The upside of Irrationality

Always good stuff from Dan:

Early Retirement May Diminish Brain Power, Memory: Study | Life | Epoch Times

The good side of a poor economy and not increasing social security? (Ok, I am kidding, but it is an interesting result none-the-less.

Early Retirement May Diminish Brain Power, Memory: Study | Life | Epoch Times:

"“Early retirement appears to have a significant negative impact on the cognitive ability of people in their early 60s that is both quantitatively important and causal,” the study concluded. It was co-authored by Susann Rohwedder, a senior economist at the RAND Center for the Study of Aging, and Robert J. Willis, Professor of Economics at the University of Michigan."

Financial Research Reveals Truth In Rare Disaster Theory | Voxy.co.nz

Financial Research Reveals Truth In Rare Disaster Theory | Voxy.co.nz:

This one has the potential to be HUGE....

Here is the actual paper.

"Professor Jacobsen says the theory sheds light on two key issues in finance. The first is the equity premium puzzle, that returns on stocks are too high relative to other investments, and the second is that the volatility of stockmarkets is too high to be explained by economic variables.

'For decades people have tried to explain these puzzles but, so far, not convincingly. However, this new theory would explain both. According to this theory, if investors account for a small probability of a rare disaster and if this probability fluctuates over time these two puzzles can be explained."

Why such surprise about the corn crop? - TwinCities.com

Why such surprise about the corn crop? - TwinCities.com:

The article begins with a discussion of Eugene Fama and market efficiency--the reaction to new information:

"One also wonders why corn prices jumped more than 20 percent. The new information was not about a crop-destroying tsunami or a sudden attack by UFOs. The raw information about the weather and its impact had been out there for weeks. Since there is such potential profit in pre-guessing the USDA, why didn't traders put more resources into gathering such information themselves? And why doesn't such private production of information result in buying in anticipation of higher prices that would have reduced the eventual jump when authoritative government numbers were released?

Efficient markets adherents would say that this is just an ordinary example of a random error in expectations that, over time, will be offset by other errors in the other direction. But over time the sum of such errors will be zero. Perhaps."

Some videos we will be using in Behavioral Finance class tonight

We are covering the idea of charity or altruism as rational or irrational.  Now clearly this idea of helping others is irrational is well established in some circles.   To start what is altruism? Let's ask Google. 

Now many economists have argued for years that it is bad.  For instance, Ayn Rand in her writings and more recently from the Ayn Rand Institute.



Last week we ended class talking about this video where the monkeys shared their gains and acted in a manner that would be seen as uneconomic (giving away nuts, caring about "fairness" etc).  If you have not seen that video, I highly recommend it.  (oh and please give me a juicy grape :) )  So cooperation may be useful for the species.

Here is an example not in an artificial setting.

Here is a short video on monkeys

So what can we learn from animals? And here is a longer video from Emory University:


This is not a new phenomena. The idea sacrificing for others is seemingly well ingrained in the fabric of our DNA. For instance, SBU's own Joel Bennington presented this to our class last year. It is based on the Ultimatum Game this is from a classic economist.

Related articles

• Fairness Is Relative - That Means it Changes (For Those in Rio Linda) (i2i-align.com)
• What's Fair is Fair (And Why) (psychologytoday.com)
• 3 Emotions That Will Destroy Your Retirement (money.usnews.com)
• How Greed Works (forbes.com)
• Physiological reactions, moral attitudes, and the ultimatum game (Andrea Lavazza and Mario De Caro) (kolber.typepad.com)

Enter the Neuro-Economists: Why Do Investors Do What They Do? - New York Times

Cool article:


Enter the Neuro-Economists: Why Do Investors Do What They Do? - New York Times:

"For instance, when humans are in a 'positive arousal state,' they think about prospective benefits and enjoy the feeling of risk. All of us are familiar with the giddy excitement that accompanies a triumph. Camelia Kuhnen and Brian Knutson, two researchers at Stanford University, have found that people are more likely to take a foolish risk when their brains show this kind of activation.

But when people think about costs, they use different brain modules and become more anxious. They play it too safe, at least in the laboratory. Furthermore, people are especially afraid of ambiguous risks with unknown odds. This may help explain why so many investors are reluctant to seek out foreign stock markets, even when they could diversify their portfolios at low cost.

Why So Many People Can't Make Decisions - WSJ.com

Why So Many People Can't Make Decisions - WSJ.com:

"If there isn't an easy answer, ambivalent people, more than black-and-white thinkers, are likely to procrastinate and avoid making a choice....
Researchers can't say for sure why some people tend towards greater ambivalence. Certain personality traits play a role—people with a strong need to reach a conclusion in a given situation tend to black-and-white thinking, while ambivalent people tend to be more comfortable with uncertainty."

I THINK we will use this in class tonight, but then again maybe not...lol.

Rogue Traders: A Greatest-Hits Album - NYTimes.com

Rogue Traders: A Greatest-Hits Album - NYTimes.com: "Traders Gone Rogue: A Greatest-Hits Album

A great history lesson/refresher on traders who have lost billions (and in many cases put their company out of business...the list includes Jerome Kerviel, Nick Leeson, John Rusnak.

Will definitely use this one in classes!

Ex-French Trader Must Pay $6.7 Billion For Fraud : NPR

Ex-French Trader Must Pay $6.7 Billion For Fraud : NPR:

"Jerome Kerviel, a former trader for Societe Generale SA, was convicted on all counts Tuesday in one of history's biggest trading frauds, sentenced to three years in jail and ordered to pay the bank a mind-numbing euro4.9 billion ($6.7 billion) in damages...

"I have the feeling Jerome Kerviel is paying for an entire system," said Metzner, noting that his client hadn't benefited financially from the fraud....It wasn't immediately clear how he could do so, or whether the bank really expects to see that money back.

Why not make the number bigger? There is ALMOST no way an individual will be able to pay it back anyways and the number was largely for show.

Overconfidence : videos, links, and Moore (as in more Moore)

For Behavioral Finance we will be covering overconfidence, here are some videos you may enjoy on the topic:

From PBS:



More from Moore (from the above PBS piece)






From AfterHour Investing:


After Hours Investing: Beware Investor Overconfidence (video)!: "Here's an interview from Harvard Kennedy School's Investment Decisions and Behavioral Finance conference that highlights how overconfidence ..."


Overconfidence in males.

Terrance Odean has many cool links on his website.

trading is Hazardous to your Wealth.

A heuristic of buying what had drawn your attention "look shiny things"
By Barber and Odean.

S.E.C. Sued Over Shareholder Rule - NYTimes.com

S.E.C. Sued Over Shareholder Rule - NYTimes.com:
The SEC is being sued by two groups to block this.

"The S.E.C., in a 3-2 vote, stipulated that investors or groups of shareholders who have owned 3 percent of a company for three years could have candidates on proxy statements. Under the regulation, shareholders would be able to nominate at least one director and as much as 25 percent of a board. "

We will talk more about it in class, but I have a hard time imagining a firm being "hijacked" by the inclusion of another candidate. Shareholders do not need to vote for the candidate just because (s)he is listed on the proxy.

Justin Fox on Regulatory Reform and Market Irrationality -- Seeking Alpha

This is a bit old (over a year ago) but still worth a read...we will be using it in class and think it is worthy of a wider audience:

Justin Fox on Regulatory Reform and Market Irrationality -- Seeking Alpha:

"...a lot of people in academic finance had this idea that financial market prices were more reliable and rational than those in goods markets, because financial markets were more liquid, prices were less sticky, etc. But when you think about what participants in financial markets are actually doing—”anticipating what average opinion expects the average opinion to be,” as Keynes put it—it’s pretty clear that there’s going to be a tendency toward herding and bubbles that is far less likely to be found in markets for eggs or SUVs. And in the first half of this decade the real estate market, which has aspects of both a goods market and a financial market, went totally financial."

and later:

"If you just mean securities markets are hard to outsmart, which is what Malkiel’s getting at, then he’s right. I haven’t been able to bury that notion, and I wouldn’t want to. If you mean that the prices prevailing in securities markets are always rational and reasonable, which really is what lots of finance professors used to believe, then that’s pretty well dead and buried by now. The upshot for regulation is that financial markets go crazy, but you can’t rely on regulators knowing when markets are wrong"

- Sent using Google Toolbar"

A look at historical bubbles

Interesting

Excessive Volatility and Market Efficiency Lecture from Yale's Robert Schiller

We mentioned excessive volatility in last week's class.  For more on the topic, learn from Robert Schiller: (skip in to about 6 minutes for the EMH discussion).

I am clearly biased from my work with BonaResponds, but those that I dealt with in New Orleans were not happy with their insurance, but