Investment Mistakes: The View From Behavioral Finance - WSJ.com

Investment Mistakes: The View From Behavioral Finance - WSJ.com:

"Why did we think and feel and behave as we did? Why did we act in a way that today, in hindsight, seems so obviously stupid? Only by understanding the answer to these questions can we begin to improve our financial future.

This is where behavioral finance comes in. Most investors are intelligent people, neither irrational nor insane. But behavioral finance tells us we are also normal, with brains that are often full and emotions that are often overflowing. And that means we are normal smart at times, and normal stupid at others."

Yep, another one required for class. Read the whole thing! :)

McGraw Hill CEO: We Just Got It Wrong

From CNBC and Clusterstock: This was one of the more interesting CNBC interviews I have seen in a long time.

The interview is with McGraw-Hill CEO Terry McGraw. In the interview Mr McGraw starts off talking about new tools for college classrooms but then it gets more exciting and he discusses the recent case in which a judge allowed rating agencies to be sued. McGraw stresses that there was no fraud, but that they did not expect real estate declines to be as sharp as they were. (it is interesting to note, they did allow for 15% declines which if you remember back last year people were saying that rating agencies never considered ANY decline. So that was clearly wrong.

He then tackles the basic structure of the rating agencies where firms pay to be rated and disagrees that it is flawed.

From Clusterstock: McGraw Hill CEO: We Just Got It Wrong:

"..he addresses the pay-to-play model, and he argues that it's the only one that makes sense. When issuer-pays, the ratings are freely disseminable to everyone. When a buyer pays, the information stays with the buyer. And what's more, there's not much of a business selling this kind of research to each customers"

SSRN-Governance Matters VIII: Aggregate and Individual Governance Indicators, 1996-2008 by Daniel Kaufmann, Aart Kraay, Massimo Mastruzzi

Yes this will be used in class :)

SSRN-Governance Matters VIII: Aggregate and Individual Governance Indicators, 1996-2008 by Daniel Kaufmann, Aart Kraay, Massimo Mastruzzi:

"Abstract:

This paper reports on the 2009 update of the Worldwide Governance Indicators (WGI) research project, covering 212 countries and territories and measuring six dimensions of governance between 1996 and 2008: Voice and Accountability, Political Stability and Absence of Violence/Terrorism, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption. These aggregate indicators are based on hundreds of specific and disaggregated individual variables measuring various dimensions of governance, taken from 35 data sources provided by 33 different organizations. The data reflect the views on governance of public sector, private sector and NGO experts, as well as thousands of citizen and firm survey respondents worldwide. We also explicitly report the margins of error accompanying each country estimate. These reflect the inherent difficulties in measuring governance using any kind of data. We find that even after taking margins of error into account, the WGI permit meaningful cross-country comparisons as well as monitoring progress over time."

SSRN-Short Sales, Limits to Arbitrage and Fundamental Value by Dirk Brounen, Melissa Porras Prado, Marno Verbeek

Score another for short sales!

SSRN-Short Sales, Limits to Arbitrage and Fundamental Value by Dirk Brounen, Melissa Porras Prado, Marno Verbeek:

"The presence of short sale constraints ensures that pessimistic investors' negative information is not reflected in the stock price as they are not able to sell short, short sales hamper the tendency of the optimist to bid up prices."

Rating agencies lose free-speech claim | Reuters

Rating agencies lose free-speech claim | Reuters:

"'You can't yell fire in a crowded theater, but here it seems the agencies were doing the opposite,' said Jonathan Macey, a professor at Yale Law School. 'There was a fire, but they were saying there was nothing to worry about and taking money for saying that.'"

Football, Statistics, and Agency Problems « The Baseline Scenario

Agency costs occur when the agent looks out for his or her own interests and not those of whom hired him/her. The typical example of this is when manager looks out for his/her personal pay and not the returns of the shareholders.

That said the world is full of examples of such conflicts. The Baseline Scenario provides a wonderful example using football. Specifically, the fact that football teams punt much more than they should. Probably the best explanation of this is that the coaches do not want to be criticized for "going for it" even if "going for it" is better for the team.

Football, Statistics, and Agency Problems « The Baseline Scenario:

"The conclusion (PDF p. 14) is that over most of the field you should go for it if you have four or fewer yards to go; there is a big spike around the opponent’s 33-yard line where you should go for it even on fourth and nine, because the net field position benefit of punting is low and the expected point value of attempting a field goal is low.

The implication, of course, is that football teams don’t maximize. Romer concedes that making the right decision on fourth down would lead to about one more win every three years, and this is probably outweighed by the asymmetric returns: you are more likely to be penalized (as a coach) if you go against convention and are wrong than if you follow convention, since the fans (and the owners) are more likely to notice departures from convention. So the incentives of football coaches are not simply to maximize points, but also to maintain their reputations."

Forbes: Bills lead league in value increase : Sports : The Buffalo News

Forbes: Bills lead league in value increase : Sports : The Buffalo News:

"Forbes magazine has released its annual rankings of NFL franchises and their worth. The Bills are valued at $909 million, 26th in the league overall. They were 27th last season.

Buffalo is one of four teams, with New England, Tampa Bay, San Diego, whose value is up 3 percent from 2008....

The Dallas Cowboys are worth $1.65 billion, the most of any U.S.-based sports franchise, according to Forbes. Only Manchester United of the English Premier League is worth more worldwide, $1.87 billion."

SSRN-Capital Structure Decisions Around the World: Which Factors are Reliably Important? by Özde Öztekin

SSRN-Capital Structure Decisions Around the World: Which Factors are Reliably Important? by Özde Öztekin:

"The most reliable determinants are past leverage, tangibility, firm size, research and development, depreciation expenses, industry median leverage, and liquidity. The signs of the reliable determinants give consistent support to the dynamic trade off theory."

This one will definitely be required reading for my Advanced Corporate class when we get to the Capital Structure part of the course!

SSRN-CFOs and CEOs: Who Have the Most Influence on Earnings Management? by John (Xuefeng) Jiang, Kathy Petroni, Isabel Wang

SSRN-CFOs and CEOs: Who Have the Most Influence on Earnings Management? by John (Xuefeng) Jiang, Kathy Petroni, Isabel Wang:

"Because CFOs’ primary responsibility is financial reporting, CFO incentives should play a stronger role than those of the CEO. We find that the magnitude of accruals and the likelihood of beating analyst forecasts are more sensitive to CFO equity incentives than to those of the CEO. Our evidence supports the SEC’s new disclosure requirement on CFO compensation."

Given our text begins with a description of the roles of each of the executives at the firm, this is PERFECTLY timed.

HT to WayneMarr.

Tweets of the week

Have not done this in a while, but since class just started I figured I would point out some really cool tweets of note. Not very diversified today, but ran out of time and the transaction costs of diversification were too high.

From Wayne Marr

1. [Harvard HBS, BA680] How Marvel Went from Bankruptcy to $4B Buyout http://tinyurl.com/msr563
2. [SSRN] CFOs and CEOs: Who have the most Influence on earnings management? http://bit.ly/15pFay
3. [SSRN] Which leverage factors are consistently important for capital structure decisions of firms around the world http://bit.ly/GZ6oz
4. Urban Institute suggest the stock market collapse will have small effects on most Americans' retirement incomes http://tinyurl.com/n83cjq
5. RT @setandgoprods: STATS: Young People Are Flocking to Twitter http://bit.ly/I2lJw GOOD!
6. [bePress] Bob Schiller -People just don't seem to understand how little housing should and will appreciate long term http://bit.ly/4uJ9M2
7. [Harvard, HBS] The key to effectiveness? FOCUS http://tinyurl.com/ltfa6a
8. [CIRANO] Study finds that option-implied volatility and skewness are also good predictors of future realized beta http://tinyurl.com/m93mt6
9. [St. Louis FED] Can the term spread predict changes in economic activity? http://tinyurl.com/kkbtoj
10. [Simon Johnson, MIT] The nature of modern finance [Simon teaches finance courses at MIT!] http://tinyurl.com/m62hqz
11. [Harvard, SSRN] Competition between FASB and the IASB is better than a converging of FASB & IASB. http://bit.ly/LzLP4
12. [NBER, SSRN] Paper's two-factor model is as successful empirically as the three-factor Fama-French model. http://tinyurl.com/mglxt3
13. [SSRN] Analysts do not efficiently incorporate information into their forecasts and stock valuations http://bit.ly/g3DCK
14. [SSRN] Credible hedging commitments reduce the agency costs of debt http://bit.ly/8Mnwa
15. [Greg Mankiw, Harvard] Harvard freshman seminar this semester reading list http://tinyurl.com/lqlqhc
16. [WSJ] Big firms quick to collect, slow to pay [Basic Finance if you can do it!] http://tinyurl.com/m2van3
17. [Felix Salmon] The efficient markets hypothesis in fund fees - [easy read] http://tinyurl.com/myuvjk
18. [The Economist, BA325] EXCELLENT & USEFUL Big Mac index, guide to valuing currencies http://bit.ly/Elwfr
19. [SSRN] Compensation paid to audit committees is positively correlated with audit fees and SOX http://bit.ly/eaVTV
20. [Jeffrey Sachs, Columbia] The financial crisis one year after http://tinyurl.com/mbbxxv
21. [Fama/French - Chicago] How Unusual Was the Stock Market of 2008? [EXCELLENT PAPER, EXCELLENT GRAPHS] http://bit.ly/4cuazC
22. [SSRN] Can auditors can effectively use non-financial measures to help detect financial statement fraud http://bit.ly/4iMQUU

Freakonomics

1. Is the S.E.C. More or Less Scary Today?: Let's say you are currently running your own shady investment scheme. P.. http://bit.ly/HcToG
2. Biblical Property Rights: Deuteronomy 23:25-26 reflects the limits on altruism: When thou comest into thy ne.. http://bit.ly/36ATFl
3. The Strangely Powerful Placebo: It's got the pharmaceutical industry worried enough to fund a major study to ide.. http://bit.ly/44ENLS

Simoleon Sense

1. Media Multitaskers Pay Mental Price: Tagline: Attention, multitaskers (if you can pay attention, that is): Your .. http://bit.ly/1pYnMS
2. Individual rationality can mean collective irrationality & An Institutional Theory of Momentum and Reversal: I l.. http://bit.ly/DdjAi
3. Countries and Culture in Behavioral Finance: How cultural differences influence investor behavior. Click Here To.. http://bit.ly/131ch2
4. Are You Smarter than a CFA’er?: Is this a light way of saying CFA’s match markets better than MBAs (insert.. http://bit.ly/17vKSg
5. BBC Documentary: The History Of Gold: The perfect documentary for a relaxing weekend. Enjoy! (Big Hat Tip to Edw.. http://bit.ly/WPCHz

Bebchuk

1. New on Harvard’s Corporate Governance Forum: Shareholder Activism, Say on Pay and Executive Compensation, http://tinyurl.com/mvuhf8
2. New on Harvard’s Corporate Governance Forum: Treasury Inc.: How the Bailout Reshapes Corporate Theory & Practice, http://tinyurl.com/ldpg4s

well time is up...sorry...

We're All Predictably Irrational - Dan Ariely

YouTube - We're All Predictably Irrational - Dan Ariely:

"Dan Ariely, a professor of behavioral economics at Duke University, presents examples of cognitive illusions that help illustrate why humans make predictably irrational decisions."

Just used this in class. It is excellent!

How to Lose $3 Million in Six Years - Yahoo! Buzz

The Buzz Log - How to Lose $3 Million in Six Years - Yahoo! Buzz:

"Callie Rogers was just 16 when she won a whopping $3 million in the lottery. Six years later, she reports that she blew untold sums on drugs, partying, exotic cars, and breast implants. A staggering $730,000 went to designer clothes alone, Ms. Rogers explains in an article from AOL. Says Rogers: 'I honestly wish I'd never won the lottery money — and knowing what I know now I should have just given it all back to them.' She's currently left with around $32,000.

In these trying economic times, Ms. Rogers will likely find little sympathy. Still, it's worth noting that she's hardly the first big winner who wished she'd never bought a ticket."

Not exactly what Jensen was talking about when he coined free cash flow problem, but an extreme case of it.

Greg Mankiw's Blog: An Impossible Task

I am embarrassed that I have read so few of them! I guess I know what I better do this year!

Greg Mankiw's Blog: An Impossible Task:

"For those blog readers who might be interested in what the seminar will be reading, here is the list of books:

* The Worldly Philosophers, by Robert Heilbroner
* Spin-Free Economics, by Nariman Behravesh
* Capitalism and Freedom, by Milton Friedman
* Equality and Efficiency: The Big Tradeoff, by Arthur Okun
* Nudge, by Richard Thaler and Cass Sunstein
* The Return of Depression Economics, by Paul Krugman
* Animal Spirits, by George Akerlof and Robert Shiller
* The Myth of the Rational Voter, by Bryan Caplan
* Economic Gangsters, by Raymond Fisman and Edward Miguel
* The Price of Everything, by Russell Roberts"

Greg Mankiw's Blog: An Impossible Task

I am embarrassed that I have read so few of them! I guess I know what I better do this year!

Greg Mankiw's Blog: An Impossible Task:

"For those blog readers who might be interested in what the seminar will be reading, here is the list of books:

* The Worldly Philosophers, by Robert Heilbroner
* Spin-Free Economics, by Nariman Behravesh
* Capitalism and Freedom, by Milton Friedman
* Equality and Efficiency: The Big Tradeoff, by Arthur Okun
* Nudge, by Richard Thaler and Cass Sunstein
* The Return of Depression Economics, by Paul Krugman
* Animal Spirits, by George Akerlof and Robert Shiller
* The Myth of the Rational Voter, by Bryan Caplan
* Economic Gangsters, by Raymond Fisman and Edward Miguel
* The Price of Everything, by Russell Roberts"