Scamming Journalists with Counterfactuals

Skim and Pump

Every so often there’s a story in the press about contactless payment cards being skimmed and money being extracted from them. Basically someone goes around tapping hapless commuters on the ass with a contactless card reader. Which given the state of the UK’s stupid prosecution service probably puts them more at risk of a charge of sexual assault than being arrested for theft.

This story is a recurring meme, and exemplifies what’s wrong with the state of financial journalism today. And on the way we get to look at real-world conspiracy theories and a bit of behavioral economics. What fun.

Read Full Post >>

Salience is Golden

New Frames

As so often in the past Warren Buffett has stirred up a swarm of annoyed investors, this time by explaining why he thinks gold as an asset class isn’t so much overvalued as irrelevant. He’s done this in a way typical of the man, by changing our frame of reference, to give us an entirely new perspective on the issue.

This gives us an insight not just into gold's current status as an investment class but also into why Buffett is almost unique as an investment guru. He doesn’t rely on the old arguments about what’s important by drawing on existing ideas of what’s salient, but develops new ones, based on his own models. He changes what’s salient, and that’s real gold for investors.

Read Full Post >>

Investment Analysts, Sunk By Deepwater Horizon

Flawed Analysis

“BP has a systemic problem with its culture that runs deep.”

There are unlikely to be any readers of this article unaware of the disaster surrounding BP in 2010 when their Gulf of Mexico based oil drilling rig Deepwater Horizon lived up to its name in dramatic and tragic circumstances. Since then many people have pointed fingers and made accusations but the quote above, by Hersch Shefrin, comes from his book, Ending the Management Illusion, based on an analysis of the behavioral flaws apparent in BP’s management, and written two years before the disaster at the Macondo Prospect.

Yet while Shefrin was able to identify the potential problems at BP ahead of the game not only did this not alert investors to the dangers of investing in BP it also failed to jolt oil sector analysts into any kind of action at all. And, frankly, if analysts can’t tell the difference between an oil major taking excessive safety risks and one that isn’t, what the hell’s the point of them?

Read Full Post >>

Herd of Investors

Bovine and Asinine

It seems sort of obvious that investors, a generally bovine group when not in asinine mood, will tend to congregate in herds and then charge about randomly, often over the edge of the nearest cliff. If this is true, however, it poses a set of puzzles that it’s not clear that any of the current approaches to understanding mass market behaviour can properly explain.

Certainly this behaviour isn’t efficient in the sense of obtaining the right price for a security, because deciding what to do based on the person running about in ever-decreasing circles next to you doesn’t come close to propagating useful information. However, if investors are irrational in herds then this implies that somehow their behaviour is synchronised and it’s certainly not clear that the simple set of isolated psychological biases that analysts currently work with is anywhere near sufficient to explain this.

Read Full Post >>

It’s Not Different This Time

The Smoking Cigar of Behavioural Bias

Not all failures of investment logic are based in human psychological flaws but, to paraphrase Freud, although sometimes a cigar is just a cigar mostly it’s behavioural bias. The smoking gun is almost invariably linked to people doing predictably stupid things. Like building shacks on earthquake fault lines, thinking they can banish risk with a spreadsheet and regarding the lessons of history as too remote to be interesting.

Sadly the fact that these things are predictable doesn’t make them any less easy to deal with. Our current set of financial woes is a wonderful test bed for those inclined to point to the short-termist biases inherent in the human conditions. We’d do well to enshrine these lessons in our systems now, because it won’t be long before we’ll start to forget.

Read Full Post >>