The Honest Truth About Dishonesty by Dan Ariely

RSA and Ariely together?  YES! 

Nova's Mind over Money

Interesting look at behavioral finance from PBS' Nova:


Good stuff!

 

U.S. Accuses S.&P. of Fraud in Suit on Loan Bundles - NYTimes.com

This took longer than expected.

U.S. Accuses S.&P. of Fraud in Suit on Loan Bundles - NYTimes.com:

"The Justice Department filed civil fraud charges late on Monday against the nation’s largest credit-ratings agency, Standard & Poor’s, accusing the firm of inflating the ratings of mortgage investments

From September 2004 through October 2007, S.&P. “knowingly and with the intent to defraud, devised, participated in, and executed a scheme to defraud investors” in certain mortgage-related securities, according to the suit filed against the agency and its parent company, McGraw-Hill Companies. S.&P. also falsely represented that its ratings “were objective, independent, uninfluenced by any conflicts of interest,” the suit said."

From the AP (via Crains' New York Business)

The charges would mark the first enforcement action the government has taken against a major rating agency involving the financial crisis.

Read more: http://www.crainsnewyork.com/article/20130204/FINANCE/130209974#ixzz2K2lPyyCz

aiCIO - A Neurology Lesson for Money Managers

Chief Investment Officer-CIO - A Neurology Lesson for Money Managers:

Nice short list (8 points) on how neuroeconomics effects money managers from Paul Zak.

"The crossover applications between neurology and economics don’t end there. In fact, an entire discipline has sprung up in their midst: neuroeconomics. Two leaders in this field have teamed up and crafted a list of the eight crucial takeaways from neuroeconomics for money managers.

According to Paul Zak, the head of a center for neuroeconomics at Claremont Graduate University, and Steven Sapra, a finance professor the University of Southern California, these are the key points of neuroeconomics for money managers:"

The first three points:

1. Anticipating rewards (you can get addicted to the "rush")
2. Balancing risks (you tend to take bigger chances after some success)
3. Wait for it (Delaying gratification can be difficult)

Great article.  Definitely will appear on some tests this semester! :)

Why You Shouldn't Think Of The S&P 500 As A Diversified Basket Of 500 Companies - Seeking Alpha

Why You Shouldn't Think Of The S&P 500 As A Diversified Basket Of 500 Companies - Seeking Alpha:
The S&P, like most indexes, is a market-weighted index.  So the larger the stock, the more the influence.  This is demonstrated in this article from Seeking Alpha:

Two look-ins:

"...the top five holdings of the Vanguard S&P 500 ETF (VOO). They are Apple (AAPL), Exxon (XOM), General Electric (GE), Chevron (CVX), and IBM (IBM)....for every $100 that you invest in the Vanguard S&P 500 ETF, $3.90 gets invested into Apple, $3.10 gets invested into Exxon, $1.70 gets invested into General Electric, $1.70 gets invested into Chevron, and $1.60 gets invested into IBM. In other words, when you are purchasing a basket of 500 companies, you are really putting 12% of your wealth into just five companies alone."

and

"...the Vanguard S&P 500 ETF owns $5.7 billion worth of Apple stock. Let's compare that to the weighting of, say, the 400th weighted stock in the S&P 500. That would be Cincinnati Financial (CINF). The S&P 500 ETF only owns $50 million worth of the insurance firm."

Related articles

• Exxon Mobil Overtakes Apple To Become Most Valuable US Company

Hedge funds disappoint -- again - CBS News

Logo of CBS News (Photo credit: Wikipedia)

Hedge funds disappoint -- again - CBS News:

While this says nothing about the hedge aspects (may be a good low correlation investment), it does suggest that at Hedge funds are not the be all and end all that some suggest.

"Over the past five years, the S&P 500 returned 1.7 percent per year, producing a cumulative return of 8.6 percent, while the HFRX Index lost 2.9 percent per year, producing a cumulative loss of 13.6 percent."

Related articles

• Buffett's Big Bet Is Panning Out
• KKR Agrees to Buy 25% Stake in Hedge Fund Nephila Capital - Bloomberg
• Ex-Silicon Valley Hedge Fund Manager Gets 12 Years For Fraud

Which Volatility Hedged ETF Should You Consider? - Zacks.com

Which Volatility Hedged ETF Should You Consider? - Zacks.com

A must for SIMM class where we just mentioned this in class:

"The tail risk hedge takes care of extreme market volatility which can potentially result in a crash. Therefore these events are considered to be outliers which normally do not fall within three standard deviations of the average of the implied volatility.

The Volatility Index and the S&P 500 basically have a very strong negative correlation. Therefore, to hedge against the S&P 500 volatility, the ETF takes a long position in VIX Call options"

Are women better investors?

Female hedge fund managers outperformed male managers in 2012

"Meredith Jones, director at Rothstein Kass and the author of the report, believes there are two primary factors at play in the exceptional performance of women in alternative investments.

1. Women tend to be more risk-averse than men. “Women may be better equipped to position a portfolio to handle market volatility which we certainly have had no shortage of over the past five years,” Jones tells The Daily Ticker's Lauren Lyster.
2. The size of women-run hedge funds. “Women-run funds tend to be smaller pools of capital than men-run funds and as a result of that they’re more nimble and better able to navigate the market,” says Jones."

Related articles

• Women's Role in PE & Hedge Funds Reaching "Tipping Point" - Report
• Want To Find A Good Hedge Fund? Hire A Female
• Returns at Hedge Funds Run by Women Beat the Industry, Report Says
• Need A Better Investment Strategy? Listen To A Woman

Before Facebook Deal, Instagram's Talks With Twitter - NYTimes.com

Before Facebook Deal, Instagram's Talks With Twitter - NYTimes.com:

This one will be talked about for years:

"Facebook’s deal to buy Instagram for $1 billion stunned Wall Street and Silicon Valley when it was announced in April. But executives at Twitter had an additional reason to be surprised. Instagram’s founders “held several meetings as late as March with top Twitter executives,” The New York Times’s Nick Bilton reports. “The sides had verbally agreed weeks earlier on a price for Instagram of $525 million in cash and Twitter shares,”"

Interestingly the deal closed for about $735m down from the $1billion that was based on pre-IPO valuations. 

Irving Fisher, the First Celebrity Finance Professor - Bloomberg

Irving Fisher, the First Celebrity Finance Professor - Bloomberg:

A history lesson on the man behind the "Fisher effect"

"Fisher developed revolutionary insights into financial theory that are still invoked today. He explained that the market interest rate coincides with the human tendency to discount an uncertain future when compared with the more pressing present. He argued that we distribute our present and expected future wealth over the consumption decisions we make now and in the future. In doing so, he anticipated the life-cycle hypothesis that would demonstrate, half a century later, why we save and how we consume."

Take the money: Why we make better financial decisions for strangers than family

Take the money: Why we make better financial decisions for strangers than family

This one should not really surprise anyone and is essentially the logic behind my recent test question of "what is the role of a financial planner in the face of investors prone to behavioral biases".

"They found participants were more likely to select a smaller immediate reward than delay for a larger pay-off both for themselves and for beneficiaries they were more closely related to. The decisions got progressively less impulsive and steadily more rational as the family connection became more distant. The most rational economic choices were made on behalf of complete strangers.

The study, published in the online journal PLOS ONE, is the first to show that decisions taken on behalf of others are affected systematically by the closeness of the relationship...."

Why Should Hostess Executives Get The Bonuses They're Demanding? - Forbes

Why Should Hostess Executives Get The Bonuses They're Demanding? - Forbes:

"AP is reporting that the Irving, Texas company is planning to ask a bankruptcy judge to grant approval of bonuses totaling up to $1.8 million for its executives....It’s tough to see why managers should get bonuses for driving a company into the ground and sacrificing some 18,000 jobs. Hostess had become horribly insolvent, with a net loss of $1.1 billion in fiscal 2012 on revenues of $2.5 billion. The company also reportedly has $111 million in unfunded pension obligations."

Gee this could be a good class discussion! 

Former baseball star Doug DeCinces indicted for insider trading - Yahoo! Finance

Former baseball star Doug DeCinces indicted for insider trading - Yahoo! Finance:

"DeCinces was charged with 42 counts of criminal securities fraud and one count of money laundering over the 2008 purchase of stock in a medical device company based on insider information, according to an indictment filed in a federal court in Southern California.

DeCinces, 62, bought $160,000 worth of stock in Advanced Medical Optics Inc, after a "close personal friend" alerted him to an impending takeover bid by Abbott Laboratories, according to prosecutors.

He sold his stock shortly after the takeover bid was announced, making $1.3 million in profits, the department said."

How Do Banks React to Increased Asset Risks? Evidence from Hurricane Katrina by Claudia Lambert, Felix Noth, Ulrich Schuewer :: SSRN

How Do Banks React to Increased Asset Risks? Evidence from Hurricane Katrina by Claudia Lambert, Felix Noth, Ulrich Schuewer :: SSRN:

Two takeaways:

1. Banks increase risk-based capital ratios in times of great uncertainty.
2. The increase comes largely from well capitalized banks and by reducing loans.  

From the Abstract:

"[We] find that banks in the disaster areas increase their risk-based capital ratios after the hurricane. This finding shows that banks act precautious by themselves irrespective of regulatory requirements. However, when we examine low-capitalized and high-capitalized banks separately, we find that results are driven by high-capitalized banks. In addition, high-capitalized banks increase their risk-based capital ratios by decreasing loans and not by increasing capital."

cite:
Lambert, Claudia, Noth, Felix and Schuewer, Ulrich, How Do Banks React to Increased Asset Risks? Evidence from Hurricane Katrina (March 1, 2012). 29th International Conference of the French Finance Association (AFFI) 2012. Available at SSRN: http://ssrn.com/abstract=2083732