Best of 2014: Behavioral Finance, Economics, Fixed Income, Meditation, and More
I realized as I was authoring this piece that many of you who loyally read my materials may not understand my professional role at CFA Institute. (I promise this is germane to the task at hand.) So here it goes . . .
Across the globe I identify, curate, and create (I hope) compelling investment content for the 130,000-plus members of CFA Institute, candidates for our various educational programs, as well as the professional investor and general public.
I spend well over one-third of my time reading — reading everything. I read 60-plus news sources per day, as well as white papers, scientific papers, and monographs. My tastes in reading tend to be eclectic. Nonetheless, I have endeavored to categorize the 2014 stories I consider to be the best, at best, and hopefully, at worst, among the most interesting. I hope that you enjoy these pieces as much as I did when reading them. Happiest of New Years to each of you!
Best of 2014 in Behavioral Finance
Those that know me well know that an entire drinking game could be based on some of my pet topics. One that would be guaranteed to get the majority of you knackered is “context.” Context is shorthand for how you are scaling and framing your awareness, and hence, it determines how you understand the world. So grab hold of your favorite adult beverage, as R&D Magazine reported on a brilliant piece of research that shows context determines our perception of even very simple things, like whether a number is odd or even.
Not only am I a fan of behavioral finance, but I am also a critic. It seems that I am not alone, as this 3 June story in the Guardian about psychologist Gerd Gigerenzer illustrates. Gigerenzer is especially critical of Daniel Kahneman as well as Cass Sunstein and Richard Thaler of Nudge fame.
Best of 2014 in Economics
My first academic love was economics because I seemed naturally to view the world from a benefits versus costs point of view. Over time though I realized it is called the dismal science for a reason. Nonetheless, I think we can all agree that economics can captivate at times (says the nerd in me).
Late last year the Financial Times published a fascinating story about the negative economics of owning cows in India, and that this seemingly oxymoronic situation was evidence that economics is flawed. We already knew that — however, this is still a rivetingly interesting piece.
Here are several stories that criticize the calculation of economic numbers most of us take for granted, including:
- Global trade balances, as reported in the South China Morning Post
- GDP’s poor estimate of productivity from FinanceAsia
Best of 2014 in Environmental, Social, and Governance (ESG)
Researchers have developed transparent solar panels that can be placed over windows. While the conversion of photons to electricity is very inefficient at this early juncture, the researchers believe that major efficiency gains are likely. All hail the possibility for painlessly increasing the surface area for photon capture.
Best of 2014 in Ethics
Are you an early riser? If so, this scintillating study says that you are more likely to commit immoral acts at night, as reported by the BBC. Are there ramifications for global finance? Who knows? I still find the research to be worth a look-see.
Best of 2014 in Finance
As I discuss in my book The Intuitive Investor there is no such thing as a future fact. Facts, by definition, occur in the past, yet investing results unfold in the future. We investors therefore cannot escape forecasting. Turns out that intuition is critical in becoming a successful forecaster, as this lengthy but fabulous Financial Times piece describes “How to See into the Future.”
Similarly, adding uncertainty explicitly into mathematical models improves their predictability, according to R&D Magazine.
Benchmarking. (Sigh!) Many active managers, including me, have long decried the unintended consequences of benchmarking — that most necessary of evils in finance. But now new theories, coupled with research papers, are demonstrating exactly this point.
A story in Business Insider describes the odd way in which capital is sometimes raised in Silicon Valley and why some are starting to call it Silly Valley. Under scrutiny is Clinkle, its founders, and its Silicon Valley supporters.
Best of 2014 in Fixed Income
From the “Gee, why am I not surprised?” file comes a story regarding a sweeping Moody’s study that demonstrates that covenant-lite bonds have higher default rates than comparable debt with stronger covenants. Even though if I asked you to guess the outcome of the story, it is nice to have confirmation that cov-lite just ain’t right. Way to go Moody’s!
Among the most opaque markets in the world is the municipal bond market in the United States. But the Municipal Securities Rulemaking Board (MSRB) is looking to change that refrain with the launch of its Electronic Municipal Market Access (EMMA) platform.
Every once in awhile a statistic encapsulates a story so well it obviates the need for a narrative. On 4 September, a report by Bloomberg detailed the fact that half of the world’s government bonds yielded less than one percent.
Over the years I have privately told people that standardized bond issues would help fixed income markets become more liquid. A commentator in the Financial Times agreed with me recently.
And in the coming year, the CFA Institute will hold its Fixed-Income Management 2015 Conference in Boston, Massachusetts, on 22–23 October.
Best of 2014 in Meditation
Many of you know that I am an avid meditator and believe that it is one of the most powerful tools for decreasing stress, improving creativity and insight, and altering your ethical makeup. Most germane to finance, as reported in Inc., INSEAD/Wharton researchers found that just 15 minutes a day of meditation helps people overcome sunk-cost bias. Specific to investing. How many times have you lost money on shares in a business and the cost basis is emblazoned on your mind? “If it trades back up at ¥2500 then I will sell.”
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.