The Irrational Investor

Behavioral Econ at Harvard

2006-02-28T14:02:00.000-08:00

Courtesy of Marginal Revolution.

How Hard is the Fed's Job?

2006-02-18T22:47:00.000-08:00

Ben Bernanke thinks that a machine can do it.

Field of Dreams

2006-02-13T16:12:00.000-08:00

Kevin Hassett writes on the story behind ethanol as an alternative fuel.

Michael Crichton, Journalist of the Year

2006-02-10T19:34:00.000-08:00

Catch this, and other great riffs this week from the inimitable Dr. Bob Park.

Fortune's Formula

2006-02-08T11:58:00.000-08:00

Anyone who enjoys reading this blog will enjoy William Poundstone's Fortune's Formula. The book is chock full of great anecdotes, and tells the incredible story of the enigmatic Claude Shannon. Most of the book is dedicated to the method of wagering developed by Texan physicist John Kelly, who died tragically at the age of 41, and how the method is linked to Shannon's information theory.? The book is one of the best examinations of the orthodoxy surrounding the Efficient Market Hypothesis I've read, and paints a pretty unsavory picture of its devotees. In my opinion, any good scientist would roll their eyes at most of this theory. The book features a huge cast of characters, and I've certainly learned a lot from it. For instance, Leo Breiman (famous for CART and Random Forests) published a method for portfolio allocation in Naval Research Logistics Quarterly (to say nothing of the story of Ivan Boesky)

Economic Sociology and History

2006-02-02T21:30:00.000-08:00

Here are some great recent books that discuss the sociological aspects of economies:

Organizing America: Wealth, Power, and the Origins of Corporate Capitalism by Charles Perrow

The Sociology of the Economy by Frank Dobbin

The New Economic Sociology, A Reader by Frank Dobbin

It's funny to consider this work alongside Martin Whitman's recent letter to shareholders.

Unstoppable

2006-01-22T20:40:00.000-08:00

Perhaps I'm the last person to hear about them, but these comics are the funniest things I've seen in a while.

Neural Networks

2006-01-10T15:34:00.000-08:00

Here's a nice introduction to how learning is thought to work in the brain.

Politically Incorrect Data Mining

2006-01-06T19:14:00.000-08:00

WalMart seem to be encountering difficulties getting statistical matching algorithms to behave politely.

The Original Blog

2005-12-16T19:55:00.000-08:00

Bob Park has been writing about science policy issues for years, and makes his latest work available each Friday. Today's issue has some interesting reports on science ethics. I only wish that more people like Bob were involved in public discourse relating to science and policy. If there are other blogs like this, please leave them in the comments section so that I can help to promote them more widely.

What Investors Want to Hear

2005-12-06T23:04:00.000-08:00

After reading this article I started buying the Wall Street Journal just to view the ads. Much to my chagrin, a lot of the ad space is dedicated to men's jewelery and apparel, which doesn't reveal much about investor sentiment (maybe these ads are targeted at a New York audience, it would be nice to know if the same sort of thing appears in printed editions distributed on the west coast). If you don't have time to read the article, it's jist is that brokerage firms like to confirm peoples' existing sentiments about the financial markets. If market sentiment is positive, firms' ads present pictures of a grandfather and his grandson fishing together, or a printed ciruit board in the shape of a bull. If it's negative, imagery is chosen to reflect the firm's ability to protect the investor in times of tumult. Reading this Slate article creates a fairly ambiguous picture of current sentiment. The author complains about the profusion of insulting ads that suggest people are satistified with the investment climate, and profiles some of Schwab's recent ads that suggest some people might feel differently.

As for the "dog meter" mentioned in the second ad, wouldn't it make more sense for people to be directed toward mutual funds instead of some piece of software that is supposed to screen your stocks?

technorati tags: investor_sentiment

Just Say "no" to Gay

2005-12-06T12:41:00.000-08:00

The Ford Motor Company has announced that they are discontinuing advertising of their Jaguar and Land Rover vehicles in magazines that are read primarily by homosexuals. Ford has been subject to a boycott by the American Family Association, which announced recently that they are lifting their ban. More info available here. Ford has commented that premium cars like Jaguar and Land Rover are (suprise, suprise) unprofitable. Media reports suggest they are not changing their advertising policy on Volvos.

Politically Correct Gold Investment

2005-12-02T11:51:00.000-08:00

Bloomberg media have been dedicating a lot of air time to gold, and the suggestion is that the price will go higher. I've never felt philosophically comfortable with buying a metal that has limited industrial use, and the demand currently is being driven by the jewelry industry, central banks, and momentum investors. Nonetheless, it's an attractive investment. I like the iShares South Africa ETF as a way to catch this momentum. I own it, and the StreetTracks GLD ETF.

Politically Incorrect Use of "her"

2005-11-29T13:09:00.000-08:00

It's entertaining to encounter the use of the pronoun "her" so often in behavioral finance and economics papers. Invariably, this pronoun is used in place of "the agent", who usually shows cognitive bias of one sort or another. On the face of it, "him" might be a better choice, as most of the cognitive biases are things I tend to see in men more than women. For examples, see here and here.

Analogies for Limited Arbitrage and Agent Distrust

2005-11-19T21:17:00.000-08:00

Here in New York, people take their jaywalking pretty seriously. Let's call it a "limits to jaywalking" theory. There are a few exceptions. I have seen bicycle couriers do things that I thought were attempts at suicide, but I digress.

When presented with the opportunity, I will often do a diagonal jaywalk across a busy intersection. This has to be on a stale green in the direction I am walking, orthogonal to the cross. They are fairly easy to set up and decide upon, but the looks I get from pedestrians after finishing the move are similar to those I give to the apparently suicidal bicycle couriers.

What's the relevance of this? Hedge funds have a real problem these days acting on arbitrage opportunities because their marketing department's requirement that they be open ended (for competitive reasons, customers can withdraw their money whenever they want). This is referred to in the literature as limits to arbitrage. It's basically a trust problem. Hedge funds may identify an arbitrage (mispricing of equivalent assets), but these have a tendency to become more mispriced after the hedge fund takes a position as more noise traders enter the market. The hedge fund customer gets a performance statement in the mail (you lost money this month) and decides that the fund manager is incompetent and withdraws their funds to place them with a manager that has postive returns during each and every month. The hedge fund manager has to unwind their arbitrage position at a loss in order to redeem the customer's capital investment. This one of the reasons for the 1998 meltdown in Long Term Capital Management.

The only other analogy I can think of for this is based on professional experience (limits to refactoring?). A software engineer is placed on a project with some mess of old source code written by people that are long gone. To add insult to injury, the erstwhile engineers used to take freequent breaks from their work to inject exotic drugs in the bathroom of their employer. The new engineer has no existing trust relationship with the manager that hired her in apart from a few thumbs up from references and people that conducted interviews with her. The manager asks her to make a few minor feature enhancements in the project, and provides a two week deadline. She presents a proposal to rework some of the most sclerotic code in an effort to make other modifications down the road easier. The manager very tentatively agrees, and checks in every now and then to ask how things are going. The software engineer has a pale look, and the manager thinks about firing her. At the end of two weeks, the mods are complete and some of the byzantine code has been exorcised. Both manager and engineer are reluctant to plan any further sanitizing of the existing code.

If anyone can come up with another analogy from their own experience, please write it as a comment!

technorati tags: limits_to_arbitrage

November 2005 Workshop in Behavioral Finance

2005-11-19T09:06:00.000-08:00

A list of papers from this workshop is available here. For general information about the workshop, click here.

New Browser

2005-11-17T22:58:00.000-08:00

A new browser named flock seems to be rapidly gaining in interest. I'm just starting to play with it, and this blog entry is being written through their client interface. Flock also integrates del.icio.us in place of bookmarks, which is a nice thing.

Under Siege: Attack on Statistical Arbitrage

2005-11-15T20:20:00.000-08:00

This is a fine paper describing the process of having your trading desk destroyed by a passenger jet, and having to take your act to the suburbs. Do the people on the other side of your trades have any sympathy for what happened to you? You can guess the answer to that question.

Many other great working papers are available for download from the Russell Sage Foundation.

A Satisficing World

2005-11-15T15:13:00.000-08:00

Today's Wall St. Journal (11/15/05) has two interesting articles about the American workplace. The first, from the Cubicle Culture weekly feature provides a list of passive agressive behaviors that you can use at work to get ahead without any real fear of reprisal (they won't be listed on your performance review, because there will be no evidence to substantiate any claim). Perhaps I should start another blog dedicated to just this topic (psycho-freeloading?).

The second from the Career Journal section is a bit more depressing, and details the difficulty those with a stuttering problem have getting hired. Imagine the drain on the economy from this.

2005-11-05T06:10:00.000-08:00

Exchange Traded Funds

I am in grave envy of those just starting their investing careers. When I was a young'en access to low cost, objective averages of industry sectors, national economies, and commodities was limited at best. The individual had to either go macro, "risk everything with a pitch and toss" on an individual stock, or trust your money to the delightful folks in the mutual fund business. Exchange Traded Funds have changed all that. You can now develop a cheap sampling scheme that supports bets on Belguim, small increments of Gold, Malaysia, Singapore, South Africa, US Retail, Treasury Inflation Protected Securities, the list goes on.

I now make routine use of ETFs in formulating execution of my investment objectives. Please help feed my ego by doing the same.

To learn more about how exhange traded funds work, look here and here.

2005-10-25T06:30:00.000-07:00

Rudyard Kipling's poem If.

Alien Abduction Bias as Religion Proxy

2005-10-21T05:00:00.000-07:00

A new book by Harvard psychologist Susan Clancy explores the anomalously large number of reported alien abductions within the American populace. More info available here. Thankfully this cognitive bias is not subject to social influences. At least, not yet.

Bookstores In New York

2005-10-18T06:41:00.000-07:00

This is meant as a resource for the few like myself who have a hard time finding people that can give you the low-down on the good bookstores in New York. When I first moved here, I was very disappointed when I compared the city to the San Francisco Bay Area with stores like the Stanford Bookstore, Cody's, and Black Oak.

Top of the list has to be the Barnes and Noble textbook store on 18th St. What's a bookstore without a psychopharmacology section? For the tabula rasa crowd, there's Labyrinth on 112th between Broadway and Amsterdam (close to the Columbia U bookstore, which is also OK). New York's signature strength is its used bookstores. For volume, nothing beats The Strand (great African History section) on Broadway and 12th. For ambiance, there's the Housing Works Used Book Cafe on Crosby St. A smaller, well managed collection can be found at 12th Street Books, on 12th St. close to University.

The Ultimate in Rational Management?

2005-10-17T09:15:00.000-07:00

This stock appeared on my radar screen recently. It seems like the best of example of rational management I could find (specialists in psychology). The company seems to operate a fairly socially responsible business, so it's easy on the conscience as well.

New York Retailers' Aversion to Carrying Change

2005-10-14T08:00:00.000-07:00

I'm revealing some ignorance here. On a recent trip to Boston, I presented a subway booth attendant with a twenty dollar bill for a single ride. She provided me with change that included nine ones, and seemed very apologetic about it.

Here in New York, I have this constant problem of wondering how I'm going to change up the $20 bills I get from the ATM, as whenever and wherever I use them to buy a coffee, I get a dose of attitude from the seller, and nineteen one dollar bills in change. I'm the one who has to say sorry.

My only theory for this dichotomy is that even though New York is "the safest large city in the United States", store operators retain their belief that things haven't changed since the blackout days of 1977. New York as a lot of people, and that means that the likelihood of a robbery occuring is a lot higher than in a city like Boston, even though the crime rate might be less. Of course, if a crime occurs here, the media are all over it, and people get daily doses in the evening news (including all of Long Island) which reinforce their beliefs. This makes store operators only carry the minimum amount of change necessary to operate their business.