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Original source: SimoleonSense.com .

Dear Readers,

I’m especially happy to post an interview with my friend James Montier. I’ve often admired James and count myself  fortunate to have learned a great deal from him.Enjoy!

Best,

Miguel

James Montier Background (via GMO):

Mr. Montier is a member of GMO’s asset allocation team. Prior to joining GMO in 2009, he was co-head of Global Strategy at Société Générale. Mr. Montier is the author of several books including Behavioural Investing: A Practitioner’s Guide to Applying Behavioural Finance; Value Investing: Tools and Techniques for Intelligent Investment; and The Little Book of Behavioural Investing. Mr. Montier is a visiting fellow at the University of Durham and a fellow of the Royal Society of Arts. He holds a B.A. in Economics from Portsmouth University and an M.Sc. in Economics from Warwick University.

*image via Amazon

Interview is copyright of Miguel Barbosa & James Montier 2010

Part 1: Interview with James Montier: Value Investing – Tools & Techniques for Intelligent Investing

Miguel: James it’s a great pleasure to have you here. Thank you for taking the time to answer my questions and tell us about your latest book.

Miguel: Your book is called Value Investing – Tools & Techniques for Intelligent Investing. Luckily for us it is an annotated collection of your best pieces for Soc Gen. That said I’d like to ask you some questions to better introduce your writing to our readers.

Miguel: Let’s talk about the concept of seductive details…can you give us an example of how investors are trapped by irrelevant information?

James Montier: The sheer amount of irrelevant information faced by investors is truly staggering. Today we find ourselves captives of the information age, anything you could possibly need to know seems to appear at the touch of keypad. However, rarely, if ever, do we stop and ask ourselves exactly what we need to know in order to make a good decision.

Seductive details are the kind of information that seems important, but really isn’t. Let me give you an example. Today investors are surrounded by analysts who are experts in their fields. I once worked with an IT analyst who could take a PC apart in front of you, and tell you what every little bit did, fascinating stuff to be sure, but did it help make better investment decisions, clearly not. Did the analyst know anything at all about valuing a company or a stock, I’m afraid not. Yet he was immensely popular because he provided seductive details.

Miguel: Interestingly you connect the dangers of irrelevant information to modern risk management. I’m referring to your comments on Value at Risk – “VAR is fundamentally flawed after all it cuts off the very it of the distribution that we are interested in: the tails! This is akin to buying a car with an airbag that is guaranteed to work unless you have a crash…” Can you tell us more?

James Montier: Sure. Modern risk management is a farce; it is pseudoscience of the worst kind. The idea that the risk of an investment, or indeed, a portfolio of investments can be reduced to a single number is utter madness. In essence, the problem with risk management is that is assumes that volatility equals risk. Nothing could be further from the truth. Volatility creates opportunity. For instance, was the stock market more risky in 2007 or 2009? According to views of risk managers, 2007 was the less risky year, it had low volatility, which they happily fed into their risk models and concluded (falsely) that the world was a safe place to take risk. In contrast, these very same risk managers were staying that the world was exceptionally risky in 2009, and that one should be cutting back on risk. This is, of course, the complete opposite to what one should have been doing. In 2007, the evidence of a housing/credit bubble was plain to see, this suggested risk, valuations were high, it was time to scale back exposure. In 2009, bargains abounded, this was the perfect time to take ‘risk’ on, not to run away. Risk managers are the sorts of fellows that lend out umbrellas on fine days, and ask for them back when it starts to rain.

Miguel: I’d like to transition to another concept, “narrow framing – our habit of not seeing through the way in which information is presented to us”. Give us an example of how this harms investors.

James Montier: The best example of narrow framing that I can think of is the use of pro forma earnings. Think about what pro forma earnings mean….Essentially this is a company turning up and saying, hello I’m lying to you, these are the earnings I didn’t make, but I’d be jolly grateful if we could all just pretend I did. So what do our legions of analysts do, they don’t question the use of these made up numbers, they go and right up the press release, like some overpaid PR machine. Investors regularly fail to look through the way information is presented to them in this fashion.

Miguel: You talk about the benefits of reverse engineering DCF models – as a check on implied growth rates. Run us through the basic steps of a reverse dcf?

James Montier: In theory DCF is a great way of valuing a company (in fact, the only way). However, it’s implementation is riddled with pitfalls. With enough creativity a DCF can turn out any answer you like. So rather than try and combat this, I prefer to use reverse dcf. This effectively takes the market price, and backs out the growth that would be required to justify the current price. I can then compare that implied growth against a historical distribution of all company growth rates over time and see whether there is any chance of that growth actually being achieved.

In terms of the mechanics, these things can be a simple or a complex as you like. I tend to use a three stage model, I use the analyst inputs for the first three years, and a trend GDP related growth rate for the terminal years, and then imply what the market implies for the middle period of growth.

For instance, at the moment the mining sector implies 12% growth p.a. each and every year for the next two decades! That is a cyclical sector with an implied growth rate double a generous estimate of nominal GDP growth. Cyclicals masquerading as growth stocks rarely end well for investors.

Miguel: Tell us about the price = quality heuristic? Why do investors overpay for beauty and underpay for toads…after all they are one step away from becoming princes are they not? This heuristic complements the Anginer et all study where ugly defendants are more likely to be found guilty and receive longer sentences than attractive defendants.

James Montier: We humans have a bizarre bias against a bargain. For instance, my friend Dan Airely has done some great experiments in this field showing some pretty odd findings. Imagine you taste two glasses of wine one you are told comes from a $10 bottle, the other comes from a $90 bottle. You will almost certainly say that the $90 wine tastes much better. The only snag is that the two wines are exactly the same. So never come to dinner at my house, because I’ll give $10 wine, and tell you it costs $90!

The same thing happens with pain killers. It is why branded pain killers exist alongside generic equivalents. They both have exactly the same active ingredient, but people report the branded version works better.

I suspect that something similar happens with stocks. Stocks are the one thing we don’t like to see on sale. So a ‘cheap’ stock must have something wrong with it, and an ‘expensive’ stock must be a sign of quality – at least that’s the way we tend to view things.

The Anginer et al study shows some similar findings in the legal context. Ugly defendants get far worse sentences, than attractive defendants. We have a hard time believing that attractive people could have been bad – a kind of halo effect, if you will.

Miguel: This Q/A would not be complete without mentioning the Trinity of Risk. Tell us about the Trinity of Risk. Which of the three components do you think is the hardest to monitor, why?

James Montier: As I mentioned earlier, I don’t think of risk as a number, but rather as a permanent impairment of capital (as Ben Graham put it). Now that permanent impairment can be generated by three potential sources (which aren’t mutually exclusive). Firstly, there is valuation risk – you can simply overpay for an asset. Secondly, there is fundamental or business risk – something goes wrong with the underlying economics of the asset. Thirdly, financing risk or leverage (which no matter how hard you try can’t make a bad investment god, but can make a good investment bad).

I’m not sure that any of them is easier or trickier to monitor. I think you to consider all three aspects in order to gain a holistic view.

Miguel: Why are we so terrible at predicting our emotions?

James Montier: I wish I knew. However, all the evidence shows that we are truly appalling at predicting how we will act in the heat of the moment. On a ‘up’ day in the market we tend to feel confident and happy, and are sure that we would buy more at a lower price. However, when that lower price arrives, we are caught like rabbits in the headlights. Learning to master your emotions is one of the most valuable things that investors can learn to do.

Miguel: You say knowledge doesn’t equal behavior. What a wise statement tell us more.

James Montier: Regrettably, knowledge and behaviour are not the same thing. As you know (because we’ve met) I am a large man (on the BMI I am on the boarderline between overweight and obese). Now I know this, and I know that the easiest way for me to remedy this situation is for me to eat less. Sadly, I love food, and thus I don’t cut down my consumption. So despite my knowledge my behaviour doesn’t change. The same is true when it comes to investing. Realizing that we are prone to behavioural biases is an important first step, but it isn’t enough. We need to force ourselves to actually change our behaviour by altering the way we approach investing.

Miguel: James I have to say I’m confident an investor could read your 10 tenets of investing and with diligence outperform major indices. However, I’d like to ask you to elaborate on several of these principles.

1. Tell us how you look at cycles. Are there any indicators or measurements you rely on?

James Montier: Personally I’ve never really found it that tricky to know where we are in a cycle. There are a lot of indicators that gauge exactly that sort of thing from the ISM to the ECRI measures. The Philly Fed have a good (by which I mean timely) index called the ADS measure which tracks where we are in real time.

2. You praise skepticism…How do you balance skepticism with (a perma bear) bias?

James Montier: To me skepticism means questioning what I hear. That tends to lead to a contrarian perspective. When everything I hear is bullish skepticism leads me to be bearish, and when everything I hear is bearish, skepticism pushes me to be bullish. If this time ever does prove to be different then I’ll miss the boat, but so far it hasn’t proved to be the case.

3. History matters: Name 3 of your favorite financial history books.

James Montier: Kindleberger’s Manias, Panics and Crashes is just awesome. As is Devil takes the hindmost by friend and colleague Edward Chancellor. My third choice would be The engines the move markets by another friend, Sandy Nairn. If I were allowed a fourth it would be J.K Galbraith’s, A Short History of financial euphoria. Studying these four books would do most investors a much greater service than studying for a CFA.

4. I also find your Paul Wilmot and Emanuel Derman Quote quite interesting.

“I will remember that I didn’t make the world, and it doesn’t satisfy my equations”

“Though I will use models bodly to estimate value, I will not be overly impressed by mathematics”

“I will never sacrifice reality for elegance without explaining why I have done so”

“Nor will I give the people who use my model false comfort about its accuracy. Instead, I will make explicit its assumptions and oversights”

“I understand that my work my have enormous effects on society and the economy, many of them beyond my comprehension”

James Montier: I’ve long argued that those of us who work in finance should take a form of the Hippocratic oath- to do no harm. It never ceases to amaze me the way we constantly embrace the latest fad or innovation, when they are just replicates of things we’ve seen before. Take CDOs, they looked exactly like the CBOs which turned up during the junk bond mania of the late 80s. Anyone familiar with that era couldn’t help but notice the uncanny parallels with more recent events.

Miguel: Let’s talk about the work of Lerner & Phil Tetlock: Tell us about the detrimental effects of holding people accountable for outcomes.

James Montier: My work in this field was sparked by listening to gold medal winners being interviewed at the Olympics a few years back. Invariably the interviewer would ask them what was going through their mind before the race started, where they focused on the gold? The response always came back that they were always focused on what they had to do (i.e the process) not on the outcome (the medal).

Process is the one aspect of investing that we can control. Yet all too often we focus on outcomes rather than process. Yet ironically, the best way of getting good outcomes is to follow a sound process. The research shows that holding people accountable for outcomes tends to lead to suboptimal performance, generally because they spend all their time worrying about the things they can’t control. I’d advise a far better approach to assess people on the criteria of adherence to process.

Miguel: Tell us about your research on Bob Kirby’s Coffe Can Portfolios. What do these findings imply about investment behavior?

James Montier: Bob Kirby was an investment great. His writings on investing are right up there with the best, yet he remains a name that is relatively unknown. One of his papers was on the subject of the coffee can portfolio. He harked back to the days of the old west, when people would keep their most prized possessions in a coffee can under the bed. Kirby argued that investors should behave in a similar fashion, and create a portfolio of stocks that they would be happy to hold in a can and forget about (he called this passively active as opposed to actively passive).

Today we seem further away than ever from Kirby’s ideal. It appears as if investors have a chronic case of attention deficit hyperactivity disorder. The average holding period for a stock on the New York Stock Exchange is just 6 months! This has nothing to do with investment, and everything to do with speculation. Having a longer time horizon than these speculators appears to be one of the most enduring edges an investor can possess. If everyone else is jumping around only concerned with the next two quarters of earning announcements, then they are likely to end up mispricing assets for the long-term.

Miguel: Tell us about your deep value screen borrowed from Ben Graham (page 207)

James Montier: Ben Graham is one of my investing heros, so when I came across a screen he’d designed shortly before his death I was intrigued. I set it up and have been running it for over a decade now. The criteria are simple (as is all good investing). The stock must be cheap (with an earnings yield at least twice the AAA boind yield), it must be returning cash to shareholders (with a dividend yield of at least 2/3rds of the AAA bond yield), and it must have limited leverage (with total debt less than 2/3rds of tangible book value). I added one extra criterion, a Graham and Dodd PE (current price over a 10 year moving average of earnings) of less than 16x times. I added this is to prevent us from buying cyclicals which had enjoyed a short sharp run up in earnings, but didn’t have sustainable earnings power.

I’ve used the screen for both top down and bottom up work. The bottoms up benefits are obvious; it can provide us with a list of stocks which make sense as a starting point for a portfolio. From a top down perspective I find the number of opportunities showing up tells me something about the overall state of the market. If I can find a plethora of potential investments then the overall market is likely to cheap (or at least a large part of it) – a prime example was the largest number of stocks passing the screen I’d ever seen in late 2008, early 2009 – which made me feel very bullish. In contrast, the dearth of opportunities in 2007 suggested the need for caution. Right now I’m not finding massive amounts of opportunity, in fact I finding less than half the number of stocks passing this screen now compared with late 2008.

Miguel: Tell us about the folly of using price to sales as a proxy for value.

James Montier: Price to sales is fine if you are looking for short candidates, but as a long side value criteria it makes no sense to be at all. After all as long as you promise to value me on price to sales, I’ll set up a business selling $20 bills for $19…I’ll never make a profit, but if you are looking at price to sales you won’t care.

Price to sales is typical of the drift up the income statement when the bottom line gets too demanding. If your PE starts to look expensive, get everyone to look at a less demanding metric, enter stage left price to sales. If that starts to look tough, abandon the income statement and look at the value based on eyeballs and clicks!

Miguel: What I enjoy about your writing is that you aren’t afraid to talk about “controversial topics” – yes I’m talking about your work on short selling. Can you quickly tell us what you have learned about short sellers (their characteristics, screens, etc).

James Montier: Short sellers are everyone’s favorite scapegoats. They make money when things go ‘wrong’. Of course, what the authorities forget is that simply because a short seller sells a stock, doesn’t mean it goes down – if only it were that easy we’d all be short sellers. As David Einhorn observed, I’m not critical because I’m short, I’m short because I‘m critical.

In my experience, short sellers are amongst the most fundamental investors you’ll come across. They understand the ins and outs of a business better than just about everyone else. They are highly skilled at figuring out poor economics when they see if. They act as acting police, helping to uncover fraud – something that the regulators used to do (a very long time ago).

My own work on short selling has focused on a number of areas. In general, shorts tend to come into a couple of categories: bad businesses (i.e. poor economics), bad accounting (obvious), bad management (the guys at the top haven’t got a clue). In addition I often look for several traits, such as expensive, unrealistic growth expectations, too much debt, and poor capital discipline (i.e. needless and tangential M&A).

I also created a measure called the C-score (C is for cheating or cooking the books). It aims to look for the quantitative red flags which often accompany bad accounting.

Excerpt: Details of the C score Page 263 of Value Investing Tools & Techniques for Intelligent Investment

1. A growing difference between net income and cash flow from operations.
2. Day sales outstanding is increasing.
3. Growing days sales of inventory
4. Increasing other current assets to revenues.
5. Declines in depreciation relative to gross property plant and equipment.
6. High total asset growth.

Miguel: You uncover some fantastic research linking the characteristics of psychopaths with management styles. It seems like your checklist in this area is essentially a screen for narcissism.

James Montier: Yes, this kind of fits in with bad management aspect that I mentioned above. There is some intriguing work arguing that many managers share a lot of traits with psychopaths (minus the violent tendencies). The checklist I use is as you say essentially a screen for narcissism, I’m trying to weed out those who are so caught up in their own self importance that they wouldn’t see a problem coming even if bite them on the ass.

Miguel: James I can confidently say that we are all huge fans of your work- what’s the best way for us to keep pace of your latest writings.

James Montier: You are far too kind. These days you can get my writings from the GMO website, they will even send them to your inbox if you sign up for the white papers. I’m aiming to be writing once a quarter or so.

Miguel: Thanks again for answering our questions. We wish you and your family the best of health.

James Montier: It has been my pleasure Miguel. Keep well.

Miguel: If you enjoyed this interview I recommend reading – Value Investing Tools & Techniques for Intelligent Investment. Also, stay tuned for part 2 where we will discuss James’ -Little Book of Behavioral Investing.

Original source: SimoleonSense.com .

I spend 8 hours every Sunday putting this together…If you like this roundup kindly include a reference to SimoleonSense.com .Thanks!

Weekly Cartoon

Joke of Week

Q: How many central bank economists does it take to screw in a light bulb?
A: Just one — he holds the light bulb and the whole earth revolves around him.

Most Important Articles Of The Week !!

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Radio Show & Podcast: Gary Belsky on Behavioral Economics – via CC

Sheena Iyengar’s The Art of Choosing & Deciding – Via Situationist – The power of choice: Understanding the motivations, biases, and cultural influences that determine the choices, large and small, we make in our lives.” As interesting as those issues are, the interview itself is at its best when Sheena discusses her own remarkable situation and how that influenced her research.

Complexity is the handmaiden of deception - via Naked Capitalism – After Elizabeth Warren had her chance to speak, the thought on my mind was ‘complexity is the handmaiden of deception.’ That wasn’t the only point of her presentation on consumer protection, but that was the takeaway for me. Her point was simply that contracts are the bedrock of the U.S. legal system in promoting law and order. The purpose of contracts is to support the ‘invisible hand’ by allowing both sides of the contract to walk away happy.

Graham and Doddsville Newsletter – Winter 2010 - via Value Investing World

What is neuroeconomics? – via QN – This new field looks at how economic decision-making actually happens inside the brain. Jonathan Cohen, co-director of the Princeton Neuroscience Institute at Princeton University, describes insight that are emerging from the collaborative work of neuroscientists, psychologists, and economists.

Some CEOs Are Selling Their Companies Short - via Finance Professor – “‘There is no question these transactions should be a red flag for investors,’ says Carr Bettis, the co-founder of forensic accounting firm Gradient Analytics and co-author of a recent study on hedging. ‘The evidence is pretty compelling that hedges tend to be used before bad news hits the market.’ Bettis’ research found that in the year after executives and directors had engaged in hedging, their company’s stock often dropped markedly. He also found evidence of an increase in financial restatements and shareholder lawsuits during the same period. Executives at MCI, Enron, ImClone (IMCL), Krispy Kreme—companies that suffered some of the great stock melt-downs of the last decade—hedged their shares.”

Billionaire Alert! -The Other Ron Burkle - via Investors Consigliere & Business Week – The billionaire has been belittled for his celebrity friends and bitter lawsuits. But his moves on Barnes & Noble and Barneys are no laughing matter

Consumer Product Makers Going Direct To Consumers - via Business Week – Move over, Amazon. Consumer-products makers, squeezed by private-label goods at retailers like Wal-Mart, are hawking their wares directly to buyers online.

A New Age of Monopolies - via WSJ – ‘If monopoly persists, monopoly will always sit at the helm of the government,” Woodrow Wilson once wrote. “If there are men in this country big enough to own the government of the United States, they are going to own it.”

Miguel’s Weekly Favorites

Fantastic Presentation! The Age of Impossible Numbers -Via Seed Magazine – The human brain is poorly equipped for comprehending massive quantities. This makes sense from an evolutionary perspective; large numbers are relatively new features of our mental landscapes. Thousands, millions, billions, and recently trillions—once reserved for describing cosmic distances of faraway galaxies—have been brought down to Earth in terms of the national deficits we accrue, the bytes of information we clock, and critically, the stuff we consume. But how to wrap one’s head around such unfathomable figures in a meaningful way? In Running the Numbers, photographer Chris Jordan attempts to convey the vastness of modern consumption by breaking down annual statistics into more graspable quantities depicted by clever visualizations made of individual objects or groups of objects that he photographs. The 106,000 aluminum cans consumed in the US every 30 seconds, for instance, become the individual dots of Seurat’s Sunday Afternoon on the Island of La Grande Jatte. “There’s a disconnect that happens when we assume we know what we’re talking about when we talk about hundreds of millions of plastic bottles,” Jordan says. “I’m trying to translate these numbers from the deadening language of statistics into a visual language that allows some kind of comprehension.”

Video: Joseph Stiglitz on Charlie Rose - via Finance Professor

Behavioral Economics and The Bachelor: Why Jake is a perfect example of predictable irrationality - via Brooks Bell – Besides being written in a conversational and engaging style, the facts within are fascinating. Who knew that we were so easily and willingly manipulated as a society of consumers? Since finishing the book, I’ve been noticing examples everywhere of the content covered. Decision paralysis in the grocery store. The Achilles’ heel of arousal. And so on. But one popular television show really demonstrates some of the principles that Ariely covers. And those principles are dramatically and glaringly obvious—in high definition.

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Wisdom is a tree - via DFA – Wisdom is a tree. The attributes of wisdom are its fruit. As man knows the attributes of wisdom man tries to teach these attributes. It is very difficult and frustrating to cultivate these attributes because it is the same as trying to produce bananas without the banana tree. Cultivate the tree and the bananas will emerge automatically.One must be fully trained to play the game of life to the best of one’s fully developed potential. While the world is focused on researching and refining ways of how to develop one’s regular intelligence potential one’s other equally important emotional intelligence potential is more or less neglected. And as result most people live their lives struggling with a partially developed emotional intelligence potential. By the time experience grinds down this gap in potential they are ready to retire having missed out on playing the game of life as it is supposed to be played in full prime of life.

Neuromarketing the Neurology of Facebook - via Neurocritic – First, we had the fictitious Neurology of Twitter study, sponsored by The Neurocritic. Now it appears there’s been an actual (unpublished) fMRI study of viewing Facebook pages, conducted by Netway, a neuromarketing firm.

Is it okay to ignore results from people you don’t trust? – via Bad Science – If the media were actuarial about drawing our attention to the causes of avoidable death, your newspapers would be filled with diarrhoea, Aids, and cigarettes every day. In reality we know this is an absurd idea. For those interested in the scale of our fascination with rarity, one piece of research looked at a 3 month period in 2002 and found that 8,571 people had to die from smoking to generate one story on the subject from the BBC, while there were 3 stories for every death from vCJD.

Cultural Cognition of Scientific Consensus - via SSRN – Why do members of the public disagree – sharply and persistently – about facts on which expert scientists largely agree? We designed a study to test a distinctive explanation: the cultural cognition of scientific consensus. The “cultural cognition of risk” refers to the tendency of individuals to form risk perceptions that are congenial to their values. The study presents both correlational and experimental evidence confirming that cultural cognition shapes individuals’ beliefs about the existence of scientific consensus, and the process by which they form such beliefs, relating to climate change, the disposal of nuclear wastes, and the effect of permitting concealed possession of handguns. The implications of this dynamic for science communication and public policy-making are discussed.

Mark Twain on Risk - via Street Capitalist – Most people fixate on interesting accidents over frequent accidents. This often causes sensationalist reporting and people start to fear a shark attack over crashing into a deer, even though the latter is 300 times more likely to occur.

The Cold Hard Facts of Cold Reading - via Point of Inquiry – Ian Rowland is a Mentalist and Mind Reader living near London, UK. The world’s foremost authority on cold reading, he is the author of the Full Facts Book of Cold Reading. In this book, Rowland has defined and categorized the different types of psychic readings, and created a taxonomy of cold reading techniques. Rowland was the first person to lecture on cold reading to the Magic Circle and his book has been described as “the definitive work” on the subject by Derren Brown, James Randi, Martin Gardner, Teller, and Banachek.

Do Green Products Make Us Better People? - via Sagepub – Consumer choices reflect not only price and quality preferences but also social and moral values, as witnessed in the remarkable growth of the global market for organic and environmentally friendly products. Building on recent research on behavioral
priming and moral regulation, we found that mere exposure to green products and the purchase of such products lead to markedly different behavioral consequences. In line with the halo associated with green consumerism, results showed that people act more altruistically after mere exposure to green products than after mere exposure to conventional products. However, people act less altruistically and are more likely to cheat and steal after purchasing green products than after purchasing conventional products. Together, our studies show that consumption is connected to social and ethical behaviors more broadly across domains than previously thought.

Dan Ariely Recommends A Behavioral Story: Mine – via Predictably Irrational

Exclusive Features (The Must Reads)

Will Airlines and Passengers Call a Truce? - via NYT – When weather forecasters predicted severe winter storms across the country in the last few weeks, airlines sent their customers a steady stream of e-mail and text messages, giving them a chance to change their itineraries ahead of the bad weather.

Finance: Where The Law Of One Price Doesn’t Apply - via PsyFi – Even the smartest amongst us can be fooled by the pricing structures of relatively simple financial products. In any normal industry we would expect the law of one price would be prominent – in efficient markets all identical goods must have only one price.

The Top Ten Ways to Crack Down on Corporate Financial Crime - via Counterpunch – Ninety-five percent of criminologists study blue collar crime. Five percent study white collar crime. Of the tiny minority who study white collar crime, ninety five percent focus on the individuals who rip off the corporation. We are left with a small handful of criminologists – think Edwin Sutherland, John Braithwaite, Gil Geis – who have studied or are studying – corporate crime.

New York Isn’t Silicon Valley. That’s Why They Like It. – via NYT – “Just a year ago, it was less than half that,” he said in an e-mail message. “New York has become a hotbed of innovation,” he said. “Many start-ups there have as much promise as the best start-ups here in Silicon Valley. And the ecosystem of entrepreneurs, engineers, investors and other players is growing at a pace similar to Silicon Valley when it first got started.”

Stiglitz, Nobel Prize-Winning Economist, Says Federal Reserve System ‘Corrupt’ - via Huffington Post – One of the world’s leading economists said Wednesday that the very structure of the Federal Reserve system is so fraught with conflicts that it’s “corrupt.” Nobel laureate Joseph Stiglitz, a former chief economist at the World Bank, said that if a country had applied for World Bank aid during his tenure, with a financial regulatory system similar to the Federal Reserve’s — in which regional Feds are partly governed by the very banks they’re supposed to police — it would have raised alarms.

The Fully Disclosed Fraud - via False Profits Blog – Until recent years, to “prove” that an endless chain income or sales scheme was a fraud only required explaining that it was in fact an endless chain. In other words, endless chain schemes were understood to be “inherent” frauds. They are not good businesses gone bad or good people doing wrong. They are, by definition, frauds, custom-designed scams that must deceive and will always cheat the majority who join them. The fraud of endless chains may be reduced to a simple fact: They make a false promise, much like a “bait and switch” proposition does. That false promise is that everyone, always, has the opportunity to make unlimited money from an ever-expanding base of new investors.

Finance & Investing

Private Equity and Industry Performance - via Harvard Law – Overall, we are unable to find evidence supporting the detrimental effects of PE investments on industries.

Dan Loeb’s Third Point Q4 Letter – via Scribd

Trapeze Asset’s Latest Letter (Feb 2010) - Via My Investing Notebook

The Corporate Pyramid Fable - via Harvard Law – Our results indicate matters worked out much differently. Although politicians may have supported the intercorporate dividends tax because they believed that it would induce corporations to unwind stakes held in other publicly traded corporations, tax reform apparently did not have that effect. Corporations that owned large stakes in publicly traded firms rarely sought to exit in the years immediately following the introduction of intercorporate taxation of dividends, and many corporations even increased their ownership stakes in other corporations. A key reason the introduction of intercorporate taxation of dividends did not have the anticipated impact was that the tax burden was so modest. Although dividends by one corporation to another corporation were no longer completely tax-free, they remained largely exempt.

Videos & Media

1. Videos from The Encultured Brain – Via NeuroAnthro- It gives me great pleasure to announce that you can apparently now access streaming .wmv files of the four long-format talks that were given at The Encultured Brain Conference at the University of Notre Dame in October 2009. No, you do not have to rush out to your video store, nor do you need to send me a stamped self-addressed envelope as well as a surprisingly large fee for ‘postage and handling.’ Yes, it has taken a while, so file this in the ‘much better late than never’ box, and enjoy.

Academic Papers

An effort based analysis of the paradoxical effects of incentives on decision-aided performance - via JBDM – This study examines the effect of incentives on decision-aided performance. In particular, the study provides further insight into whether, when, and how incentives affect task performance in the presence of decision aids by (1) replicating previous research showing the negative effects of incentives on performance; (2) investigating whether this effect generalizes to a more realistic scenario in which decision makers have access to additional contextual information not captured by the decision aid; and (3) applying an effort-based framework to explain the link between incentives and performance. In contrast to the findings of prior research, our study shows that incentives do not necessarily decrease performance in the presence of decision aids. Rather, we demonstrate that the effect of incentives on decision-aided performance depends on other contextual factors such as the absence or presence of additional contextual information. By further specifying the conditions under which incentives result in increases or decreases to decision-aided task performance, our results have implications for both future research and the design of incentive systems in practice.

You’re Having Fun When Time Flies – The Hedonic Consequences of Subjective Time Progression - via Psychological Science – Seven studies tested the hypothesis that people use subjective time progression in hedonic evaluation. When people believe that time has passed unexpectedly quickly, they rate tasks as more engaging, noises as less irritating, and songs as more enjoyable. We propose that felt time distortion operates as a metacognitive cue that people implicitly attribute to their enjoyment of an experience (i.e., time flew, so the experience must have been fun). Consistent with this attribution account, the effects of felt time distortion on enjoyment ratings were moderated by the need for attribution, the strength of the “time flies” naive theory, and the presence of an alternative attribution. These findings suggest a previously unexplored process through which subjective time progression can influence the hedonic evaluation of experiences.

Goal Management in Sequential Choices: Consumer Choices for Others Are More Indulgent than Personal Choices – via Chicago – What are the differences in exerting self‐control in sequential choices when consumers choose for others (family or friends) rather than for themselves? Sequential choices represent an opportunity to manage the pursuit of one’s multiple personal goals. Consumers typically manage these personal goals by combining indulgent and virtuous choices. When choosing for others, however, this is not the case. Consumers then focus on a pleasure‐seeking goal, which leads to indulgent choices for others. Six experiments demonstrate this phenomenon and uncover conditions that encourage more virtuous choices for others.

I’m No Longer Torn After Choice : How Explicit Choices Implicitly Shape Preferences of Odors – via Psych Science – Several studies have shown that preferences can be strongly modulated by cognitive processes such as decision making and choices. However, it is still unclear whether choices can influence preferences of sensory stimuli implicitly. This question was addressed here by asking participants to evaluate odors, to choose their preferred odors within pairs, to reevaluate the odors, and to perform an unexpected memory test. Results revealed, for the first time in the study of olfaction, the existence of postchoice preference changes, in the sense of an overvaluation of chosen odors and a devaluation of rejected ones, even when
choices were forgotten. These results suggest that chemosensory preferences can be modulated by explicit choices and that such modulation might rely on implicit mechanisms. This finding rules out any explanation of postchoice preference changes in terms of experimental demand and strongly challenges the classical cognitive-dissonance-reduction account of such preference changes.

THE ROLE OF MOBILE PHONES IN SUSTAINABLE RURAL POVERTY REDUCTION - via ICT – Many developing country governments and developing agencies are focusing on extending telecommunications services into rural areas, as they seek to alleviate poverty, encourage economic and social growth, and overcome a perceived ‘digital divide’. However, relatively little is known about how rural communities benefit from modern telecommunications services and what impact it is having on their lives and livelihoods. This paper endeavors to redress the balance, by examining the role of mobile telephones in sustainable poverty reduction among the rural poor.

Other Very Interesting Articles

Alcohol as a social lubricant – Alcohol is an important part of life in many cultures throughout the world, but there are many misperceptions about this common social lubricant.

Obamacare worth the price to Democrats - via OC Register – So there was President Obama, giving his bazillionth speech on health care, droning yet again that “now is the hour when we must seize the moment,” the same moment he’s been seizing every day of the week for the past year, only this time his genius photo-op guys thought it would look good to have him surrounded by men in white coats.

Algebra in Wonderland - via NYT – SINCE “Alice’s Adventures in Wonderland” was published, in 1865, scholars have noted how its characters are based on real people in the life of its author, Charles Dodgson, who wrote under the name Lewis Carroll. Alice is Alice Pleasance Liddell, the daughter of an Oxford dean; the Lory and Eaglet are Alice’s sisters Lorina and Edith; Dodgson himself, a stutterer, is the Dodo (“Do-Do-Dodgson”).

Brain Science vs. Criminal Law - via NYT – Advances in neuroscience put it increasingly in conflict with criminal law: If all our mental states can ultimately be reduced to neurophysiological conditions, and there is really no such thing as free will, how can people be held accountable for crimes?

Fake Drugs: Causes, Consequences, and Possible Solutions - via Policy Pointers – A US speech addressing the problem of substandard and counterfeit drugs

Infographics

(Click On Images for A Larger Version)

What is the Difference Between Humans & Animals

What Happened To The Tarp?

Original source: SimoleonSense.com .

This article has been making rounds in the blogosphere…enjoy!

P.S. I posted the original research for this article  several months ago, here.

Conclusion: when investing in shady companies wear baggy clothing.

Click Here To Read: Why Shady Deeds Are More Likely to Happen in the Dark

Introduction (via TIME)

Human beings can be a devious lot. At some point, even the most moral of us have skulked or sneaked or filched something we weren’t supposed to — even if it were just a cookie from the kitchen. Of all the things that get our sneakiness juices going, there is nothing like a little darkness.

There has always been a correlation between how ethically we behave and how brightly our surroundings are lit — most evil deeds are done under cover of darkness, and the rarest and most brazen crimes are those committed in broad daylight — not least because we’re less likely to be caught in the act after nightfall. But in a new study published in the journal Psychological Science, psychologists Chen-Bo Zhong and Vanessa Bohns of the University of Toronto and Francesca Gino of the University of North Carolina suggest that it’s not only about the threat of discovery. There are other reasons darkness gives us a waiver to misbehave.

Interesting (via Time)

Philip Zimbardo found that if subjects were wearing dark hoods and baggy clothes, they were more inclined to administer electric shocks to other volunteers than they otherwise would be.

Original source: SimoleonSense.com .

More of a historical piece but with some interesting conclusions, bravo Mr. Shiller.

Click Here To Read: Robert Shiller: Mom, Apple Pie and Mortgages! Rethinking Housing Finance

Introduction (via NYT)

For decades, the federal government has subsidized housing — particularly owner-occupied housing. This has been especially true during the continuing financial crisis, with Fannie Mae, Freddie Mac and the Federal Housing Administration propping up the housing market by issuing guarantees for investors on most new mortgages.

But what is the long-term justification for putting taxpayers on the line to subsidize homeownership? Is this nothing more than a sacred cow in American society — a political necessity because so many voters own homes and are mindful of their resale value?

In fact, there is much more to the history of subsidizing housing. While the crisis in the housing market shows that our current approach is far from perfect, there is a certain wisdom behind it, related not only to economic stimulus but also to the preservation of a sense of national identity. It’s important to remember this as we consider re-engineering our institutions as the crisis ebbs.

Additional Excerpts (via NYT)

But consider what will happen once the economy is again operating at full capacity. Basic economics tells us that when Americans, over all, spend more on housing, they must ultimately spend less on something else. Why should housing consumption be better than other consumption, or investments that people might choose?

This time, the best answer isn’t found in traditional economics but rather in American culture: a long-standing feeling that owning homes in healthy communities is connected to individual liberties that embody our national identity. Historically, homeownership has been associated with freedom, while renting — often in tenements or mill villages — has been linked to the oppression of a landlord.

Most Important Lessons (via NYT)

American mortgage institutions encourage people to take a leveraged position in the real estate market, which is quite risky because home prices can and do decline, as we have learned so painfully. Leverage a risky investment 10 to 1 and you can expect trouble — and we have plenty of it today. More than 16 million homeowners owe more on their mortgages than their homes are worth, according to Mark Zandi of Economy.com.

If we choose to keep subsidizing individual homeownership, we must also commit to adding safeguards so that homeowners are less financially vulnerable. Of course, that will require some creative finance.

But first, we should rethink the idea of renting, which could be a viable option for many more Americans and needn’t endanger the traditional values of individual liberty and good citizenship.

Click Here To Read: Robert Shiller: Mom, Apple Pie and Mortgages! Rethinking Housing Finance

Original source: SimoleonSense.com .

Synopsis (via Stanford)

Experts can be more persuasive by expressing uncertainty, argues Stanford Graduate School of Business marketing professor Zakary Tormala.

Full Excerpt (via Stanford)

STANFORD GRADUATE SCHOOL OF BUSINESS — Zakary L. Tormala’s research flies in the face of logic. If you’re an expert and make your points with confidence, people will be far more convinced than if you sound uncertain. Right?

Well, no — at least not when it comes to consumers, the associate professor of marketing discovered in research he did with Stanford Graduate School of Business doctoral candidate Uma R. Karmarkar.

“Our key finding,” Tormala said, “is that although non-experts can become more persuasive by expressing high certainty about their opinions, experts can become more persuasive when they express some degree of uncertainty. Across several studies, we found that expert sources gained interest and influence by expressing minor doubts about their own opinion.”

Tormala said incongruity between the source’s expertise and level of certainty makes his or her message more intriguing. “Whether it’s a person without established expertise in a given domain expressing very high certainty, or a person with clearly established expertise in a domain expressing low certainty,” Tormala said, “the inconsistency is surprising. It draws people in. And as long as the arguments in a message are reasonably strong, being drawn in leads to more persuasion.”

Earlier research by others had made the case that expressing certainty generally increases people’s persuasive power, because it boosts their perceived credibility. Tormala pointed out that those studies concerned topics such as witnesses testifying in court or stock market advisers giving stock recommendations where there is an objective truth or correct answer. In those instances, he said, people might rely on a person’s certainty as an indicator of his or her credibility. “In more subjective domains like consumer contexts, though,” Tormala said, “expressing certainty appears to have a more dynamic effect, giving a message more or less impact depending on who is expressing it.”

Tormala and Karmarkar studied this issue by giving consumers what purported to be customer reviews for a new restaurant. “Restaurant reviews provided a good setting for this research,” Tormala said. “Like other consumer topics, they’re subjective, but there also are traditional markers of quality.”

He said such attributes as ambience, service, and taste of the food can be described with enough detail to let people understand the reviewer’s perspective, but still reach their own conclusions about whether the restaurant would be suited to their tastes.

Participants in one experiment read a favorable review of a new restaurant called “Bianco’s.” Across experimental conditions, the main part of the review contained the same core comments about Bianco’s, comments the researchers had pre-tested on a sampling of readers to make sure they were strong. In the main study, some participants were told that the reviewer was a renowned food critic who often contributed to a major regional newspaper; others were told that the reviewer was a network administrator at a local community college who kept a personal web journal — and normally ate fast food.

In addition to varying the supposed source of the review, the researchers varied the level of certainty expressed in it. In the high-certainty recommendation, the review was titled “Bianco’s — a confident 4 out of 5,” and the author expressed certainty about the quality of the food and the restaurant twice in the review (saying, for example, “Having eaten there for dinner, I can confidently give Bianco’s a rating of 4 [out of 5] stars”). In the low-certainty recommendation, the title of the review was “Bianco’s — a tentative 4 out of 5″ and the author expressed uncertainty about these same points (for example, “Having eaten there only once, I don’t have complete confidence in my opinion, but I suppose would give Bianco’s a rating of 4 [out of 5] stars”).

“We find that when the regular, everyday person is extremely certain, that’s surprising to readers,’ Tormala said. ‘Conversely, when the expert is not so certain, that’s surprising. In both cases, surprise increases readers’ interest in and involvement with the review, which is essentially a persuasive message, and this promotes persuasion. So non-experts get more attention and can have more impact when they express certainty in their messages. Experts, in contrast, get more attention and can have more impact when they express uncertainty.”

Tormala added that all the findings apply only if the basic message is compelling, or contains strong arguments. When a fictional reviewer wrote about liking the restaurant because he approved of the colors on the menus or enjoyed a conversation with a friend, his opinions had little impact on readers regardless of how much certainty he expressed.

“This ties our experiments to a classic finding in persuasion research — increasing consumers’ involvement and processing of your message is a good thing as long as your message is strong. If your message is weak, increasing others’ involvement or interest has no effect, or can even backfire.”

— Dave Murphy

Original Source (via Dave @ Stanford)

Original source: SimoleonSense.com .

Summary (via Fora.tv)

Long Finance is an initiative begun in 2007 to establish a World Centre Of Thinking On Long-Term Finance. The initiative began with a question – ­”When would we know our financial system is working?” – which challenges a system that can’t provide today’s 20-year-olds with a reliable financial retirement structure. The aim of the Long Finance Institute is “to improve society’s understanding and use of finance over the long-term.”

The research project proposals range from theory versus practice or fiscal versus monetary to sustainability versus robustness. The iconic project for Long Finance is the Eternal Coin, with the objective of starting a global debate about society’s values over the long-term.

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Original source: SimoleonSense.com .

About this talk (Via Ted)

Srikumar Rao says we spend most of our lives learning to be unhappy, even as we strive for happiness. At Columbia University, he teaches us how to break free of the “I’d be happy if …” mental model, and embrace our hard-wired happiness.

About Srikumar Rao (via Ted)

Executive, educator, writer and life coach Srikumar S. Rao asks, “Are you ready to succeed?” — and in his famous graduate course “Creativity and Personal Mastery,” he teaches his students how…

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