16 May 2012
How Are Decisions Really Made? (Joe Pitzl, IFS Blog)
In this blogpost, we explore the roots of the decision-making process and argue that humans make (financial) decisions through a very irrational process. And while we can't change that - we are biologically wired to function in this manner - a heightened awareness of this wiring can help us slow down and make better decisions in a more consistent manner.
The Perma-Bears Will Never Be Convinced (Value Walk)
The author of this article explains that no matter how positive the news, people will somehow find a way for it to be bad. The exerpt within this column is almost comical if it wasn't so typical of analysts, economists and bar-stool advisors alike. He argues that today, "Being a “bear” is cool. Just look around. Bears are the economic equivalent of hipsters. Everything is a joke, everything is to be mocked and anyone who thinks the opposite of them is just clearly a moron. Despite everything that has happened since the depths of ’08-’09, people are still overwhelmingly pessimistic. Pick any 10 randoms headlines from any financial publication. If 8 of them aren’t negative, I’d be shocked."
The Big Danger With Investment Banks (Tom Frost, Wall Street Journal)
Tom Frost argues what we have long believed. The Glass-Steagall Act of 1993 (which was repealed in 1999) must be reinstated. In short, Glass-Steagall was put in place after the depression to prevent exactly what happened over the last decade. Frost argues that any bank that accepts insured deposits from the public should not be allowed to engage in the risky activities they are allowed to participate in today.
James Montier on the Failures of Modern Finance (Robert Heubscher, Advisor Perspectives)
In his keynote presentation at the CFA Institute Annual Conference, James Montier completely blasts the industry, both professional and academic, and blames them for the recent economic crisis. We love Montier's work and have quoted him extensively the last few years. Never one to sugar-coat an issue, Montier blames the industry for adopting and clinging to bad models, policies, incentives and behaviors. He cited the NRA slogan, “It’s not guns that kill people; It’s people that kill people,” and a rebuttal, “People kill people, but so would monkeys if you give them guns.” Montier said he takes a similar view of financial practioners and financial models. “If you were to give a bunch of monkeys a CAPM pricing model or a VAR risk model, you will end up creating a financial crisis,” he said. “In fact, I am pretty sure that is just what we have done.” The industry has taken terms like "risk" and redefined them, because real risk does not fit into their complex algorithms and prevents them from doing pretty mathematics.“Mathematics is ordinarily considered as producing precise, dependable results. But in the stock market, the more elaborate and obtuse the mathematics, the more uncertain and speculative the conclusions we draw therefrom. Whenever calculus is brought in, or higher algebra, you can take it as a warning signal that the operator is trying to substitute theory for experience.”
Intelligent Decisions. Simplification. Peace of Mind.