Tuesday, December 24, 2013

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1969

Today marks the first entry that will form part of the Nobel Prize in Economics Profile series.

My purpose in forming this series is twofold:

1) To learn more about Economic History, Applied Economics and Economic Theory 

2) To continue my Autodidact-led journey - and to join (or try to join) the ranks of the famous self-learners

Accumulating these profiles, and providing, not only a summary, but an opinion on each, will hopefully provide various rewards: economic knowledge, true social science awareness and inspirational accounts to learn from. 

The premise herein: one has to study the events of the past, to live the active present, which ultimately leads to envisioning a future.

One of my greatest regrets was to have approached mathematics begrudgingly during my formative years. Had I gone beyond the usual dry learning approach and realized the philosophy behind the subject and how speaking it would serve me in multiple forms, I wouldn't have waited until college to take it seriously. Any mathematician, math teacher and math enthuthiast can attest to its beauty

Mathematics is usually an underestimated disciplines, yet anyone who decides to venture into the private sector can surely add value. When it comes to Economics - the following winners, were not only fluent in Mathematics; they used it to their advantage; revolutionizing economics from thereon.

So, without further ado: 

From www.nobelprize.org:

Ragnar Frisch

Ragnar Frisch

Jan Tinbergen

Jan Tinbergen

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1969 was awarded jointly to Ragnar Frisch and Jan Tinbergen "for having developed and applied dynamic models for the analysis of economic processes"

These two Economists revolutionized the field of Economics, having founded Econometrics - the discipline that gave way to the formal quantitative analysis that most economic concepts and theories lacked until that point. 

Jan Tinbergen also (assumedly - but surely not a mere factoid) promoted the terms "Macroeconomics" and "Microeconomics", before these two economic branches were in common use.

Monday, December 16, 2013

Nobel Prize in Economics Profile Series

Dear Reader:

I have decided to start a Nobel Prize in Economics Profile Series - starting this upcoming weekend.

I will be profiling, in chronological order, every Nobel Prize in Economics Winner dating from 1969 (when the first ever was awarded), up till this year's, and, every year after that.

The Reason?

The prizes that were awarded closely mirrored the changing facets that came with Economics through the years - profiling the winners is like peering through very interesting (and inspirational) windows. There is much to learn from them.

It will be a self-rewarding experience that I will thoroughly enjoy, and through this blog, have a chance to archive.


See you soon.

Sunday, December 8, 2013

At what cost?

A rose blooming on its own.

I read a couple of articles this week that referred to the age-old question:
At what cost do people pursue their goals?
For the authentically ambitious person, who craves achievement above all else, unswerving dedication to the pursuit of personal dreams and goals can limit the amount of time that is spent on anything else. Personal relationships can suffer momentary lapses in undivided attention.

An article from The Atlantic explains how, in the end, people ultimately determine that "relationships are more important than ambition," and how "ambition drives people forward; relationships and community, by imposing limits, hold people back."

Well, that certainly depends.

Benjamin Franklin, said: “ What is best for people is what they do for themselves. 

That he coined that phrase should come as no surprise, given how he handled his personal life. 

Franklin was often away from home, from one adventure to the next, leaving those close to him to fend for themselves. He was a doting husband in spirit, but was mostly absent from his wife's life. He was also intermittently estranged from his own son. Regardless, the man did contribute a lot to his country, and to the world. Walter Isaacson's account of Franklin's personal foibles paint an interesting picture; one that makes you realize, that personal ambition is not always a sinful passion, or at least not when the person in question contributes and adds value in some way.  

Most world leaders, artists, inventors, innovators and geniuses fit this mold.

And most had satisfying personal lives - in terms of the ardor, dedication and devotion that came in spurts of intensity to those around them.

The cost behind the pursuit of personal goals, must then, be regarded as a function of the results they render.

So, to complement the question, "at what cost do people pursue their goals", I would add, "at what price would people value other's contributions?"

Sunday, November 17, 2013

The Debate on Creativity

True potential is hard to manifest.

Pickthebrain.com's 2007 article on creativity states that "Creativity isn't creation at all, it's reorganization."

The premise behind the author's statement is that inspired creation is derived from existing influences and sources, and is, therefore, not necessarily innate in those that are exceedingly inventive. 

Interestingly enough, another article, written in 2011 and published in Psychology Today, answers "No" to the question "Can creativity be taught?"

The authors state:
Creativity only manifests when a person with the right sets of skills and knowledge invents or finds an appropriate problem that cannot be solved using any existing approach, but which is amenable to solution by that person's unique set of experiences.
As generally happens with opinions that lead to arguments, both can seem right to some and wrong to others. In the end, nothing is ever black or white, but shades of gray can most assuredly be determined to be either lighter or darker. An opinion, however, is just an opinion, while an argument, has to be sustained by sound reasoning, which in turn, must be held as clearly evident. 

When considering which article to consider most valid, i.e., most conducing to argumentation and not resorting solely to opinion-based rhetoric, the following comparison comes to mind: pickthebrain.com's article veers into the author argumenting that the creative process is absorbed through influence more than it is enigmatically manifested in a person by focusing on her own journey in becoming a top self-help website editor, where as Michele and Robert Root-Bernstein's article focuses on California's attempt to test state school student's creativity and explaining how the attempt is guaranteed to lead to failure.

Even though the Root-Bernsteins boast more credentials when it comes to the study of the concept of creativity, pickthebrain.com's author's first hand account of her own creative-led journey warrants partial validity inasmuch as she justifies herself as a primary source.

And at first, it seems that the Root-Bernstein's are denying that Creativity can be taught. 

Then, upon further inspection of their credentials, their book on creativity's tag line, as seen online, states:

Creativity isn't born, it's cultivated—this innovative guide distills the work of extraordinary artists and thinkers to show you how.

Wait a second.

"Creativity isn't born, it's cultivated -".

After taking a good look at that verb, and momentarily realizing the power of semantics, I understood what the authors meant: creativity cannot be taught - it can be emulated, it can be manifested in the right conditions, and it can be ultimately cultivated, but no, it cannot be outright taught.

The challenge then becomes apparent: learning how to be truly creative is tantamount to studying how to be a chessmaster - without the right training, background, setting and specific traits, it becomes incredibly hard to manifest, and thus, cultivate the skill in question.

Can then, some people, not manifest their true creative potential (thereby never achieving cultivation), irregardless of the fact that they might be naturally creative?

A recent video I saw of Angelina Jolie receiving the Jean Hersholt Humanitarian Award at the 2013 Governors Awards in Hollywood California, encapsulates the aforementioned idea, in a slightly different context:

She says:
"I have never understood why some people are lucky enough to be born with the chance that I had, to have this path in life. And why across the world, there's a woman just like me, with the same abilities, and the same desires, same work ethic and love for her family, who would most likely make better films, better speeches...only she sits in a refugee camp. And she has no voice. She worries about what her children will eat, how to keep them safe, and if they'll ever be allowed to return home. 
I don't know why this is my life and that's hers. I don't understand that, but I will do as my mother asks [she asked her to contribute and be of value to others] and do the best I can with this life and to be of use. And to stand here today means I did as she asked, and if she were alive, she'd be very proud."

In the same way, there is no telling whether the seemingly mediocre person we brush by every day on our way to work could be the world's next great inventor, or how some poor pick-pocket in a third world country will never be able to show his true creative potential because he's more worried about survival.

What is certain though, and of the utmost importance, is to manifest the creativity reserve we have, whether we know about it or not.

Imagine - what a world we'd live in if people gave themselves a chance.

Sunday, November 10, 2013

The Sopranos, "Pump and Dump" schemes and my personal process on "How to watch a TV Series"

When I say "Sell", you "Sell". You got me?

After years of avoiding the late night binge-watching that would inevitably come with deciding to take on The Sopranos TV series, I bowed to sibling pressure, subsequently relented, and as expected, I am now hopelessly addicted. I recently finished watching Season 1.

My particular way of watching TV series could be labeled as unconventional: subtitles are paramount to understanding every piece of dialogue (to miss a word or nuance is to miss the whole narration), I pause regularly (to understand the different person, place or thing that is mentioned that I do not know) and I sometimes rewind to rewatch particular scenes that are key to character development.

While I don't publicize this way of viewing or even suggest it as "the better way" when it comes to watching critically acclaimed series (i.e., I don't pause much when watching "Suits"), this particular method has worked very well for me.

I'll summarize the benefits related to following my TV-Series watching process:

1) User-friendlinessEverything (characters, settings, scenes and subtext) becomes fully understandable, comprehensible and intelligible. Which means: you enjoy the series even more. Or at least beyond the enjoyment that comes with the simplistic self-gratification some viewers get with just watching "people get shot" or "things blow up".

2) Perspicaciousness via Autodidactism: I am a firm believer that intelligent conversations with intelligent people stimulate intelligence, or at the very least, promote a clearer understanding of the non-obvious. In a series, witnessing intelligent dialogue between intelligent characters in a well thought out scene, can lead to "learning triggers", which in turn, promotes autodidactism, and as such, encourages further understanding and enjoyment.

3) Boredom is never an option: With the brain in a constant state of discernment, there are no boring episodes. Ever. If there are, the viewer can safely assume that the series has pretty much, jumped the shark. HBO will most likely never sacrifice content quality, so series like The Sopranos will always be boredom-free.

In practice, when applying this formulaic process to The Sopranos, I was pausing more than usual to define every Italian word and phrase that was being mentioned. The Italian-American culture and sub-culture represented on screen became easier to understand, and as a consequence, more compelling.

If I've lost you because this has nothing to do with Economics or Finance, I will kindly ask you, Dear Reader, to keep on reading...there is a point to all of this.

Pay attention or gedoudahee

The first episode of the second season of The Sopranos showcases, amongst other things, the evolution of Christopher Moltisanti (Anthony Soprano's nephew), who initially started out as small-time thug leader, and is now positioned as a high-functioning career criminal, with his own business-based crew. His present team, now working out of an office, is helping him foray into the more sophisticated world of white-collar crime.

Soon enough, a new term is mentioned, concerning the illegal trading scam Moltisanti is heading - one of the office henchmen mentions it after having sent a dissenting stock broker to the hospital: pump and dump.


5 minutes later - 

A "pump and dump" scheme is basically a small-cap (penny stocks, basically) fraud where brokers misguide investors by pumping up a stock they own, and then dumping it for a hefty profit when the fraud becomes unsustainable, leaving investors with a worthless investment.

The film "Boiler Room" also made a point of the scam in the year 2000. It must be no coincidence that The Soprano's second season aired in 2000.

This must mean that the scam was predominant during those years, as TV Series tend to reflect popular culture. It's no secret that the dot-com bubble, which occurred during the late 1990's, until bursting in 2000, was exacerbated by illegal and legal versions that followed the basic principles behind the pump and dump. Investors were duped into considering clicks and eyeballs as legitimate revenue-drivers, as much as other would-be investors were flat out lied to when it came to the businesses they were supposedly investing in.

The subject gets even more interesting when you start thinking about pump and dump schemes in the 21st century.

An automatic thought: in this post Bernie Madoff day and age, with a tougher SEC, how can people still do this?

Maybe not through old-school cold-calling anymore, but criminals can certainly hook the ignorant and inattentive masses through fake analysis, social media outlets, spam and even hacking. Click the links in the previous sentence for articles that describe such actions, all recent. 

The impending and progressive worldwide regulation of the Internet is beyond the scope of the article, but denoting the importance inherent in recognizing fraud as a pervasive and persistent crime in the cyber realm should be taught to every investor out there.

In the end, everyone is responsible for the risk they decide to take, as is very entertainingly manifested in the series The Sopranos - but maybe not everyone is astute enough to recognize the risk inherent in a seemingly risk-free investment.

I'd like to think that maybe someone out there, watched The Sopranos, or some other show, and somehow steered clear of danger.

No wonder governments and institutions banned books before television existed.

Content matters.

The Crisis as a Classic Financial Panic

History repeats itself.

History repeats itself. Everyone knows this. But people tend to ignore that fact. 

Acknowledging history - economic or otherwise - is the best policy.

The Crisis as a Classic Financial Panic

Chairman Ben S. Bernanke
14th Jacques Polak Annual Research Conference
Washington, D.C., November 8, 2013

Sunday, October 27, 2013

Self-Reliance and Politics

This might have been set up.

I've long been fascinated with the differences in ideologies held by the thousands of political organizations that are or were in power around the world. I marvel at the logic and reasoning behind the set of principles that distinguish one party from the other and the philosophy/set of beliefs that uphold the movement and forces that distinguish each party.

Every party has their raison d'ĂȘtre. There is no right or wrong. Historical context helps to determine each party's validity. And wars and other markable global events have either served as catalysts for some parties (ex: Capitalist-oriented) or as immediate elimination for others (ex: National Socialism).

I have become familiar with the United States two-party system and have since followed the back and forth on a variety of issues between the Republican and Democratic parties. I've generally followed the evolution (or lack thereof) of both parties' economic policies.

In a general sense, the Republican party's economic policy supports (i) free markets (laissez-faire economics) and have, in factions, advocated supply side economics (most notably during the Reagan years) and have characterized themselves as being "pro-business", holding individuals accountable for the country's wealth creation and economic growth. The Democratic party's economic policy supports (i) increased government spending/intervention and progressive taxation to produce the benefits required by the general population and those determined to be "in need".

The Republican party has been derided for benefiting the rich, most notably through tax cuts, and through the wealth inequality stemming from the ensuing distribution of wealth as a result of leaving the economy to its own devices. The Democratic party has also come under fire for its supposedly irresponsible push towards looking to create a welfare state, in which entrepreneurship is partially affected as a result of progressive taxation and citizens abusing the system (spending other people's money, assuming it will never run out).

The differences between each party and their distinctive economic policies are much more complicated than described, but the central idea and essence that distinguishes each party is present.

As of late, Republican obstructionism has been gaining strength, as evidenced by the recent stand-off between parties that led to the 2013 US federal government shutdown. Democratic insistence and support for Obamacare has also become a divisive issue. Poll results have found that the general US population believes that the Republican party favors the wealthy. This and other events have all become political hallmarks that demonstrate the ongoing partisanship that has plagued the US political system during the years following the 2007-2008 financial crisis.

Who is wrong and who is right often comes down to a matter of opinion. When this happens, politicians like to resort to facts. Facts, most of the time, become useful tools that help support ideologies.

Fact-checking aside, it becomes an awesome thing to witness politicians slinging mud at each side's arguments, all the while having the evidence to support it all. Some argue that democratic frameworks have favored historic economic growth - Krugman does a great job of rubbing it in. Others choose to focus on the ills produced by government intervention and make a point of the unwanted effects it produces.

The literature on this subject is endless; the effect Keynes, Friedman and other Economists have had on the economic policies favored by the Democratic and Republican parties has been remarkable. The back-and-forth between what's right and what isn't has also been schizophrenic at times. What was thought to have worked (New Deal, anyone?) before was found to not have been as successful than originally believed. Believing that something works only to find out later it has been a failure has been the crying call between party leaders for decades; warning the public of the dangers and ultimate demise of the different acts, programs and legislation presented by the opponent is the norm - some predictions have been proven right, and some haven't. Serious soul-seraching usually ensues.

The political process and the slow path to evolution is occasionally draining. The genius behind great politicians lies in their ability in absorbing (and transforming) the harsh realities that come with public service.

What becomes apparent, and ultimately undeniable, is that the different forces behind each party's ideologies were a product of supreme intelligence and motivated self-reliance.

It was this last set of words (self-reliance) that bought me to Ralph Waldo Emerson's famous essay.

I read that essay in college and I remember I was taken aback. The language was dense, the phrasing was poetic (so much, that at times it was grating), and the message was profoundly spot-on: trust yourself, believe in yourself, understand yourself and become one outside of what society determines you to be. In a nutshell: become an iconoclast in your own right, so much so, that you can readily survive anywhere.

The great political, economic and social revolutionaries (think Marx, think Keynes, think Schumpeter, think Franklin) were superhuman when it came to idea creation. Some did not live long enough to realize the effect they had on the world. But one thing connects them all: their self-reliance.

Self-reliance combined with eventual collective support and world-wide implementation bred the political systems we know today.

The text below explains the concept well. Few grasp it well enough to apply it.

But once the occasional confident visionary steps in, it becomes possible to turn the world on its head.

For the moment, the Republicans and Democrats have been mired in a political stalemate where their differences have dissipated any chance of reaching a general sense of agreement.

Let's see what self-reliant element comes in to shape things up and change what we think is certain today, which might be uncertain tomorrow.

From Emerson's essay Self-Reliance:

"And so the reliance on Property, including the reliance on governments which protect it, is the want of self-reliance. Men have looked away from themselves and at things so long that they have come to esteem the religious, learned and civil institutions as guards of property, and they deprecate assaults on these, because they feel them to be assaults on property. They measure their esteem of each other by what each has, and not by what each is. 
But a cultivated man becomes ashamed of his property, out of new respect for his nature. Especially he hates what he has if he sees that it is accidental, - came to him by inheritance, or gift, or crime; then he feels that it is not having; it does not belong to him, has no root in him and merely lies there because no revolution or no robber takes it away. But that which a man is, does always by necessity acquire; and what the man acquires, is living property, which does not wait the beck of rulers, or mobs, or revolutions, or fire, or storm, or bankruptcies, but perpetually renews itself, wherever that man breathes. 
'Thy lot or portion of life,' said the Caliph Ali, 'is seeking after thee; therefore be at rest from seeking after it.' 
Out dependence on these foreign goods leads us to our slavish respect for numbers. The political parties meet in numerous conventions; the greater the concourse and with each new uproar of announcement, The delegation from Essex! The Democrats from New Hampshire! The Whigs of Main! the young patriot feels himself stronger than before by a new thousand of eyes and arms. In like manner the reformers summon conventions and vote and resolve in multitude. Not so, O friends! will the God deign to enter and inhabit you, but by a method precisely the reverse. It is only as a man puts off all foreign support and stands alone that I see him to be strong and to prevail. He is weaker by every recruit to his banner. Is not the man better than a town? Ask nothing of men, and, in the endless mutation, thou only firm column must presently appear the upholder of all that surrounds thee. 
He who knows that power is inborn, that he is weak because he has looked for good out of him and elsewhere, and, so perceiving, throws himself unhesitatingly on his thought, instantly rights himself, stands in the erect position, commands his limbs, works miracles; just as a man who stands on his feet is stronger than a man who stands on his head. 
So use all that is called Fortune. Most men gamble with her, and gain all, and lose all, as her wheel rolls. But do thou leave as unlawful these winnings, and deal with Cause and Effect, the chancellors of God. In the Will work and acquire, and thou hast chained the wheel of Chance, and shall sit hereafter out of fear from her rotations. A political victory, a rise of rents, the recovery of your sick or the return of your absent friend, or some other favorable event raises your spirits, and you think good days are preparing for you. Do not believe it. Nothing can bring you peace but yourself. Nothing can bring you peace but the triumph of principles."

Sunday, October 20, 2013

Econ/Finance and Neuroscience Articles worth reading

From Barry Ritholtz's weekend reads collection:

Until we can all do this, I'll keep sharing knowledge on my blog.

1. What We’ve Learned from the Financial Crisis - one of the best HBR articles I've ever read. Period. Also - one of the best if not the best all-encompassing financial/economic 2008 - 2013 crisis summary out there.

2. You can increase your intelligence: 5 ways to maximize your cognitive potential - Increase your intelligence by following the 5 primary principles: 

(i) Seek Novelty, (ii) Challenge Yourself, (iii) Think Creatively, (iv) Do Things The Hard Way and (v) Network.

Sunday, October 13, 2013

I say jump, you say how high

Paul Krugman recently made a reference to a Tom Wolfe essay titled "The Ultimate Power: Seeing 'Em Jump" in his article about the GOP and the true motivation behind the US's top money makers: the 0.1%.

The essay, first published in New York Magazine in 1968, focuses on power - Wolfe goes on to describe in detail how power-hungry New York politicians and businessmen lead their lives, indulge in very specific possessions and treat their underlings.

An obvious question that lacks an obvious answer quickly surfaces: What lies behind their drive for power?

To answer, Wolfe references Abraham Ribicoff, a former Connecticut Senator and Governor, who offers an interesting take on what drives these people:
On what really drives people like congressmen and senators - fame? money? the exercise of power? 
Ribicoff says: 
"It's not fame, at least not in the sense of publicity. They see their names and faces in the paper so often they take it for granted. It's not money. There may be some congressmen with deals going, but most lose money while in office because of the cost of campaigning and entertaining. It's not even the exercise of power, at least not in the sense of putting a bill through or having a part in policy decisions. For most of them it is something else. It's more...seeing people jump. It's a feeling...knowing that anywhere they go, people will move for them, give way, run errands, gather around...and jump..." 
Wolfe adds: 
Jump! Power is, after all, control over people's lives. So perhaps it is natural that the symbols of power - as opposed to mere fame or wealth - should involve people jumping, i.e., acting like servants or loyal vassals.

"Now, raise your hand if you like it when they jump."

I'd be hard-pressed to think of a better way to describe most politicians.

Cristina Fernandez from Argentina, according to an article in The Economist, has built an administration and cabinet full of jumpers (or as Argentines call them, "sock-lickers"), that cannot exist without her.

Fidel & Raul Castro, Evo Morales and Nicolas Maduro are all examples of leaders that not only have jumpers, but also have historically gotten rid of those that do not jump, threaten to stop jumping or just simply, for valid reasons or not, cannot jump anymore.

Africa's longest-serving leaders (Ethiopia's Meles Zenawi - 20 years, Chad's Idriss Deby - 21 years, Sudan's Omar al-Bashir - 22 years, Burkina Faso's Blaise Compaore - 24 years, Uganda's Yoweri Museveni - 26 years, Cameroon's Paul Biya - 29 years, Zimbabwe's Robert Mugabe - 31 years, Angola's Jose Eduardo dos Santos - 32 years, Equatorial Guinea's Nguema Baso - 32 years, until recently, Libya's Muammar al-Gaddafi - 41 years - reference) certainly have their fair share of jumpers, and it'd be idiotic to assume that they're not turned on by others jumping for them. If anything, after so many years in power, it would have to become even reasonable to assume that these men can't help it - their own search for power has made them addicted to it.

They thrive; their people languish.

The world economy suffers.

Mind-numbing subservience squashes entrepreneurship.  Citizens that aren't free end up either working for the detrimental system that limits them (which becomes more powerful through their conscious promotion) or are paralyzed by it.

Global trade advances at a snail's pace. Necessity provokes reform and advances, but mires the newly erected economic structure with corruption and conflicts of interest.

Education is perverted. Creativity and innovation is cornered and made to forcibly trudge through pre-approved channels - thus dampening, stagnating and deviating the creative process.

Those are some general effects.

To describe what lies behind this, one might think of pride, the most serious of the 7 deadly sins; a vice to watch out for, mainly because of the dangers and moral pitfalls related to superiority complexes.

In a religious context, pride has been a point of discussion since Lucifer was cast out of heaven for challenging his Creator. God said "Jump" and Lucifer said "You jump." That was it.

On earth, people are free to make others jump - which is fine, if the jumping serves a purpose. After all, someone has to jump.

The problem, in a nutshell, comes when the jumper is made to jump for its own sake.

Sunday, September 29, 2013

How the Economic Machine works by Ray Dalio

Twists and Turns via Hyperbolic/Exponential Discounting

The law of diminishing returns can be summarized easily: too much of a good thing can make you sick; in some cases more sick than in others. Increases in total outcomes are not necessarily linked to increases in individual factors of production

There is so much pizza you can eat before it makes you sick and there are so many Master Degrees (if any) a person can obtain before student loans and other costs outweigh the benefits (increased salaries and such). 

To ground the idea with a more Economics-based example: there is a limited number of livestock, seed and workers that can be slaughtered, planted and employed in a farm, field and factory before output starts tapering off and marginal output starts contracting.

The quest for returns has made firms recognize this law and auto-correct if they dare break it.

But when considering a different set of laws, ones regarding investments - firms, individuals and governments rarely behave optimally...or rationally.

Theory states that agents/players utilize exponential discounting to determine their utilities. This method provides a clean-cut, time-consistent process that determines an investment's utility over time. Hyperbolic discounting, however, discounts short term gains at a higher rate than long term ones. Some empirical studies argue that people do in fact discount the short term more heavily than years ahead, proving that in practice, preferences change over time. 

The interesting problem comes when players under-discount future risks and losses and therefore make investments in the present that may not be the most favorable for them in the future. Social implications therefore abound: arbitrarily choosing to binge on vanilla ice cream today can manifest health risk factors in the future. Smokers regularly discount future risks hyperbolically; Bertrand Russell, a long time smoker and occasional philosopher (small joke), lucked out and died at 97, but most would agree that smoking is a slow countdown to death. And as such, should be heavily discounted.

Money today, it has been said, is worth more than money tomorrow. But money in 10 years, most believe, is worth practically the same as a bit of more money on the 11th year. As one approaches the 10th year though, money on the 10th year is once again valued above money on the 11th. And this is how preferences have been shown to change, resulting in agent's behavior aligning more with hyperbolic discounting than exponential discounting.

After having watched two post-apocalyptic films this weekend (Oblivion and Elysium), where the short-term actions of a whole civilization resulted in long-term damage, I realized the importance of discounting wisely:

In Politics: 
Short term gains as delivered by politician's campaign promises to constituents can and will backfire. Politicians are known to take the public's crap, and still ask for more, so much so, that in the end, all they do is try and please. Who is watching out for whom is anyone's guess. In the end, the people get the government they deserve; which shows how the public's predilection for instant gratification and mass hysteria when promises aren't kept constantly get in the way of investing in the future.

In Economics, Social Development and Order:
Developed economies are growing their GDP at 1% to 2% a year. Accumulating debt at an exponential rate is only viable if growth is increasing at the same rate. Cheap resources are becoming scarce and the economy cannot grow fast enough to make up for that fact. The search for yield has led to cheap money to land elsewhere (emerging markets, or local high risk investments). Social implications take the form of lost opportunities, greater income disparity between social classes and serious overall soul-searching.

In Education:
Rising education costs. Re-framing the MBA: are Finance jobs done, and are Entrepreneurial careers in? I'm all for it: I would rather create value through new companies than engage in astute money plays.

And then?

Example: A couple of years ago I was thinking of which MBA to go to, and I asked Seth Godin for his opinion. Seth is a generous person and is great at answering emails. His answer was (paraphrased): Why don't you take that money and start a company instead?

I thought about that long and hard, but decided not to. In my case, I applied Hyperbolic Discounting in my decision. I under-discounted the future risk in having to pay for graduate school in return for two years of unparalleled education. 

And it paid off. My current situation is a product of what I learned and did during those formative years. Drop-outs, Non-MBA's and successful prodigies can disagree, but in the end, it all depends.

What's perplexing is that Hyperbolic Discounting benefited me, when it probably, through particular circumstances, could have very well harmed someone else. 

What is clear though, is that, while there is no proverbial crystal ball, and predicting investment risk through well thought out discount rates is somewhat non-scientific, the theory behind discount rates is sound enough to help in making informed and conscious decisions regarding what could or might be.

The decisions agents "can live with" are suboptimal and myopic - aspiring to make the right decisions in spite of what an investor can live with could and can make a difference.

Sunday, September 22, 2013

Who do you obey?

You can even do it in the board room.

Took a dive into the spiritual realm recently and decided to check out the Upanishads.

According to Wikipedia:
The Upanishads are considered by orthodox Hindus to contain revealed truths (Sruti) concerning the nature of ultimate reality (brahman) and describing the character and form of human salvation (moksha).
This is a rich way of explaining the alll-encompassing nature of the texts.

A gem I found in the collection (specifically in part III - Katha):
The sense of the wise man obey his mind, his mind obeys his intellect, his intellect obeys his ego, and his ego obeys the Self.
The words convey a subtle yet direct message; the wise, as is denoted in the sentence, follow a chain of command that carries out orders from the top, the "top" here being the "Self" (i.e., the spirit/soul/essence).

Reality check: How many egos obey the Self? 

Every day impulses and vices (just consider the 7 deadly sins) are driven by the mind (impulsive instant gratification rewards await), and the rest by the intellect/ego.

The intellect, inasmuch as it refers to the capacity human beings have to resolve problems and subsequently determine a rational course of action to do so, is enough, in most circumstances, to live by. In other words, leaving the soul out of one's life, can work for a while, but in theory, not in the long term.

Note: I'll leave the definition of "Self" (i.e. the soul) to the reader. 

The problem here is: how can one achieve a true connection with the Soul without being a monk or a cloistered nun?

How does a business world inhabitant -  an Investment Banker, an Engineer, a Salesman or a CEO - to name a few, balance it all out? In these individuals, does the Intellect/Ego divorce itself from the Self, and are both therefore attended separately? 

The separation itself leads to falling back in line with the Intellect/Ego. There might not be a true possibility for a verifiable separation.

Referring to a religious man - 

Pope Francis, when asked in a recent interview who he was - responded: 
“I ​​do not know what might be the most fitting description.... I am a sinner. This is the most accurate definition. It is not a figure of speech, a literary genre. I am a sinner. 
When I first read this I thought about the Catholic Church; whose members are taught that they are sinners by default. 

After reading the text from the Upanishads I referred to previously, I realized how profound Pope Francis' self-description was:

We are all, in some way "sinners". Even monks and swamis have bad days, in which they undoubtedly make mistakes. When they are in touch with their Self they might make less, but being in a perfect state of existence is an impossibility, at least when regarding life in practical terms.

Yet the mere reflection regarding whether we're guided by our Self merits further discussion. Contemplating a deeper connection to one's innate sense of purpose is something that is not only reserved for the spiritual or religious. And separating the Self from the Intellect/Ego can, therefore, be avoided.

Granted, juxtaposing the proverbial monk with the secular white collar capitalist to compare their practices and as such, their relation with the Self, seems silly, if not insane, but considering what they have in common, at least when considering that both are subject to the human condition, can lead to interesting questions. 

And an interesting one is: Who do you obey?

Tuesday, September 17, 2013

Sunday, September 8, 2013

Intuition vs Intellect - Being clear is being right

Put that in your pipe and smoke it. 
Bertrand Russell is the ultimate badass.

Why? Because he's superiorly witty and he makes sense of things in a rational way.

He also put his money where his mouth is.

He was thrown in prison for his activism, and he stood up against church and state throughout his lengthy career. He was also a gifted writer, which make his books great reads.

Here are some excerpts from Russell's "Our Knowledge of the External World"

On Intuition vs Intellect:
"It is neither intellect nor intuition, but sensation, that supplies new data, but when the data are new in any remarkable manner, intellect is much more capable of dealing with them than intuition would be. The hen with a brood of ducklings no doubt has intuitions which seem to place her inside them, and not merely to know them analytically; but when the ducklings take to the water, the whole apparent intuition is seen to be illusory, and the hen is left helpless on the shore. Intuition, in fact, is an aspect and development of instinct, and, like all instinct, is admirable in those customary surroundings which have moulded the habits of the animal in question, but totally incompetent as soon as the surroundings are changed in a way which demands some non-habitual mode of action." 
"Intellect, in civilized man, like artistic capacity, has occasionally been developed beyond the point where it is useful to the individual; intuition, on the other hand, seems on the whole to diminish as civilization increases. Speaking broadly, it is greater in children than in adults, in the uneducated that in the educated. Probably in dogs it exceeds anything to be found in human beings. But those who find in these facts a recommendation of intuition ought to return to running wild in the woods, dyeing themselves with woad and living on hips and haws."
Why this is relevant:

Social and educational promotion of the intellect, and its application in problem-solving, critical thinking and logical reasoning leads to enlightenment-type ideas to arouse in people, leading to beliefs that establish that advances in the arts and sciences produce a better state of being for human beings (as promoted by theories like the Idea of Progress). In this regard, intellectual stimulation is good.

However, deviating from the rational application of the intellect, that is, falling prey to irrational thought or unclear thinking, even in the pursuit of developing the human condition through seemingly logical thinking, leads to unsatisfactory outcomes; manifesting in macro-settings as economic/social strife, decadent societies and scientific incompatibility with human advancement.

Practical Applications:

Individual intellectual advancement, in today's modern 21st century highly competitive environment, where the "Knowledge Worker" reigns, can lead to better decision making. Ethical implications become relevant as societies transcend and basic needs have been met. Relying on intuition is frankly, not enough.

On Rationalism and Science vs Intuition in understanding Reality:
"The philosophy, therefore, which is to be genuinely inspired by the scientific spirit, must deal with somewhat dry and abstract matters, and must not hope to find an answer to the practical problems of life. To those who wish to understand much of what has in the past been most difficult and obscure in the constitution of the universe, it has great rewards to offer - triumphs as noteworthy as those of Newton and Darwin, and as important, in the long run, for the moulding of our mental habits. And it brings with it - as a new and powerful method of investigation always does - a sense of power and a hope of progress more reliable and better grounded than any that rests on hasty and fallacious generalization as to the nature of the universe at large. Many hopes which inspired philosophers in the past it cannot claim to fulfill; but other hopes, more purely intellectual, it can satisfy more fully than former ages could have deemed possible for human minds."
There is something to be learned from a man that was so vehement about modernizing (at the time) philosophy through formal logic and analytic scrutiny.

Insofar as the improvement of the human condition is concerned, we should all, as the human race, be for it.

And clear thinking might be the first step:

Practical and Useful advice on Presentations

Fail proof.

Sunday, September 1, 2013

Giving control to the customer - Netflix has done it well

A friend of mine sent me a video that's gone viral:

Kevin Spacey urging TV Channel executives to give control to viewers

It's going to be interesting to see how Netflix's business model and other tech-based disruptive innovations will affect what consumers demand and Netflix's competitors roll out in the coming year.

Kudos to Netflix for rolling with the punches after it's stock took a hit in 2011 when it decided to raise its subscription prices.

The market had lost faith back then (as markets often do), forcing the company to subsequently go through a sustained market price trough, taking shareholders along a rough ride (having experienced a high of $300 per share to then see it plummet to the low $50's), until early 2013, when it began to bounce back.

Keep that slope positive please

Having the market punish your company and then staging a comeback that doesn't come down to just pricing strategies, is very respectable.

Let's hope they keep innovating.

Sunday, August 25, 2013

It's time to meet the Muppets

Barry Ritholtz's latest column:

Since the era of Adam Smith, the following has been held to be true:

Individually optimal decisions often lead to collectively inferior solutions.

Do Brokers watch out for their clients (i.e. their investment returns)? Or are they watching out for themselves (i.e. broker commissions)?

What do you guys think about Brokers?
Let's just ignore the "ideal" when considering the "real" factors in this situation and instead choose to follow a more cynical truth: no rational, self-serving capitalist would ever watch out for shareholders. Why would someone sacrifice their own livelihood for someone else's? Practically no one would. Unless they had to.

And to some degree, Brokers must serve shareholders. Just enough to not lose them entirely. But not out of the goodness of their hearts.

Unfortunately, not every Broker has to respond to a higher authority that says "do no harm" (not exactly - most Brokers do; but how some skirt their fiduciary duties is beyond this post), and that's where the client must fend for himself.

Wall Street Brokers are not particularly evil; if these astute vendors convince clients to buy into their miracle financial product spiels and dizzying factual presentations, they're no different than the very savvy salespeople that perniciously sell the $100-dollars-a-pop miracle Dead Sea salt scrubs every day at the local mall. 

Both the Wall Street Broker and the Mall Merchant know how to sell their product beforehand. Both are selfishly watching out for their own self-interest, and both know how to play with their client's emotions.

Granted, there's nothing wrong with Dead Sea salt scrubs or complex financial products - choosing them out of ignorance; that's what's wrong.

A quick solution: becoming financially literate and learning the basics of how investing works. Investopedia, Yahoo, Wikipedia and MIT's Open Courseware are all excellent educational resources. 

An additional pragmatic piece of advice: asking financial advisors if they're working under the fiduciary standard, questioning them about how they're being paid and demanding they explain the credentials they hold can be a first step.  

The doer alone learneth.

No, I'm sorry, we only let you know the price once you've promised to buy the product.