Rookie, in a way the divergence state by state is somewhat similar. Corporations seek right to work states, e.g BA. Most Asian auto-makers have selected Alabama, Georgia and South Carolina. Each state, or perhaps region, seems to have economic distinctions that are more pronouned than in the past. What does this portend for the future? How does the central planning agency deal with the enhanced distinctions? The problem with an academic analysis that encompasses only econometric models, is that the sociological and demographic issues are given scant weight. Economics is called the "dismal science" but its handful of "laws" are insufficient to allow any meaningful prediction. In a conversation with my 84 year-old mother the other day, she said "I don't know how a couple with children can stay above water." That tells me more than any of the fools that appear on CNBC,etc. I was in West Palm last March for a couple of days, and then drove across the state to Ft. Myers. In talking to people, they echo your comments. This will go down as a unique period of American history, and will likely defy the type of analysis that gets promulgated every hour.
Why A Stock Market Bubble Is Forming Right Now [View article]
I think we're in the midst of a great socio-economic 'experiment.' I use the term 'experiment' in a pseudo-scientific sense, in that central planning institutions have a working hypothesis based on a set of assumptions. These assumptions reflect historical observation, refined by models. Of course, part of the analysis suggests that operating mistakes were made by allowing the previous morphine drip to become addictive. But more of the same-indeed much higher doses were needed- to sustain the patient. But, is this not an ephemeral and elusive discussion? Witness the daily and incessant preoccupation with the Fed, ECB, BOJ, etc. And, how many words are devoted to the utter ineffectiveness of elected officials to 'do something.' The central banks proclaim that they can't do all the lifting. Why is there no fiscal counter-balance to the equation? But I suppose the real point of substance is the utter abdication of elected officials to a vast array of regulatory agencies. We proudly laud the Bill of Rights, while we simultaneously surrender it's heart and soul to the most extraordinary and extensive regulation in the history of the human race. And we shackle our future with a debt burden that is unimaginable. Note that since 1960, the federal budget has been either balanced or in surplus a mere five times. (And, yes some of the early years were small deficits). The only inference to be derived from this statistic is simply that the correlation between economic or business cycles and fiscal integrity i.e.. rational balances, is lacking. A big part of the problem is simple: the immediate need is to deal with today's known misery, and the future is an imagined, ambiguous point where prosperity rules and happiness is assured. But, an increasing amount of liquidity and debt are shifted to the future. Thus, we don't 'invest for' the future, we "borrow from' the future. But to add to the author's point about the management of liquidity, we want to sharpen our focus just a bit. If we accept that government regulation has proliferated, and importantly, now forms a web (perhaps tangled) such that financial decisions are manifestly impacted, our next observation is to note the rather rapid integration of said regulation with debt-financed consumption. The evidence is clear that federal regulators insisted that FNMA support the mortgage securitization debacle. Most folks would stop at that observation, as if the riddle had been solved. No-it's more insidious in that private markets were diluted, and, as usual, clarity and basic accounting didn't apply. There has to be a point where managing liquidity is held hostage to more than an economic cycle. That point in time will be determined by a stubborn economic suppression, which defies the liquidity antidote. That suppression will be revealed by continued high unemployment and stagnant opportunity.
4 More Years Of What? The Past As Prologue [View article]
Despite one's political preference, it's worthwhile to think about underlying causes versus prima facie observations. I have yet to read any account that truly specifies some unique and specific act, or set of acts, within any significant historical context, that reflect and explain this moment in time. Yes, the cited authorities, as well as many others, have offered a post hoc perspective. But where is the voice of the armchair quaterback a priori? Greenspan, in Congressional testimony, raved about the trillions of dollars of home equity. Yet, the monolithic bastions of free enterprise were laying off thousands pursuant to "re-engineering." Instead of using 2000 as a defining point in time, why not 1988. At the moment the Berlin Wall came down, millions of new job-seekers cropped up overnight. It would take too long to review all the implications arising therefrom. At that same time, trade balances began to change (unfavorably for the US), as business schools sought to understand and teach Japanese management techniques. The role of the Fed became reactionary, and arrogant, by assuming a wisdom that remained elusive. The art of re-arranging the deck chairs became all the rage, as the chaos underneath remained a shadowy phantom. Superficial analysis passed for logic and rigor. The culture, and the resulting economy, were being transformed. Governmental policies dealt with the superficial, while natural forces operated with impunity. But it always happens that way. We want the illusion. And we will pursue that illusion, and we will insist that others share our illusion. Politicians will oblige the dominant illusion so that the people will praise their adroit leaders-and nod gently into a peaceful sleep.
The first thing I would do is protect her assets from potential nursing home liens. If she owns real estate, as indicated, I see a tragedy waiting to happen. Rather than put a few dollars in the stock market, I suggest you visit a lawyer that specializes in trusts and protecting assets from creditors. Otherwise, the odds are that your efforts will benefit the Medicare/Medicaid system. OUCH!
The Major Bubble That Nobody Is Talking About [View article]
With many pundits screaming that gold will fall to $500, it creates a self-fulfilling prophecy. I'm anything but a gold expert, but I do have a nose for panic. Panic presents extraordinary opportunities. It's like a surfer, waiting to catch just the right wave. Another apt analogy is herd behavior on the African plains. People are like wildebeests, stampeding first in one direction until exhaustion, then, after a rest, they are just as likely to turn around and run in the opposite direction. The crocodile and the lion wait pateiently for the right moment.
It's not just the economists-it's the analysts as well. I have a thick notebook from 2007, full of analysts reports/reviews/price targets, etc. Just to share a couple of them: NUE $88/ACI $82. NUE hovers around $40. ACI is an unmitigated disaster. These are just two examples. Often, people will say that earnings are the only thing that matter, and that "eventually" a share price must reflect fundamental value. "Eventually" the planet will be consumed by the sun. "Eventually" the universe will be ripped apart. I often wonder how these people go about constructing the "reality" in which they live. Of course, the answer is that they sing from the choir book of self-interest. The evidence is so overwhelming and so pervasive against these morons that any respectable weather prognosticator would be embarrassed to admit of such a record. They can only owe their sustainability to the short-term memories of their audience, and the general tendency of most folks to forgive and forget.
Why We're Nowhere Near a Bottom in Housing [View article]
Note that the conversation has shifted from incentive/rebound to how low will it go. We see all the classical components of denial and anchoring, combined with a continuous display of inarticulate bafflement. Time will reveal a fundamental shift in the demand curve, caused by a confluence of powerful forces-not a mere movement along price points. So, to "call a bottom" is nothing more than a fools errand. The tidy neighborhood of Ward and June Cleaver, and all that it came to represent, doesn't exist anymore-except in the memories of those that can't separate nostalgic memory from the harsh light of current reality. A new equilibrium is, of course, inevitable. But it won't be something the Beaver would recognize.
Inflationary Thursday - Dow 15,000, Plus $5 Will Get You a Happy Meal [View article]
I've consulted with the Anti-nabob of NegativityGroup (that's the group that tends to focus on the top 10 reasons to buy and hold thru thick and thin), and seems that you guys aren't drinking enough tea. Look, there's absolutely no reason to worry about the bottom 99% getting out of control-here's why: (1) 63.2% of the bottom 99% are obese, and simply don't have the mobility or energy level to protest-riots are out of the question; (2) The Scooter Store, it turns out, can remotely disable those little scooters, therby causing a massive traffic jam at critical points ; (3)Soccer moms don't have time to participate-hell they can't even keep up with their book-club assignments; (4) teenagers would only riot if ATT cut their bandwidth, or if one of those Twilight characters cast a spell; (5)If pushed, Waylon, Willie and the boys would give concerts to feed the hungry; and,(6)the whole thing would turn into a tail-gate party, and a few officials would be sacrificed for making bad calls. Let them eat cake, indeed! Give 'em a happy meal! Back to business. Did someone say that NFLX is a buy at these levels?
The Housing Rebound And Why The Fed Should Begin Tightening [View article]
Historically low mortgage rates have, in a de facto sense, extended the first time home buyer credit. Also, the billions allocated to residential properties via extraordinary and unprecedented actions of large funds, distorts comparisons. Also, there is an increased use of HAMP/HARP, etc programs, as well as seniors using reverse mortgages to buy both primary residences, as well as investment properties. So, apples to apples is a bit more complicated. But, it is a given that median income has recently declined for the first time in the post-war era. The low mortgage rates probably mask a 'normal' real estate mortgage/purchase/qual... scenario-but it's anyone's guess as to how higher mortgage rates can be absorbed in a world confronted with higher property taxes, higher utility costs, insurance, etc. (given, as indicated, the inescapable issue of declining median income). Certainly a reasonable bounce was anticipated. But what run rate is sustainable, and under what set of interest rate assumptions? Could it be that the folks having the means to buy a new house are taking advantage of low rates? There is pent-up demand in that group. But, as that set is played out-what next? I don't have a clue. I own self-storage facilities throughout the southeast and Midwest, and my managers all have different perspectives on the client base. The only thing I know for sure is that the game has changed in a major way. If you've owned real estate from the late 1960's forward-you have to know that the world shifted in 2007. It's not the same anymore-not even close.
The Real Experiment That Is Being Carried Out In Japan [View article]
Excellent article. In reading same, I was reminded, yet again, not so much of Japan's issues, but of the intellectual frailty which so characterizes the world's political leadership. As Keynes noted, of all the elusive variables that can be extrapolated with any degree of certainty, population dynamics stands near the top of the list. The pig and lipstick analogy comes to mind-but that's a pollyanna metaphor. More appropriate is something that delivers a kick to the gut and a slap across the face. Thus, our politicians content themselves with performing cosmetic surgery on a corpse-and announce their success with great jubilation. And, in the process, denounce one of the most gifted minds of the 20th century as something akin to Lex Luther.
This Is The Most Critical Time For The Market Since 2007 [View article]
Well, I'm bullish, except when I'm bearish-and I'm bearish except when I'm bullish. But, all in all, I'm neither bullish nor bearish. I just enjoy the lowly job of selling tickets to the patrons filling the seats in the coliseum. I just want everyone to have a good time, bet on their favorite gladiator, and leave with contentment in their hearts. Some will win, many will lose-but it's all in the game. For the game will continue, and the crowds will roar. A secular bull up against a cyclical bear-or do I have it backwards? Fools on the left, jokers on the right-do we have rooms for you tonight? Yes, of course. Check out? Well, any time you want (but you can never leave).
Disturbing Trend In Growth From January Jobs Report [View article]
BINGO! you beat me to the comment. More part time openings to avoid full-time status. The big box retailers leave a little room to fudge the obvious. 35 hrs looks better than 391/2 hrs.
Covered Calls For Income Can Cost Dearly In Long-Term Gains [View article]
Covered calls are not my cup of tea-not for the reasons listed in the article per se, but because buying 100 shares of stock is sub-optimal anyway. However, a one- dimensional preference i.e. accepting the risk of holding shares otherwise unhedged, allows for only dividend income and/or selling calls. So, it is an exceptional strategy, if: we assume, arguendo, that it is the ONLY strategy open to a market participant. So, if our hands are thus tied, here are some things to consider: (1)For any option period under consideration, there is one optimal moment (where the price of the option hits its peak). Selling at that point will yield close to a 100% probability that the option will expire worthless. That point can be estimated by studying historical volatility, and setting a parameter (GTF) order at that point. One must understand that blindly selling options at the beginning of a cycle is NOT the better play. (2)Selling options during a period where earnings are due to be reported, or some important announcement is expected, is also not optimal. In those cases, theta will be subservient to implied volatility, and it's entirely possible for an option to maintain it's value for the duration of a cycle-even where the price of the underlying stock has not moved. (3)Highly volatile stocks are typically not good candidates for call selling. The novice gets excited about the premium amount and sells a call with out regard to any of the above. Once a call runs against the novice, the initial bad decision begets another bad decision, and the results are totally at odds with the textbook expectation. (4)The way to deal with covered calls that appear to have gone 'walk-about' separates the pros from the amateur. The objective is to always put the odds in your favor. This requires that one understand historical volatility, and the context of events that may impact implied volatility. Patience is also required as there is the easy temptation to sell a call when the stock moves down in advance of your decision. Selling a call on a down day for your stock should generally be avoided. (That's the day you want to sell a put spread). Note that you might miss a month to sell a call, but you will be better off over the longer run if you manage your call selling. Finally, assignment of calls almost always occurs at expiration (unlike put assignment)-this allows one to wait until the waning hours of options expiration afternoon to assess alternatives. two things to realize is that (a) assignment is easily avoided by rolling out for even more premium, and (b) so what if you let the stock be called? Does that mean that the end of the world is just around the corner? Are you financially damaged as a result thereof? Expiration actually takes place on a Saturday afternoon, when the markets are closed. So, the following Monday morning you can buy another 100 shares. (Or sell a put to buy a call which will synthetically replace the 100 shares). Although selling covered calls seems simple, there is a process which requires patience, study and reflection AND execution which requires dynamic management. Watch an old black and white video of Van Cliburn playing the piano at a concert, and compare that with a relative beginner.
Dividends: A Case of Behavioral Heuristics? [View article]
Briar, I greatly admire you for attempting to provide a mere snippet of a book destined as a landmark. Note this comment from Richard H. Thaler: "This book is a tour de force by an intellectual giant; it is readable, wise and deep...Read it slowly and repeatedly. It will change the way you think, on the job, about the world, and in your own life." The book is readable because Kahneman uses "System 1" and System 2" to make a distinction between heuristics and the type of reasoning required for more 'complicated' problems. Also, each chapter concludes with a "System 1" type perspective, which facilitates understanding of the material. As Kahneman states..."Much of the discussion in this book is about biases of intuition..." He quickly alerts the reader to the famous Muller-Lyer illusion (this is the one where the subject is asked to determine the length of a horizontal line among two choices where one line is framed with 'closed' angles, and the other with 'open' angles). The two lines are the same distance, but the illusion fools everyone-unless they have prior knowledge. Yet, prior knowledge will not remove the cognitive illusion. This is not a book about investing. Nonetheless, experiments conducted over 40 years clearly demonstrates an assortment of biases that doom rational choice. Perhaps the area of research most familiar is Prospect Theory- and within that area 'loss aversion' may be the most significant for investors. I particularly found the study of professional golfers interesting. To wit, pros will grind out a par putt, because making a bogey is perceived as a loss. The emotional content is similar to investing, in that a birdie merits a 'pat on the back' while a bogey is tantamount to a swift kick in the gut. Both golfers and investors can be led astray by loss aversion. The comments about the fund manager and Ford are detailed in the book-but the takeaway is not as simple as one might wish to believe. Two of the chapters with particular relevance are "The Illusion of Understanding" and "The Illusion of Validity."Documented studies prepared for investment firms were 'swept under the rug.' As indicated at p215: "...the evidence from more than fifty years of research is conclusive for a large majority of fund managers, the selection of stocks is more like rolling dice than playing poker. Typically, at least two out of three mutual funds underperformed the overall market in any given year." I think it critically important to understand the history of economic thought, and how the 'rational man' assumption came about-and how the body of knowledge has changed over the last 50 years or so. In that context, one of the more interesting chapters deals with 'Allais's Paradox." I won't take the time to detail, but the significance is found in the fact that the economic giants of the Twentieth Century-Paul Samuelson, Kenneth Arrow and Milton Friedman-all flew to Paris in 1952 to discuss the works of von Neumann and Morgenstern's theory of risk. At that meeting, Maurice Allais, a future Nobel recipient, posed a simple choice to the intellectual giants. The result shattered utility theory, but utility theorists classically ignored the result, while decision theorists took the results quite seriously. So, sixty years later, we now have the rudimentary tools by which to challenge our assumptions, and uncover our biases. I have previously studied the work of Kahneman and Tversky in great detail. So, a lot of the material was redundant. But, the synthesis and logical progression of forty years of ground-breaking research is extraordinary. And, the book closes with Part 5-which includes chapters entitled "Two selves," "Life As A Story," "Experienced Well-Being,"and "Thinking About Life." Only rarely has decisional research incorporated and explained the human spirit-Kahneman has advanced the works of Kant, Hume, Popper and other great philosophers-no small feat.
Just How Sick Is This Market? [View article]
The problem with an academic analysis that encompasses only econometric models, is that the sociological and demographic issues are given scant weight. Economics is called the "dismal science" but its handful of "laws" are insufficient to allow any meaningful prediction.
In a conversation with my 84 year-old mother the other day, she said "I don't know how a couple with children can stay above water." That tells me more than any of the fools that appear on CNBC,etc.
I was in West Palm last March for a couple of days, and then drove across the state to Ft. Myers. In talking to people, they echo your comments. This will go down as a unique period of American history, and will likely defy the type of analysis that gets promulgated every hour.
Why A Stock Market Bubble Is Forming Right Now [View article]
Of course, part of the analysis suggests that operating mistakes were made by allowing the previous morphine drip to become addictive. But more of the same-indeed much higher doses were needed- to sustain the patient.
But, is this not an ephemeral and elusive discussion? Witness the daily and incessant preoccupation with the Fed, ECB, BOJ, etc. And, how many words are devoted to the utter ineffectiveness of elected officials to 'do something.' The central banks proclaim that they can't do all the lifting. Why is there no fiscal counter-balance to the equation?
But I suppose the real point of substance is the utter abdication of elected officials to a vast array of regulatory agencies. We proudly laud the Bill of Rights, while we simultaneously surrender it's heart and soul to the most extraordinary and extensive regulation in the history of the human race. And we shackle our future with a debt burden that is unimaginable. Note that since 1960, the federal budget has been either balanced or in surplus a mere five times. (And, yes some of the early years were small deficits).
The only inference to be derived from this statistic is simply that the correlation between economic or business cycles and fiscal integrity i.e.. rational balances, is lacking. A big part of the problem is simple: the immediate need is to deal with today's known misery, and the future is an imagined, ambiguous point where prosperity rules and happiness is assured. But, an increasing amount of liquidity and debt are shifted to the future. Thus, we don't 'invest for' the future, we "borrow from' the future.
But to add to the author's point about the management of liquidity, we want to sharpen our focus just a bit. If we accept that government regulation has proliferated, and importantly, now forms a web (perhaps tangled) such that financial decisions are manifestly impacted, our next observation is to note the rather rapid integration of said regulation with debt-financed consumption. The evidence is clear that federal regulators insisted that FNMA support the mortgage securitization debacle. Most folks would stop at that observation, as if the riddle had been solved. No-it's more insidious in that private markets were diluted, and, as usual, clarity and basic accounting didn't apply.
There has to be a point where managing liquidity is held hostage to more than an economic cycle. That point in time will be determined by a stubborn economic suppression, which defies the liquidity antidote. That suppression will be revealed by continued high unemployment and stagnant opportunity.
4 More Years Of What? The Past As Prologue [View article]
Yes, the cited authorities, as well as many others, have offered a post hoc perspective. But where is the voice of the armchair quaterback a priori? Greenspan, in Congressional testimony, raved about the trillions of dollars of home equity. Yet, the monolithic bastions of free enterprise were laying off thousands pursuant to "re-engineering."
Instead of using 2000 as a defining point in time, why not 1988. At the moment the Berlin Wall came down, millions of new job-seekers cropped up overnight. It would take too long to review all the implications arising therefrom. At that same time, trade balances began to change (unfavorably for the US), as business schools sought to understand and teach Japanese management techniques.
The role of the Fed became reactionary, and arrogant, by assuming a wisdom that remained elusive. The art of re-arranging the deck chairs became all the rage, as the chaos underneath remained a shadowy phantom. Superficial analysis passed for logic and rigor. The culture, and the resulting economy, were being transformed. Governmental policies dealt with the superficial, while natural forces operated with impunity.
But it always happens that way. We want the illusion. And we will pursue that illusion, and we will insist that others share our illusion. Politicians will oblige the dominant illusion so that the people will praise their adroit leaders-and nod gently into a peaceful sleep.
Taking Care Of Grandma's Money [View article]
Monday Market Momentum - Prices Go Parabolic [View article]
The Major Bubble That Nobody Is Talking About [View article]
Another apt analogy is herd behavior on the African plains. People are like wildebeests, stampeding first in one direction until exhaustion, then, after a rest, they are just as likely to turn around and run in the opposite direction. The crocodile and the lion wait pateiently for the right moment.
Just How Sick Is This Market? [View article]
Often, people will say that earnings are the only thing that matter, and that "eventually" a share price must reflect fundamental value. "Eventually" the planet will be consumed by the sun. "Eventually" the universe will be ripped apart. I often wonder how these people go about constructing the "reality" in which they live. Of course, the answer is that they sing from the choir book of self-interest. The evidence is so overwhelming and so pervasive against these morons that any respectable weather prognosticator would be embarrassed to admit of such a record. They can only owe their sustainability to the short-term memories of their audience, and the general tendency of most folks to forgive and forget.
Why We're Nowhere Near a Bottom in Housing [View article]
Inflationary Thursday - Dow 15,000, Plus $5 Will Get You a Happy Meal [View article]
Back to business. Did someone say that NFLX is a buy at these levels?
The Housing Rebound And Why The Fed Should Begin Tightening [View article]
Also, there is an increased use of HAMP/HARP, etc programs, as well as seniors using reverse mortgages to buy both primary residences, as well as investment properties. So, apples to apples is a bit more complicated.
But, it is a given that median income has recently declined for the first time in the post-war era. The low mortgage rates probably mask a 'normal' real estate mortgage/purchase/qual... scenario-but it's anyone's guess as to how higher mortgage rates can be absorbed in a world confronted with higher property taxes, higher utility costs, insurance, etc. (given, as indicated, the inescapable issue of declining median income).
Certainly a reasonable bounce was anticipated. But what run rate is sustainable, and under what set of interest rate assumptions?
Could it be that the folks having the means to buy a new house are taking advantage of low rates? There is pent-up demand in that group. But, as that set is played out-what next?
I don't have a clue. I own self-storage facilities throughout the southeast and Midwest, and my managers all have different perspectives on the client base.
The only thing I know for sure is that the game has changed in a major way. If you've owned real estate from the late 1960's forward-you have to know that the world shifted in 2007. It's not the same anymore-not even close.
The Real Experiment That Is Being Carried Out In Japan [View article]
As Keynes noted, of all the elusive variables that can be extrapolated with any degree of certainty, population dynamics stands near the top of the list. The pig and lipstick analogy comes to mind-but that's a pollyanna metaphor. More appropriate is something that delivers a kick to the gut and a slap across the face. Thus, our politicians content themselves with performing cosmetic surgery on a corpse-and announce their success with great jubilation. And, in the process, denounce one of the most gifted minds of the 20th century as something akin to Lex Luther.
This Is The Most Critical Time For The Market Since 2007 [View article]
Disturbing Trend In Growth From January Jobs Report [View article]
Covered Calls For Income Can Cost Dearly In Long-Term Gains [View article]
However, a one- dimensional preference i.e. accepting the risk of holding shares otherwise unhedged, allows for only dividend income and/or selling calls. So, it is an exceptional strategy, if: we assume, arguendo, that it is the ONLY strategy open to a market participant.
So, if our hands are thus tied, here are some things to consider:
(1)For any option period under consideration, there is one optimal moment (where the price of the option hits its peak). Selling at that point will yield close to a 100% probability that the option will expire worthless. That point can be estimated by studying historical volatility, and setting a parameter (GTF) order at that point. One must understand that blindly selling options at the beginning of a cycle is NOT the better play.
(2)Selling options during a period where earnings are due to be reported, or some important announcement is expected, is also not optimal. In those cases, theta will be subservient to implied volatility, and it's entirely possible for an option to maintain it's value for the duration of a cycle-even where the price of the underlying stock has not moved.
(3)Highly volatile stocks are typically not good candidates for call selling. The novice gets excited about the premium amount and sells a call with out regard to any of the above. Once a call runs against the novice, the initial bad decision begets another bad decision, and the results are totally at odds with the textbook expectation.
(4)The way to deal with covered calls that appear to have gone 'walk-about' separates the pros from the amateur. The objective is to always put the odds in your favor. This requires that one understand historical volatility, and the context of events that may impact implied volatility. Patience is also required as there is the easy temptation to sell a call when the stock moves down in advance of your decision. Selling a call on a down day for your stock should generally be avoided. (That's the day you want to sell a put spread). Note that you might miss a month to sell a call, but you will be better off over the longer run if you manage your call selling.
Finally, assignment of calls almost always occurs at expiration (unlike put assignment)-this allows one to wait until the waning hours of options expiration afternoon to assess alternatives. two things to realize is that (a) assignment is easily avoided by rolling out for even more premium, and (b) so what if you let the stock be called? Does that mean that the end of the world is just around the corner? Are you financially damaged as a result thereof? Expiration actually takes place on a Saturday afternoon, when the markets are closed. So, the following Monday morning you can buy another 100 shares. (Or sell a put to buy a call which will synthetically replace the 100 shares).
Although selling covered calls seems simple, there is a process which requires patience, study and reflection AND execution which requires dynamic management. Watch an old black and white video of Van Cliburn playing the piano at a concert, and compare that with a relative beginner.
Dividends: A Case of Behavioral Heuristics? [View article]
The book is readable because Kahneman uses "System 1" and System 2" to make a distinction between heuristics and the type of reasoning required for more 'complicated' problems. Also, each chapter concludes with a "System 1" type perspective, which facilitates understanding of the material.
As Kahneman states..."Much of the discussion in this book is about biases of intuition..." He quickly alerts the reader to the famous Muller-Lyer illusion (this is the one where the subject is asked to determine the length of a horizontal line among two choices where one line is framed with 'closed' angles, and the other with 'open' angles). The two lines are the same distance, but the illusion fools everyone-unless they have prior knowledge. Yet, prior knowledge will not remove the cognitive illusion.
This is not a book about investing. Nonetheless, experiments conducted over 40 years clearly demonstrates an assortment of biases that doom rational choice. Perhaps the area of research most familiar is Prospect Theory- and within that area 'loss aversion' may be the most significant for investors. I particularly found the study of professional golfers interesting. To wit, pros will grind out a par putt, because making a bogey is perceived as a loss. The emotional content is similar to investing, in that a birdie merits a 'pat on the back' while a bogey is tantamount to a swift kick in the gut. Both golfers and investors can be led astray by loss aversion.
The comments about the fund manager and Ford are detailed in the book-but the takeaway is not as simple as one might wish to believe. Two of the chapters with particular relevance are "The Illusion of Understanding" and "The Illusion of Validity."Documented studies prepared for investment firms were 'swept under the rug.' As indicated at p215: "...the evidence from more than fifty years of research is conclusive for a large majority of fund managers, the selection of stocks is more like rolling dice than playing poker. Typically, at least two out of three mutual funds underperformed the overall market in any given year."
I think it critically important to understand the history of economic thought, and how the 'rational man' assumption came about-and how the body of knowledge has changed over the last 50 years or so. In that context, one of the more interesting chapters deals with 'Allais's Paradox." I won't take the time to detail, but the significance is found in the fact that the economic giants of the Twentieth Century-Paul Samuelson, Kenneth Arrow and Milton Friedman-all flew to Paris in 1952 to discuss the works of von Neumann and Morgenstern's theory of risk. At that meeting, Maurice Allais, a future Nobel recipient, posed a simple choice to the intellectual giants. The result shattered utility theory, but utility theorists classically ignored the result, while decision theorists took the results quite seriously. So, sixty years later, we now have the rudimentary tools by which to challenge our assumptions, and uncover our biases.
I have previously studied the work of Kahneman and Tversky in great detail. So, a lot of the material was redundant. But, the synthesis and logical progression of forty years of ground-breaking research is extraordinary. And, the book closes with Part 5-which includes chapters entitled "Two selves," "Life As A Story," "Experienced Well-Being,"and "Thinking About Life." Only rarely has decisional research incorporated and explained the human spirit-Kahneman has advanced the works of Kant, Hume, Popper and other great philosophers-no small feat.