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. 

Pope plans bank rules for more financial transparency - USATODAY.com

Pope plans bank rules for more financial transparency - USATODAY.com:

"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."

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

There is a lot more to ETFs than meets the eye - USATODAY.com:

"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."

Trader Holds $3 Billion of LME Copper - WSJ.com

Trader Holds $3 Billion of LME Copper - WSJ.com:

"... 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.

Odds Skew Against Investors in Bets on Strangers' Lives - WSJ.com

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 - WSJ.com:

"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.

Related articles

• Odds Skew Against Investors in Bets on Strangers' Lives (online.wsj.com)
• Recent Federal Reserve Action Underscores Stability of Life Settlement Industry (eon.businesswire.com)

Be a Better-Than-Average Investor - CBS MoneyWatch.com

Be a Better-Than-Average Investor - CBS MoneyWatch.com:

"...in 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.

Ernst & Young Faces Fraud Charges - WSJ.com

Ernst & Young Faces Fraud Charges - WSJ.com:

"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."

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.

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.

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).

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

Wow...

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 - NYTimes.com

Two Madoff stories of note:

Madoff Trustee Sues HSBC Over Servicing a Fraud - NYTimes.com:

"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 - NYTimes.com:

"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."

Related articles

• After HSBC, Madoff Trustee May Pursue Mets' Owners (dealbook.nytimes.com)
• Madoff trustee Sues HSBC For $9 Billion (huffingtonpost.com)
• Madoff trustee sues HSBC for more than $9 billion (marketwatch.com)

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.

A Dying Banker’s Last Financial Instructions - Your Money - NYTimes.com

A Dying Banker’s Last Financial Instructions - Your Money - NYTimes.com:

"...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 - NYTimes.com

Too Big to Succeed - NYTimes.com:

"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.

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

Unraveling the mystery of why we give, or don't - USATODAY.com:

"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!