On May 17th 1792, twenty-four stock brokers met under a buttonwood tree outside 68 Wall Street and agreed to set up the New York Stock and Exchange board. The tree was a symbol of Wall Street, but also, it was where people originally met to trade, to discuss and to argue.
The Economist has done an excellent job of keeping the tradition alive by bringing together top global financial executives, policymakers, global regulators and opinion leaders to discuss and debate proposed guidelines for the financial community, seeking to bridge fundamental financial issues with macroeconomic and geopolitical viewpoints.
As I mentioned yesterday, I usually don’t like conferences but not only did I find myself sitting between BOE Governor Mervyn King and Nobel Prize winner Joseph Stiglitz but we got to watch my favorite economics rap video together and even met the guys who created it from EconStories, who have lots of good videos on their site (of a more serious nature).
The conference itself does not take itself too seriously. Even Nassim Taleb was able to make a few jokes while explaining to us why the financial system is irrevocably screwed up unless we give it a major overhaul. Taleb’s main points were:
People are inherently greedy.
The Financial Crisis was caused by and increase of hidden risks that was encouraged by the rules set forth in Basel II
Multiple exposure to low-probability, high-risk events accumulate to high probability of bad outcome (Taleb’s "Black Swan").
Bonus packages and compensation encourage very bad risky behavior. Stock options that offer potential upside and no downside encourage the maxing of risk-taking by potential beneficiaries.
This leads to a banking system where all the traders get rich and all the investors become poor.
There is a general,.chronic underestimation of risk and business schools reinforce this bad behavior.
Regulation gives investors a false sense of security.
Capitalism must be symmetrical – bonus without penalties (clawbacks, etc.) must be eliminated.
When I am at one of these conferences, I like to watch the audience reaction to what is being said. Here we have a gathering of the World’s movers and shakers and sometimes the reaction to what is being said is more important than the thing that is said. For instance, my note on Taleb’s comment that regulations give investors a false sense of security is that…
The market value of the high yield FINRA-BLP Active U.S. Corporate Bond Index relative to its investment grade counterpart has now exceeded the level seen in May 2007, at the peak of the credit bubble.
If you ask me, it looks like risk-taking is back with a vengeance.
This is interesting. However, the conclusion that "individuals with antisocial personality disorder may not be unaware of… consequences… but instead that their intense reward-seeking motivation consumes their attention wholly until they have fulfilled their desire for reward" seems overstated, and only a small piece of the psychopath puzzle.
For a different perspective, that of a financial writer, and an even farther-fetched conclusion, read the second article below. The same data can be interpreted to show that a trader taking on excessive risk is "hopped up on dopamine" so they can’t see negative consequences, making them "kind of a psychopath." Take all this with a grain of salt haloperidol. - Ilene
An overactive dopamine reward system in the brain may help explain why psychopaths pursue rewards without regard for consequences, according to new research published this week in the journal Nature Neuroscience. Previous research has found that individuals who suffer from antisocial personality disorder—often referred to as sociopathology or psychopathology, despite debate over whether these are distinct conditions—lack empathy and fear. Yet this new study, from researchers at Vanderbilt University examines what these individuals may have in excess. According to the study, led by Joshua Buckholtz, a graduate student in psychology at Vanderbilt, individuals with antisocial personality disorder traits show signs of dysfunction in dopamine reward systems—suggesting that, in psychopaths, the drive toward reward can overwhelm all else.
Prior to participating in two different experiments, study subjects completed personality tests to identify presence and severity of psychopathic characteristic—including aggression, lack of empathy, and capacity for manipulation, among other things. Drawing on previous research that has established a strong link between substance abuse and psychopathology, in the first experiment researchers gave participants amphetamine, then used functional Magentic Resonance Imaging (fMRI) brain scans to monitor how dopamine release was affected by the stimulant. In a second experiment, study participants were told that they would be paid for performing a simple task, and researchers conducted brain scans while they completed the tasks.
In both experiments, researchers found that participants who had psychopathic characteristics according to the personality test, were more likely than those without those traits to have greater activity in the nucleus accumbens, the area of the brain associated with dopamine reward processing—whether in response to the chemical stimulant, or the suggestion of monetary reward.
On average stock traders lose money. So do people who play the lottery. Yet both sets of people will often buy insurance as well. On one hand people are risk takers, engaging in risky and usually unprofitable activities, yet on the other they’re risk adverse, looking to protect themselves against possible, although often unlikely, losses.
Mostly we don’t find this particularly odd. Yet it poses a particular problem for economists and psychologists trying to disentangle the various threads that make up the skein of the human condition. They feel we should either be risk seekers or risk fearers: to be simultaneously both suggests something strange is going on. Stock pickers take note: sell insurers, buy lotteries. Or is it the other way around?
Markowitz’s Lottery Puzzle
One of the earliest researchers to note this gambling/insurance peculiarity was Harry Markowitz who we’ve met before in Markowitz’s Portfolio Theory and the Efficient Frontier. In the same year he published the paper that eventually led to modern Portfolio Theory, the efficient markets mayhem and a Nobel Prize he also wrote The Utility of Wealth in which he both described this confused risk model and sought to explain it.
It’s a bit of surprise to find the father of rational investing theories elaborating on a subject which describes how irrational people really are. However his two 1952 papers are linked. While The Utility of Wealth describes how people really behave Portfolio Selection describes how they should behave to maximise their wealth. We can’t blame Markowitz for the investment industry using his ideas with all the subtlety of a Mob family collecting a debt from the man who wasted their mother with a cheesegrater.
Models which really aim to describe the way humans deal with risk are deluded and denuded if they exclude the risk-seeking part of the human experience. Deluded because they ignore the evidence of everyday life and denuded because they strip away the essence of human experience. Humanity would still be trolling around on its knuckles in East Africa if curiosity about what was on the other side of the forest canopy hadn’t…
There’ve been a lot of studies that indicate that women make better investors than men. They’re less inclined to overtrade, which reduces the fees they pay and means they start with an inbuilt advantage. However, there’s not been much analysis of why this behaviour occurs.
For it’s not self-evident that the lack of a pair of testicles should automatically make you a better investor. The pop-psychological view that this is due to surges of testosterone driving risk taking actions by red-blooded alpha males is highly seductive, but also pretty useless. Humans are uniquely evolved to allow us to override the urgings of of our genes, regardless of what sex organs they endow us with.
Cool Female Heads
However, there’s not much doubt that the basic finding – that women are less active traders and produce better returns on average over the long-term – is correct. Odean and Barber showed this in their 2001 study on overconfidence for instance. What’s more interesting, though, is how easily the idea that this is simply due to non-eradicable sex differences is accepted. In fact some observers have gone so far as to suggest that market extremes could be avoided by ensuring more women are present in investment houses – the idea being, presumably, that the cooler headed females will reduce the hot-headed male impulses to trade irrationally.
Like hell. More likely, of course, the presence of additional women would simply stimulate the men into ever more risky trades in feverish attempts to impress them: taking risks may have benefits that don’t translate into pure financial advantage. Meanwhile any women interested enough to get involved in market trading are more likely to do so in order to become rich rather than to act as a self-regulating safety valve for their male colleagues.
Now before we can investigate this more we need to take a careful look at what causes sex differences. It’s perfectly obvious that our genes have fitted males and females differently for the purposes of reproduction but beyond that it’s surprisingly difficult to definitively tease apart the influences of genes and environment. Even the well known male map reading advantage can be traced to the greater willingness of parents to allow young
The Securities and Exchange Commission announced today:
The Securities and Exchange Commission today charged a former 20-year employee of BP p.l.c. and a senior responder during the 2010 Deepwater Horizon oil spill with insider trading in BP securities based on confidential information about the magnitude of the disaster. The price of BP securities fell significantly after the April 20, 2010 explosion on the Deepwater Horizon rig, and the subsequent oil spill in the Gulf of Mexico, resulted in an extensive clean-up effort....
Rovi Corporation (NASDAQ: ROVI), a global leader in entertainment discovery, announced it has entered into a definitive agreement to sell its DivX and MainConcept businesses. Rovi had previously announced its intent to sell the DivX and MainConcept businesses by the end of the second qua...
This one matters a lot. Abenomics was predicated on a lunatic notion—namely, that the economic ills from Japan’s massive debt overhang could be cured by a central bank bond buying spree that was designed to be nearly 3X larger relative to its GDP than that of the Fed. Yet anyone with a modicum of common sense and market...
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As Chief Strategist for STA Wealth Management, I start each and every day by consuming copious amounts of a heavily caffeinated beverage and a data feed from a litany of web and blog sites. Over the last couple of days in particular, they have been numerous articles on whether the market is currently in a bubble. Here are a few as an example that I just grabbed from RealClearMarkets.com:
Shares in Chipotle Mexican Grill Inc. (Ticker: CMG) opened higher on Thursday morning, rising more than 6.0% to $589.00, after the restaurant operator reported better than expected first-quarter sales ahead of the opening bell. But, the stock began to falter just before lunchtime on concerns the burrito-maker will increase menu prices for the first time in three years. The price of Chipotle’s shares have since fallen into negative territory and currently trade down 3.5% on the session at $532.89 as of 1:50 p.m. ET.
This week I’m in Disney World with the family, our first proper vacation all together in years. As such, I’m off the grid and away from computers of any kind (I’m trying to stay married, you guys). But while I’m gone, I’ve left you some stuff to catch up on…
These were the biggest posts – as read and shared by you – during the first quarter of this year. The theme of today’s collection is good investing and understanding the psychological forces at work when we commit capital. No matter how long I’m doing this...
Last week’s market performance was nasty again, especially for the Small-cap Growth style/cap, down 4%. Large-caps faired the best, losing only 2.7%. That’s ugly and today’s market seemed likely to be uglier today with escalating tensions over the weekend in Ukraine.
But once again, positive economic trumped the beating of the war drums. Retail Sales jumped up 1.1% over a projected 0.8% and last month’s tepid 0.3%, which was revised up to 0.7%. While autos led, sales were up solidly overall. Business inventories were about as expected with a positive tone. Citigroup (C) handily beat estimates to add to the morning’s surprises. As a result, the market was positive through most of the day, led by the DJI, up 0.91%, and the S&P 500, up 0.82%. NASDAQ had a less...
[Facebook] The social network is only weeks away from obtaining regulatory approval in Ireland for a service that would allow its users to store money on Facebook and use it to pay and exchange money with others, according to several people involved in the process.
The authorisation from Ireland’s central bank to become an “e-money” institution would allow ...
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I just wanted to be sure you saw this. There’s a ‘live’ training webinar this Thursday, March 27th at Noon or 9:00 pm ET.
If GOOGLE, the NSA, and Steve Jobs all got together in a room with the task of building a tremendously accurate trading algorithm… it wouldn’t just be any ordinary system… it’d be the greatest trading algorithm in the world.
Well, I hate to break it to you though… they never got around to building it, but my friends at Market Tamer did.
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Ladies and Gentlemen, hobos and tramps,
Cross-eyed mosquitoes, and Bow-legged ants,
I come before you, To stand behind you,
To tell you something, I know nothing about.
And so the circus begins in Union Square, San Francisco for this weeks JP Morgan Healthcare Conference. Will the momentum from 2013, which carried the S&P Spider Biotech ETF to all time highs, carry on in 2014? The Biotech ETF beat the S&P by better than 3 points.
As I noted in my previous post, Biotechs Galore - IPOs and More, biotechs were rushing to IPOs so that venture capitalists could unwind their holdings (funds are usually 5-7 years), as well as take advantage of the opportune moment...
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