March 2012 Roundup: Of Muppets, Keynes and Female Risk Aversion

April 8, 2012

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Muppets and God

This was the month that saw Goldman Sachs' Muppetgate, and a $1.5 million book deal for Greg Smith, the man who precipitated it. Perhaps the most interesting revelation was that Smith’s role of “executive director” apparently equates to “teaboy”, if inside reports are to be believed. This grade inflation presumably reaches all the way to the top, or to “God” as CEO Lloyd Blankfein is now known. At least that would mean his much derided comment that bankers were doing God’s work finally makes sense…

Tea and Keynes

According to Smith standards have slipped at Goldman’s, although his rosy recollection belies the fact that back in the good old days they were busy finding ways of hiding Greek debt from the European Union’s financial overseers. Admittedly, that’s about as hard as playing hide and seek with Helen Keller, but the idea that GS was a hive of modest disinterested behavior a decade ago seems unlikely at best.

Elsewhere Paul Krugman and Steve Keen had a squabble that resembled two all-powerful demigods having a fight over whose turn it was to tidy up after tea. The nub of the debate was the arcane topic of fractional reserve banking and whether bank tellers can create money or not. The answer seems to be that they can. Or maybe they can’t. It just depends on your perspective. More interestingly Jason Zweig produced a good piece about research into Keynes the investor and promptly got flamed by people who dislike Keynes because of his economic policies and who can't think beyond their prejudices to look at the data. Jason responded by dissecting his respondents' problems with halo effects and confirmation bias in a blog article which included a link back here, thus neatly re-directing the ire across the Atlantic.

Research and Posts

Interesting research published in March included the idea that it's institutions that cause bubbles not private investors, at least in South Korea (Are Individual or Institutional Investors the Agents of Bubbles?). Meanwhile the German Bundesbank came down firmly against the idea that women are more risk adverse when it comes to money in Executive Board Composition and Bank Risk Taking. It's probably fair to say that the general response to this was less than positive; e.g.Bundesbank Comes Out Against Women, War On All Good Things Continues, Puppies and Ice Cream Targeted Next from FT Alphaville. And, in the month that saw unarmed teenager Trayvon Martin shot dead, a pre-release from the University of Notre Dame suggests that holding a gun makes you think others are too.

Over on StockTwits Howard Lindzon posted a follow-up to Noise, Sentiment and StockTwits, adding to the research indicating the rising importance of social media and particularly Twitter, for investors. The data continues to flow, as The Impact of Divergence of Opinions About Earnings within a Social Network (actually StockTwits again) provides yet more evidence that tweeters' sentiment predicts stock movements. This one's going to run and run.

Annoyed and Upset

Meanwhile, as usual, I wrote some stuff about behavioral bias and all that. One of the more popular articles was Risk := ON, about the likely mean reversion of high profit margins, although that was probably because Barry Ritholtz linked to it, which triggered the normal small avalanche of interest. The financial blogosphere also figured quite highly in Why There’s Never Been a More Dangerous Time To Invest, which was written in response to Tadas Viskanta's Abnormal Returns post There Has Never Been A Better Time To Be An Individual Investor. I think we're both right, but I could be biased …

We also at looked a range of previously uncovered biases. How To Be A Bad Manager: The Pygmalion Effect examined the research showing that managers’ expectations predict subordinates’ performance, an effect originally noted in children and a sure-fire way of ensuring you don’t get the best out of people. In Do Stocks Always Outperform (in the Long Run)? we covered the erratic nature of the equity risk premium and the psychological research that explains it. Shares are not safe, not even in the long run.

Just to annoy goldbugs we covered off the behavioral bias of salience with reference to Warren Buffet’s musings on the intangible intrinsic value of gold in his latest letter to Berkshire Hathaway shareholders and to upset anti-environmentalists looked at Jevons’ Paradox or why improving fuel efficiency means we use more fuel. Then, seeking to aggravate as many people as possible in one month, we targeted passive investors by pointing out that index trackers may be creating a bubble in stocks in the major indexes (Hubble, Bubble, Index Trouble).

Less controversially Craving a High: Trading on Dopamine covered the research showing that there’s a link between the genetic disposition for the hormone dopamine and successful, or unsuccessful traders. Too much and you’re turned on by risk for risk’s sake. Too little and you can’t bring yourself to trade at all. We also added to past research on the duel between economics and happiness in Manifesto for a Low-Growth World, by re-examining the evidence that suggests more money doesn't make us happier, and we should spend it on experiences rather than physical goods.

Coming Up

In the coming month we’ll turn our attention to the links between non-dividend paying stocks and investors’ tendency to overvalue them, why we don’t want to save enough for our retirement but will make sacrifices for someone else’s and the terrible truth that most of the time we don’t know what investment decisions our brain is making for us, and what we can do about it. I might write about something topical as well, if anything interesting happens.

With luck we’ll also get time to review the rise of the financial blogosphere as we see the publication of Backstage Wall Street: An Insider’s Guide

by the Reformed Broker’s Josh Brown, Tadas Viskanta's eponymous Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere

and The Indomitable Investor

by Steve Sears. What difference is it making – and why is it making it? Enough for now. I’m off to try and figure out how to make the new Google+ subscription link work.

Articles this month: