Why Rational People Can't Succeed as Economic Forecasters - Justin Fox - Harvard Business Review

Harvard Business Review takes a look at economic forecasting.  One comment,

"Is there a risk that you get overconfident because of that? One of the things that happened in the ‘20s is that things kept going so well, and the forecasters who predicted a continued boom were right again and again. If you get very confident that government knows what it’s doing and can manage the economy well, does that increase risk at all?"

This is consistent with the ideas that trends can generate positive feedback that encourages overshooting and complacency.  This make it all the more likely that a bubble will ensure.  The difficulty is that it starts with something real and becomes over-extended.  Where do the two meet?:

Barclays’ bonuses give the City a say on banking values - FT.com

FT.com makes the Rooney analogy:

"It is the Wayne Rooney answer. Weekend reports say that the Manchester United football star is negotiating an extended, improved contract even though the team is enduring the worst season for years. His employers could respond to poor results by cutting wages but would then lose their star players, have to pay nearly as much for replacements who are not nearly so good and risk falling into a downward spiral. So it is in investment banking, where the worst of all possible worlds is to have an A-grade cost base and B-grade revenue potential. Thus, while Barclays sticks to its big league investment banking strategy, it has little choice but to pay up."

David Graeber: Play at the heart of everything

What’s the Point If We Can’t Have Fun? | David Graeber | The Baffler:

 "It’s hardly surprising, then, that this aspect of Kropotkin’s argument was ignored by the neo-Darwinists. Unlike “the problem of altruism,” cooperation for pleasure, as an end in itself, simply could not be recuperated for ideological purposes. "

It is a lot more interesting than that quote.

James Surowiecki: The End of Brand Loyalty : The New Yorker

James Surowiecki: The End of Brand Loyalty : The New Yorker:



The internet, the free flow of information and the decline of brands.  If  brand delivers the same product each time, that can be valuable.  However, when experience becomes more valuable and the cost and availability of information plummets, brands lose value.



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Viral math | Felix Salmon

Felix Salmon on the math of going viral on Facebook.

As a result, the important formula isn’t S·F·C; rather it’s S·F·FBT·C, where FBT is the probability that the article you’re sharing is going to actually appear in your friends’ feeds. In recent months, Facebook has been taking its foot off the throttle quite dramatically — but no one knows how long that’s going to last.

I am not sure what Facebook does to Facebook does to affect this process.  However, the model is one of chaos where changes in the initial condition (S, F, C etc) can have dramatic effects and can be adapted to other situations.

It Cost JPMorgan $1.5 Billion to Value Its Derivatives

Bloomberg assesses the accounting for derivative contracts.  The cost of funding a position that is in the money.

"But that's weird too, because not every bank has the same funding cost. It would be odd if, say, JPMorgan (5-year CDS in the 60s) was willing to pay more to do a derivative trade than Goldman Sachs (high 80s), just because it funds more cheaply. Presumably that sometimes happens,6 but mostly people trade based on market prices, and in theory at least there should be one market price. How do you calculate that market price? Probably you can take your own credit spread into account, but presumably also there are some disconnects. So if "the market" charges 50 basis points of FVA, and your own funding costs blow out to be, say, 200 basis points, then the value of the derivative receivable to you is less than its market value."

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A history of macroeconomic thinking

Roger Farmer: My Economic Window: Neo-Paleo-Keynesianism: A suggested definition:

"There has been a lot written on the blogosphere in recent weeks about the microfoundations of macroeconomics. Tony Yates argues in favour of micro-founded structural models. Adam Posen is sceptical of micro-foundations and Simon-Wren Lewis, Noah Smith and Nick Rowe call for a more eclectic approach. For those looking for a neat summary of these debates, Paul Krugman traces the history of macroeconomic ideas.  Responding to a  piece by Brad Delong, he argues that there has been a recent resurgence of what he calls “neo-paleo-Keynesianism”.  This is very useful concept and I have much in common with the ideas expressed in Paul's piece. This essay offers a novel definition of the term that Paul coined and an invitation to fellow academics to join me in pursuing an agenda based on this definition."

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What's That You're Calling a Bubble? - Justin Fox - Harvard Business Review

What's That You're Calling a Bubble? - Justin Fox - Harvard Business Review:

"So maybe we should tweak the second sentence of Brunnermaier’s definition, to something like: Bubbles arise if the price far exceeds the asset’s fundamental value, to the point that no plausible future income scenario can justify the price. A little clunky, and of course “plausible” is a judgment call. But it does get at the idea that we shouldn’t be calling every last rise in P/E ratios a bubble."

The bubble in bubbles and the difficulty of calling bubbles before the event relative to how easy it is after the event.

Scholarship: Beyond the paper

Scholarship: Beyond the paper : Nature : Nature Publishing Group:

"Henry Oldenburg created the first scientific journal in 1665 with a simple goal: apply an emerging communication technology — the printing press — to improve the dissemination of scholarly knowledge. The journal was a vast improvement over the letter-writing system that it eventually replaced. But it had a cost: no longer could scientists read everything someone sent them; existing information filters became swamped."

The future of academic publishing (maybe).

Moocs

Learning about social learning in MOOCs: From statistical analysis to generative model:

"We study user behavior in the courses offered by a major Massive Online Open Course (MOOC) provider during the summer of 2013. Since social learning is a key element of scalable education in MOOCs and is done via online discussion forums, our main focus is in understanding forum activities"

Why do people drop out?

Beating the Market Has Become Nearly Impossible | Institutional Investor

A look at alpha and beating the market.

Risk, money illusion and new financial assets

Worthwhile Canadian Initiative: Nominal-loss-aversion and its consequences:

"Suppose some promoter comes along with a new financial asset. The promoter promises that you will never lose money if you invest your savings in this new financial asset. Even better, he promises that he will buy back that financial asset at the issue price any time you ask him to. And suppose all the people who suffer from nominal-loss-aversion take him up on his offer, and buy the new financial asset."

There is clearly some political power involved here. However, this is not the whole story.  The safe assets are being swallowed up by overseas central banks as a parking space for US dollars accumulated as a result of foreign exchange intervention.  This means that the return on the safe asset is not longer a compensation for real losses (it does just about cover nominal loss). As such there is a demand for a safe asset with a higher return. It may be impossible, but where there is demand, there is supply.

Mind and Machine - logistics

Unhappy Truckers & Other Algorithmic Problems - Nautilus: The scheduling problem.

"Powell’s biggest revelation in considering the role of humans in algorithms, though, was that humans can do it better. “I would go down to Yellow, we were trying to solve these big deterministic problems. We weren’t even close. I would sit and look at the dispatch center and think, how are they doing it?” That’s when he noticed: They are not trying to solve the whole week’s schedule at once. They’re doing it in pieces. “We humans have funny ways of solving problems that no one’s been able to articulate,” he says. Operations research people just punt and call it a “heuristic approach.”"

  Machine optimisation vs the controller.

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The Buffett difference, derivatives edition | FT Alphaville

The Buffett difference, derivatives edition | FT Alphaville: "The derivatives also showcase other Buffett skills — selling risk when many others are buying (pushing the price beyond what is rational) and the confidence that he will be able to invest the additional float successfully over time to make the whole enterprise worthwhile."

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The Buffett difference, derivatives edition | FT Alphaville

The Buffett difference, derivatives edition | FT Alphaville: "The derivatives also showcase other Buffett skills — selling risk when many others are buying (pushing the price beyond what is rational) and the confidence that he will be able to invest the additional float successfully over time to make the whole enterprise worthwhile."

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Microfoundations

A discussion of microfoundations with Stephen Williamson: New Monetarist Economics: Microfoundations:

 "I've never much liked the word "microfoundations," which comes from the title of the Phelps volume. When the Phelps volume came out in 1970, micro and macro looked like they came from people living on different planets, and you had to convince people that it made sense to take ideas from Mars and use them on Venus. We know better now, of course, and economics is one unified whole. People who call themselves macroeconomists make liberal use of game theory, mechanism design, information theory, optimal growth theory, etc., etc. Solid economists worked all that stuff out for us to use, and it would be wasteful to leave it on the shelf."

and a reply by Nick Rowe
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Microfoundsations that we like vs microfoundations that we can solve

A summary of the evidence that most published research is false | Simply Statistics

A summary of the evidence that most published research is false | Simply Statistics:

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"Hold to maturity" or "Available for Sale"

FT.com has a story about the effect of Volcker Rule.  It does not make clear why the rule requires the re-classification.  In any case, it highlights one way that accounting classification can affect the value of assets and the capital required to support those assets:

"financial officer, told analysts on a conference call, the bank is reclassifying the CDOs from “held to maturity” (HTM) to “available for sale” (AFS). Gains and losses on securities that are held as AFS feed into financial companies’ regulatory capital ratios under incoming Basel III rules.  Zions estimated that reclassifying its portfolio of CDOs to AFS would result in its tier one common equity ratio falling from 10.47 to 9.74 per cent."

Raising the Minimum Wage: Old Shibboleths, New Evidence - NYTimes.com

Raising the Minimum Wage: Old Shibboleths, New Evidence - NYTimes.com:

 "For a good overview, look to a paper by Arindrajit Dube of the University of Massachusetts, Amherst; T. William Lester of the University of North Carolina, Chapel Hill; and Michael Reich of the University of California, Berkeley. Using two decades of data and side-by-side comparisons of bordering counties in the United States, they find that higher minimum wages raise the earnings of low-wage workers and have negligible effects on employment levels. According to their estimates, an increase of 10 percent in the minimum wage would have a statistically negligible effect on employment in industries and occupations employing minimum-wage workers."

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Bubbles

Worthwhile Canadian Initiative: We know the economy needs a bubble; but how big?: "Mr Ponzi issues a financial asset. Assume that the demand to hold that asset grows at the same rate as GDP. If people are willing to hold that asset at a rate of return less than the growth rate of GDP, Mr Ponzi can run a sustainable Ponzi scheme. He can issue new assets to pay the interest on the existing assets, and still issue a few more to provide some income for himself. Another name for a sustainable Ponzi scheme is a rational bubble."

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