Crowds and networds

Tim Harford highlights the work of Mark Granovetter on networks and crowds.

: "Consider the following simple model of a potential riot, based on an idea published in 1978 by the sociologist Mark Granovetter. There are 1,000 people in a crowd of protesters, and all of them have some underlying tendency to embark on a looting spree. We might reckon that an outbreak of rioting might be triggered by insensitive policing, or by the poverty of the crowd, or the opportunities for theft or for violent protest. But for simplicity let’s assume that the only thing everyone in the crowd cares about is what everyone else in the crowd is doing. Some people will start looting without much company. Others will hang back until the riot is well under way."

This can also be used, I think, to look at the way that speculation can build.  Given the information cascade that builds when valuation is difficult and that activity of others can imply some understanding that may not exist.  

Finance must escape the shadows - FT.com

Excellent.

John Kay - The parable of the ox

Interesting - though I am not sure that the Chicago model (Black-Scholes?) manages to generate a price from thin air - it needs important elements (such as the current price and the estimate of volatility).  It is also important to remember that there are people like Buffett making guesses and if the crowd is very wrong, he will be the closest.  John Kay - The parable of the ox:

"One difficulty was that sometimes there were few, or even no, guesses of the oxen’s weight. But that problem was soon overcome. Mathematicians from the University of Chicago developed models from which it was possible to estimate what, if there had actually been many guesses as to the weight of the animal, the average of these guesses would have been. No knowledge of animal husbandry was required, only a powerful computer."

Interesting, non-the-less. '

How Do You Choke Away the British Open? The Science of the Tight Collar | Wired Science | Wired.com

The explanation for why English Premier League players can be good for their club and poor for their country (outside ability of the rest of the team).

Sport psychology: "“You can’t dictate your genes,” says Stone. “But among the many identities you have, you can choose which to operate from.” Tiger Woods, for instance, has clearly forged an identity that transcends the potential vulnerabilities of his multiracial makeup. You can wallow in your most negative identity — the slow one, the overthinker, the one who doesn’t care — or you can foreground another identity, the one who is ready, the one who knows what’s coming, the one who calmly attacks the problem."

With a solution

The shocking story of how a council pursued Peter Williams

It raises the question of how different are the private and public institutions.

The shocking story of how a council pursued Peter Williams | Liberal Conspiracy: "On the 8th of February a man took his own life. Peter Williams was a gifted engineer, whose invention, still manufactured today, landed him in the Guinness World Records, but he was driven to bankruptcy and suicide by an unthinking and inhumane bureaucratic system"

Models

Krugman explains that models are tools or simplifications that are used to solve a problem.  However, the assumptions of the model cannot be used to explain the implications of the model.  That would be circular.  Gadgets Versus Fundamentals (Wonkish) - NYTimes.com:

"The point is that all this work USES Dixit-Stiglitz, but it’s not ABOUT Dixit-Stiglitz; D-S is a gadget, a tool that helps you work with the fundamental issues, but you don’t ever want to forget that it is no more than that."

George Monbiot – False Summit

George Monbiot – False Summit: "We were wrong about peak oil: there’s enough in the ground to deep-fry the plane"

It is always dangerous to make forecasts.  There is always some unsuspecting element that can crop up.

and then!

Monbiot peak oil u-turn based on bad science, worse maths

http://www.davidstrahan.com/blog/?p=1576

Oil glut forecaster Maugeri admits duff maths
http://www.davidstrahan.com/blog/?p=1570

David Strahan

Energy writer

Easter Island - people or rats?

Easter Island 

"Jared Diamond drew heavily on Flenley’s work for his assertion in Collapse, his influential 2005 book, that ancient Easter Islanders committed unintentional ecocide."
When the wood was gone and civil war began, the islanders began toppling the moai. By the 19th century none were standing. Easter Island’s landscape acquired the aura of tragedy that, in the eyes of Diamond and many others, it retains today.

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Andrew Gelman on political statistics

Andrew Gelman on How Americans Vote | FiveBooks | The Browser: "The idea is that these people know enough about us so that they can manipulate our vote. Realistically, political consultants nowadays know a lot about us, and they do try to convince us. There are two kinds of people they follow. One is people where they know who they’re going to vote for, but they’re not sure that they’re going to vote. The other is people who are very likely to vote, but you don’t know which way they’re going to vote. The first type of person they try to mobilise just to turn out and vote, and the second kind of person they try to persuade. They’re pretty good at knowing who people are. In fact, at this point, a lot of this is just a question of resources. To the extent they have resources they will go out to people and call you on the phone. If they think you’re already likely to vote for a certain candidate, they’ll try to find somebody to knock on your door and convince you that it’s an important election and it’s worth voting for. In some sense it’s not as mysterious or conspiratorial as it’s made out to be in that book."

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Greece’s ailing economy grinds to a halt - FT.com

The FT.com looks at the effect that a lack of credit is having on the Greek economy.

"But after thinking it over, Yannis Stamos, the company’s co-founder, turned the customer away. Filling the order would have meant reaching into Medical Service’s own pockets to cover the €35,000 cost of such a machine, since Greek banks have stopped lending and the company’s German suppliers now demand pre-payment in cash."

Bond market liquidity

FT.com: discusses the lack of liquidity in the corporate bond market.  A combination of risk-aversion, Volcker rule and capital costs seem to have combined to encourage banks to hold less inventory.  

 "Data from the Federal Reserve on Thursday showed corporate bond holdings among the largest dealers fell last week to $45bn. These inventories reached highs of more than $200bn in 2007 before falling to $90bn a year ago.
Asset managers are concerned that reduced liquidity will make it harder to move in and out of large positions, particularly at times of market stress.
“The buyside is looking for an answer on how to fix this,” said one of the dealer participants."'

Declining liquidity makes the market more of one where deals are worked over time and ultimately increases the cost of borrowing as final investors know that there is limited possibility of a swift sale.

Social network vs critics

The Guardian: reports on a Harvard business school study that compares Amazon book reviews to critics and finds that evaluation is similar, though the reviews are swift to find new authors.

 "Amazon reviewers were more likely to give a favourable review to a debut author, which the Harvard academics said suggested that "one drawback of expert reviews is that they may be slower to learn about new and unknown books".
Professional critics were more positive about prizewinning authors, and "more favourable to authors who have garnered other attention in the press (as measured by number of media mentions outside of the review)"."

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Collateral and rating

A good overview of the effect of rating downgrade and increased risk aversion on the profitability of investment banks and, inevitably, the liquidity of financial markets.

M Stanley reassesses downgrade impact - FT.com: "The additional collateral needed could reduce Morgan Stanley’s fixed income derivatives revenues by almost a third, analysts at AllianceBernstein estimated in a recent note. In addition to having to stump up extra collateral to its trading partners, Morgan Stanley could also face a higher cost of funding, the analysts said."

This also gives some indication of the importance of the economies of scale in investment banking.

International holding of bonds and capital

International holding of government bonds.

Bank adequacy: weight and see - FT.com: "But what would be the effect of removing the zero weighting on banks’ domestic sovereign debt holdings? In its latest stability report, the IMF takes a stab at estimating the “correct” risk weightings to use, via default rates embedded in sovereign credit default swap spreads. Doing this lowers the average capital adequacy ratios across banks in emerging countries by 2-3 percentage points – no small sum. Ratios for European banks fall by less, between 0.5-2 percentage points. The reduction for US lenders is smaller still. Even so, more capital would be needed."

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Funds move directly into loan market

If funds cannot If funds cannot get access to loans via structured products, can they go into the market themselves by making loans?  M&G are in £266m property financing deal - FT.com  

"It is the second time this week a UK insurer has provided debt finance for a property deal, with Legal & General issuing its maiden property loan on Tuesday.

The relationship between the two sectors is deepening rapidly as insurers snap up opportunities created by the shortage of bank lending."

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German banks rein in exposure to Spain - FT.com

German banks rein in exposure to Spain - FT.com: "Will Spain – where house prices have fallen more than 22 per cent from their peak, with analysts expecting worse to come – bring more pain? Figures published this month by the Bank for International Settlements show that German banks had $146bn of exposure to Spain at the end of 2011 – more than the banks of any other country. Some $53bn of the exposure is to Spanish banks, while a further $68bn is to the rest of the private sector"

End-December 2011
           Denmark France     Germany     Greece     Ireland      Italy       Japan       Mexico
Spain   1,951      115,162   146,096        292       4,696       26,939    21,691       540 ...

http://www.bis.org/statistics/r_qa1206_anx9b.pdf

FX Momentum trades

Forex momentum trade yields long-term gains - FT.com: "Currency momentum strategies that buy or sell currencies according to whether they have risen or fallen over the previous month yielded annual returns of nearly 10 per cent between 1976 and 2010, according to the Cass study, which analysed 48 currencies against the US dollar. The paper, “Currency Momentum Strategies”, is due to be published in the Journal of Financial Economics."

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Investment Bank Leverage

The FT reports on the rise in capital at investment bank Goldman.

Goldman Sachs: then and now - FT.com: "Spookily, it is as if nothing has changed for six long years. But a financial crisis has come and gone since then and regulators are now throwing everything at banks. Of course, there is one huge difference between the two periods, but it is not to be found in the profit and loss account. Flip to the balance sheet and be astounded to remember that in 2006 Goldman was running on just $27bn of common shareholders’ equity. With exactly the same earnings today, that number is now two and a half times higher."

Hedge funds and leverage

Hedge funds keep a lid on leverage - FT.com: "According to the UK’s Financial Services Authority, which in February published its annual survey of the global hedge fund industry, the average hedge fund currently uses leverage of about 2.5 times its capital – as it has done for the past three years.
Indeed, unlike prop desks, most hedge funds have to grapple with all too finite liquidity and financing – issues no manager has been able to ignore since 2008."

How the leverage has been reduced as pro trading transfers from investment banks to hedge funds.

The BBK seeks insurance against EMU break-up

The Bundesbank has no right at all to be baffled - FT.com:

"It also tells us something else: by seeking insurance against a collapse of the euro, the Bundesbank tells us it no longer regards the demise of the euro as a zero-probability event. If the Bundesbank seeks insurance, so should everybody else."

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