Gladwell on Taleb

Very Interesting.  Gladwell has a profile of Tlaeb. The hedge fund that buys out of the money options. There is a good link to Kahneman and Tversky.

 "Nonetheless, we have strong preferences among them. Why? Because we're more willing to gamble when it comes to losses, but are risk averse when it comes to our gains. That's why we like small daily winnings in the stock market, even if that requires that we risk losing everything in a crash."

The most interesting point is whether options are under-priced.  We know about the smile and the way that this allows fat-tails.  Is that sufficient?  I supposed they checked.

The Future of Computer Based Trading

Tim Johnson has a blog Magic, maths and money: Here is is looking at a government report on computer based trading.  He makes the distinction between broking and jobbing or market-making and speculating.

 "Modern criticism of high frequency trading  is a continuation of a long tradition of distinguishing the activities of Monied Men investing in the market and Traders speculating within the market.  As such it can get entangled in a web of social judgements, such as it is OK for the rich to gamble but not the poor.  To make decisions about HFT, therefore, requires some understanding of this mess."

This is the same issue that arises time after time through Thomas Mortimer, Keynes and into the assessment of HFT.  The role of speculation in the market is a major issue.  One interesting point that Tim makes is that Big Bang blurred the line between broking and speculation.

Life In The Slow Lane

Paul Krugman shows how traffic congestion encourages road rage.  Life In The Slow Lane (Trivial) - NYTimes.com.  Probably a good exercise to conduct all these calculations:

1. What is total journey time? 
2. How much time spent flashing past others? 
3. How much time watching others flash past? 
4. Time saved with a 50 mph train.  

Data analysis

The FT has an interesting article today looking at
the work of James Cheshire on spatial analysis. The link to the FT article is here.  James's website is here.  He also blogs at mappinglondon.co.uk.  Some of the work appears to have been done with R. 

Hungary struggles with foreign currency loan burden

Hungarian foreign currency loans. FT.com:

"But the financial crisis sent the forint tumbling. The capital value and servicing costs of the loans mushroomed in forint terms; consumer spending slumped. At the end of March, Hungary still had over Ft3.55tn ($15.8bn) of foreign currency mortgages outstanding, equivalent to 12 per cent of gross domestic product. More than 20 per cent of the loans by value had repayments more than 90 days overdue."

This is the resolution of the HUF carry trade, conducted by domestic households:  borrowing EUR and CHF to purchase higher yielding domestic assets.

Measuring Recession

Jeffrey Frankel compares US and European methods of assessing recessions and comes down firmly on the side of the US version: not two quarters of negative growth but a more holistic assessment of the economy and its potential.

"These measurement issues may sound like minor technical details; but they can have significant real-world implications. So, what are the differences between European and US criteria for judging recessions?"

The US measurement removes the constant twitter about double or triple dips.

Bandwaggons and herding

The Economist assess why missing out on one job application is bad news for your chances in the next.

"The existence of bandwagon behaviour can be hard to prove. A product or an asset usually becomes popular (or unpopular) in the first place because it is genuinely superior (or inferior). But some have tried to isolate the self-fulfilling effects of popularity. One 2004 study* by Alan Sorensen, now of the University of Wisconsin, examined accidental omissions from the New York Times bestseller list"

As with the carry trade, there is some underlying effect but it is magnified by the attempt to deal with asymmetric information. This magnification causes a distortion that can eventually be significant.

Two decades ago Abhijit Banerjee, now at the Massachusetts Institute of Technology, devised a model of “rational herding” in which market participants base their decision on a combination of their own information and the actions of others. Over successive rounds of transactions, participants responded less to their own information and more to the herd.

Expectations and learning

Learning from Inflation Experiences assess the way that expectations are formed and finds that personal experience has an impact.

: "How do individuals form expectations about future inflation? We propose that personal experiences play an important role. Individuals adapt their forecasts to new data but overweight inflation realized during their lifetimes."

There is scope here to use some of these ideas in understanding how expectations about the probability of success with the carry trade can affect the trade itself. What is the recent experience?  How have traders experienced the carry?

Frequency of words over time

The ngramr – an R package for Google Ngrams can create charts of the frequency with which words are used over time.  The package uses the Google Books diagnostics to scan Google Books to look for names.  The chart needs to be turned into data.

 "The Ngram Viewer will display an n-gram chart, but does not provide the underlying data for your own analysis. But all is not lost. The chart is produced using JavaScript and so the n-gram data is buried in the source of the web page in the code. It looks something like this:"

This can be used to see how economic words change over time and use this as a proxy for sentiment or thinking and then look for how this sentiment or general thinking affects things like the work of the central bank or the structural budge deficit, the PE ratio or more.

Budget iPhone: ugly on purpose | BGR

Analysis by BGR suggests that the Budget iPhone is ugly on purpose

"Pictures of candy-colored entry-level iPhones with rounded corners have started circulating. Many have branded them hideous, crude atrocities. They need to be. Apple is facing a unique dilemma: Because of the stellar success of the iOS app universe, the entry-level iPhone has to have nearly the same specs as the flagship iPhone. The display has to be large. The processing power has to be substantial. Apple cannot afford to fragment the iPhone device base, particularly since it has spent years mocking Android vendors mercilessly for doing just that. Still, the budget iPhones have to be something that affluent and aspirational consumers despise."

Is this price discrimination?  Some textbooks provide the example of French third class train carriages that, they say, used to have the roof taken off to make sure that they were inferior to the second class.