying: lend a business $1,000 and you own it; lend it $1 million and it owns you. This latest crisis confirms that the economic influence of the largest financial institutions is so great that their chief executives cannot manage them, nor can their regulators provide adequate oversight."
I don't necessarily agree with all of it (big is not necessarily bad), but I do think management (or someone--general partnerships night be a remedy), must be held responsible for excessive risk taking.

Wednesday, December 01, 2010

Unraveling the mystery of why we give, or don't -

Unraveling the mystery of why we give, or don't -
"Exactly how the complicated workings of the brain stimulate or suppress giving and how families, co-workers and values affect generosity remain a mystery despite years of study. The University of Notre Dame is leading a new research initiative that will merge economic, sociological, neurological and psychological studies to explain why some people give and some don't and to create a new academic field."
The article goes on to lay out various theories of why people give. Including:
"Omri Gillath is trying to learn whether "attachment security" — an internal sense we are worthy of love and people support us — is one cause of generosity.

Gillath, a social psychology professor at the University of Kansas, says attachment security is formed in childhood when we seek caregivers, starting with our mothers, to protect us. People who have been neglected or rejected by caregivers can develop attachment insecurity."

So much for strictly dollar and sense decisions!

Tuesday, November 30, 2010

Finding a Post-Crash Economic Model -

Finding a Post-Crash Economic Model -
"In the wake of a financial crisis and punishing recession that the models failed to capture, a growing number of economists are beginning to question the intellectual foundations on which the models are built. Researchers, some of whom spent years on the academic margins, are offering up a barrage of ideas that they hope could form the building blocks of a new paradigm."
Rationality with limits will win. My prediction.

See there can SOMETIMES be benefits of procrastination

There are benefits of procrastination.

A slew of biases thrown together.

BusinessWorld Online Edition: Delaying tactics:
"While deferring gratification may be a good character trait, postponing duties until the last minute is not viewed in the same light....Being late allows the latecomer to learn from the mistakes of the eager beaver whose ideas get shot down first. In a panel discussion, the last panelist has the most brilliant insights, synthesizing or demolishing previous ideas. The first mover in business loses money as his copycats learn the business and avoid mistakes."
Yes! I am redeemed. Well at least partially. Not sure who well these carry over to academia where I have a pile of papers waiting to be corrected.

Death Cometh for the Greenback

This is from Joseph Stiglitz, a Nobel Prize Winner and professor at Columbia, and Washington Economist who is not afraid to say his mind. He is a more negative on free markets than me, but regardless of your politics, he makes many important points. Well worth a read.

Death Cometh for the Greenback:
"For the past eight years, the dollar has increasingly become less revered. Its value has been volatile. As the rest of the world saw the United States struggling with a failing war and soaring budget deficits, many who had large dollar holdings began to reduce those reserves (or increase them less than they otherwise would have). All this put downward pressure on the dollar. And thus began the first signs of a vicious circle. The strength of the dollar is becoming riskier and riskier. The growing U.S. deficit and the ballooning of the Federal Reserve's balance sheets leave many worried that in their wake will come inflation, undermining the long-term attractiveness of the U.S. currency.

In this article, I try to explain why the dollar is in trouble, but ask-should we care? What are the consequences? I will suggest that, for the most part, and for most Americans, it is probably a good thing. But the adjustment to a lower value of the dollar will not necessarily come easily. One of the consequences-already under way-is the fraying of the dollar-reserve system. I argue that a move to a global reserve system would be good for the United States, and good for the world."

Monday, November 29, 2010

The Guilty Secret to Giving the Best Gifts -

The Guilty Secret to Giving the Best Gifts -
"'A good gift is something that someone really wants but feels guilty buying for themselves.' This perspective is interesting because it suggests that the ideal gift is not something that the recipient can't afford or didn't know she wanted. It all comes down to alleviating guilt.
Behavioral Economics at its best: explaining what we know, but somehow have forgotten.

Saturday, November 27, 2010

A Closer Look at Insider Trading Cases: Prosecutions, Defenses, and What Can Send You to Jail -

Video - A Closer Look at Insider Trading Cases: Prosecutions, Defenses, and What Can Send You to Jail -
"In the wake of recent FBI raids at several hedge funds, Alan Murray sat down with Joel Cohen, a former federal prosecutor and insider trading expert, to examine the complicated, and often gray world of insider trading law and prosecutions."

Good interview on Insider trading.

Wednesday, November 24, 2010

Meir Statman: Amateur investors expect impossible - SFGate

Tomorrow (yes on Thanksgiving) I am speaking with Meir Statman on some Behavioral finance issues. Recently he was in the San Francisco Chronicle. His basic investment advice:

Meir Statman: Amateur investors expect impossible - SFGate:
"Q: You pound the drum for index funds. Is that because you think the markets are efficient and therefore unbeatable over the long-term?

A: The market is not efficient. It's crazy, but the fact that it's crazy doesn't make you a psychiatrist. It's crazy like a wild animal. You wouldn't want to go against a wild lion because it's crazy. It's crazy in ways you cannot understand and cannot forecast.

People in behavioral finance and standard finance come to the same conclusion - don't try to beat the market. Whether it is rational, as people in standard finance say, or crazy, as I say, don't try it.

Practically speaking, individual investors should treat the market as unbeatable and realize that when they try to beat it because it is inefficient, they are likely to injure themselves, rather than gain at the expense of another.

Tuesday, November 23, 2010

FRB: FOMC Minutes, November 2-3, 2010

By now you probably have seen the news story on the Fed lowering their growth forecasts for the coming year. For instance here is how it was reported by the Washington Post:
"Federal Reserve officials expect the unemployment rate to remain around nine percent at the end of next year and eight percent at the end of 2012, according to internal forecasts that drove the central bank to take new efforts to boost the economy three weeks ago.
The 18 top leaders of the central bank expect the U.S. economy to grow at a 3 to 3.6 percent pace next year, which by their calculations will be enough to bring joblessness, currently at 9.6 percent, down to the 8.9 to 9.1 percent range in late 2011."
While the news gets it right, you really only get the headlines.  Therefore I would encourage all of you (especially any students who are in Money and Banking or Financial Institutions), to take a few extra minutes and actually read the minutes from the meeting.

FRB: FOMC Minutes, November 2-3, 2010:
"...information reviewed at the November 2-3 meeting indicated that the economic recovery proceeded at a modest rate in recent months, with only a gradual improvement in labor market conditions, and was accompanied by a continued low rate of inflation. Consumer spending, business investment in equipment and software, and exports posted further gains in the third quarter, and nonfarm inventory investment stepped up. But construction activity in both the residential and nonresidential sectors remained depressed, and a significant portion of the rise in domestic demand was again met by imports. U.S. industrial production slowed noticeably in August and September, hiring at private businesses remained modest, and the unemployment rate stayed elevated. Headline consumer price inflation was subdued in recent months, despite a rise in energy prices, as core consumer price inflation trended lower..."
And later a discussion of why unemployment is recovering slowly:
"Participants agreed that progress in reducing unemployment was disappointing; indeed, several noted that the recent rate of output growth, if continued, would more likely be associated with an increase than a decrease in the unemployment rate. Participants again discussed the extent to which employment was being held down, and the unemployment rate boosted, by structural factors such as mismatches between the skills of the workers who had lost their jobs and the skills needed in the sectors of the economy with vacancies, the inability of the unemployed to relocate because their homes were worth less than the principal they owed on their mortgages, and the effects of extended unemployment benefits on the duration of unemployed workers' search for a new job. Participants agreed that such factors were contributing to continued high unemployment but differed in their assessments of the magnitude of such effects."

There is much much more detail and breadth in the minutes. Well worth the read. 

SSRN-Internal Sources of Finance and the Great Recession by Michelle Barnes, N. Pancost

SSRN-Internal Sources of Finance and the Great Recession by Michelle Barnes, N. Pancost:
"The rising stockpile of cash as a share of total assets at US firms has intrigued that the rise in cash holdings has coincided with an increased willingness to save internally-generated cash. We show that although investment is normally sensitive to externally-generated cash, the increased sensitivity of investment to cash during the Great Recession is driven by cash from internal sources. Smaller firms were also more affected by the recent downturn than larger firms."

Nothing surprising but it does fit the models that having cash on hand for a "rainy day" is a good thing. Also that the cash largely came from internal sources.
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A look at the Eqyptian Stock Market

As It Shifts, Egypt's Economy Retains Some Oddities : The Two-Way : NPR:

"Nearly 30 years in office, Egypt's President Hosni Mubarak has become a strong proponent of a market economy. Only vestiges remain of the state socialism that for decades defined Egypt.

Enterprises like banks that were once state-owned are now firmly in private hands. Foreign investment, construction and tourism are growing and Egypt's stock exchange, said to be the oldest in the Middle East, is thriving."

From the Egyptian Exchange's history page:
"The Egyptian Exchange is one of the oldest stock markets established in the Middle East. The Egyptian Exchange traces its origins to 1883 when the Alexandria Stock Exchange was established, followed by the Cairo Stock Exchange in 1903."

The article tells of past futures and forward markets as well as how some believe that the 1907 Panic that swept the world actually got its start in Egypt.

Here is a Yahoo Chart comparing returns on S&P vs Egyptian Exchange's Index. 

(BTW Picture #8 on the NPR page is of the exchange)
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Video - Is Insider Trading Everywhere? -

Video - Is Insider Trading Everywhere? - "WSJ's Dennis Berman discusses with colleague Evan Newmark a lawsuit filed by a retailer in Florida alleging that a research house stole trade secrets and published sensitive inside information about the company."

From the WSJ online:

"Big Lots alleges the firm pried information out of store managers, in effect stealing trade secrets and aiding and abetting employees' breach of fiduciary duty. It has asked the court for an injunction to immediately stop what it calls "wrongfully induced" snooping."

This is clearly one-sided, BUT it definitely does deserve more attention.  To me, if you ask a question and the other party tells you, that is not theft.  Of course there may be more to the story, but this one could put research back quite a ways. 

(Note to Big Lots: I do not think you do not want me on your jury.)
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Monday, November 22, 2010

Do Bonuses Enhance Sales Productivity? A Dynamic Structural Analysis of Bonus-Based Compensation Plans — HBS Working Knowledge

Do Bonuses Enhance Sales Productivity? A Dynamic Structural Analysis of Bonus-Based Compensation Plans — HBS Working Knowledge:
"Key concepts include:

* Bonuses do increase productivity.
* Quarterly bonuses increase sales force productivity more than annual bonuses.
* Sales people tend to give up when far away from reaching a quota, but they don't slow down once a quota is reached-especially if a firm offers commissions for overachievement"

Thanks to SimoleonSense! Good article!

Can Wall Street Justify Its Existence? -

Can Wall Street Justify Its Existence? -

Yes Wall Street does much good, but does it take more money than it earns? That is the question that is asked in this week's New Yorker Magazine and is rehashed in today's DealBook.

"...the question stands: a strange industry exists that mints multimillionaires on the basis of stock movements and bond issues. Can it justify its existence, or will it simply purchase the political favors to continue as before? What does it do for the rest of humanity? And does it cause more harm than good?

John Cassidy, a staff writer for The New Yorker, leads a tour of the uses and abuses of finance, and looks at how Wall Street went from the fund-raiser of corporations to a self-referential trading juggernaut."

One final look-in:

"Thomas Philippon, an economist at N.Y.U.’s Stern School of Business.

“In most industries, when people are paid too much, their firms go bankrupt, and they are no longer paid too much,” Mr. Philippon tells Mr. Cassidy. But recent history shows that people in the finance industry get paid too much, their firms get bailed out, and then they go back to getting paid a lot.

Mr. Philippon says traders, who get evaluated on a quarterly basis, can earn big from short-term bets that ultimately go south. “In most industries, a good idea is rewarded because the company generates profits and real cash flows,” he says. “In finance, it is often just a trading gain. The closer you get to financial markets, the easier it is to book funny profits.”"

Does pay have to be looked at? Yes. Do agency costs play a much larger role than we like to admit? Yes. Is there an easy solution? No.

On idea is to get some semblance of risk symmetry back. Be it via partnerships, or clawbacks, or ???. Short-term orientation is too tempting when win big is good while losing big brings no (or limited) consequences.

For more on this, I recommend going back and watching the middle of the roundtable on executive pay. It focuses directly on Wall Street.

Sunday, November 21, 2010

A panel discussion on Executive Compensation

Good stuff.  Has public board members, lawyer, politicans, and a professor.  Very interesting, especially the discussion of how compensation committees set executive compensation  (i.e. what do boards do), and changes that have come up in the last few years.

Excellent even if it drags a bit at the very start.  (it is 86 minutes so you can skip around some ;) )

Here is the link.

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Video of the Trillion Dollar Bet in 5 parts

YouTube - The Black-Scholes Formula - 1/5:

The Trillion Dollar bet, which is based on the Long Term Capital Management story (when Genius Failed) , is a staple in my classes. Here is the first of 5 parts of the old PBS video.

HIGHLY recommended! The show is really two separate stories--on one on the history of the Black Scholes formula, and one on the Collapse of Long Term Capital Management.  (FWIW We  usually use the latter mainly in class but the whole thing is good!)

The moral of the story is that absolute adherence to quantitative models is what frequently gets you in trouble. Models are representations of reality and reality can often vary widely from the model.

Part 1, Part 2, Part 3Part 4, Part 5
Thanks to Zvi for the link (and reminding that I had promised to post this!)
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U.S. Pursues Sweeping Insider-Trading Probe -

U.S. Pursues Sweeping Insider-Trading Probe -

"Federal authorities, capping a three-year investigation, are preparing insider-trading charges that could ensnare consultants, investment bankers, hedge-fund and mutual-fund traders and analysts across the nation, according to people familiar with the matter.

and later:
"The investigations, if they bear fruit, have the potential to expose a culture of pervasive insider trading in U.S. financial markets, including new ways non-public information is passed to traders through experts tied to specific industries or companies, federal authorities say."

We just spoke on insider trading (both legal and illegal) yesterday in class. 
- Sent using Google Toolbar"
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Saturday, November 20, 2010

Video time: Simpsons on flashing, Bubbles, and Monkeys!

The weekend is a good time to catch up on some videos, so here are some. (And
I want my students to watch these, so I better make use a flashy article name!)

Three somewhat fun, but also pretty interesting videos:

The May Flash Crash was back in the news, so we will start off with this. You remember the flash crash. It was when stock markets fell with amazing speed back in May.
Flash Crash. Markets don't move that fast! (One of the theories was that someone with fat fingers just hit the wrong order. Now it may be just a metaphor, but the Simpson's make it interesting.  

For what it is worth, the Wikipedia article on the so-called flash crash is pretty good.

Christ Martensen does a good job with a 15 minute video on Bubbles.

and finally a Ted Talk by Laurie Santos that looks at predictable irrationality and Monkeys. (sorry if you don't like monkeys ;) )

Friday, November 19, 2010

Two videos on market efficiency

These are a bit dated (from last year), but perfectly timed for I will include them.

YouTube - Lessons From the Father of Modern Portfolio Theory:

And Justin Fox:

Update: 6:45 AM Nov 20:

Two other videos that also deserve mention:
* a video asking whether Modern Portfolio Theory is dead from the president of Ibbotson?

* a shorter "trailer" for the Justin Fox book.

A Half-Dozen Essential "Business" Books : The D & O Diary

A former student sent me this. I confess I have not read that many of them, hence this post is a reminder to myself as well as a suggestion to others.

A Half-Dozen Essential "Business" Books : The D & O Diary:
"I figure that no one really needs me to suggest the usual fare from the business section at the book store, like, for example, The Smartest Guys in the Room or Liar’s Poker. If those books interest you, by all means, read them.

The problem with the vast run of business books is that they rarely aim for anything higher. To find anything of more lasting value, you must look elsewhere. So my suggested 'business' books won’t be found in the business section, and in fact may not necessarily meet anybody’s idea of what constitutes a business book. But these books have more to say about the business of life and the life of business than the more conventional fare."

Treasury Takes Initial Public Loss on GM Shares -

Treasury Takes Initial Public Loss on GM Shares - "The Treasury paid about $40 billion for the 912 million common shares it held at the start of the day Wednesday. To get that all back at once, the Treasury would have had to sell all its shares at about $43.85 in the IPO.

After the IPO, the Treasury Department retains about a 37% stake in GM. The remaining 554 million common shares the government owns have an indicated value of about $18.3 billion at Wednesday's IPO price."

Thursday, November 18, 2010

How Companies Use Derivatives for Hedging & Risk Management |

How Companies Use Derivatives for Hedging & Risk Management |
"Hedging, in simple words, means reducing or controlling risk. This is done by taking a position in the futures market that is opposite to the one in the physical market with the objective of reducing or limiting risks associated with price changes."
Nice introductory article. Good for class!

Monday, November 15, 2010

Women in the Netherlands work less, have lesser titles and a big gender pay gap, and they love it. - By Jessica Olien - Slate Magazine

Women in the Netherlands work less, have lesser titles and a big gender pay gap, and they love it. - By Jessica Olien - Slate Magazine:

More evidence that people maximize utility and not income!
"Dutch women's refusal to seek longer hours has long bewildered economists. In the spring, the United Nations, suspicious that there was something keeping women from full-time jobs, launched an inquiry to see whether the Netherlands was in compliance with the women's rights treaty. A comprehensive 2009 study by Alison L. Booth & Jan C. Van Ours looked at the amount of time women in the Netherlands spend at work compared with women in other European countries. The authors assumed that part-time work was less desirable but ultimately confirmed that Dutch women don't want to spend more time at work."

The Sketchpad: Personal Finance on a Napkin - Interactive Feature -

The Sketchpad: Personal Finance on a Napkin - Interactive Feature -

Some brilliant, some only ok, but DEFINITELY worth looking at!

"In a continuing series of back-of-the-napkin drawings and posts on the Bucks blog Carl Richards, a financial planner, has been explaining the basics of money through simple graphs and diagrams."

Keep it simple!

BBC News - Can brain scans tell us who makes a good chief executive?

BBC News - Can brain scans tell us who makes a good chief executive?:
BBC video that shows how some neuroeconomics tests are done:

"Professor Douglas Saddy of Reading's Centre for Integrative Neuroscience and Neurodynamics looks on as the businessman presses a keypad to make various financial decisions by pressing buttons: "In this case," he explains, "what he is being asked to do is make a judgement about whether given a certain set of information a short-term reward would be better than a long-term reward."
While he presses the keypad his brain activity is being measured. The results of this and a number of other scans will be aggregated to try to draw out some lessons."

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George Bailey, the dark side (The Deal Magazine)

George Bailey, the dark side (The Deal Magazine):

While we all know we should not stereotype when it comes to people, many do it all the time with organizations ("Big business is bad business" etc). However, the Deal Magazine reminds us that small banks can have their own problems.

"To be sure, breaking up the banks would certainly solve our mammoth too-big-to-fail problem. But it could also touch off a liquidity crisis and wreak economic havoc. And a breakup is hardly trivial. But no matter. That small banks are better, more virtuous and capable of providing us with all the services we'll ever need is now taken on faith. Small banks have become the proverbial little guy -- a George Bailey-esque figure worthy of reverence and protection.

Is that reverence warranted?...Time magazine decided to investigate.

Time looks at a small bank in Georgia and finds that they too had problems.

GREAT for a Money and Banking, Commercial Bank management, or even a Financial Institutions class.

HT to ResearchPuzzler.

Friday, November 12, 2010

Chicago Mercantile Exchange starts offering rainfall futures and options | Business | The Observer

Almost any article that is on derivatives that uses the word "hitherto" is likely to be mentioned here! Especially one that fits so well with class discussions of why and how firms hedge.

Chicago Mercantile Exchange starts offering rainfall futures and options | Business | The Observer:
"...a hitherto unnoticed corner of the exchange is quietly growing in value by offering futures and options based on the weather. The newly minted rainfall contracts join existing products based on snowfall, hurricanes, frost and unusual lurches in temperature. They allow investors to go long on thunderstorms, short on drizzle or insure against a deluge.

Hedging on the weather is a young business – the first weather derivative was traded in 1997 by a US power company, Aquila Energy. But trading futures and options on climatic conditions has grown to be worth more than $15bn annually according to the Weather Risk Management Association, which tracks activity. The CME says typical customers include utilities, concert promoters, sports impresarios, theme parks and any other businesses with profits highly vulnerable to the elements."
Class: a great essay might be discuss limitations and costs of hedging with these. Specifically consider a small grocery store, whose sales are tightly tied to weather (in a concave type function--the hypothetical store does well in really good or really bad weather). The answer would have to include cost of the hedge, whether the contract was for a site near the location, whether the contract size would "fit" with the size of the store profit fluctuations.

Thursday, November 11, 2010

Drive: Daniel Pink on Motivation

Does pay for performance dull creativity?  Slow progress?  Thought provoking.

BTW I HIGHLY recommend reading his book Drive
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The Burden of Choice | Psychology Today

In my first PHD economics course I remember the teacher (who I could BARELY understand) say that more choices were often bad for the consumer. It was a new idea to me and I at first disagreed, but was persuaded.
This idea is why stores like Trader Joes or Stew Leonard's offer fewer choices (and get higher sales) as a result.
The Burden of Choice | Psychology Today:
"In an experiment examining the effects of choice on happiness, Iyengar and Lepper randomized individuals to either a group in which they could choose from 30 types of chocolate or a group in which they could choose from six types of chocolate. While subjects initially reported liking having the choice of 30 chocolates, they ended up being more dissatisfied and regretful of the choices they made than those who only had the choice of six. Barry Schwartz, the author of The Paradox of Choice, elaborates on this phenomenon, emphasizing that regret avoidance and anticipated regret are some of the most detrimental effects of overchoice. He states, 'the more options there are, the more likely one will make a non-optimal choice, and this prospect undermines whatever pleasure one may get from one's actual choice.'"
Financial Implications:
* Offering more fund choices for 401K plans or insurance options may be detrimental.
* Keep it Simple Stupid
* Heuristics can make sense since they serve as filters to remove some choices.
* We can get overwhelmed by choices and procrastinate and end up doing nothing. 
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Investor Psychology: Your Brain is Hardwired to 'Follow the Herd' | Steadfast Finances

Another great Steadfast Finances post (with some cool videos too!)

Investor Psychology: Your Brain is Hardwired to 'Follow the Herd' | Steadfast Finances:
"This is because herding behavior is a result of not being in the know in any given situation. If you don’t know what’s going on, you begin to rely upon those around you who do. After all, there has to be someone out there who does, so why not follow along with him or her? If they screw up, then you can say it was their dumb idea and you’re not the only sucker who got fooled. Once again, you’re anxiety free since you’re back within the safety of the group a second time.

So it’s fairly commonplace to witness the old adage “there is safety in numbers” rule most daily of our lives."
Which is almost exactly what we have been saying in class. The more uncertainty and the more we are paid for relative performance, the more we are apt to follow the crowd.

Visualizing How the Things You Own, End Up Owning You. | Steadfast Finances

A fascinating look from Steadfast Finances at where money goes by work days in calendar form:

Visualizing How the Things You Own, End Up Owning You. | Steadfast Finances:
"I thought it would be beneficial if I documented exactly how I use a simple monthly calendar and a few personal finance metrics to visually represent how many hours, days, even weeks, I had to work in order to maintain “ownership” of my stuff when I first entered the workforce."

Interestingly (and this may explain why I have such a boring life), I have done this basic idea for as long as i can remember: translate purchases into opportunity costs. For instance, is working an extra hour really worth that new shirt, etc. Now it gets a bit messy on a salary and without overtime, but the basic idea holds.

Deep Rationality II: Conspicuous Consumption as Mating Display | Psychology Today

Deep Rationality II: Conspicuous Consumption as Mating Display | Psychology Today:
"By flashing its brilliant tail, a peacock increases his chances of becoming some predator’s dinner; it’s like he’s turning on a neon sign that says “eat here.” If nature selects those animals that are better at surviving, then how can such a display (what biologists now call a “costly signal”) evolve? The answer is that natural selection is not ultimately about survival, it is about reproduction. Every choice in nature involves a trade-off, and any peacock who wasn’t willing to risk a shorter life would not attract females, hence his careful genes would not get passed on"
Something seemingly irrational (Conspicuous consumption) explained.  What makes it even better is that this conspicous consumption in men is then tied to apparent willingness for a short-term fling. 
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Tuesday, November 09, 2010

Ian Ayres: Super Crunchers

I regularly get asked about good books to read, here is one for you that is a few years old, but excellent!

Ian Ayres' Super Crunchers

Southern Finance Association's Annual Meeting

Had a talk yesterday about Southerns whcih is next week. It looks good! Here is the program. If you can make it I am sure you will enjoy it and learn a great deal.

Inside Job Trailer

It looks remarkably (as in over the top-Michael Mooreish) biased, but as a fellow FinanceProfessor said in an email "a must see".

Friday, November 05, 2010

Prospect Theory and the Taxpayer Receipt | Mother Jones

Cool use of prospect theory to looking US politics: both sides are afraid of losing what they now "have".

Prospect Theory and the Taxpayer Receipt | Mother Jones:
"Budget allocations are a relatively zero-sum game in the short term, and both sides would have to believe that the odds of getting the other guy's goodies is overwhelmingly in their favor before they'd agree to anything that puts their existing goodies at risk. So it's not just a matter of both sides mistakenly thinking the taxpayer receipt is more likely to benefit the other side and therefore shying away. Even if both sides are modestly optimistic about their chances of outgunning the other side, the prospect of a loss is still too daunting. So they won't do it."

BTW there is a nice (easy) description of prospect theory in the article.

Thursday, November 04, 2010

Enjoy Today and Save More Tomorrow - Yahoo! News

Enjoy Today and Save More Tomorrow - Yahoo! News:

"In the program, which is designed to be offered by employers, people agree ahead of time to contribute to a retirement plan, and to have their contributions automatically increased regularly, corresponding with when they receive payraises. The first implementation of Thaler and Benartzi's system involved a midsized manufacturing company; over 28 months, the average saving rates of those in the program increased more than threefold, from 3.5% to 11.6%. Interestingly, the minority of employees who opted not to enroll in the plan had originally saved, on average, more than those who signed up -- 5.3% of their income, as opposed to 3.5%. But after the 28 months, the longtime savers only increased that rate to 7.5%, far less than the participants' 11.6%."
This is the article on the Save More Tomorrow program we talked about in class.

Interview with Richard Thaler

Skip in a few minutes. It gets pretty good.

Switching the default rule for an AIDS test

In Behavioral Finance class we frequently mention the importance of defaults. For instance many of you probably have seen Dan Ariely discuss organ donations. If not, watch it, it is good.

Well here is more evidence from the Nudge blog · Switching the default rule for an AIDS test:
"The change to opt-out helped Botswana increase acceptance of AIDS tests from 64 percent to 83 percent in just one year. Test rates in clinics in Zimbabwe went from 65 percent to 99 percent with a similar change."

Again it is one of those things that should not matter, but ends up having huge consequences.

Wednesday, November 03, 2010

Study Unmasks the Biology of Bluffing

Study Unmasks the Biology of Bluffing:
"Bhatt put it this way: 'We believe the areas indicate that the strategists -- bluffers -- are essentially thinking ahead. Specifically, they're keeping track of how their suggestions are changing their reputation in the seller's mind and are in turn improving or harming their chances at good payouts in the future.'

Paul J. Zak, director of the Center for Neuroeconomics Studies at Claremont Graduate University in Claremont, Calif., was skeptical about the study's worth since it doesn't reveal much that's new about bluffing. It's 'fun and amusing, very well-designed and executed, but of little value I think,' he said."

It does suggest telling the truth is easier, other than that I agree with Zak.

Tuesday, November 02, 2010

Catching up on some things...

Seems like I am always behind in everything in my life. (indeed I remember after being cut from the Basketball team my freshman year that my mom said that about me--"It always takes you longer than others."  Uh, thanks Mom.)  But anyways, here are a few things that have been accumulating in my inbox:

* Long time reader  Phil Maybin has started Algorithmic Finance a new academic journal that looks fascinating.  In his words; " Our aim is to bridge computer science and finance, with topics like high frequency finance, agent-based finance, issues of complexity, and some behavioral finance, to the extent it is research on the algorithms of individual investors."

* Phil also pointed me to a very interesting piece on the twitter paper I mentioned the other day.  I think I took the twitter piece more as in interesting article that may not have all that much financial bite, but still interesting to the degree it suggests mood matters.   Richard Warr gives a better (and much more rigorous) analysis of it on his Finance Clippings Blog.

* The use of credit cards by college students is a regularly discussed topic on many blogs.  My take is that every student should have a credit card, but not that every student should use it.  They should be paid off on a monthly basis.  For a more thorough analysis of this see this interesting piece over at CollegeCrunch.

* At the FMA conference a couple of weeks ago had a nice talk with the Unknown Professor from Financial Rounds.  He suggested I point out his videos.  For instance here is one on the time value of money.  Great review for those who need it!

* The Southern Finance Association's Annual meeting is coming up.  If you have not reserved a place, You should soon!  The SFA's are usually very good.  I don't make it to them every year but plan on going this year.

* I am reading What Investors Really Want by Meir Statman.  He will be interviewed on FinanceProfessor December 7th.  It is an interesting look at some lessons from Behavioral Finance.  

*  The Money Management course that I oversee (can't really say teach since the leaders do so much of it themselves) is called SIMM--Students In Money Management.)  The TV commercial has been in high play of late.  Or at least it must be as I hear about it every time I go anywhere in town.  The portfolio is now up to $186,000 and we just started a new twitter account.  Follow us to see what we are up to! 
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Sunday, October 31, 2010

The Intelligent Investor: Why Your Adviser Is Scared to Set You Straight -

The Intelligent Investor: Why Your Adviser Is Scared to Set You Straight -
"The stampede into bonds... may be intensifying. A recent survey of financial advisers by Charles Schwab found that 77% planned....Yet bond prices are near all-time highs and future returns are likely to shrink.

Financial advisers contend that one of their most important functions is encouraging clients to 'rebalance,' or sell whatever has gone up and buy whatever has gone down.

The TD Ameritrade and Schwab numbers suggest, however, that financial advisers have been unbalancing instead of rebalancing their clients' accounts. "

Halloween best time to buy shares - NZ varsity study | The National Business Review - New Zealand - business, markets, finance, politics, property, technology and more

Halloween best time to buy shares - NZ varsity study | The National Business Review - New Zealand - business, markets, finance, politics, property, technology and more:
"A Massey University research team say their study supports the 'Halloween Indicator' theory - which suggests investors get the best bang for their buck if they only buy stock after November and sell by May.

Professor Ben Jacobsen and finance PhD student Cherry Zhang, from the university's School of Economics and Finance, reviewed 300 years of data from the British stock exchange from 1693."

Friday, October 29, 2010

Papyrus research provides insights into 'modern concerns' of ancient world

Papyrus research provides insights into 'modern concerns' of ancient world:
"Katherine Blouin from the University of Toronto publishes on a papyrus text regarding a Greek loan of money with interest in kind, the interest being paid in cabbages. Such in-kind interest protected the lender from currency inflation, which was rampant after 275 AD."

Bonds are pay interest in some asset other than money are still around but clearly not the norm. They are often called Payment in kind bonds where the payment can be in anything from oil, to an other bond, or gold.

Class: Explain why this would be a useful hedge.

Twitter (mood) as a predictor of the Dow

Image representing Twitter as depicted in Crun...            Image via | Indiana Daily Student |:
"..research by Johan Bollen, an associate professor in the School of Informatics and Computing at IU, supports speculation that these components could be related.
Bollen conducted an empirical study of more than 10 million Twitter posts — tweets — during 10 months in 2008.
His findings revealed a startling correlation between aggregate mood expressed on Twitter and the Dow Jones Industrial Average.
The predictions are nearly 90 percent accurate up to a week in advance of the Dow’s close.
Here is a video interview with the author from Bloomberg (can not embed).
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FMA papers Part V

Synthetic shortImage via Wikipedia
Some more papers from last week's FMA conference.  

Shorts:  Gundy, Lim, and Verwijmeren give a fascinating analysis of whether option markets allow market participants to get around short sale bans.  The short answer is NO.  This is likely because many who sell the puts, hedge their risk by shorting the stock.  When the short is disallowed, the put contract volume for shares of firms on the "do not short" list also falls.  This leades to more "mispricing" in option markets as well.  Very interesting.

Is it time to change fund managers?  If you do, you can expect cash outflows even if performance increases.   So you better think twice.  Robeco, Lansdorp and Verbeek examine fund flows following the replacement of a money manager.  They find that net flows are negative following the replacement even though on average the fund performs better (which may be caused by mean reversion?)  Surprisingly this is more pronounced for institutional funds than retail funds.  Why?  Good question.  Maybe the new manager does not fit the style the investor desires?  Or maybe people just do not like change. 

Financial flexibility is valuable.  That is the key finding from a paper by Clark who confirms the long-held view (just ask any manager) that having the ability to raise new money quickly (debt issuance) is an important benefit.   This helps to explain the supposed "under leverage" issues that we often see in Capital Structure models.

So you are on the board of a firm that allowed backdating.  You also sit on other boards.  You notice  that fewer shareholders are supporting you.  You are not alone. Ertimur, Ferri, and Maber find that investors "punish" Board Members of firms for transgressions done at the past at other firms by withholding votes.  This is shownby looking at baord members of firms that allowed backdating, and then looking at shareholder voting for or against those baord members at other firms.  The authors find "the percentage of votes withheld from directors at backdating firms is twice the percentage withheld from their counterparts at non-backdating firms. This voting penalty is more pronounced for directors sitting on the compensation committee (CC)...."

previous FMA article posts:
Part 1
Part 2
Part 3
Part 4

Thursday, October 28, 2010

FMA papers-Part IV

The fourth in a series of posts that looks at some of the new research that was presented at the FMA conference last week in NYC. 

Two of my favorite papers happened to be in the same session (a fact that I doubt was independent, watching a good (or bad) presentation no doubt has carryover effects to the next paper).

Jayaraman and Millburn examine two simultaneous long term trends of increased market liquidity (which is presumed to make stock prices more informative) and paying executives with more market based pay and find that the latter is dependent on the former.  That is, as liquidity increases, so too does pay sensitivity that is tied to stock performance.  (Notably, they find no such increase for pay to earnings sensitivity which presumably is seen as a second best solution to paying managers for performance.) Using the change to decimalization and inclusion into S&P 500 as robustness checks gives further support to this idea.  (it should be noted that SP inclusion was used because it leads to LESS informative prices and consequently lower equity pay sensitivity.

Then in a paper so good that I really enjoyed it even though the presenter was not an author.  Intuitively I just love the idea and can not figure out why firms are not doing it!  The author York's Yisone Sam Tian shows that using Asian options (which uses the average stock price instead of closing stock price) helps alleviate some of the incentive problems that arise when using traditional executive stock options.  For instance the risk manager would be not need as large of premium for accepting the pay, there would be less incentive to withhold bad news, etc.  That said, there might be increased incentive for earnings smoothing as the discussant pointed out.   Genius!

Durham, Perry, and Carpenter examine pay equity in NFL football and find that it a team has a wide dispersion of pay (paying some a great deal and many others near the league minimum for example), turnover increases and winning percentages drop.  This is not the first time for similar findings.  Past researchers have examined pay equity issues in many settings, including professional sports.  The past results have been quite mixed, but in a nutshell have suggested that for "large team games" such as US football, baseball, soccer some measure of fairness matters, where in smaller team games (basketball) it matters less (presumably where a few superstars can carry the team).  And I really wish they had looked at whether turnover led to turnovers.  LOL..

 previous posts from the FMAs

Part 1
Part 2
Part 3