Dan Ariely » Blog Archive This Is How I Feel About Buying Apps «

                         Image via WikipediaDan Ariely » Blog Archive This Is How I Feel About Buying Apps «:

Another use of anchoring (and a cool cartoon): Click through!

"We are perfectly willing to spend $4 on coffee (for some of us this is a daily purchase), or $500 on devices that you can argue we don’t really need. However, when it comes to buying digital items, such as apps, most of which are priced at $1, we suddenly get really cheap. Why? .....why is the price anchor for apps so low? I think the answer to this is that we have been trained with the expectation that apps should be free."

Related articles

• Why We Agonize Over Buying $1 Apps (apple.slashdot.org)

New York Mets’ Citi Field Bond Rating Outlook Cut by S&P - Businessweek

New York Mets’ Citi Field Bond Rating Outlook Cut by S&P - Businessweek:

A few days ago I posted on the NY Mets' Financial difficulties. Now the Mets' difficulties are dragging down the rating of the bonds that were used to finance Citi Field as well. The bonds, which are in theory separate from the Mets, were given a negative outlook and a BB+ rating by S&P based on the fact that the Bonds are heavily dependent on individual game ticket sales and these are highly dependent on the team's winning, which seems to be unlikely this year.

From Bloomberg:

“The key issue looking forward is that any unfavorable change in team financial operations may hurt team performance and reduce turnstile volumes and revenue,” S&P said....Season tickets, which make up about 40 percent of Citi Field’s total revenue, declined 22 percent, S&P said. Merchandise and food and beverage receipts, which make up 1 percent and 7 percent of revenue, respectively, fell 20 percent, the rating company said....

"A $20,000 block of Mets stadium bonds backed by payments in lieu of taxes with a 5 percent coupon and maturing in 2046 traded yesterday at 83.3 cents on the dollar to yield 6.2 percent."

HT to MetsBlog

Related articles

• Citi Field Debt Downgraded to Negative (metsreport.com)
• Bats: S.&.P. Outlook on Citi Field Bonds Sours (bats.blogs.nytimes.com)
• Another day, another depressing financial story (randombaseballstuff.com)
• The perks of being a Mets minority owner... (randombaseballstuff.com)

Patents: good, bad, or indifferent?

Tabarrok on Innovation | EconTalk | Library of Economics and Liberty:

Ok, so this is probably economics, but it was so interesting I could not pass up sharing it.  And be careful to jumping to conclusions.  He points out that the one area where he believes it works is in pharmaceuticals.  His conclusions?  Create patents of differing times periods (some 3 years, some 20 years, etc).

"Alex Tabarrok argues that innovation in the United States is being held back by patent law, the legal system, and immigration policies. He then suggests how these might be improved to create a better climate for innovation that would lead to higher productivity and a higher standard of living."

It is a podcast and Ted Talk. Here is a look-in via the transcript from the podcast from George Mason:

"The argument for patents is that imitation is a lot cheaper than innovation. So that, if a firm innovates, creates something new, and another firm can come along, imitate that product, eat away all the profit, and the first firm can't recover its research and development costs. And then they wouldn't have any incentive to do them and you won't get much innovation in the first place. Exactly right. Now, there's lots of arguments against. One of the first arguments against is just to ask: Are patents necessary?.....in 1930, we created in the Plant Patent Act, we could patent roses. So, did patenting of roses lead to more roses, more beautiful roses? Because people could capture the benefits without fear of being copied? Exactly. Did it lead to a flowering? No, it did not. We didn't see any big increase in rose innovation. In fact, we might have seen a little bit of a decrease. Moreover, even today, most new roses are not patented. Most inventions, most innovations are not patented. And I think people are a little bit surprised about this. With a few exceptions--chemicals, pharmaceuticals--being really the two biggest important exceptions. In some fields we don't even all patents, like fashion. Highly innovative, no patents at all. But in most fields, most innovations are not patented at all. You mention an example I've been thinking about recently, which is sports. Somebody innovates a new formation in football. It can't be patented. But coaches spend hours looking for a small edge."

Here is the Ted Talk:

 

HT to Ismail Ali Manik

Related articles

• Tabarrok on innovation (cafehayek.com)
• Tabarrok the Statist (marginalrevolution.com)
• Launching the Innovation Renaissance (marginalrevolution.com)
• Plant Patents: If It Smells Like A Rose . . . (tacticalip.com)

Correlation or Causation? - Businessweek

Correlation or Causation? - Businessweek:

The pictures/graphs will be more memorable than a long discussion!

"Need to prove something you already believe? Statistics are easy: All you need are two graphs and a leading question"

H/T to Holly S for the link! 

Related articles

• Correlation vs. Causation (A Mathographic) (seomoz.org)
• Correlation vs. Causation (A Mathographic) (mt-soft.com.ar)

Self imposed contraints back to the time of the ancient Greeks.

TEDtalksDirector's Channel - YouTube:


While a rational person would not need to impose constraints on ourselves, many of us need to.  In Behavioral finance we often talk about the seeming irrationality of them but all acknowledge both using them and them working.  In his TED talk, Dan Goldstein goes further into this topic and explains why we impose constraints on ourselves (100 calorie packs, Stickk.com, even budgets), how framing matters, and even how the discount rates we use affects our decision making.

While the entire talk is good, I especially enjoyed the discussion of Odysseus having himself tied to the mast to avoid the Sirens. (btw here are two pictures of that event: a PG version and a R version (nudity). )

Daniel Goldstein makes tools that help us imagine ourselves over time, so that we make smart choices for Future Us.

Bees teach investors handy lessons | Adelaide Now

Image via Wikipedia
Bees teach investors handy lessons | Adelaide Now:

Are bees risk averse?  Would they rather have less, but a sure thing?  or are they gamblers willing to take chances for a bigger payoff?  





If you said risk averse, you are correct!



 From Adelaidnow.com :

"During the experiment bees were given their own investment choice to make: Either feed from blue flowers which always contained 2ml of nectar without fail, or gorge on yellow flowers, which were randomly mixed so that one in three contained a triple payoff with 6ml nectar.

The experiment showed that bees initially "invested" evenly in both colors. But they quickly learned to stick to blue flowers, which always contained 2ml of nectar. In fact, they preferred the reliable blue flowers over the yellow flowers 84 per cent of the time."

For Mets, Vast Debt and Not a Lot of Time - NYTimes.com

Image by Getty Images via @daylifeFor Mets, Vast Debt and Not a Lot of Time - NYTimes.com:

Oh my...my Mets are not looking good (Remember: debt makes good times great, and bad times horrible.)

"... the Mets worry Major League Baseball enough to be seen as a troubled franchise on a short tether. Their $430 million loan on the team is due in 2014. Their $25 million loan from M.L.B. is past due and repayment has been extended. They recently borrowed $40 million from Bank of America.

Their valuable network, SNY, is also heavily leveraged, to the tune of $450 million, a loan that must be repaid in 2015. And the Mets’ Citi Field bond payments leapt from $19 million last year to $43.7 million.

That is a lot of borrowing for a team that lost $70 million last season and had faltering attendance."

Related articles

• Mets, Struggling for Cash, Receive $40 Million Bank Loan - NYTimes.com (financeprofessorblog.blogspot.com)
• For Mets, Vast Debt and Not a Lot of Time (nytimes.com)
• Meet the Mets! (gameofroles.wordpress.com)
• Mets Pilot Bond Investors Win But Team's Fans Lose (forbes.com)

Impact Investing - YouTube

Image via WikipediaImpact Investing - YouTube: Impact Investing


Duke' Fuqua School of Business just posted this fascinating talk by Antony Bugg-Levine (author of Impact Investing) on what Impact Investing is and what he sees in the field.
It's sort of long, but very interesting talk on Impact Investing!

What is impact investing? I would define it as sort of the marriage between traditional finance and social entrepreneurship that concludes profit based organizations can and do much good.

(Oh and he is right, it sounds better to say "I am a social entrepreneur" than than "I run a charity").

From Wikipedia:

"Impact investing refers to investments made based on the practice of assessing not only the financial return on investment, but also the social and environmental impacts of the investment that happen in the course of the operations of the business and the consumption of the product or service which the business creates. An impact investor seeks to enhance social structure or environmental health as well as achieve financial returns."

Related articles

• Impact Investing: Transforming How We Make Money While Making a Difference (pro2sell.com)
• Waving Goodbye to Social Finance and Impact Investing in 2011 (socialfinance.ca)
• Robert Zevin: Impact Investing: New Kid on the Block? (huffingtonpost.com)
• Canadian Task Force on Social Finance celebrates a year of momentum (marsdd.com)

In a New York Village, the Bank Around the Corner - NYTimes.com

In a New York Village, the Bank Around the Corner - NYTimes.com:

"This has not exactly been a time of great love for bankers. From the continuing foreclosure crisis to Occupy Wall Street’s campaign against “the 1 percent,” it is easy to forget that not all banks are complicated giants, trading in derivatives and re-hypothecating valueless collateral. The Bank of Cattaraugus, for example, is by asset size the state’s smallest bank (one branch, eight employees, no credit default swaps) and yet it plays an outsize role in this hilly village an hour south of Buffalo: housing its deposits, lending to its neediest inhabitants and recently forbearing on a mortgage when the borrower, a bus mechanic, temporarily lost his job after shooting off his finger while holstering his gun.

If it sounds old-fashioned, it is: It’s not the kind of bank you’ll find anymore in New York City, where multiple branches and capitalizations counted in 10 figures are the norm. With $12 million in total assets, the Bank of Cattaraugus is a microbank, well below the $10 billion threshold that defines small banks. It exists in a seemingly different universe from the mammoth money-center banks-turned-financial-services-conglomerates, like Citigroup ($1.9 trillion in assets) or JPMorgan Chase ($2.25 trillion).

With obvious exceptions, business at the Bank of Cattaraugus hasn’t changed much since 1882, when 20 prominent residents — among them a Civil War surgeon and a cousin of Davy Crockett — established the bank to safeguard townsfolk’s money and to finance local commerce.

In its 120-year history, the bank has rarely booked a profit for itself in excess of $50,000 (last year, Mr. Cullen said, it made $5,000.) He and his officers are industry anomalies: bankers who avoid high-risk and high-growth tactics in order to reinvest the bulk of their earnings in their community’s economy."

This bank is run by the Cullens, a family who has sent many through SBU and I had two of them as students (Tom and Tim). Great people! (also active in BonaResponds!)

Haiti leaders to begin talks on improving investment laws - Haiti - MiamiHerald.com

Haiti leaders to begin talks on improving investment laws - Haiti - MiamiHerald.com:

“It makes no sense that it takes 75 days — used to be 150 days — to register a business in Haiti,” Jean-Louis said, speaking at the Haiti Reconstruction Forum 2011 sponsored by the Inter-American Development Bank (IDB) and Enterprise Florida. “The Martelly-Conille government wants to take action. We are taking action to improve business environment in Haiti.”

Later, Jean-Louis told The Miami Herald that he feels “there is a momentum” happening in Haiti, “now it’s up to us to make sure laws are being passed.”

Brainwaves on the economy translated into a fine science - The National

Brainwaves on the economy translated into a fine science - The National:

" The neuroeconomic revolution has passed some key milestones recently, notably the publication last year of the neuroscientist Paul Glimcher's book Foundations of Neuroeconomic Analysis - a pointed variation on the title of Paul Samuelson's 1947 classic, Foundations of Economic Analysis, which helped to launch an earlier revolution in economic theory. And Mr Glimcher himself now holds an appointment at New York University's economics department.

To most economists, however, Mr Glimcher might as well have come from outer space. After all, his doctorate is from the University of Pennsylvania school of medicine's neuroscience department."



I finally got around to watching his presentation at the Nobel Conference from back in October. HIGHLY HIGHLY recommended. It is STAGGERINGLY good!

 

Related articles

• The Dawn of Neuroeconomics (bigthink.com)
• The Neuroeconomics Revolution - Robert J. Shiller (logicamp.wordpress.com)

An Asset-Pricing Model for the Contagion Age: Polson and Scott - Bloomberg

An Asset-Pricing Model for the Contagion Age: Polson and Scott - Bloomberg:

From the Bloomberg "Business Class" Blog:

" working on a more accurate pricing model that incorporates The financial crisis and the meltdown in Europe have exposed the deficiencies of traditional asset- pricing models, particularly their inability to account for the effect of contagion from one market to another. The good news is that the length and the persistence of the turmoil have given researchers a trove of data to develop new predictive tools.

In our work, we developed an asset-pricing model to study these market disruptions, which incorporates random shocks to volatility that are correlated across markets"

From the paper itself:

"Crucially, our model expresses all three ways in which market shocks tend to cluster during times of crisis: time-series clustering, whereby large shocks today predict further large shocks tomorrow; cross-sectional clustering, whereby large shocks in one region pre- dict large shocks in other regions; and directional clustering, whereby shocks to aggregate volatility are associated with specific directional biases in contemporaneous country-level returns."

and later:

"We have three main findings. First, we present evidence that European equity markets exhibited significant excess correlation during the debt crisis of 2010, relative to an asset- pricing model that assumes regional market integration.....[Secondly] we find that part of this excess correlation can be attributed to the impact of mutually exciting volatility shocks in the cross-section of expected returns. We propose global and regional volatility-risk factors to quantify this impact, and show how to con- struct these volatility risk factors directly from the time series of market returns....Our third main finding concerns the contemporaneous relationship between volatility and expected returns. We are primarily interested in the role of volatility shocks in under- standing contagion, rather than in estimating volatility per se. Nonetheless, in performing a formal statistical assessment of our volatility model, we find a significant negative rela- tionship between daily volatility and expected returns on the U.S. market portfolio."

Well this one is timely. We ended class this past week saying that what we know and what we don't know about finance. One of the things I said we don't know is the benefits of diversification within a world where correlations increase dramatically in times of market turmoil. The authors do a wonderful job of looking at this "unknown" in a paper that is guaranteed to be coming to a top ranked journal soon.

I^3=Important, Interesting, Informative

Inside Capitol, Investor Access Yields Rich Tips - WSJ.com

Inside Capitol, Investor Access Yields Rich Tips - WSJ.com:

"When Senate Democrats finally brokered a compromise over the proposed health-care law, a group of hedge funds were let in on the deal, learning details hours before a public announcement on Dec. 8, 2009.

The news was potentially worth millions of dollars to the investors, though none would publicly divulge how they used the information. They belong to a select group who pay for early, firsthand reports on Capitol Hill."

It just goes on and on:

Related articles

• Inside Capitol, Investor Access Yields Rich Tips (huffingtonpost.com)
• Hedge Funds Pay For Early Congressional News (politicalwire.com)
• Lawmakers Give Inside Info to Big Investors - Legally (newser.com)
• Inside Capitol, Investor Access Yields Rich Tips (online.wsj.com)
• In Capitol, Investor Access Yields Rich Tips (online.wsj.com)

The U.S. – On Track To Become a Net Exporter of Oil, Once Again — Oil and Gas Investments Bulletin

The U.S. – On Track To Become a Net Exporter of Oil, Once Again — Oil and Gas Investments Bulletin:

"For the first time since 1949, the United States is poised to become a net exporter of petroleum, according to the Petroleum Supply Monthly report for November put out by the U.S. Energy Information Administration.

Through the first nine months of 2011, the U.S. exported 753.4 million barrels of gasoline, diesel and other oil-based fuels while only importing 689.4 million barrels."

10 Videos on High Frequency Trading - MoneyScience's blog - MoneyScience

10 Videos on High Frequency Trading - MoneyScience's blog - MoneyScience:

10 Videos on High Frequency Trading

I watched several of them and they are well done.

My favorite:

High-frequency trading from Marketplace on Vimeo.

VERY good for class!

BTW I definitely recommend you follow MoneyScience.

Do Criminal Sanctions Deter Insider Trading by Bart Frijns, Aaron Gilbert, Alireza Tourani-Rad :: SSRN

Do Criminal Sanctions Deter Insider Trading by Bart Frijns, Aaron Gilbert, Alireza Tourani-Rad :: SSRN:

I was not expecting this:

"Although criminal sanctions represent a much greater penalty than civil sanctions, the higher burden of proof required makes their enforceability weaker. This trade-off between severity and enforceability implies that the impact of criminal sanctions is ambiguous. In this paper, we empirically examine this issue by studying the deterrence of insider trading following the introduction of criminal sanctions in a developed market. Significant changes in sanction regimes are rare, especially when criminal sanctions are introduced without other changes. In February 2008, New Zealand introduced criminal sanctions for insider trading. This change of law offers a unique setting to examine the deterrence effect of criminalization. Using measures for the cost of trading, degree of information asymmetry, and probability of informed trading, we find that the enactment of this law led to a worsening in these measures. These findings suggest that the weaker enforceability of criminalization outweighs the associated increased severity of the penalties. Consequently, we would suggest that criminal sanctions in New Zealand and in other markets where they have been applied should be reconsidered."

Walmart Heirs Worth Same Amount As Bottom 30 Percent Of Americans In 2007: Analysis

Walmart Heirs Worth Same Amount As Bottom 30 Percent Of Americans In 2007: Analysis:

" The six children of Walmart's founders, Sam and James "Bud" Walton, had the same net worth in 2007 as the entire bottom 30 percent of American earners, according to an analysis from Sylvia Allegretto, a labor economist at University of California-Berkeley's Center on Wage and Employment Dynamics.

Though the 2007 figure is striking, the gap between the Walmart heirs and the rest of the country may get even bigger -- the Walton's combined fortune has grown by more than $20 billion, according to data compiled from the Forbes 400 this year."

An MBA student sent me this last week and I never had time to post it (and was not sure if I believed it), but seeming looks legit.

via @MoneyScience and @SimoloeonSense: http://t.co/intjmgun http://bit.ly/rNzhwS

Can there be no heroes? SEC Says Rudy Ruettiger Is A Stock Scammer - Forbes

SEC Says Rudy Ruettiger Is A Stock Scammer - Forbes:

"The Securities & Exchange Commission, however, says Rudy Ruettiger has grown up to become a penny stock promoter and scammer. The former Notre Dame walk-on has agreed to pay $382,866 to resolve the SEC’s claim that he participated in a pump-and-dump, fraudulently inducing investors to bid up the stock of his sports drink"

Yes, that "Rudy".

Taxpayers will lose $14B on auto bailouts – USATODAY.com

Taxpayers will lose $14B on auto bailouts – USATODAY.com
I confess I have not run any numbers on this, but come on, losing $14B (and maybe more as the article was ambigous on whether this included the "$19.4 billion the government put into GM before the 2009 bankruptcy" or not) can hardly be an unambiguous success. Can it?

"Taxpayers will lose about $14 billion on the $82 billion investment to restructure General Motors, Chrysler and Ally Financial, former auto czar Steven Rattner said Thursday."

He continues:

""It's unambiguous that it was a success," Rattner told the Detroit Economic Club, acknowledging his inherent bias because he led the effort."

Wait, really?

American Airlines, Bankruptcy, and the Housing Bubble : The New Yorker

American Airlines, Bankruptcy, and the Housing Bubble : The New Yorker:

"Recently, American Airlines filed for bankruptcy, it did so deliberately. The airline had four billion dollars in the bank and could have kept paying its bills. But it has been losing money for a while, and its board decided that it was foolish to keep throwing good money after bad. Declaring bankruptcy will trim American’s debt load and allow it to break its union contracts, so that it can slim down and cut costs.

American wasn’t stigmatized for the move. Instead, analysts hailed it as “very smart.""

What are your thoughts? Good move? What will be impact on future borrowing? Relations with others stakeholders?

BBC News - Top economists reveal their graphs of 2011

BBC News - Top economists reveal their graphs of 2011:

"For a long time the perception was that the creation of the euro meant sovereign risk was effectively the same across all countries. That of course proved to be wrong. The Lehman's crisis and financial meltdown that followed affected the deficits and debt levels of different countries in different ways. Interestingly it is much the same countries now with very high yields as it was pre-euro, suggesting little has changed fundamentally in a decade." VICKY PRYCE, SENIOR MANAGING DIRECTOR FTI CONSULTING

Mets, Struggling for Cash, Receive $40 Million Bank Loan - NYTimes.com

Mets, Struggling for Cash, Receive $40 Million Bank Loan - NYTimes.com:

"The loan marks the second time in a year that the Mets have received an infusion of cash. A year ago, the team’s owners, Fred Wilpon and Saul Katz, received a $25 million loan from Major League Baseball, but they have not been able to repay it. Meanwhile, Sandy Alderson, the club’s general manager, said last week that the organization had lost $70 million in 2011 alone."

Related articles

• Cash-Strapped Mets Take Out $40 Million 'Bridge Loan' (newyork.cbslocal.com)
• Financially-strapped Mets got $40M bank loan (espn.go.com)
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Freakonomics » What Makes a Rogue Trader Tick? A Q&A with FT Columnist John Gapper

Freakonomics » What Makes a Rogue Trader Tick? A Q&A with FT Columnist John Gapper

"In his new e-book, How to Be a Rogue Trader, Financial Times columnist John Gapper explains why this story has become so familiar over the years. As he puts it, the rogue trader is a species of sorts within the world of finance, a special breed with certain behaviors and characteristics that are consistent through time. Gapper delves into evolutionary biology and the research of Daniel Kahneman to better understand the nature of men like Nick Leeson, Joe Jett, and Jerome Kerviel.

Q. You start with a discussion of evolutionary biology to examine the motivations of a rogue trader. Explain that.
A. I found the research fascinating, these evolutionary studies of the ways that species adjust their behavior when foraging for food. When they’re comfortable, they behave with risk aversion — they’ll go to the place that is the most reliable, even if it doesn’t offer the best returns. But when their survival is threatened, they will go to the riskiest places.
Q. You also spend a bit of time discussing the work of Daniel Kahneman. ....
A. The Kahneman work is classic in the way that it explains how we react to gain and loss. It did strike me, the degree to which the behavior of traders falls in line with his work. They are hungry in a very basic sense. Kahneman talks about how moving the reference point changes people’s attitude to risk. If you look at a trading floor in those terms, you’re setting up an incentive system so that traders are eager to take risks."

I predict my students will LOVE this one!

Related articles

• The Folie De Grandeur Of Rogue Traders (forbes.com)
• Why rogue traders will never disappear (blogs.reuters.com)
• Sam Harris interviews Daniel Kahneman (3quarksdaily.com)
• How to Dispel Your Illusions (nybooks.com)

Hat tip to Ismail Ali Mani for the link!!! 

Counterparty Risk FAQ: Credit VaR, PFE, CVA, DVA, Closeout, Netting, Collateral, Re-Hypothecation, WWR, Basel, Funding, CCDS and Margin Lending by Damiano Brigo :: SSRN

Very well done. It was a joy to read and I learned quite a bit!

Counterparty Risk FAQ: Credit VaR, PFE, CVA, DVA, Closeout, Netting, Collateral, Re-Hypothecation, WWR, Basel, Funding, CCDS and Margin Lending by Damiano Brigo :: SSRN: a dialogue on Counterparty Credit Risk touching on Credit Value at Risk (Credit VaR), Potential Future Exposure (PFE), Expected Exposure (EE), Expected Positive Exposure (EPE), Credit Valuation Adjustment (CVA), Debit Valuation Adjustment (DVA), DVA Hedging, Closeout conventions, Netting clauses, Collateral modeling, Gap Risk, Re-hypothecation, Wrong Way Risk, Basel III, inclusion of Funding costs, First to Default risk, Contingent Credit Default Swaps (CCDS) and CVA restructuring possibilities through margin lending. The dialogue is in the form of a Q&A between a CVA expert and a newly hired colleague.


A rather long look in:

"Q: Fine. How is Credit VaR typically calculated?
A: Credit VaR is calculated through a simulation of the basic financial variables underlying the portfolio under the historical probability mea- sure, commonly referred as P, up to the risk horizon. The simulation also includes the default of the counterparties. At the risk horizon, the portfolio is priced in every simulated scenario of the basic financial variables, including defaults, obtaining a number of scenarios for the portfolio value at the risk horizon.

Q: So if the risk horizon is one year, we obtain a number of scenarios for what will be the value of the portfolio in one year, based on the eve- olution of the underlying market variables and on the possible default of the counterparties.
A: Precisely. A distribution of the losses of the portfolio is built based on these scenarios of portfolio values. When we say ”priced” we mean to say that the discounted future cash flows of the portfolio after the risk horizon are averaged conditional on each scenario at the risk horizon but under another probability measure, the Pricing measure, or Risk Neutral measure, or Equivalent Martingale Measure if you want to go technical...

Good stuff although I doubt it will be coming to a stage near you soon.


Via MoneyScience

Bottom Line - Corzine: I don't know where missing MF money is

I don't think I expected him to say "well we were short funds and used it to cover losses" but none the less it is an awful lot of money to lose track of. 


Bottom Line - Corzine: I don't know where missing MF money is:

"In his first public statement since MF's bankruptcy, the eighth largest in U.S. history, Corzine apologized to all those affected and said he was stunned when he heard about the missing money. Corzine, a former head of Goldman Sachs, made the remarks in prepared testimony for a House Agriculture Committee hearing.

"I was stunned when I was told ... that MF Global could not account for many hundreds of millions of dollars of client money. I remain deeply concerned about the impact that the unreconciled and frozen funds have had on MF Global’s customers and others," Corzine said.

"I simply do not know where the money is, or why the accounts have not been reconciled to date," he said.

Related articles

• Corzine: Don't know where MF Global's missing money is - USA Today (usatoday.com)
• Corzine: I don't know where missing funds are (marketwatch.com)
• Corzine "Simply Does Not Know Where The Money Is" - Presenting Jon Corzine's Complete Testimony To Congress (zerohedge.com)
• Ten questions for Jon Corzine (finance.fortune.cnn.com)

Niall Ferguson: The end of the great divergence--6 killer apps of prosperity - YouTube

Niall Ferguson: The 6 killer apps of prosperity - YouTube:

This should be entitled the "End of the Great Divergence" but oh well. I thought I had shared this before, but I do not see it on the blog and even if I had, oh well. It is that important. I used it in class this semester and it actually was the basis of an essay question. It is not strictly finance, but it is more finance than anyone probably wants to admit. Watch it. Yes it is 20 minutes. But I bet you remember it 10 years from now more than anything else you will do today.





Over the past few centuries, Western cultures have been very good at creating general prosperity for themselves. Historian Niall Ferguson asks: Why the West, and less so the rest? He suggests half a dozen big ideas from Western culture -- call them the 6 killer apps -- that promote wealth, stability and innovation. And in this new century, he says, these apps are all shareable.

Andrew Klavan: Wall Street On Trial - YouTube

Andrew Klavan: Wall Street On Trial - YouTube

Well worth watching!

Congress and insider trading, a step in the right direction

Remember the 60 Minutes piece about Congressional Insider trading?  Well now that everyone knows about it, it appears the Stock Act (blocking insider trading by congress) may be passed.  Will it be enforced?  Will the SEC be afraid to enforce it?  Time will tell.

From Yahoo:

Do Nice Guys Finish Last? | Wired Science | Wired.com

Image via WikipediaDo Nice Guys Finish Last? | Wired Science | Wired.com:

"Nice guys really do finish last, or at least make significantly less money. According to a new study in the Journal of Personality and Social Psychology by Beth A. Livingston of Cornell, Timothy A. Judge of Notre Dame, and Charlice Hurst of the University of Western Ontario, levels of “agreeableness” are negatively correlated with the earnings.

The article goes on to describe "disagreeable" not as downright mean or evil but in a way I would describe as more "self interested" than others.

From the article:

"...these disagreeable people do consistently exhibit one special trait: They are willing to “aggressively advocate for their position during conflicts.” While more agreeable people are quick to compromise for the good of the group...their disagreeable colleagues insist on holding firm"

So what? Well like the cliche a squeaky wheal gets oiled, these disagreeable people get paid:

"The researchers summarize their data: Overall, across the first three studies, men who are one standard deviation below the mean on agreeableness earn an average of 18.31 percent ($9,772) more than men one standard deviation above the mean on agreeableness. Meanwhile, the “disagreeableness premium” for women was only 5.47 percent ($1,828). Thus, the income premium for disagreeableness is more than three times stronger for men than for women."

BTW the article also confirms previous studies that show women are paid less for same jobs as men.

Related articles

• Nice Guys Never Win (Neither Do Mean Girls) (freakonomics.com)
• Nice guys earn less, study finds (cnn.com)
• Nice guys do finish last - and they earn less (independent.co.uk)

Market Pros Had Bad Year, So Why Not Just Buy Index Fund? - Yahoo! Finance

Market Pros Had Bad Year, So Why Not Just Buy Index Fund? - Yahoo! Finance:

"Just one in four managers beat the major stock indexes this year, as an intensely volatile market environment drove an aversion from risk that left many dangerously exposed during pullbacks and woefully flatfooted during rallies."

and later:

"Just one in four managers beat the major stock indexes this year, as an intensely volatile market environment drove an aversion from risk that left many dangerously exposed during pullbacks and woefully flatfooted during rallies"

I'd like to see some control for risk in this, but none-the-less, the idea that it is exceedingly hard to consistently beat the market is worth repeating.

Finance Crooks - video from class

Finance Crooks - YouTube

Ok, this is not the usual fare, but some of my students put this video for class. The "rap" starts about 1:30 in. (and you get an 8 Mile view of the local area around SBU as some looks at campus)

Taxi!! A better investent than almost anything?

Podcast : NPR:

"...in New York City, two taxi medallions, the metal plates that make it legal to dive a cab in the city, sold for $1 million each.

On today's podcast, we try to answer the question — why?"

Investing in a taxi medallion has proved a better investment than gold as Bloomberg showed back in August.

Interesting look at what can happen when you interfere with markets: someone wins and it leads to more interventions and rules.

Fed Faces New Scrutiny for Trillions in Assistance to Banks After Crisis | PBS NewsHour | Nov. 29, 2011 | PBS

Just shaking my head....we have so little idea of what goes on. Think that Enron or Adelphia etc were bad when they hid billions? Try trillions!


Fed Faces New Scrutiny for Trillions in Assistance to Banks After Crisis | PBS NewsHour | Nov. 29, 2011 | PBS:

"JUDY WOODRUFF: What did you learn about the scope of what the Fed did and who the recipients were?

BOB IVRY: It was a lot bigger than we thought, Judy, compared to TARP. TARP was the Treasury program that helped the banks get through a tough time in 2008.

And that was lending up to $700 billion. In one day, the Fed had loans out totaling $1.2 trillion. So, that one day in December of 2008 just completely dwarfs the much better known TARP program."

Now clearly it is not all bad. For instance, the Fed (in its role as lender of last resort) should be making these loans to the firms that needed it, but what about those that didn't need it but wanted a nice handout?


Also there is a debate as to how much of this was previously disclosed:

"JUDY WOODRUFF: Now, we know that you and Bloomberg News went to great lengths to get this information. There was a FOIA, a Freedom of Information, request that went all the way, I gather, to the Supreme Court.
But we did at the NewsHour talk to Fed officials today. And they say the extent to which this was hidden, was secret is being overstated here to some extent. They're saying that they made weekly reports about the amount of lending; then, ultimately, the information came out after the Dodd-Frank bill was passed into law.
BOB IVRY: They did disclose the information in aggregate form, meaning that you just got a lump: This particular program, for instance, lent this week this amount of money.
What we didn't know before very recently was that a bank like Morgan Stanley took $107 billion in one day or that Bank of America or Citigroup were borrowing on a single day at their peak almost $100 billion.
So, all that is now public. And that's because Bloomberg and Bloomberg News sued the Federal Reserve to get this money and to get this"

Related articles

• Fed Loaned Banks Trillions in Bailout, Bloomberg Reports - ABC News (blog) (abcnews.go.com)
• The Federal Reserve's 'breathtaking' $7.7 trillion bank bailout (kaystreet.wordpress.com)

Gross / Fink: Heavy Hitters Special, Nov. 17 - Video - Bloomberg

Gross / Fink: Heavy Hitters Special, Nov. 17 - Video - Bloomberg http://bloom.bg/sMeM6I#ooid=czaGgxMzrdBsdBv6Z-Q8EmotIzII6yU9:

Nov. 22 (Bloomberg) -- Bill Gross, co-chief investment officer at Pacific Investment Management Co., and Laurence Fink, chief executive officer of BlackRock Inc., discuss the European sovereign-debt crisis, the U.S. economy and investment strategy. Bloomberg's Erik Schatzker moderated the Nov. 17 event hosted by the UCLA Anderson School of Management and Bloomberg Television. (Source: Bloomberg)

From Bloomberg.

Related articles

• Fink, Gross on European debt crisis (investmentpostcards.com)
• You Won't Believe What Bill Gross And Larry Fink Said About Occupy Wall Street On Bloomberg (businessinsider.com)
• Pimco's Gross and BlackRock's Fink The Acceptable Face Of Capitalism (forbes.com)
• Here's A Sentence Bill Gross Wishes He'd Never Written... (businessinsider.com)

The Missing Logic of Boards

Image via Wikipedia
From The Conference Board's  Roger Martin via MBA Depot

"A board of directors is asked to span a wide (and widening) gulf, resolving the tension between two very different markets with very different actors. On the one hand, boards are intended to act on behalf of outside shareholders... On the other hand, the board must deal closely with executives...motivated to maximize their own returns, even at the expense of shareholders."

and one more:

"It raises the question: Why would we imagine that the directorial agents would act any differently than the executive agents? After all, directors and executives are drawn largely from the same pool: Current and former senior executives are highly sought as directors. Yet we choose to apply agency theory to executives and not to directors. We assume that executives will maximize their self-interest but that directors will not. This is a failure of logic."


BTW the logic is the same as that of Dr. Seuss!  Here it is from "The Economics of Dr. Seuss"---and it was in an older Brealey and Myers(?) text when I was a grad student.

"... Out west, near Hawtch-Hawtch, there’s a Hawtch-Hawtcher Bee-Watcher. His job is to watch… is to keep both his eyes on the lazy town bee. A bee that is watched will work harder, you see.
Well…he watched and he watched. But, in spite of his watch, that bee didn’t work any harder. Not mawtch.

So then somebody said, “Our old bee-watching man just isn’t bee-watching as hard as he can. He ought to be watched by another Hawtch-Hawtcher. The thing that we need is a Bee-Watcher-Watcher.”

WELL… The Bee-Watcher Watcher watched the Bee-Watcher. He didn’t watch well. So another Hawtch-Hawtcher had to come in as a Watch-Watcher-Watcher.

And today all the Hawtchers who live in Hawtch-Hawtch are watching on Watch-Watcher-Watchering-Watch, Watch-Watching the Watcher who’s watching that bee. You’re not a Hawtch-Hawtcher. You’re lucky you see."

perfect for my class' Nexus of Contracts and Governance discussion.

Related articles

• The Fundamental Error: Shareholders & Ownership (professorbainbridge.com)
• CEOs and Boards Need a Pact on How the Firm Will be Run - HBR (bjconquest.com)

Margin Call Movie Trailer 2011 Official HD - YouTube

I had never even heard of this, but I definitely want to see it.


Margin Call Movie Trailer 2011 Official HD - YouTube:
"When entry-level analyst Peter Sullivan (Zachary Quinto) unlocks information that could prove to be the downfall of the firm, a roller-coaster ride ensues as decisions both financial and moral catapult the lives of all involved to the brink of disaster. Expanding the parameters of genre, "Margin Call" is a riveting examination of the human components of a subject too often relegated to partisan issues of black and white."





HT to the Big Picture!

Related articles

• Jonathan Kim: ReThink Review: Margin Call -- 'Twas the Night Before the Meltdown... (huffingtonpost.com)

FT Alphaville » Randomness and the lost lesson of Bill Miller

Image via Wikipedia

FT Alphaville » Randomness and the lost lesson of Bill Miller:



FT Alphaville uses the retirement of Bill Miller to discuss randomness and probabilities:

" A newsletter published by Credit Suisse-First Boston in 2003, a few years before the streak ended, calculated the odds of a manager outperforming the market on chance alone for 12 straight years to be one in 2.2 billion.

But what if Miller’s streak wasn’t so remarkable to begin with?

The statisticians like those from CSFB were considering the odds that a specific fund would outperform for 12 straight years if the fund begins investing at a specific time. But as Mlodinow explained, maybe the better question to ask is actually this: given the number of mutual funds that have existed in the modern era, what are the odds that any of them would have beaten the market over any 15-year period of time on chance alone?

Answer: 3 out of 4."

Important to remember that! 

Related articles

• Bill Miller Heads for the Exit (fool.com)
• Legendary Mutual Fund Manager Bill Miller Is Stepping Down From Main Fund (businessinsider.com)
• Stock Picking Guru Bill Miller Leaves Mutual Fund (patspapers.com)
• Lucky or Good or Both? (growthology.org)
• Permabull Down: Bill Miller Is Out After "Falling Behind Peers" (zerohedge.com)

A look at Olympus

I want to use Olympus in class, so I put together a short recap from various sources:

From the BBC:

"The Japanese camera and medical equipment company, Olympus, has admitted to hiding investment losses dating back to the 1990s. The revelation came after the firm's British president, Michael Woodford, went public with allegations that the company had wasted $1.4bn (£880m) on buying companies for inflated prices, as a way of covering up old losses. He was subsequently fired. The company's shares plunged in value when Olympus bosses confirmed the attempts to conceal losses and apologised

BTW the BBC piece is an absolutely great interview with former CEO Michael Woodford which will be the part of another class on Japanese governance which is rapidly being shown to be far from adequate.

From the Economist:

"The scandal first hit global headlines on October 14th, when Michael Woodford, a Briton who had recently taken over as Olympus’s boss, was sacked. Mr Woodford had just told the board that the unusual payments merited investigation....Olympus’s shares fell 29% on November 8th, their daily limit. They are now 80% lower than before Mr Woodford was ousted. The Tokyo Stock Exchange has placed the firm on a watch-list for delisting."

From CBSNews'Is Olympus scandal tip of a Japanese iceberg?

"No corporations like losses (unless the engineered kind that reduce taxes). Announcing them to investors is painful, so you can understand why executives might want them to go away. But there's a big difference between wishful thinking and corrupt financial engineering, which is what some people at the top of Olympus allegedly did.
Although the details are still sketchy, apparently Olympus had suffered decades of losses on investments. Instead of admitting to one level of ineptitude, a few executives took things to a whole new level. They covered over the losses and then disguised them as acquisitions. Oh, they acquired companies, but the prices were sometimes outrageously high and the size of the fees to advisors, stunning."

From Time:

"...a publicly listed brand-name corporation spends hundreds of millions of dollars to buy companies that at the time of the acquisitions have zero revenue and dubious assets. That's what Olympus...did.......Japan Inc. is notorious for poor board and shareholder oversight. While the apparent lack of credible checks on top management is not unique, the details of the Olympus case are still stunning. From 2006 to '09, Olympus made four acquisitions, three of which had nothing to do with the company's core businesses, which are digital imaging and medical paraphernalia. Those three outfits, for which Olympus paid close to $1 billion.....In the fourth case, Olympus, after acquiring a British-based medical-instruments company for $2.2 billion in 2008, forwarded $687 million as "a transaction fee" to two investment bankers — also into a Caymans account that subsequently vanished.Read more: http://www.time.com/time/magazine/article/0,9171,2098601,00.html#ixzz1eVbSgwWH

While some are saying the faked transactions were shams to cover past losses, some are now wondering if they weren't payments to organized crime. Bloomberg addresses this in a piece that covered Warren Buffett's trip to Japan to consider buying some firms. There he was asked about Olympus. He said it was not a a reason to avoid Japan stocks as a whole, but Bloomberg.com wondered.
Buffett Is No Match for Mobsters With Tattoos: William Pesek - Bloomberg:

"Olympus, as venerable a name as there is in Japan, demonstrates the point. Investigators want to know what happened to at least $4.9 billion they say is unaccounted for at the camera maker. Of all the bizarre questions surrounding this sordid tale, the role of organized crime groups, or yakuza, is the most tantalizing. Police are looking into how much of the missing cash went into the pockets of these gangs."

and then this:

"With their full-body tattoos and amputated fingers, the yakuza have long held a unique place in the public imagination. Unfortunately, that goes for Japan’s economy, too. Adelstein calls the yakuza “Goldman Sachs with guns” because of the prowess with which their groups’ roughly 80,000 members infiltrate companies through extortion and intimidation. "

Olympus for their part maintain that money did not go to "anti-social" groups (i.e. organized crime).

Stay tuned.


Note to my classes: if you are still looking for a case, this would be a good one.

Related articles

• Olympus accounting probe widens (ft.com)
• Woodford to Face Olympus Board That Fired Him on Tokyo Return (businessweek.com)
• Police look for gangster link in Olympus cover-up scandal (independent.co.uk)
• You: Woodford: In-house probe lacks credibility (japantimes.co.jp)

Income inequalities and how they hurt

The traditional economist in me has trouble with this.  Why would people care if others have more than they do?  If I am happy, it should not matter if my neighbor gets $20,000 or $200,000 or $200,000,000 a year so long as (s)he has enough to live.

On the other side has been a growing field of research that has shown that inequalities hurt the overall "happiness" and even the health of residents of a country.  While we cover some of it in Behavioral Finance class, I was surprised by the enormity of the findings.

Worth watching even if you may not agree with all of it.

Why Do Listed Firms Pay for Market Making in Their Own Stock? by Bernt Ødegaard, Johannes Skjeltorp :: SSRN

Why Do Listed Firms Pay for Market Making in Their Own Stock? by Bernt Ødegaard, Johannes Skjeltorp :: SSRN:

" A recent innovation in equity markets is the introduction of market maker services paid for by the listed companies themselves. We investigate why firms are willing to pay a cost to improve the secondary market liquidity of their shares. We show that a contributing factor in this decision is the likelihood that the firm will interact with the capital markets in the near future, either because they have capital needs, or that they are planning to repurchase shares. We also find significant reductions in liquidity risk and cost of capital for firms that hire a market maker."

a look-in gives a better summary:

"In several electronic limit order markets, market participants have appeared with promises to maintain an orderly market in a particular stock, for example by keeping the spread at or below some agreed upon maximum. The innovation of these Designated Market Makers (hereafter DMMs) is that they charge a fee to the firm that has issued the equity to keep an orderly market in the firm's stock.
DMMs have appeared in several countries such as the Netherlands, France, Germany and Sweden. The DMM introductions have been studied for all these markets, where the main question examined is whether liquidity improves following the initiation of DMM agreements. A consensus finding in this research is that liquidity improves...."

I did not know this. It will definitely make its way to class!

Cite: Ødegaard, Bernt Arne and Skjeltorp, Johannes Atle, Why Do Listed Firms Pay for Market Making in Their Own Stock? (October 20, 2011). Paris December 2011 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: http://ssrn.com/abstract=1944057

How to Lose Money Investing in Bonds - Yahoo! Finance

How to Lose Money Investing in Bonds - Yahoo! Finance:

" Maturity dates and durations are other good tools for assessing the impact rising interest rates will have on the value of your bonds. A bond's maturity is the scheduled date when an issuer stops making interest payments and returns your principal. Duration is a measure of how sensitive a bond's price is to changes in interest rates. It takes several factors into account, including time to maturity and the interest rate. Bonds with shorter maturity periods typically have a lower duration and are less at risk of declining in value than bonds with a longer maturity period."

Sound familiar class??? FYI for others. Here is a Bondpricing spreadsheet we use in class. It is a tad dated, but works for introductory classes and shows Duration.

Madoff Associate Says Fraud Went Back to 1970s - NYTimes.com

           Image via WikipediaMadoff Associate Says Fraud Went Back to 1970s - NYTimes.com:

Wow. Shocking how how long it has been going on.

"Madoff’s multibillion-dollar Ponzi scheme stretched back at least to the early 1970s, when his employees used historical information on stocks to create false trades that could be placed on customer statements, a former trader revealed as he pleaded guilty on Monday to criminal charges."

Related articles

• Ex-Madoff trader pleads guilty in plea deal in NYC (seattletimes.nwsource.com)
• Ex-Madoff trader admits to faking financial statements (usatoday.com)
• Madoff's financial fraud 'dates back to the 1970s' (independent.co.uk)
• S.E.C. Disciplines 8 Employees Over Madoff Failure - NYTimes.com (policyabcs.wordpress.com)

Risk Aversion vs. Individualism: What Drives Risk Taking in Household Finance? by Wolfgang Breuer, Michael Riesener, Astrid Salzmann :: SSRN

Image via WikipediaRisk Aversion vs. Individualism: What Drives Risk Taking in Household Finance? by Wolfgang Breuer, Michael Riesener, Astrid Salzmann :: SSRN:

"We ask why the prevalence of stockholding is so limited. We focus on individuals’ attitudes towards risk and identify relevant factors that affect the willingness to take financial risks. Our empirical evidence contradicts standard portfolio theory, as it does not indicate a significant relationship between risk aversion and financial risk taking. However, our analysis supports the behavioral view that psychological factors rooted in national culture affect portfolio choice. Individualism, which is linked to overconfidence and overoptimism, has a significantly positive effect on financial risk taking. In micro data from Germany and Singapore, as well as in cross-country data, we find evidence consistent with low levels of individualism being an important factor in explaining the limited participation puzzle."

Two studies in a week that find culture effects financial decision making. (here is the other one)

Models Behaving Badly Led to MF’s Global Collapse – People Too: Emanuel Derman

An over reliance on short-term financing is at the root of the problems according to Emmanuel Derman but he cautions it is not exactly a repeat of Long Term Capital Management.

My favorite line is that we should use models to predict what we should pay for an asset (i.e. intrinsic value) not for predicting what the market should be.  He is also very good talking about what Goldman's risk management was like when he was there (not just checking a box for regulatory reasons).

A look-in: from Yahoo's Daily Ticker

"MF Global's collapse — and the inability of investigators to find about $1.2 billion in "missing" customer funds, which is twice the amount previously thought — has only further undermined confidence among investors and market participants alike.

Emanuel Derman, a professor at Columbia University and former Goldman Sachs managing director, says MF Global was undone by an over-reliance on short-term funding, which dried up as revelations of its leveraged bets on European sovereign debt came to light."

The Neuroeconomics Revolution - Robert J. Shiller - Project Syndicate

The Neuroeconomics Revolution - Robert J. Shiller - Project Syndicate

just one short look-in:

"Efforts to link neuroscience to economics have occurred mostly in just the last few years, and the growth of neuroeconomics is still in its early stages. But its nascence follows a pattern: revolutions in science tend to come from completely unexpected places. A field of science can turn barren if no fundamentally new approaches to research are on the horizon. Scholars can become so trapped in their methods – in the language and assumptions of the accepted approach to their discipline – that their research becomes repetitive or trivial."

Crushing the Cost of Predicting the Future - NYTimes.com

Crushing the Cost of Predicting the Future - NYTimes.com:

Gee, I wish I knew how this one would turn out:

" A company called Recorded Future looks at 100,000 Web pages an hour, scanning across 50,000 sources that include everything from Securities and Exchange Commission filings to Twitter comments. The idea is to look for statements about the future, like notice of an annual meeting or predictions about when a product might be released, look at past developments and then create a “temporal index” that suggests trends.

“The Web has come to reflect the world,” says Christopher Ahlberg, the co-founder and chief executive of Recorded Future. “We can use that to predict things.”"