Original source: SimoleonSense.com .
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Joke of Week
Patient: Doctor, I can’t stop stealing things.
Psychiatrist: Take these pills. They should help you.
Patient: But what if they don’t?
Psychiatrist: Pick up a Rolls for me.
Most Important Articles Of The Week !!
Berkshire Hathaway Annual Report – via BRK
Warren Buffett’s Letters to Shareholders – via BRK
Manufacturing Tail Risk: A Perspective on the Financial Crisis of 2007-09 - via SSRN – We argue that the fundamental cause of the financial crisis of 2007-09 was that large, complex financial institutions (“LCFIs”) took excessive leverage in the form of manufacturing tail risks that were systemic in nature and inadequately capitalized. We employ a set of headline facts about the build-up of such risk exposures to explain how and why LCFIs adopted this new banking model during 2003-2Q 2007, relative to earlier models. We compare the crisis to other episodes in the United States, in particular, the panic of 1907, the failure of Continental Illinois and the Savings and Loan crisis. We conclude that several principal imperfections, in particular, distortions induced by regulation and government guarantees, developed in decades preceding the current one, allowing LCFIs to take on excessive systemic risk. We also examine alternative explanations for the financial crisis. We conclude that while moral hazard problems in the originate-and-distribute model of banking, excess liquidity due to global imbalances and mispricing of risk due to behavioral biases have some merit as candidates, they fail to explain the complete spectrum of evidence on the crisis.
Miguel’s Weekly Favorites
Why Are Millennials So Darn Optimistic? – Via The Atlantic – That’s how Pew Research defines the Millennial generation — Americans born since 1980. We’re socially liberal, technologically savvy and wildly optimistic.
Neuromarketing appeals to your senses - via Dana Foundation – There really is no limit to how far companies are willing to go to get inside the heads of consumers—literally. At least, that’s the take-home message I got from a new article in Time about “neuroadvertising,” the business of using new neuroscientific understanding to, well, generate more business.
Better live in Sweden than in the US: Why More Equal Societies Almost Always Do Better - via Cog Culture – Let’s talk about politics for once. It is common knowledge that in rich societies the poor have shorter lives and suffer more from almost every social problem. In a quite fascinating book, The Spirit Level: Why More Equal Societies Almost Always do Better, epidemiologists Richard Wilkinson and Kate Pickett demonstrate that more unequal societies are bad for almost everyone – the well-off as well as the poor (here is the Guardian review, and here is Nature’s). The remarkable data the book lays out and the measures it uses are like a ’spirit level’ which we can hold up to compare the conditions of different societies. The differences revealed, even between rich market democracies, are striking. Almost every modern social and environmental problem – ill-health, lack of community life, violence, drugs, obesity, mental illness, long working hours, big prison populations – is more likely to occur in a less equal society. The book goes to the heart of the apparent contrast between the material success and social failings of many modern societies. The Spirit Level does not simply provide a key to diagnosing our ills. It tells us how to shift the balance from self-interested ‘consumerism’ to a friendlier and more collaborative society. It shows a way out of the social and environmental problems which beset us and opens up a major new approach to improving the real quality of life, not just for the poor but for everyone. Last but not least, (at least for the reader of the ICCI’s blog), it is a very good piece of sociology based on cognition and evolution.
How Your Brain Groups Words - via Brain Blogger – When you say or hear a concrete noun, such as “apple”, what happens in your mind? Even without seeing a physical apple in front of you, your brain is drawing up an image of an apple, maybe the last one you ate or saw in the stores or on TV. A team of researchers at Carnegie Mellon used an fMRI (functional magnetic resonance image) machine to find out. Rather than using complex transparent concepts, like “honesty”, the team used simple words that convey physical, everyday objects to see which parts of the brain was activated. The goal was to see how the brain functions when we think of an object, rather than just trying to see an object in our mind. The brain was activated in many different parts for the simplest words, showing a complex, networked effect for even the easiest thoughts.
Big Thinkers Speaker Series with Richard Thaler - via Farnam St – Economist and University of Chicago Professor Richard Thaler kicked off the Yahoo! Labs 2010 Big Thinkers Speaker Series with a talk about his New York Times bestselling book, “Nudge: Improving Decisions about Health, Wealth, and Happiness.” In short, people have to make decisions every day that affect every aspect of their lives, personally and professionally. The way people make decisions is often impacted by human fallibility such as bounded self-interest, willpower, and rationality, according to Thaler, they could do with a little help, or “nudge”, in making such decisions.
The Science of Hollywood Films: It’s All in the Chaos Theory - via National Geographic – A cognitive psychologist from Cornell University studied over 150 films from the past 70 years, shot by shot, to find out just what makes one a snoozer and another an edge-of-the seat thriller.
Interview With Harry Markopolos: Math Is Hard - Via NYtimes – What was it like to spend nine years trying to persuade the Securities and Exchange Commission that Bernard Madoff was a fraud, only to learn that the agency thought he was perfectly reputable?
How America Can Rise Again – via The Atlantic – Is America going to hell? After a year of economic calamity that many fear has sent us into irreversible decline, the author finds reassurance in the peculiarly American cycle of crisis and renewal, and in the continuing strength of the forces that have made the country great: our university system, our receptiveness to immigration, our culture of innovation. In most significant ways, the U.S. remains the envy of the world. But here’s the alarming problem: our governing system is old and broken and dysfunctional. Fixing it—without resorting to a constitutional convention or a coup—is the key to securing the nation’s future.
Behavioral Portfolios- Beer Balancing Behavioralism - Via PsyFi – Perusing the literature on behavioural finance you might be inclined to the thought that although this stuff is all very interesting and even occasionally amusing it’s not much use when you come to actually investing. It’s a bit like posture – it’s easy enough to point out to someone that they slouch like a sloth with a dose of haemorrhoids, it’s entirely another to explain to them how to retrain their muscles to start balancing pitchers of beer on their head on the way back from the bar.
Consumer Expectations and Culture: The Effect of Belief in Karma in India - via Chicago – In the customer expectations arena, relatively little attention has been paid to the impact on expectations of variation in cultural variables unique to a country. Here we focus on one country, India, and a major cultural influence there—the extent of belief in karma. Prior research in the United States suggests that disconfirmation sensitivity lowers expectations. Here we examine whether belief in karma and, consequently, having a long‐term orientation, counteracts the tendency to lower expectations in two studies that measure and prime respondents’ belief in karma. Results show that the extent of belief in karma, operating largely through its impact on long‐run orientation, does moderate (decrease) the effect of disconfirmation sensitivity on expectations. These findings suggest that it is important to tailor advertising messages by matching them with customer expectations and their cultural determinants.
Planning to Make Unplanned Purchases? The Role of In‐Store Slack in Budget Deviation - via U Chicago – We propose that consumers have mental budgets for grocery trips that are typically composed of both an itemized portion and in‐store slack. We conceptualize the itemized portion as the amount that the consumer has allocated to spend on items planned to the brand or product level and the in‐store slack as the portion of the mental budget that is not assigned to be spent on any particular product but remains available for in‐store decisions. Using a secondary data set and a field study, we find incidence of in‐store slack. Moreover, we find support for our framework predicting that the relationship between in‐store slack and budget deviation (the amount by which actual spending deviates from the mental trip budget) depends on factors related to desire and willpower.
Nonprofits Are Seen as Warm and For‐Profits as Competent: Firm Stereotypes Matter - via U Chicago – Consumers use warmth and competence, two fundamental dimensions that govern social judgments of people, to form perceptions of firms. Three experiments showed that consumers perceive nonprofits as being warmer than for‐profits but as less competent. Further, consumers are less willing to buy a product made by a nonprofit than a for‐profit because of their perception that the firm lacks competence. Consequently, when perceived competence of a nonprofit is boosted through subtle cues that connote credibility, discrepancies in willingness to buy disappear. In fact, when consumers perceive high levels of competence and warmth, they feel admiration for the firm—which translates to consumers’ increased desire to buy. This work highlights the importance of consumer stereotypes about nonprofit and for‐profit companies that, at baseline, come with opposing advantages and disadvantages but that can be altered.
Does the Devil Really Wear Prada? The Psychology of Anthropomorphism and Dehumanization - via APS – People talk to their plants, pray to humanlike gods, name their cars, and even dress their pets up in clothing. We have a strong tendency to give nonhuman entities human characteristics (known as anthropomorphism), but why? In a new report in Current Directions in Psychological Science, a journal of the Association for Psychological Science, psychological scientists Adam Waytz from Harvard University and Nicholas Epley and John T. Cacioppo from University of Chicago, examine the psychology of anthropomorphism.
Gain from the pain of failure - via FT – Failure has always been a fundamental part of a market economy. When markets work, they do so because new ideas are constantly being tried out. Most fail. Those that succeed cause older ideas to fail instead. In the US, about 10 per cent of businesses disappears each year. This is an awkward insight – but trial and error could be starting to take its rightful place as a business technique, rather than the dirty little secret of capitalism.
TV Ads May Be More Effective If We Pay Less Attention - via ScienceDaily — Viewers pay less attention to creative television advertisements, shows new research from the University of Bath, but may make themselves more vulnerable to the advertiser’s message.
The Long-Term Effects of Short-Term Emotions - via HBR – The heat of the moment is a powerful, dangerous thing. We all know this. If we’re happy, we may be overly generous. Maybe we leave a big tip, or buy a boat. If we’re irritated, we may snap. Maybe we rifle off that nasty e-mail to the boss, or punch someone. And for that fleeting second, we feel great. But the regret—and the consequences of that decision—may last years, a whole career, or even a lifetime.
The Psychology of Chocolate - via Dr Shock – The authors explain that chocolate as used nowadays is completely different from how it was probably originally consumed as a frothy, tart-tasting, and mildly alcoholic beverage among the Olmec and Maya. Those days it also was a critical source of calories in a calorie-constrained society. For the history of chocolate read Cacao and Chocolate Timeline
Reward centers in men activated by optimal hip-to-waist ratio in women - via Deric Bownds – Observations from Platek and Singh add to the evolutionary psychologists’ discussion of determinants of men’s sexual preferences. They take male preference for lower hip waist ratio in females (as indicative of reproductive quality) to be culturally universal, but I recall debate on this point, and indeed find that debate covered by cited references (17,18) at the end of the article. Their core observation is that when men view photographs of women after and before plastic surgery to achieve an optimal (~0.7) waist to hip ratio (with redistributed body fat but relatively unaffected body mass index), an increase in activation of brain rewards centers can be observed. They suggest their observations “are the first description of a neural correlate implicating waist to hip ratio as a putative honest biological signal of female reproductive viability and its effects on men’s neurological processing.”
Behavioral Economics & Redrawing the Route to Online Privacy – via Ny Times – It is an artifact of the 1990s, intended as a light-touch policy to nurture innovation in an emerging industry. And its central concept is “notice and choice,” in which Web sites post notices of their privacy policies and users can then make choices about sites they frequent and the levels of privacy they prefer. But policy and privacy experts agree that the relentless rise of Internet data harvesting has overrun the old approach of using lengthy written notices to safeguard privacy.
Exclusive Features (The Must Reads)
The data deluge Businesses, governments and society are only starting to tap its vast potential – via The Economist – Everywhere you look, the quantity of information in the world is soaring. According to one estimate, mankind created 150 exabytes (billion gigabytes) of data in 2005. This year, it will create 1,200 exabytes. Merely keeping up with this flood, and storing the bits that might be useful, is difficult enough. Analysing it, to spot patterns and extract useful information, is harder still. Even so, the data deluge is already starting to transform business, government, science and everyday life (see our special report in this issue). It has great potential for good—as long as consumers, companies and governments make the right choices about when to restrict the flow of data, and when to encourage it.
Niall Ferguson -Complexity and Collapse: Complexity and Collapse - via FA – There is no better illustration of the life cycle of a great power than The Course of Empire, a series of five paintings by Thomas Cole that hang in the New-York Historical Society. Cole was a founder of the Hudson River School and one of the pioneers of nineteenth-century American landscape painting; in The Course of Empire, he beautifully captured a theory of imperial rise and fall to which most people remain in thrall to this day.
Corporate Governance and the Financial Crisis: Causes and Cures - via Harvard Law – A recent discussion that I moderated at the Corporate Directors Forum at the University of San Diego focused on the changing regulatory landscape triggered by the financial crisis. The focus was on the changing rhetoric in the corporate governance debate, and whether the rhetoric matches the proposals being advanced – i.e., does the “talk-the-talk” fit with the “walk-the-walk”.
It is time to treat Wall Street like Main Street – via FT – Thirty years ago, when we were still using typewriters and fewer than 25 per cent of households invested in the stock market, economists conjectured that employees would work harder and make better decisions under a “pay-for-performance” system. This theory became popular in boardrooms – especially since it was an influential argument for increasing the pay of the chief executive and top officers. Bonuses tied to performance became standard practice in US companies and on Wall Street in particular.
20 (More) Reality-Checking Questions for Would-Be Entrepreneurs - via HBR – I find too many business bloggers fail to describe the real experience of starting up a company. They ignore the human aspects. It seems like there is some unwritten law of business blogging that says you can only write about the inspirational and positive aspects of creating a start–up business.
The Mathematics Behind a Good Night’s Sleep - via ScienceDaily — Why can’t I fall asleep? Will this new medication keep me up all night? Can I sleep off this cold? Despite decades of research, answers to these basic questions about one of our most essential bodily functions remain exceptionally difficult to answer. In fact, researchers still don’t fully understand why we even sleep at all. In an effort to better understand the sleep-wake cycle and how it can go awry, researchers at Rensselaer Polytechnic Institute are taking a different approach than the traditional brain scans and sleep studies. They are using mathematics.
Game theory shows evolution follows most successful member - via Ars Technica – Game theory has become a useful way to evaluate strategies for survival in evolution scenarios. In a new study, scientists set up a model where human players engage with each other and compete for resources, and can change their strategies for doing so in various ways. They found that as more rounds of the game were played, the human players developed a tendency to imitate the best player, causing the players as a group to tend to play the game the same way. This implies that in evolution, as one member of a species enjoys more and more success, its methods become hard to ignore for the others, which will eventually follow its lead.
Am happy, will be selfish; Am sad, will be fair. Oh Really?!? - via The Mouse Trap – Many a times, researchers have their own personal agendas and its very human to fall in to the temptation to interpret study results or spin them to suit ones long term subject matter and expertise. This is a trap in which Joe Forgas et al fall when they report in JESP that happy people are selfish and sad people are fair. They have a long research interest that goes aka sadness is beneficial for you and every result has to fit in that model.
What raises murder rates - via Boston – A recent analysis of global homicide rates came up with some interesting conclusions. It turns out that the proportion of young males, population density, degree of urbanization, and income inequality are not significant predictors of the homicide rate. Instead, ethnic and linguistic diversity, education, and the quality of governing institutions were the most significant factors. Although it’s not surprising that ethnic strife and law enforcement matter for the homicide rate, there was a surprising effect found for education: An extra year of school for the average female increased the homicide rate almost as much as one less year of school for the average male.
Think Twice: How the Gut’s “Second Brain” Influences Mood and Well-Being - via SciAm – The emerging and surprising view of how the enteric nervous system in our bellies goes far beyond just processing the food we eat
Finance & Investing
Macroeconomics for the 21st century: Part 1, Theory - Via Voxeu – What are the implications of combining Keynesian ideas with Walrasian general equilibrium theory in a way that does not assume sticky prices? This column presents the first of a two-part outline of a new macroeconomics paradigm for the 21st century, starting with the theory.
Macroeconomics for the 21st century: Part 2, Policy - via Voxeu – What are the implications of combining Keynesian ideas with Walrasian general equilibrium theory in a way that does not assume sticky prices? This column presents the second in a two-part outline of a new paradigm for macroeconomics in the 21st century, focusing on policy. It argues that fiscal policy is not the right response to a financial crisis.
The economics of cloud computing - via Voxeu – What will the next big technology be? This column argues that “cloud computing” will have a dramatic effect on how we live our lives and how we do business. The economic impact of the diffusion of this technology could match that of telecommunication infrastructures in the ’70s and ’80s or the introduction of the internet in the ’90s. Once diffusion gathers apace, cloud computing could significantly boost GDP growth and could create around a million EU jobs within five years.
Mining booms and the Australian economy - via BIS – The topic of my talk tonight is “Mining Booms and the Australian Economy”. I have chosen this topic because the Australian economy is currently experiencing a surge in mining activity, one of a sequence of mining booms since the European settlement of Australia. These have been a powerful force in shaping the Australian economy. Tonight I want to review the effects of these booms. Of particular interest is the question of whether there are recurring themes from which we can draw lessons on how to manage the current episode.
Videos & Media
2 Videos of Andrew Lo: on Quants and the Financial Crisis - via Money Science – Andrew W. Lo, director of the Massachusetts Institute of Technology’s Laboratory for Financial Engineering, breaks down the hot debate over the current financial crisis and how math may have played a part. Explore the arguments for and against the claim that the mathematical models used to manage specific complex financial securities are responsible for the Great Recession. Was it systematically programmed or just human nature?
Sean Carroll on the arrow of time - via Ted – In Part 1 of his lecture at the University of Sydney, cosmologist Sean Carroll gives an entertaining and thought-provoking talk about the nature of time, the origin of entropy, and how what happened before the Big Bang might be responsible for the arrow of time we observe today.
Olympic expectations gone awry: Plushenko conforms to silver medalist syndrome. - via Social Psych – Avid Olympic watchers most likely tuned in to Thursday night’s main event: the men’s figure skating free skate. Evan Lysacek won gold for the United States, becoming the first American man to win it since 1988. Russia’s Evgeni Plushenko took the silver – losing by a mere 1.31 points overall – and ended Russia’s streak in the sport. Had Plushenko won the gold, as he expected, he would have been the first man to win back-to-back Olympic gold medals since 1952.
Geography and Attentiveness - via Social Psych – Geography is a factor in relationships. Not surprising, working, taking a class, or sharing a common space with someone may lead to a long-term friendship or relationship. An NPR news report notes that many people make long time friends when in college. Although geographical closeness at times leads to friendships the question remains as to what motivates these relationships. Cross (2009) points to a variable known as the relational self-construal defined in terms of how an individual see’s oneself in relation to others close to us. So close relationships must have lasted because someone (or both) in the dyad is high on the relational self-construal. For the purpose of continuing the relationship these individuals tend to be particularly attentive to the needs of others by paying close attention to information. Cross writes that actions such as give and take, openness, providing support and encouragement are characteristic of those high in relational self-construal. While geography may be a factor when it comes to who you are acquainted with, attentiveness to others in relation to oneself determines who your friends will be .
Culture, corruption, and the endorsement of ethical leadership. - via Wisom Research – In this chapter, we propose that society- and organization-level social context cues influence the endorsement of ethical leadership. More specifically, we propose that certain organizational culture values provide proximal contextual cues that people use to form perceptions of the importance of ethical leadership. We further propose that specific societal culture values and societal corruption provide a set of more distal, yet salient, environmental cues about the importance of ethical leadership. Using data from Project GLOBE, we provide evidence that both proximal and distal contextual cues were related to perceptions of four dimensions of ethical leadership as important for effective leadership, including character/integrity, altruism, collective motivation, and encouragement.
Other Very Interesting Articles
The price of ideas: competing incentives for innovation - Via Knowing & Making – Only someone with Nathan Myhrvold’s Microsoft money – and reputation as a mad genius – could get away with starting Intellectual Ventures and still being taken seriously. But since he can, it makes it an interesting concept.
NYT Should Rely on Experts Who Are Not Employed by J.P. Morgan - via American Prospect – The NYT reports that strong demand is causing wages to rise rapidly in China. While the article describes this as a “labor shortage,” this is actually a normal process in a growing economy. Workers move from less productive sectors to more productive sectors. Firms that cannot afford to pay the market wage go out of business.
Focusing on the Cinematic Mind - via We’re Only Human – Our household is a rolling Alfred Hitchcock festival. We almost always have at least one of the celebrated director’s films on DVD, and over the years we have watched most of our favorites—Suspicion, North by Northwest, The 39 Steps—time and time again. It’s a tribute to the master’s skills and sensibility that his films have such enduring appeal, because many films from the same time period have a distinctly “old” feel to them. It’s not just the primitive cameras and films. There is something about the rhythm and texture of early cinema that has a very different “feel” than modern films. But it’s hard to put one’s finger on just what that something is.
Experiences, Perspectives, and Frames - via Every Day Sociology – In the many meetings I attend at school, I often notice people saying things like, “in my previous life, …” or “where I used to work, …” to give examples of why or how things are done. It often annoys me since the rest of us weren’t there to know what the heck they are talking about so the connection to our present situations is lost on most of us.
You Are Predictable Using anonymous cell-phone records to determine people’s locations - via TruesLant- throughout the week, a physicist shows that he can predict a person’s location at any given time (within a couple miles) with 93% accuracy.
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