Worth reading

Recommended reading, economic debates, predictions and opinions.

Postby Bylo Selhi » 19 Mar 2008 08:54

The JP Morgan Guide to Insider Trading • Eliot Spitzer Memorial Edition
A confidential memo obtained by Wikileaks shows that not only has the U.S. Securities and Exchange Commission created an insider trading loophole big enough to drive a truck through, but that Wall Street is taking full advantage of it, establishing 'how-to' programs and even client service divisions to help well-heeled clients circumvent insider trading regulations...

Hmmm... I wonder if any of the "big boys" at Bear recently availed themselves of this service?
Sedulously eschew obfuscatory hyperverbosity and prolixity.
User avatar
Bylo Selhi
Diamond Ring
Diamond Ring
 
Posts: 22965
Joined: 16 Feb 2005 11:36
Location: Waterloo, ON

Postby drejmd » 19 Mar 2008 11:28

Just a quick comment about a feed I get in my google reader regularly that I find comforting, informative and surprising, considering it comes from CNN. They must save all the bullshit for TV.

I find the Personal finance news from CNNMoney.com comforting, informative, re-assuring....

2 recent examples:

http://asktheexpert.blogs.money.cnn.com ... n=money_pf

http://money.cnn.com/2008/03/06/pf/inte ... n=money_pf

:)
Often wrong, never in doubt.
User avatar
drejmd
Silver Ring
Silver Ring
 
Posts: 372
Joined: 01 Mar 2006 01:26
Location: 51° N, 114° W

Postby Gus » 19 Mar 2008 19:16

In another thread, Norbert referred indirectly to a recent article in the FT on Warren Buffett, investment management fees and returns.

Here it is:

Just think, the fees you could charge Buffett

A follow-up article by the same author is just as good:

No need to own the road: buy the tollbooth
Mr Buffett’s biographer reports a complaint from young Warren: his friends, the Russells, derived only noise from the traffic passing their house. “What a shame you aren’t making money from the people going by.” The schoolboy demonstrated a probably unhealthy obsession with business, but also an early recognition that you need not control an entire activity to profit from it. You do not need to own the road, only the tollbooth on the traffic artery. The brand, the business systems and the customer and supplier relationships were the business analogue of the point that all vehicles must pass.

So the Buffett empire focused on businesses with market positions that could not be replicated. Disney, with its inimitable repertoire; the Washington Post and local newspapers and broadcasters with local dominance; and businesses whose powerful consumer brands, such as Coca-Cola and Gillette, not only commanded consumer recognition but were also entrenched in distribution systems.

American Express had a secondary advantage that would also become a Buffett theme. People paid for cheques up front and cashed them later, if at all, so the business generated a float on which the corporation could earn returns. Just as there could be assets without capital, so there could be cash without assets. The concept of a float led Berkshire Hathaway into the insurance business, Graham’s central idea – that market prices varied by more than fundamental values and often independently of them – was as relevant there as in stock markets.

Mr Buffett’s success demonstrates the weakness of one economic theory, the efficient market hypothesis, and the strength of another – the central role that the pursuit and defence of economic rents plays in modern corporate life. Still, the first view remains much more popular among economists than the second. Mr Buffett became the first man in economic history to parlay an economic disputation into great personal wealth.
Money ain't got no owners, just spenders. Omar Little
User avatar
Gus
Gold Ring
Gold Ring
 
Posts: 2309
Joined: 11 Mar 2005 14:01
Location: Salt Spring Island, BC

Postby Bylo Selhi » 19 Mar 2008 20:37

Just think, the fees you could charge Buffett wrote:Suppose [Buffett] had adopted a more conventional investment management structure, charging the 2 per cent management fee and 20 per cent of performance common in private equity and hedge funds. How much of that $62bn wealth would have been the property of Buffett the manager – Buffett Investment Management – and Buffett the investor – the Buffett Foundation?

The answer is astonishing. At “2 and 20”, the split is $57bn for Buffett Investment Management and $5bn to the Buffett Foundation.
Sedulously eschew obfuscatory hyperverbosity and prolixity.
User avatar
Bylo Selhi
Diamond Ring
Diamond Ring
 
Posts: 22965
Joined: 16 Feb 2005 11:36
Location: Waterloo, ON

Postby Gus » 20 Mar 2008 01:17

Bylo Selhi wrote:
Just think, the fees you could charge Buffett wrote:Suppose [Buffett] had adopted a more conventional investment management structure, charging the 2 per cent management fee and 20 per cent of performance common in private equity and hedge funds. How much of that $62bn wealth would have been the property of Buffett the manager – Buffett Investment Management – and Buffett the investor – the Buffett Foundation?

The answer is astonishing. At “2 and 20”, the split is $57bn for Buffett Investment Management and $5bn to the Buffett Foundation.


I hesitated to quote that very passage because I couldn't quite believe the result. So, I built a spreadsheet and got similar numbers. (Only "similar" because I assumed discrete annual compounding). As the original author says, the critical assumption is that the management company reinvests all its fees into identically yielding investments. (A hedge fund manager would never, in practice, be so thrifty but, then again, Buffett would never have been so foolish as to pay such a fee in the first place).

It still seems (almost) incredible to me that a compounded management fee could be worth more than the original compounded capital minus the fees. The trick is that the fees are themselves reinvested at the same ROR but with no management fees to be deducted from them. To me, at least, this is all very counter-intuitive. :shock:
Money ain't got no owners, just spenders. Omar Little
User avatar
Gus
Gold Ring
Gold Ring
 
Posts: 2309
Joined: 11 Mar 2005 14:01
Location: Salt Spring Island, BC

Postby Bylo Selhi » 20 Mar 2008 08:24

Gus wrote:I hesitated to quote that very passage because I couldn't quite believe the result...

The details and assumptions behind the numbers are less important than the general result. As the old saw goes, the goal of a stock broker is to slowly transfer their clients' assets to their own name.
Sedulously eschew obfuscatory hyperverbosity and prolixity.
User avatar
Bylo Selhi
Diamond Ring
Diamond Ring
 
Posts: 22965
Joined: 16 Feb 2005 11:36
Location: Waterloo, ON

Postby Norbert Schlenker » 25 Mar 2008 03:54

Almost everybody at FWF knows about the backdoor to the G&M's business stories thanks to Bylo.

Here is the backdoor to the Wall Street Journal courtesy Farhad Manjoo at Salon.
Nothing can protect people who want to buy the Brooklyn Bridge.
User avatar
Norbert Schlenker
Gold Ring
Gold Ring
 
Posts: 6534
Joined: 16 Feb 2005 10:56
Location: An Argument Surrounded By Water

Postby Bylo Selhi » 25 Mar 2008 08:53

Norbert Schlenker wrote:Almost everybody at FWF knows about the backdoor to the G&M's business stories thanks to Bylo.
Twasn't moi, although I was an "early adopter" :lol:

There was also a link to the entire G&M, including all the pay-only stuff that's not even available via Google, however it no longer works. The one I'm thinking of was a freebie by RBC to their brokerage clients. Anyone know if there's something similar available these days?

Here is the backdoor to the Wall Street Journal courtesy Farhad Manjoo at Salon.
Merci vielmal as the gnomes say.
Sedulously eschew obfuscatory hyperverbosity and prolixity.
User avatar
Bylo Selhi
Diamond Ring
Diamond Ring
 
Posts: 22965
Joined: 16 Feb 2005 11:36
Location: Waterloo, ON

Postby skepticus » 26 Mar 2008 07:39

Share the distress of a fund manager who confesses to agony aunt Lucy Kellaway of the Financial Times that:

I have been a fund manager for 10 years and currently work for a large UK institution. The job is great: flexible and well-paid. My problem is that I genuinely don’t believe it is possible to do this job – outperforming other fund managers and equity indices - with any consistency. I believe the industry is based on the lie that fund managers add value through skill, rather than luck. This makes it hard for me to keep motivated. Should I move – even though I can’t think of anything else I want to do – or should I accept the idea that work is not meant to be meaningful? I am married, but have no children.
Fund manager, male, 34


Read Lucy's advice, and readers' reaction. Ouch !

http://blogs.ft.com/dearlucy/2008/03/im ... h-my-work/
User avatar
skepticus
Silver Ring
Silver Ring
 
Posts: 860
Joined: 21 Jul 2006 06:54

Postby marcharry » 27 Mar 2008 12:02

Bill Gross at PIMCO writes only slightly less well than Warren Buffet.

His Old Maid piece is entertaining and informative
http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2008/IO+March+2008.htm

Old Maid now has a second life mimicking our financial markets, and at PIMCO we’ve played it frequently in our Investment Committee over the past several months. “Who’s got the ‘Old Maid’?” we ask over and over again – not to make us feel good that we don’t – but to make sure we won’t draw it when its holder tries to pass it on. This shunned lady in asset form was originally identified as a subprime mortgage, aggregated into levered financial conduits which in turn were guaranteed to be AAA hotties either via their securitized structures or the solemn pledge of monoline insurance firms. No Old Maids in those hands, investors were assured; they were Babes with a stacked deck. Ah, but Father Time has a way of exposing plastic surgery and there have been implants aplenty in recent years. Most of the silicone to be sure involved mortgage-related assets – first the subprimes, then the Alt As, and now perhaps even levered primes. Yet those that claim that the Old Maid necessarily resides in a deck composed of mortgage loans are missing the larger point. This parlor game is best defined by leverage and not the assets that have been dealt out to more than willing players over the past decade. That subprimes have garnered the headlines is only because they were the asset class that failed first. Now as the U.S. economy slows to what Alan Greenspan labels “stall speed,” levered structures holding commercial loans, and auto and credit card receivables are the new Babes in waiting – waiting to be exposed for what some of them could be: Old Maids with collagen carelessly injected by Moody’s and S&P.
marcharry
Silver Ring
Silver Ring
 
Posts: 219
Joined: 22 Feb 2005 17:44
Location: Toronto

Postby Arby » 01 Apr 2008 17:27

I just finished reading "The Canadian Snowbird in America" by Terry F. Ritchie. I learned a quite a few interesting tidbits regarding snowbird ownership US real estate and US based stocks/ETF's, and their effect on US estate taxes. The book is worth reading if you're planning to buy a US vacation home, or if you own US stocks/ETF's and are concerned about US estate taxes.
User avatar
Arby
Gold Ring
Gold Ring
 
Posts: 1766
Joined: 20 Feb 2005 20:23
Location: Ottawa, ON

Postby WishingWealth » 04 Apr 2008 16:44

A global crusade is under way to teach personal finance to the masses.
http://www.financialwisdomforum.org/forum/posting.php
In The Economist.

“EVERYBODY wants it. Nobody understands it. Money is the great taboo. People just won't talk about it. And that is what leads you to subprime. Take the greed and the financial misrepresentation out of it, and the root of this crisis is massive levels of financial illiteracy.”

For years John Bryant has been telling anyone who will listen about the problems caused by widespread ignorance of finance. In 1992, in the aftermath of the Los Angeles riots, he founded Operation HOPE, a non-profit organisation, to give poor people in the worst-hit parts of the city “a hand-up, not a handout” through a mixture of financial education, advice and basic banking. Among other things, Operation HOPE offers mortgage advice to homebuyers and runs “Banking on Our Future”, a national personal-finance course of five hour-long sessions that has already been taken by hundreds of thousands of young people, most of them high-school students.


That many poor people do not have a bank account—and that few of them understand why this puts them at a disadvantage (let alone other essentials of personal finance)—is at the heart of “the civil-rights issue of the 21st century”, says Mr Bryant. He calls the attempt to help people help themselves out of poverty through financial literacy and economic opportunity the “silver-rights movement”.
...

WW
Last edited by Peculiar_Investor on 07 Feb 2014 08:04, edited 1 time in total.
Reason: replace old domain name with www.financialwisdomforum.org to reflect new domain name effective 19-Jan-2014
WishingWealth
Gold Ring
Gold Ring
 
Posts: 6701
Joined: 27 Feb 2005 11:53

Postby WynnQuon » 04 Apr 2008 17:37

Norbert Schlenker wrote:Almost everybody at FWF knows about the backdoor to the G&M's business stories thanks to Bylo.

Here is the backdoor to the Wall Street Journal courtesy Farhad Manjoo at Salon.


This WSJ trick is news to me! Thanks Norbert.
WynnQuon
Silver Ring
Silver Ring
 
Posts: 403
Joined: 04 Oct 2006 15:39

Postby skepticus » 05 Apr 2008 05:11

"Subprime Suspect,"

by John Cassidy, Annals of Business, The New Yorker, March 31, 2008, p. 78

The unapologetic, wealthy Stanely O'Neal : CEO of J. Morgan Stanley who got rich running his investment bank into the ground. A true 10%er

Unfortunately, not available on-line. Next time you're at the public library...
User avatar
skepticus
Silver Ring
Silver Ring
 
Posts: 860
Joined: 21 Jul 2006 06:54

Postby Bylo Selhi » 06 Apr 2008 08:52

In his swan song Jonathan Clements wrote:And It All Comes Down to This...
In eight days, I start work as director of financial education for a new Wall Street advisory service geared toward ordinary investors. That means this is my last column for The Wall Street Journal Sunday -- and, I've got to tell you, I'm feeling the pressure. What should I say in these remaining 800 words? How can I keep you on track in the years ahead? Here, culled from my two decades as a personal-finance writer, are eight simple suggestions.
1 Embrace humility.
2 Control what you can.
3 Save yourself.
4 Put pen to paper.
5 Keep your balance.
6 Take comfort.
7 Think big.
8 Take the long view.
Sedulously eschew obfuscatory hyperverbosity and prolixity.
User avatar
Bylo Selhi
Diamond Ring
Diamond Ring
 
Posts: 22965
Joined: 16 Feb 2005 11:36
Location: Waterloo, ON

Postby WishingWealth » 07 Apr 2008 15:32

Subprime, Tibet, inflation/stagflation; forget it this is small stuff compared to what's eating away some poor Indian's hard earned savings.

At the BBC.

Demonetizers

WW
WishingWealth
Gold Ring
Gold Ring
 
Posts: 6701
Joined: 27 Feb 2005 11:53

Postby WishingWealth » 11 Apr 2008 17:43

Parting Shot: What I Learned From Writing 1,008 Columns

Jonathan Clements last column / WSJ.

A few clippings.

...
The short answer is, you save now so you can spend later. But what will you spend your money on? People dream of endless leisure and bountiful possessions.

Unfortunately, after a few months, endless leisure often seems like endless tedium. Similarly, you might imagine that a flashy new car or a fancy new home will be your ticket to eternal bliss. But a year after you make your purchase, the thrill will likely be gone, and you will be lusting after something else. My point: The "rich life" of popular imagination is no great shakes.
...
If you have money, you don't have to worry about it. This isn't guaranteed. There are lots of rich folks who agonize constantly -- and needlessly -- about their finances. Still, if you save diligently, you should reach the point where money worries are relatively rare.
...



WW
WishingWealth
Gold Ring
Gold Ring
 
Posts: 6701
Joined: 27 Feb 2005 11:53

Postby Bylo Selhi » 22 Apr 2008 08:57

Impress your paper-bound friends by telling them what they'll be reading with their brunch next Sunday ;)

Triple-A Failure
In 1996, Thomas Friedman, the New York Times columnist, remarked on “The NewsHour With Jim Lehrer” that there were two superpowers in the world — the United States and Moody’s bond-rating service — and it was sometimes unclear which was more powerful. Moody’s was then a private company that rated corporate bonds, but it was, already, spreading its wings into the exotic business of rating securities backed by pools of residential mortgages...
Sedulously eschew obfuscatory hyperverbosity and prolixity.
User avatar
Bylo Selhi
Diamond Ring
Diamond Ring
 
Posts: 22965
Joined: 16 Feb 2005 11:36
Location: Waterloo, ON

Postby WishingWealth » 01 May 2008 21:56

For those who like to wallow in copula.

End-of-the-World Trade

At the LRB. (London Review of Books)

...I asked one investment banker what might cause half of North America’s top corporations to default. No ordinary economic recession or natural disaster short of an asteroid strike could do it: no hurricane, for example, and not even ‘the big one’, a catastrophic earthquake devastating California. All he could think of was ‘a revolutionary Marxist government in Washington’. That’s not a likely scenario, yet the cost of insuring against it had shot up ten-fold. Normally one can buy $10 million of end-of-the-world insurance for between two and three thousand dollars a year. By early last November, the prices quoted were between twenty and thirty thousand, and even then it was difficult to buy in quantity – at least, said the banker, ‘not from anyone you trusted’.

Of course, the credit crisis has increased the risk of systemic economic failure. But the existence and rising price of the end-of-the-world trade indicate something beyond that. The crisis isn’t just about the bursting of the US housing bubble and dodgy sub-prime lending. Nor is it merely a reflection of the perennial cycle in which greed trumps fear to create a euphoric disregard of risk, only for fear to reassert itself as the risk becomes too great. What is revealed by the end-of-the-world trade is that the current crisis concerns the collapse of public fact.

A price or an interest rate quoted by one person or firm to another and agreed between them is a private fact. That isn’t good enough for many purposes. Even purely bilateral transactions are facilitated if there is a public fact, in this example a known and credible ‘market price’ or ‘market interest rate’, that can be consulted to check whether a quoted price or rate is fair. Trustworthy public estimates of borrowers’ creditworthiness make debt markets far more liquid than they would be if borrowers’ capacity to meet their obligations had to be investigated from scratch. Believable bank balance sheets encourage banks to lend to each other; it was the suspension of such lending that undid Northern Rock. As the American sociologists Bruce Carruthers and Arthur Stinchcombe pointed out in the journal Theory and Society in 1999, market liquidity – plentiful borrowing and lending, or buying and selling – ‘is, among other things, an issue in the sociology of knowledge’. Believable market prices, valuations, credit ratings and balance sheets encourage lending, active trading, competition and keen pricing. If credibility is lost, then everyone becomes wary of lending, deals aren’t done, and an increased proportion of sellers are the desperate, who have to accept fire-sale prices.

...


WW
WishingWealth
Gold Ring
Gold Ring
 
Posts: 6701
Joined: 27 Feb 2005 11:53

Postby WishingWealth » 12 May 2008 21:21

Interview [long] with Robert Shiller.

In Portfolio.
http://www.portfolio.com/views/columns/ ... rt-Shiller

...Lloyd Grove: How did you get into this line of work?

Robert Shiller: You mean property derivatives?

L.G: No, I mean how did you become interested in economics and being a market theorist?

R.S.: Well, I think I'm a polymath. I'm interested in everything. When I was a senior in college at the University of Michigan, I was dazzled by the choice set that we had. Young people, you can do whatever you want, and I was disappointed that I had to choose one, realistically. You like to be a renaissance man and do everything. I took long walks trying to decide whether I wanted to be a physicist or a medical doctor or a sociologist, whatever-a scientist, an astronomer.
...


WW
WishingWealth
Gold Ring
Gold Ring
 
Posts: 6701
Joined: 27 Feb 2005 11:53

Postby parvus » 19 May 2008 19:22

Sorting through old (actually, relatively young) newspapers today (DW finally gets the point, but only because Josh Freed showed up on TV rather than in print, sigh :roll: ),
Image,

I came across this from January: Rebate Psychology
THE House of Representatives passed a bill on Tuesday that would try to stimulate the economy, in part, by sending “tax rebates” to more than 100 million families. The logic of a tax rebate is that people will spend more money if they have more to spend. Unfortunately, psychology may interfere with that logic.

Research on decision-making demonstrates that describing a financial windfall as a “rebate” — instead of something equally accurate — increases the likelihood that people will save it. If Congress and President Bush want to increase consumer spending, they should have pitched these $600 and $1,200 checks as “tax bonuses” instead.

Changing the way that identical income is described can significantly affect how people spend it. In an experiment I conducted at Harvard with my colleagues Dennis Mak and Lorraine Chen Idson, participants were given a $50 check. They were told that this money came from a faculty member’s research budget, financed indirectly through tuition dollars. Roughly half of the participants had this money described as a “rebate,” whereas the others had it described as a “bonus.” When unexpectedly contacted one week later, participants who got a “rebate” reported spending less than half of what those who got a “bonus” reported spending ($9.55 versus $22.04, respectively).

We observed this same pattern in other experiments when participants were asked to keep a written record of their spending, as well as in experiments in which the participants were allowed to purchase items in the lab. “Rebates” are understood to be returns from money already spent. A rebate, psychologically speaking, is the return of a loss of one’s own money rather than a pure gain provided by someone else, so it is unlikely to be seen as extra spending money.

Getting a rebate is more like being reimbursed for travel expenses than like getting a year-end bonus. Reimbursements send people on trips to the bank. Bonuses send people on trips to the Bahamas.
Wovon man nicht sprechen kann, darüber muß man schweigen — a wit
Imagefiniki, the Canadian financial wiki Your go-to guide for financial basics
Image
User avatar
parvus
Gold Ring
Gold Ring
 
Posts: 9605
Joined: 20 Feb 2005 17:09
Location: Waiting for the real estate meltdown on Rua Açores.

Postby parvus » 21 May 2008 18:23

[url=http://online.wsj.com/article/SB121089412378097011.html?mod=most_emailed_week]Bernanke's Bubble Laboratory
Princeton Protégés of Fed Chief
Study the Economics of Manias[/url]
PRINCETON, N.J. -- First came the tech-stock bubble. Then there were bubbles in housing and credit. Chinese stocks took off like a rocket. Now, as prices soar on every material from oil to corn, some suggest there's a bubble in commodities.

But how and why do bubbles form? Economists traditionally haven't offered much insight. From World War II till the mid-1990s, there weren't many U.S. investing manias for them to look at. The study of bubbles was left to economic historians sifting through musty records of 17th-century Dutch tulip-bulb prices and the like.


The dot-com boom began to change that. "You were seeing live, in action, the unfolding of lots of examples of valuations disconnecting from fundamentals," says Princeton economist Harrison Hong. Now, the study of financial bubbles is hot.

Its hub is Princeton, 40 miles south of Wall Street, home to a band of young scholars hired by former professor Ben Bernanke, now the nation's chief bubble watcher as Federal Reserve chairman. The group includes Mr. Hong, a Vietnam native raised in Silicon Valley; a Chinese wunderkind who started as a physicist; and a German who'd been groomed to take over the family carpentry business. Among their conclusions:

Bubbles emerge at times when investors profoundly disagree about the significance of a big economic development, such as the birth of the Internet. Because it's so much harder to bet on prices going down than up, the bullish investors dominate.

Once they get going, financial bubbles are marked by huge increases in trading, making them easier to identify.

Manias can persist even though many smart people suspect a bubble, because no one of them has the firepower to successfully attack it. Only when skeptical investors act simultaneously -- a moment impossible to predict -- does the bubble pop.

BUBBLEOLOGY
• Lots to Study: Research on financial bubbles is hot in academia these days.
• Jersey Boys: The hub is Princeton, where three young economists use mathematical methods to study them.
• One Finding: Investment manias can persist even though many investors see that a bubble is forming.As a result of all that and more, the Princeton squad argues that the Fed can and should try to restrain bubbles, rather than following former Chairman Alan Greenspan's approach: watchful waiting while prices rise and then cleaning up the mess after a bubble bursts.


If the tech-stock collapse didn't make that clear, the damage done by the housing and credit bubbles should, argues José Scheinkman, 60 years old, a theorist Mr. Bernanke recruited in 1999 from the University of Chicago. "Advanced economies are very dependent on the health of the financial system. What this bubble did was destroy the capacity of the financial system to finance the U.S. economy," Mr. Scheinkman says.

The Fed is giving the activist approach some thought. In a speech scheduled for delivery Thursday night, Fed Governor Frederic Mishkin suggested that while it was inappropriate to use the blunt instrument of interest-rate increases to prick bubbles, if too-easy credit appeared to be fueling a mania, policy makers might craft a regulatory response that could "help reduce the magnitude of the bubble."


Yet the very concept of bubbles is at odds with the view of some that market prices reflect the collective knowledge of multitudes. There are economists who dispute the existence of bubbles -- arguing, for instance, that what happened to prices in the dot-com boom was a rational response to the possibility that nascent Internet firms might turn into Microsofts. But these economists' numbers are thinning.

Image
<snip>
Bubbles don't spring from nowhere. They're usually tied to a development with far-reaching effects: electricity and autos in the 1920s, the Internet in the 1990s, the growth of China and India. At the outset, a surge in the values of related businesses and goods is often justified. But then it detaches from reality.

Mr. Hong, growing up in Sunnyvale, Calif., and teaching at Stanford, had a front-row seat to the technology boom. Recognizing a mania, he resisted investing in tech stocks himself -- until they were about to crest.

He recalls his thought process: "My sister's getting rich. My friends are getting rich....I think this is all crazy, but I feel so horrible about missing out, about being left out of the party." In 2000, "I finally caved in," he says. "I put in some money just as a hedge against other people getting richer than me and feeling better than me." But 2000, of course, was the year the bubble burst.

Mr. Hong, who came to Princeton two years later, and now is 37, argues that big innovations lead to big differences of opinion between bullish and bearish investors. But the deck is stacked in favor of the optimists.

One who believes a stock is too high can short it, borrowing shares and selling them in hopes of replacing them when they're cheaper. But this can be costly, both in the fees and in the risk of huge losses if the stock keeps rising. Many big investors rarely short stocks. When differences between bullish investors and bearish ones are extreme, many of the bears simply move to the sidelines. Then, with only optimists playing, prices go higher and higher.

In housing and the credit markets, the innovation was slicing and dicing loans in novel ways. As investors bought the resulting mortgage securities, they provided abundant capital for home buyers; buoyed by this and falling interest rates, house prices surged.

Betting against house prices is hard; only a few sophisticated investors found roundabout ways to do it, in derivatives markets. Most skeptics about the housing boom just sat it out; the optimists were unchecked.

At some point in a bubble, optimists' enthusiasm runs its course. Prices turn down. There's an expectation that at this point, investors who were skeptical may see prices as more reasonable and start buying. If they don't, that's a signal that prices had gotten way too high -- and then they tumble.
Wovon man nicht sprechen kann, darüber muß man schweigen — a wit
Imagefiniki, the Canadian financial wiki Your go-to guide for financial basics
Image
User avatar
parvus
Gold Ring
Gold Ring
 
Posts: 9605
Joined: 20 Feb 2005 17:09
Location: Waiting for the real estate meltdown on Rua Açores.

Postby WishingWealth » 25 May 2008 18:06

The Invisible Hand Is Shaking
In the NYT.
ADAM SMITH’S modern disciples are far more enthusiastic about his celebrated invisible-hand idea than he ever was. In their account, Smith’s assertion was that purely selfish individuals are led by an invisible hand to produce the greatest good for all. Yet Smith himself was under no such illusion.

...


HS, religions are taking a beating lately.
Einstein saying (in a recently found letter) that belief in God is childish, now the Hand of God gets a knock on the knuckles.

Is nothing sacred anymore?

WW
WishingWealth
Gold Ring
Gold Ring
 
Posts: 6701
Joined: 27 Feb 2005 11:53

Postby parvus » 25 May 2008 20:52

Better to ask: is nothing unscarred anymore. Following on your post elsewhere:
The gentle-push philosophy behind 'libertarian paternalism' is already taking root

We know that we could be saving energy at home by lowering the thermostat, turning off lights and hanging clothes to dry, but often we can't see how much energy we're using. Southern California Edison used that observation and conducted an interesting experiment to help their customers visualize their energy use – and thereby reduce it.

The utility company found that people didn't pay attention to text messages and emails about their consumption, but they did change their habits after they were given a device called an Ambient Orb.

It's a little ball that glows red when people are using a lot of energy during peak periods and green when they are using less. Within weeks, energy consumption during peak periods dropped 40 per cent in the orb-using households.

This, say University of Chicago professors Cass Sunstein and Richard Thaler, is giving people a nudge.

In their new book, Nudge: Improving Decisions about Health, Wealth and Happiness, they argue for a non-interventionist social policy based on their observations about human nature: We're susceptible to inertia, we tend to conform and we favour the status quo.

The authors have given a name to their movement: libertarian paternalism. It's not only an awkward mouthful but one that, as its compound moniker implies, joins what traditionally have been opposing views. With wit and a warm appreciation of human shortcomings, Sunstein and Thaler have applied the concept to a host of issues, including parenting, environmental problems and saving money.

"What we libertarian paternalists want to do is nudge people in a direction to make their lives a lot better and allow them to make their own decisions," says Sunstein, on the phone from Chicago.

"We don't believe governments should readily stop people from making mistakes... people should be free to choose.

"If they want to eat unhealthy food, smoke cigarettes, not save for retirement, we're not going to mandate things very often."

But, he adds, people are busy and distracted, and government and private organizations can do a lot to make them healthier, happier and more prosperous. Noting our general inaction and tendency to follow the herd, the authors observe that employees won't sign up for retirement-savings programs even when the company gives them money to do so, and that university students are greatly influenced by whom they spend time with. ("Maybe parents should worry less about what college their kids go to and more about which roommate they get," their book suggests.)

One easy way of influencing choice: putting healthy food near the entrance of a school cafeteria, so kids will choose them first.

Of course, all we're doing is dressing up common sense as behavioural finance to further refine and deepen common sense to get to ... economic models that have a long way to go before they can absorb the practical rules of thumb (many of them wrong, but satisficing, in Simon's words) and integrate them into a visible/invisible/secret handshake equation. (BTW, I favour three-handed economists. Image)
Wovon man nicht sprechen kann, darüber muß man schweigen — a wit
Imagefiniki, the Canadian financial wiki Your go-to guide for financial basics
Image
User avatar
parvus
Gold Ring
Gold Ring
 
Posts: 9605
Joined: 20 Feb 2005 17:09
Location: Waiting for the real estate meltdown on Rua Açores.

Postby Icarus » 26 May 2008 00:50

If anyone wants a very understandable, very human description of the subprime/credit crisis, this is a great broadcast:

355: The Giant Pool of Money

Actually, in general this is an outstanding radio show that I discovered (along with NPR) when I was living in the US. The archives are a treasure trove.
"If you want to tell people the truth, make them laugh. Otherwise, they'll kill you." -- Oscar Wilde
Icarus
Silver Ring
Silver Ring
 
Posts: 609
Joined: 05 Nov 2006 23:36

PreviousNext

Return to Financial News, Policy and Economics

Who is online

Users browsing this forum: No registered users and 7 guests