Credit Writedowns » psychology

The Sovereign Debt Crisis and Confirmation Bias

Edward Harrison — Fri, 13 Jan 2012 16:00:06 +0000

The myth that Greeks are lazy and Germans are industrious and that this has some significance in the sovereign debt crisis is everywhere one turns. It is false. The issues for Greece are not about working longer hours but are ones of productivity, industrial organisation, and demographics. That won't stop people from spinning the tales of lazy Greeks and workaholic Germans

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The continuing saga of bank self-regulation and other fairy tales featuring Alan Greenspan

William Black — Thu, 12 Jan 2012 13:15:46 +0000

We continue to witness remarkable developments in the intersection of the related fields of economics, finance, ethics, law, and regulation. Each of these five fields ignores a sixth related field – white-collar criminology. The six fields share a renewed interest in trust

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Cohan on Corporate Psychopaths and the Financial Crisis

Edward Harrison — Tue, 03 Jan 2012 14:22:35 +0000

William Cohan told Bloomberg Television's Erik Schatzker and Stephanie Ruhle that he believes 'psychopaths" at the helm of major financial institutions were responsible for the credit crisis

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The hidden meanings of debt

Guest Author — Thu, 15 Dec 2011 20:19:24 +0000

In Europe, the discussion of fiscal prudence vs. fiscal profligacy seems to have taken on a normative hue. It’s doesn’t seem to be just about economics, it’s also about who’s a saint and who’s a sinner. In the US, strategic default was portrayed as the act of dishonorable deadbeats. The discourse is of a discourse of “shame, guilt, and fear". This is the psychology behind the apportionment of losses between creditors and debtors

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The ECB now wants export-driven growth for the whole of Europe, not just for Germany

Guest Author — Tue, 13 Dec 2011 13:49:59 +0000

The ECB President admitted that budgets cuts and tax increases are contractionary -“in the short term” he added - but there are two ways to lessen their negative impact on growth: the confidence-enhancing effect that will follow the new “fiscal compact” or “if you enhance the competitiveness, you can actually count on your external demand, on your net exports”

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The Volatility Paradox

Rick Bookstaber — Mon, 12 Dec 2011 15:00:00 +0000

Volatility tends to drop when market risk is building up and leverage is rising, luring investors into complacency. Indeed, the lower volatility justifies investors taking on more leverage; if volatility has dropped by a third, why not take one and a half times the leverage? This pro-cyclical dynamic arising from lower volatility in times of increasing risk-taking is the volatility paradox. The main take-away from the volatility paradox is that we shouldn't use shorter-term, contemporary risk measures when they are very low

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Code words and dog whistle economics

Edward Harrison — Thu, 08 Dec 2011 15:00:01 +0000

Here are a few code words that you will often see in economic writing followed by their true meaning. The code word is a dog whistle. It acts like an emotional marker only for those attuned to the underlying 'moral' issues inferred by the code. While you may agree with the logical framework behind the code word, the purpose in using the code is to influence emotion instead of logic

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Worrisome Signs

Marc Chandler — Wed, 07 Dec 2011 19:30:53 +0000

Opinion polls and surveys are finding an increasing number of people expect one or more countries to leave the euro zone. Investors are anxious. What is to be done? What makes this so difficult is that there are so many moving parts and possibilities. The way the question is asked often conditions the answers

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The Facts They Don’t Want You to Know

Niels Jensen — Mon, 05 Dec 2011 15:30:03 +0000

If I told you that the composition of an average UK equity fund changes by 90% a year, would that startle you? How would you feel if I added that the 20 funds with the highest turnover returned just 4.7% to investors in the 3 years to the end of March 2011 whereas the 20 funds with the lowest turnover returned 16.8% over the same period? From the same source: Out of 1,230 funds across 12 different strategies, only 35 fund managers produced a performance consistent enough to earn their fund a place in the top quartile in each of the last three years (upper half of chart 1). In a universe of 1,230 funds, over a three year period and completely disregarding skill, the expected number of funds consistently ranked in the top quartile is 1,230*0.253=19.22. In other words, more than half the 35 managers were there not because of skill but because, statistically, someone was always likely to ‘over-achieve’

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Predicting the future of policy making

Edward Harrison — Tue, 22 Nov 2011 02:47:39 +0000

Predicting the future of policy making has been and will continue to be key to understanding where this economy is headed – and by extension what your investment portfolio will do

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News Links: Need to Create? Get a Constraint

Edward Harrison — Sun, 20 Nov 2011 14:30:59 +0000

Need to Create? Get a Constraint | Wired Science | Wired.com One of the many paradoxes of human creativity is that it seems to benefit from constraints. Although we imagine the imagination as requiring total freedom, the reality of the creative process is that it’s often entangled with strict conventions and formal requirements. Daring Fireball:

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Le Pen: France must leave the eurozone

Edward Harrison — Sat, 19 Nov 2011 19:42:22 +0000

With the euro zone about to implode, it makes sense for politicians outside of the main stream to rise up, grab the metaphorical mic and make a play for a nationalist response. That’s what Marine Le Pen hopes to do

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More on advocacy versus forecasting at Credit Writedowns

Edward Harrison — Tue, 15 Nov 2011 21:44:07 +0000

About a year ago I told you there would be less policy advocacy and more policy forecasting at Credit Writedowns. This is an update

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News Links: Down with the Eurozone, It’s not about Berlusconi

Edward Harrison — Sun, 13 Nov 2011 14:30:48 +0000

Down with the Eurozone – Nouriel Roubini – Project Syndicate For the last decade, the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) were the eurozone’s consumers of first and last resort, spending more than their income and running ever-larger current-account deficits. Meanwhile, the eurozone core (Germany, the Netherlands, Austria, and France) comprised the producers of

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Daniel Kahneman on Investing: Luck Vs. Skill

Edward Harrison — Mon, 31 Oct 2011 19:14:38 +0000

I have Daniel Kahnemann’s book Thinking Fast and Slow, but have yet to read it. Judging from the positive reviews and his past work, it sounds like it should be pretty good. Kahnemann was on CNBC last week discussing some themes from his book and skill and luck in the world of investing. The video is below. Take a look. Also see “Daniel Kahneman: How cognitive illusions blind us to reason” from this Saturday’s Guardian

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Paul Davidson: The State of Economics (wonkish)

Guest Author — Wed, 12 Oct 2011 15:25:50 +0000

Paul Davidson argues that a theory is the way humans describe real world observations on the basis of a model that starts with a few axioms. An axiom is an assumption accepted as a universal truth that does not need to be proved. From this axiomatic foundation, the theorist uses the laws of logic to deduce conclusions that explains what we observe in the world of experience. All theories are generally accepted in some tentative fashion. Theories are not ever conclusively established and can be replaced when events are observed that are deviations from the current existing theory. Thus, the financial crisis of 2007-2009 should have been sufficient empirical evidence to indicate that the axiomatic basis of the mainstream theory needs to be replaced

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Point of Maximum Pessimism?

Niels Jensen — Fri, 07 Oct 2011 13:22:25 +0000

We have been structurally bearish on equities since Absolute Return Partners was established in 2002. ‘Structurally bearish’ does not imply that we, or our clients, have had no exposure to equities throughout this period. Neither does it mean that we have been expecting equities to post a loss every year for the past nine years. No, ‘structurally bearish’ is a term we (and others) use to express our view on multiple trends. In a structural bear market, price/earnings (P/E) ratios decline; i.e. corporate earnings need to outgrow the decline in valuations for equities to post positive returns. Equity investors are swimming against the tide, so to speak. Now, nine years after having made that call, we begin to spot real value again with European equities trading at 9.4 times trailing 12-month earnings and 7.6 times next year’s earnings (see chart 3). A price-to-book value just below 1 and a dividend yield of 5.3% does not exactly make the value story any less compelling

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A few thoughts on economic nationalism

Edward Harrison — Mon, 26 Sep 2011 19:40:28 +0000

I want to talk a little about the political economy. A few months ago I added the topic tag “nationalism” to the topics this blog covers because I believe this is an issue which becomes relevant during global economic crises

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Herbert Hoover: 1931 Annual Message to the Congress on the State of the Union

Edward Harrison — Thu, 22 Sep 2011 20:00:36 +0000

Last week I excerpted from Herbert Hoover’s 1930 State of the Union address. This time I wanted to excerpt from the 1931 SOTU because the Credit Anstalt event had already happened, triggering retail deposit runs. Bank runs is something about which Mohamed El-Erian, the head of PIMCO, has recently expressed concerned because of the wholesale funding squeeze now ongoing in France. What caught my eye was where Hoover says “The situation largely arises from an unjustified lack of confidence.” This seems to be an almost verbatim copy of the sentiments Federal Reserve Chairman Bernanke expressed in Minneapolis just two weeks ago

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Steve Jobs

Edward Harrison — Thu, 25 Aug 2011 00:20:45 +0000

The man is special

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How credit crisis revealed weakness in US approach to epidemic of fraud

William Black — Tue, 26 Jul 2011 15:25:34 +0000

This column addresses the high price paid by the President’s Council of Economic Advisors’ failure to read Akerlof & Romer

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The Internet’s Filter: Condemned to be Free?

Rick Bookstaber — Tue, 26 Jul 2011 14:51:45 +0000

Rick Bookstaber opines about a future world in which the flood of information being produced will be filtered by third parties like Facebook and Google with as yet unpredictable consequences for society. Perhaps these filters are just computationally more powerful versions of our own cognitive filters. But the filters are not under our control. We won't understand how they are deciding what to allow through the filter for our consideration

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Does LinkedIn take advantage of weak links?

Rick Bookstaber — Wed, 20 Jul 2011 12:30:44 +0000

Rick Bookstaber asks whether LinkedIn anything more than a resume warehouse? Is it simply a web-based Rolodex to make it easier to stay up with your business contacts? He doesn't know the business model for the company, and doesn't have any basis to comment on its long-term prospects, but in a somewhat stream-of-consciousness mode, he hears the “linked” in LinkedIn, and it starts him thinking about network theory, and the place LinkedIn most naturally fills in that space, which is to establish weak links

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Americans oppose increasing the debt ceiling. Here’s why

Edward Harrison — Mon, 18 Jul 2011 17:45:00 +0000

The sense that America’s spending is out of control is visceral. It will be cut. Looking for a job, running a business or Investing in a world of austerity is a lot different from getting along in normal times. I advise everyone to think about how this impacts them because the cuts are definitely coming

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Investing in a world of austerity

Edward Harrison — Fri, 15 Jul 2011 19:42:54 +0000

If you are an investor, businessperson or employee, what you care about is outcomes. You want to know what’s likely to happen in the economy and in the markets. That is what this site is all about. What I see says that cuts were coming. What does that mean then for the economy and markets

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Bernanke: “We are not prepared at this point to take further action”

Edward Harrison — Thu, 14 Jul 2011 16:30:52 +0000

One thing I like about the Fed Chairman is that he speaks in understandable prose, unlike his predecessor. Why did everyone think the Fed will ride to the rescue? It’s wishful thinking

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Michael Mauboussin: In investing, less can make you more

Edward Harrison — Mon, 27 Jun 2011 01:00:12 +0000

Michael Mauboussin talks to Consuelo Mack about why its getting harder to beat the market and why doing less can actually make you more

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The Backfire Effect

Edward Harrison — Thu, 16 Jun 2011 19:14:13 +0000

When one's strongest held beliefs are challenged, mostly those beliefs get stronger, regardless of the facts. That's the backfire effect

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A personal anecdote on why the facts don’t really matter

Edward Harrison — Mon, 06 Jun 2011 00:45:46 +0000

I wrote three posts on why human reasoning has not evolved to pursue truth. Rather our minds were designed to argue a ‘side’ irrespective of the facts. In a sense, the facts don’t really matter. I came face-to-face with this phenomenon earlier today

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How Political Bias Alters Economic Understanding

Edward Harrison — Mon, 16 May 2011 19:35:27 +0000

If the facts go against us, we just dismiss them by selective editing or simply making stuff up to support our original thinking. When it comes to politics, when it comes to economics, the facts don't really matter. Human reasoning is not designed to pursue truth but to argue a point. It's mainly about philosophical predisposition

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Consistency

Edward Harrison — Mon, 09 May 2011 15:30:23 +0000

Once politicians set policy and commit to it by signing it into existence, they would rather risk losing office than change course

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Confirmation bias as a feature, not a bug: The facts don’t really matter

Edward Harrison — Fri, 06 May 2011 14:00:29 +0000

Reasoning was not designed to pursue the truth. Reasoning was designed by evolution to help us win arguments. That’s why they call it The Argumentative Theory of Reasoning. So, as they put it, "The evidence reviewed here shows not only that reasoning falls quite short of reliably delivering rational beliefs and rational decisions. It may

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Why markets fail

Edward Harrison — Fri, 29 Apr 2011 13:30:04 +0000

George Soros makes the case for economics as a social science using his theory of reflexivity. Here are some additional thoughts to help understand why markets fail

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Do The Facts Really Matter?

Edward Harrison — Thu, 28 Apr 2011 15:00:59 +0000

Partisans have a well-developed political world view. Facts don't change that view. How does one deal with that? If you're wrong, you will be confronted with a decision on how to react. The insidious thing about this is that when we are wrong, we react automatically in defense without even thinking about it. And that's where we get into trouble. Being wrong is humbling, humiliating, shaming – and shame is an emotion that is about as powerful as fear in driving motivations. But being wrong can be a good thing. I will leave you with a TED video by Kathryn Schulz on being wrong. I think it gets at what I'm trying to say

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More on our innate hypocrisy and confabulatory power

Edward Harrison — Tue, 19 Apr 2011 00:12:48 +0000

How do we make moral and ethical decisions? It would be nice if our choices were grounded in nothing but the facts, in the details of the issue at hand. Alas, that’s not the way it works. Jonathan Haidt, a psychologist at the University of Virginia, has famously argued that our moral judgments are like

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On The Hypocrisy of Voters: The politics of economics redux 18 Oct 2010