Posts filed under “Philosophy”

One of the major philosophical takeaways from the past 15 years has been the failures of the Efficient Market Hypothesis and the rise of Behavioral Economics. Consider, as a corollary, the argument assumption that many pro Free Market folks make: Markets are much more effective, efficient and productive than government mandates or regulations.

I do not disagree with that view. However, every now and again, we see examples that challenge, and (even disprove) this thesis. At the very least, we find circumstances that provide context for why market solutions can and do fail with stunning regularity.

Specifically, the Deregulatory era of Banks and Wall Street — we know how that ended (disastrously); BVut also consider the more strongly regulated Asian and European Internet services — they are 10X faster than that in the US; Cell service on those continents are much, much better than in the US. Both of these are offered for the same or lesser prices than here. Speaking of price: Health Care in the US costs twice the price as anywhere else in the world. Then there are the Financial “innovators” who abdicated lending standards — “hey, we’re just selling junk to securitizers who want it!” — they helped to inflate a bubble that popped, crushing housing; Bankers plowed into subprime securitization because it appeared profitable and “everyone else was doing it.” Bond buyers desperate for yield bought up all of this junk.

And post Hurricane Sandy, we have the issue of Government mandated gasoline rationing. On any given day, 50% of customers cannot legally tank up their cars due to the last digit of the license plate number.

Experience in NJ and NY shows that rationing has worked tremendously well. Gas lines have gone from 3 hours down to 15 minutes nothing, even as many stations still have no power and fuel deliveries are not back to normal.

Why does Odd/Even rationing work? 

The answer, I suspect, is for the same reason that EMH has failed: Human Behavior. There is a very human tendency for excess emotions to take control — and at the worst possible times — especially when disruptive events occurs. We see panic set in.

That is all that a gasoline line is — a panic — that is caused by fear and emotion.

Consider the Bank Runs we saw as the collapse began in 2007. There was no need to wait on a line for 3 hours for your money — your checking account is FDIC insured. Go to another bank, write a check, no worries. Even as WaMu and others were on the verge of failing, your ATM card never stopped working.

So why were their gas lines?

There is a contra argument that Markets were not allowed to work — that prices were not allowed to rise in response to supply shortages.

This is a fair argument, but it ignores a key concept that many free market absolutists seemingly miss. The contra argument is that we have decided, as a Democracy, that we do not want to see people priced out of the most basic necessities of life due to emergencies. Certainly, we can allow free markets to raise the price of food and fuel to rise in response to severe shortages; perhaps prices rise so much that only the well off can afford them. But the results of this would very likely be civil unrest, riots and even violence. This is not a very desirable outcome in an ostensibly civilized society.

Before the FDIC, people did not trust banks much. There were regular bank runs, and occasional panics. This created a system that was not stable, discouraged savings, and led to spasms of social unrest. It was a never ending issue for the economic system to deal with. We had regular panics, dislocations and crashes. It was not a conducive system in which to conduct business or grow an economy.

Rules and regulations exist because when left to their own devices, people will occasionally make spectacularly bad decisions. The impact of some of these decisions are so negative and far reaching that we as a society seek to prevent them.

Consider the Royal Bank of Scotland (RBS), at one time the biggest bank in the world. In 2008, it had assets of $3.5 trillion dollars. The Economist reported that RBS “was sunk by a loss of £8 billion, or 0.3% of its assets. RBS and its regulators had let the simplest measure of balance-sheet strength, how much equity it had compared with its total assets, fall below 1%. Other lenders were in similar positions.

0.3% !! How can a bank fail with such a tiny loss relative to their total assets? The answer is leverage. When you are jacked up 40X or 50X, it only takes a tiny miscalculation to make you insolvent.

Why don’t banks hold more capital? Because it reduces profit. Publicly traded companies have utterly misaligned incentives — its in the interest of management (but not shareholders) to use maximum leverage to generate the highest profits and therefor the most salary and bonuses for themselves. If the company fails, its the shareholders loss. (As we saw with the collapse of Lehman and Bear, insiders may have lost some paper wealth but they had already cashed out billions for themselves).

Hence,  in many circumstances, markets may not work ideally. You could even say that their outcomes are sub-optimum.

For the vast majority of economic transactions, markets are vastly superior ways to allocate resources. They are far more productive and efficient than government mandates, regulations and edicts.

There are however, areas where the market simply fails.During gasoline shortages, odd/even rationing works well. And the rest of the time, Bankers need to be moderated, lest they blow up their banks and the economy as well.

The anti-regulation, free market absolutists need to find a new theory.

Category: Markets, Philosophy, Psychology, Really, really bad calls, Regulation

The Price of ‘Attention Unworthies’ . . . ?

While I was working on my collection of lessons for my WaPo column this week, I ended up finding all manner of interesting, amusing but ultimately unusable items. Some of these were ironic and funny and snarly, but I did not want the column to be “The Schadenfreude Chronicles.”  Rather, I wanted to find real lessons…Read More

Category: Philosophy, Psychology

Lessons from 2012 Presidential Election

I am always on the look out for lessons that I can apply to investing and business. This post-election morning is not any different. Let’s take a look at some of the more interesting aspects of the election season, and try to discern what lessons there are, for investors and others to learn: 1. Process…Read More

Category: Investing, Philosophy, Rules

Bruce Bartlett: Dangers of Republican Know-Nothingism

Bruce Bartlett goes off on some of the denialist behavior from the GOP. Bartlett writes: When a study doesn’t support their dogma, the GOP censors it: Nonpartisan Tax Report Withdrawn After G.O.P. Protest Original study still available here: Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945 (PDF) Bartlett discussed…Read More

Category: Philosophy, Politics, Really, really bad calls

Nobel Winners in Economics: Geographic Dispersion

Source: Bloomberg Brief   The Sveriges Riksbank Prize in Economic (2012 Nobel Prize in Economic Sciences) was awarded to Alvin E. Roth and Lloyd S. Shapley today for their work on matching supply and demand for everything from single men and women to organ donors and their recipients. Americans have won 68% percent of all…Read More

Category: Economy, Philosophy

TBP: Teach a Man to Fish . . .

We have our annual TBP Conference next week, and I wanted to take a moment to discuss what makes this event so different from most of the conferences you see advertised.

When you see events like this week’s Value Investor or the annual Ira Sohn Conference, the emphasis is on BUY THIS or SELL THAT. Its almost always a parade of manager’s and their supposed best ideas. I can give you 1000 war stories on this, but that is not how people make money in the markets. If it were, the audiences of financial TV programs would be filthy rich.

What makes much more sense is to have a series of experts with a demonstrated expertise in a given aspect of investing share their process with you. Whether its muni bonds, macro-economics, Europe, quantitative analytics, trading, technicals, behavioral economics, or even politics, hearing from the pros who have navigated treacherous waters is instructive.

We have a terrific event planned for next week — I am looking forward to meeting those of you who can make it. There are still a few discounted seats left courtesy of Bloomberg (go to this link).


The full schedule is after the jump

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Category: Apprenticed Investor, Investing, Philosophy

Apple’s Steve Jobs Memorial

Steve Jobs passed away October 5 2011. On its home page today, Apple has a video commemorating his legacy.


Hat tip Tech Crunch

Category: Philosophy, Technology, Video

The New Nonsense: Leaving Finance

Every now and again, a meme pops up that cries out to have its head chopped off. The latest such idiocy: People leaving finance to find more “fulfilling” work. I noticed this over the past week when several such articles hit my inbox: The first I saw was a sincere discussion by Mathbabe explaining why…Read More

Category: Markets, Philosophy, Really, really bad calls, Wages & Income

Debating Jeremy Siegel & Stocks for the Long Run

Over the years, I have debated Wharton (University of Pennsylvania) Professor Jeremy Siegel numerous times. He is a very nice fellow who wrote the widely read book Stocks for the Long Run (aka SFTLR).

If I were to take the other side of the SFTLR argument, I would focus on 3 things:

My main critiques are:

1) Buy & Hold delivers inferior returns. Even worse, most Humans have a hard time sticking to it.

2) A simple system of either Valuation — think Shiller’s 10 Year Cyclically adjusted P/E — or Tactical application of Moving Average — Mebane Faber’s 10 Month moving average — significantly improves returns by reducing equity exposure and volatility as markets crash or have major corrections;

3) The current Fed driven markets (indeed, from 1981-2011) is an aberration that STFLR does not (and indeed, can not) anticipate. To quote either Jan L. A. van de Snepscheut or Yogi Berra: “In theory, there is no difference between theory and practice. But, in practice, there is.”

4) There are a myriad of data issues with SFTLR, particularly Survivorship bias, as described by jason Zweig in the WSJ and Birinyi Associates.

Regardless of my views, I want to crowd-source the arguments pro and con for SFTLR — What does Siegel get right, what does he get wrong? What is the weakest and strongest parts of his viewpoints?

What say ye?





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Category: Investing, Philosophy

Steven Pinker: Taboos, Political Correctness, and Dissent

FIRE President Greg Lukianoff interviews Harvard psychology professor and bestselling author Steven Pinker about his books, the crucial role dissent plays in keeping society sane, the special importance of free speech on campus, and the origins of political correctness. Professor Pinker, a member of FIRE’s Board of Advisors, is the author of The Blank Slate, The Better Angels of our Nature, and The Stuff of Thought.

Category: Philosophy, Politics, Video