Why are We ‘Irrational’: The Path from Neoclassical to Behavioral Economics 2.0

By Rick Bookstaber A few months ago I discussed the failing of econophysics, and more generally, the economic paradigm that treats people like computers and views economic dynamics like physics. The natural follow up question is, “What can you say that is constructive?” The answer is an emerging approach to behavioral economics. Over the past

Back to the global imbalances norm

Here is my mantra regarding so-called ‘unsustainable’ debt levels. I feel strongly about this topic so I’ll repeat it and show you a few statistics on consumer debt from the recent US government data: [P]oor quality growth can continue for very long indeed. And it is this fact which allows the narrative of easy money

Housing bad, Consumer confidence good… What gives?

The gist of the conversation we had on Business News Network on Tuesday was that the data coming out of the U.S. ahead of the President’s State of the Union address was conflicting. Housing was dreadful, but consumer confidence was up; what’s happening? Here’s my take: Technical recovery almost over. We are leaving the technical

How to Regulate Mortgage Lending, Part 2

By William K. Black (cross-posted from Benzinga.com) When Reputation becomes Ineffective or even Perverse Control fraud also makes reputation perverse. Theoclassical economists predict that reputation trumps everything, even auditors’ conflicts of interest. This prediction has repeatedly been falsified by reality. The asserted reputational trump ignores crippling errors. Several theoclassical assumptions about reputation and fraud are

The Future of Facebook and the World as We Know It

By Rick Bookstaber (A cross post by Rick Bookstaber which originally appeared at rick.bookstaber.com.) The following reflects my views and not those of the SEC or its staff. Where will Facebook be in ten or fifteen years? In our immediate euphoria, such a long term view may be like taking a good joke too far.

Some Thoughts on Market Timing

We are now seeing almost all our sell signals go off and we recommend clients hedge portfolios and reduce market exposure. We have advised clients in the past to hedge their portfolios and reduce exposure when all our sell signals have gone off. The last two times all our sell signals were activated was in January and April. In both cases the stock market performed very poorly one month out. We have continued to add new tools to our buy and sell signals. As the following chart shows, the sum of our signals is flashing a warning sign.

These signals typically lead to stock market sell-offs and forecast poor returns one month forward. I could do several letters from people I highly respect who suggest that hedging your portfolio might be wise as we go into the New Year. But this has given you a sense of what I am reading. As for actual timing? This market has been skewed by QE2. Things can remain irrational for longer than we would think. I would urge some real caution. As the guys at Variant note, there will be some opportunities to buy back in.

Grice: Europe and The Three Stages of Delusion

The recent sequence of reassurances from various eurozone policymakers suggests we are in the early, not latter, stages of the euro crisis. Only an Anglo-Saxon style QE will prevent dissolution of the euro. Such a radically un-German solution will only be taken with a full acceptance of how serious the euro’s problems are. But denial persists.

The dawning of reality hurts. Prodded and bullied along a tortuous emotional path by events unforeseen and beyond our control, we descend through three phases: the first is denial that there is a problem; the second is denial that there is a big problem; the third is denial that the problem was anything to do with us

Real Estate Investors or Speculators?

By Vedran Vuk A friend of mine met an interesting real estate investor recently. The guy claimed that he escaped the entire market crash relatively unscathed. At first, I didn’t really believe it, but his strategy made a lot of sense. I thought that it was worth passing along. Essentially, he flipped houses throughout the

Do Most Members of the US Congress Deserve Re-Election?

I thought this chart on the upcoming US midterm elections was interesting because independents are tracking Republicans very closely while Democrats are living in a different world regarding Congress. Here is what Gallup says: Democrats currently control the House of Representatives, so it follows that Democratic registered voters are more likely than Republican voters to

On The Hypocrisy of Voters: The politics of economics redux

This is from Gallup: Overall, 46% of Americans believe the federal government "poses an immediate threat to the rights and freedoms of ordinary citizens," little changed from the prior reading in 2006. However, during that time, Republicans’ and Democrats’ views of the government as a threat have shifted dramatically. The results suggest that Americans’ perceptions

Balance Sheet Recessions and The Psychology of Deflation

The chart below is from today’s morning Breakfast with Dave missive by Gluskin Sheff’s David Rosenberg. How do you fight against losses this large? Like Richard Koo and David Rosenberg, I believe the monumental hit that balance sheets of American households have taken is the kind of thing that will result in marked changes in

Secrets of the Moneylab

Kay-Yut Chen and Marina Krakovsky have earned their colours as behavioural economists at Hewlett Packard in the HP Labs and in in their new book Secrets of the Moneylab  they present the gist of their research over the past 20 years. The book is a run-through of the most salient aspects of behavioural economics and