Perpetual Novelty, Santa Fe Style

Learnings from Science

By the late 1980's there was a growing recognition that the existing understanding of financial systems was flawed. Not only did markets not behave as the economic theories predicted but they often exhibited behaviour that didn't seem to have any pattern or cause at all.

In response to this a number of economists began looking at some of the research emerging from physics, biology and computer science in the area of complex adaptive systems and this led, in 1987, to a group of economists and scientists getting together at the Santa Fe Institute. The program of work that came out of this seminal event is still unfolding today, but suggests why academics and traders have had such different views on markets: one set lives in the real world, and the other doesn't.  Wanna hazard a guess as to which is which?

Read Full Post >>

HONTI #1: How Not To Invest

Rule #1: Bias the odds in your favor: start by avoiding the avoidable mistakes.

Introduction

There aren’t many good ways to invest, but there are countless bad ones. Yet the knack to successful investment, in the end, is formidably easy: learn how not to invest – and then do the opposite. Perhaps the biggest problem for investors is that the very nature of investment tends to cause automatic behaviours that damage our returns. It’s not hard to find the underlying causes – we evolved to cope with a very different environment, where decisions were a matter of life and death. When these decision making mechanisms are translated into the modern world they cause us to behave in ways that economists regard as irrational, and which are generally damaging to our personal wealth.¹

Read Full Post >>

Euphemisms for Morally Disengaged Managers

Presentation, Not Content

Presentation is at least as important as content and don’t let anyone tell you otherwise: words matter, deeply and importantly. Just not in a very nice way.

Whatever we do we accompany with a logic of self-justification which is frequently built on an architecture of euphemisms designed to support such behaviour, no matter how immoral and unethical it might be. This is part of a psychological process known as moral disengagement, and is key to understanding why corporations go bad and their managers believe they’ve done nothing wrong.

Read Full Post >>

Death of the Accrual Anomaly

Surprise, Surprise

Company earnings are, you’d have thought, a pretty straightforward measure of a company’s health. After all, earnings are a statement of profits, are they not? Of course this is finance and, therefore, nothing is quite as it seems.

You see earnings are not necessarily cash and contain a mysterious component called accruals, the calculation of which keeps accountants the world over gainfully employed. Companies that rely heavily on accrual based earnings tend to have more earnings surprises and this anomaly is exploitable by investors: or at least it was, until it mysteriously vanished.

Read Full Post >>

Fear and Loathing in the Eurozone

Gonzo Economics

The journalist Hunter S. Thompson popularised a style of journalism that came to be called “gonzo”, operating on the theory that “fiction was the best fact”. If Thompson were still alive today and inclined to cast an eye outside of the USA towards Europe he’d probably be wondering how exactly to make the car crash that is the Eurozone sound like fact.

In fact the history of currency unions is replete with examples of spectacular failures and if the euro experiment does fail it won’t be for lack of prior example. Yet history also shows that collapse is not inevitable, assuming strong leadership and a common purpose. So we’re probably all doomed.

Read Full Post >>