Saturday, July 30, 2005
Friday, July 29, 2005
Blogging B-School Deans
BizDeansTalk is a new blog run by deans from two top business schools: Paul Danos of Dartmouth (USA) and Santiago Iniguez of the Instituto de Impresa (Spain). I'm looking forward to hearing their thoughts on the directions that b-schools are heading.
I've got a pretty good idea as to what goes on "in the trenches". However, it's always nice to get the "view from 20,000 feet".
Hat tip to Cyberlibris for the link.
Thursday, July 28, 2005
Stock Splits:Do You Want That Pizza Cut Into Six Or Eight Slices?
"You better cut the pizza in four pieces because I'm not hungry enough to eat six."From this perspective, a stock split makes the slices smaller, but there are more slices. Financial economists have studied why companies do stock splits at least since Fama, Fisher, Jensen, and Rolle's 1976 paper. FFJR found that increases in split-stock prices reversed if the splitting company didn't raise dividends in the period following the split.
The Motley Fool gets the story right in this piece titled "Buying Stock Around Splits":
Is it better to buy a company before or after it splits? That's like asking, 'Should I eat this peanut butter and jelly sandwich before or after mom cuts it in half?'"Of course, there are other reasons given why splits might increase shareholder wealth. One commonly cited reason is that by moving prices per share into a lower range, the company becomes more attractive to individual investors (as opposed to institutions). In a recent piece, Dhar, Goetzmann, and Zhu find that:
...The real reason to smile at a split announcement is because it signals that management is bullish. Companies are not likely to split their stock if they expect the price to go down.
A higher fraction of post-split trades are made by less sophisticated investors, as individual investors increase and professional investors reduce their aggregate buying activity following stock splits. This behavior supports the common practitioners' belief that stock splits help attract new investors and improve stock liquidity.
Two Primers on Financial Statements
For most non-business people, these are about as easily understood as the Mongolian language (or your average politician).
The Motley Fool has made its name by breaking down financial information for the masses. Theitr latest article, "Cracking the Accounting Code" provides a very nice, relatively jargon-free guide to financial statements. It even describes what on a statement of cash flows.
If you want more information (or another perspective), IBM has put together a series of tutorials for their stockholders. Two that are worth reading are their guide to financial statements and guide to annual reports. -- both are written with the financial novice in mind.
Wednesday, July 27, 2005
Credit Derivatives and Systemic Risk (from the WSJ)
...The Counterparty Risk Management Group II is a revival of a group that was formed in 1999, following the implosion of hedge fund Long-Term Capital Management, to consider risks in the financial system.Click here for the whole thing (online subscription required).
The group, under its chairman E. Gerald Corrigan, reconvened several months ago, spurred into action by the rise of hedge funds and the increasingly complex nature of trading and risk-taking in the markets. Gyrations in the credit markets earlier this year have heightened interest in the group's work.
"Credit is at the core of what they are looking at," says Bradley Ziff, head of the hedge-fund practice at consultancy Mercer Oliver Wyman, who worked closely with the group. "And all that has happened in the credit markets in May vindicates their concerns. Credit products have dramatically changed the marketplace."
The most compelling evidence of that transformation came in mid-May, when a ratings downgrade of General Motors Corp. corporate debt roiled both the corporate-credit and various derivatives markets. The large, unanticipated moves in these markets led to trading losses both among funds and the dealers with whom they trade. Even though the markets recovered quickly, that episode raised concerns about the risk involved when so many players engage in similar trading strategies and positions become hard to close out without a massive move in prices.
Tutoring For Big Bucks
According to this article on Bloomberg, some SAT tutors make almost $700 per hour!
Inspirica's only "master" tutor, Donald Viscardi, costs $525 an hour. Advantage Testing Inc. in New York charges $685 for its best tutors. And a top tutor with the Princeton Review can cost as much as $300 an hour...My first thought was that I'm in the wrong business.
...Students who can't afford a tutor usually buy preparation guides such as the "The Official SAT Study Guide: For the New SAT'' for $14.
Since finance theory says that there's "no free lunch", I thought about it a bit more. Then I realized that I'd have to put up with the kind of parents that would be willing to pay this much for tutoring. I have friends that teach at "elite" universities with tuition well north of $35,000 per year. Their students are pretty high-maintenance, and the students' parents are not shy about making demands for their little darlings.
Hat tip to Joanne Jacobs for the link.
Rankings of Eonomics Blogs (from Newmark's Door)
It's worth checking out where your faviorite blog is.
And no, I'm not on it. Ah well...
Becker and Posner On Corporate Social Responsibility
...My answer is "no", although maximizing value, meeting contracts, and obeying laws help achieve many of the goals by those claiming corporations should be "socially responsible" by taking care of the environment, considering the effects of their behavior on other stakeholders, and contributing to good causes. Still, laws and contracts, and individual use of their own resources, rather than corporate behavior, should be the way to implement various social goals.Posner adds:
I agree with almost everything that Becker says, but will suggest a few qualifications. I can think of one situation in which "pure" charitable donations by corporations, i.e., donations that do not increase profitability, could benefit shareholders. Assuming that most shareholders make some charitable donations, they might want the corporations they invest in to make modest charitable donations on the theory that a corporation will have more information about what are worthwhile charitable enterprises than an individual does. For example, charities differ greatly in the amount of money that they spend on their own administration, including salaries and perquisites for the employees of the charity, relative to the amount they give to the actual objects of charity. Presumably corporations are in a better position to determine which charities are efficient than individuals are; if so, then shareholders may impliedly consent to some amount of charitable giving by their corporations. But not much. The reason is that one person's charity is another person's deviltry: a shareholder who is opposed to abortion on religious grounds would be offended if his corporation contributed to Planned Parenthood. The practical significance of this point is that corporations avoid controversial charities, so that the issue of implied consent becomes whether the shareholder would like his corporation to make a modest contribution to some set of uncontroversial charities.For the whole piece(s), click here and here.
Ben and Jerry's is a perfect example of Posner's comment that "one person's charity is related to another person's deviltry". If you want to spark some good classroom discussion of these issues, Michael Schill has case titled Ben & Jerry's Homemade that's based in large part on this issue. The link takes you to the abstract on SSRN, and you can download it by clicking on the link at the bottom of the page. It's pretty "low-tech" and doesn't require much in the way of finance sophistication, so it would even be good for a low-level undergraduate class. .
Tuesday, July 26, 2005
New Additions to The Blogroll
The Big PictureCheck them, and let me know what you think. If you have any additional recommendations for sites to add, drop me a line.
The Finance RoundTable
The Freakonomics Blog
Jacqueline Mackie Paisley Passey
Hat tip to Hypothetical Bias for the link. Although a very new blog, HB seems like one worth watching (and adding to your RSS reader).
You'd Have To Be Crazy To Think You Can Beat The Market
Click here for the whole article (online subscription required) .
The study suggests the participants' lack of emotional responsiveness actually gave them an advantage when they played a simple investment game. The emotionally impaired players were more willing to take gambles that had high payoffs because they lacked fear. Players with undamaged brain wiring, however, were more cautious and reactive during the game, and wound up with less money at the end.
Some neuroscientists believe good investors may be exceptionally skilled at suppressing emotional reactions. "It's possible that people who are high-risk takers or good investors may have what you call a functional psychopathy," says Antoine Bechara, an associate professor of neurology at the University of Iowa, and a co-author of the study. "They don't react emotionally to things. Good investors can learn to control their emotions in certain ways to become like those people."
The study demonstrates how neuroeconomics can offer insight into a question that has become a growing focus of economic inquiry: Why don't people always act in their own self-interest when they make economic decisions?
Though the field is still in its infancy, researchers hope neuroeconomics could someday have dozens of real world applications -- like explaining how brain chemistry influences market phenomena such as bubble manias and investor panics. Wall Street executives already are paying attention to the findings, since it offers insight into what motivates investors.
Monday, July 25, 2005
This Week's Carnival Of Personal Finance
Everybody Loves Your Money gives some advice on how to Teach Your Kids to be Smart With Money. He's got some great ideas there.As always, your mileage may vary.
Optimized Living has information on Student Loan Consolidation.
Mighty Bargain Hunter has a post titled Auto Leasing is Back — and Better? However, I'm still not convinced that it's worth it for most people.
Modblog.com discusses Identity Theft......What to do About It. He covers both how to avoid it and what to do if you can't.
The Happy Capitalist discusses The ABCs of Mutual Funds. He goes at length into the different share classes and the fees associated with them.
Congratulations, Lance Armstrong
This reminds me of the sign that's showed up along the Tour site the last few years - it featured a map of France in the U.S. stars and stripes and the words "American Owned And Operated Since 1999".
Best of luck in your next endeavors.
Sunday, July 24, 2005
This Week's Carnival Of The Capitalists
Free Money Finance has a good piece titled Don't Believe Financial Experts (the title is all I need say, except "present company included )
After checking out the carnival, be sure to look around on the Political Calculations website - it's got some interesting calculators for various things.
Searchlight Crusade warns us about The Negative Amortization Loan.
JLP at All Things Financial gives us a good rule of thumb in How To Determine If You're Wealthy.
Oh, Those Crazy Accountants
Saturday, July 23, 2005
The Economics of Bullies and Victims
The Unknown Son is likely to be "bully bait" when he gets a bit older - at six, he's small for his age (not surprising - both parents are well below average height). In addition, for the last couple of years, he's been dealing with some medical issues that further stunted his growth, caused him to miss some of the socialization that naturally comes from spending time on the playground, and left him less than physically gifted. Finally, he's a bit of a nerd, like his father.
So, I read this post by Joanne Jacobs titled How to stop a bully with interest:
Our neighbor . . . taught Christopher "how to fight," which in Christopher's case meant how to defend himself in a very loud voice accompanied by an equally loud glare & the all-important step forward.
I still remember a kid in third grade named Ronnie. He was the only third grader who shaved (after all, he was seventeen). He lived halfway between my house and the school. Several times a week he would "escort" me as far as his house and would literally kick my A## for several blocks. And yes, I'm using the "figuratively" correctly - every few steps he would actually kick me.
There was also a whole dramatic Second Act Christopher was supposed to launch into if the bully dared to mouth off after he'd been Warned. It was basically Robert DeNiro for the 2nd grade. Christopher spent the afternoon running through the whole thing with the neighbor and his son, and then we rehearsed him at home.
It was solved the traditional way, by getting my older brother (and to several of his friends) to administer some "attitude readjustment".
Since I try to apply economics to everything possible, I though I'd analyze Joanne's strategy from an economics framework. This means looking at the cost-benefit tradeoffs involved.
- First, an economist would say that a bully bullies because he gets some benefit from it. In Jacobs' piece, she notes that bullies choose targets that cry easily so that they get the biggest "bang for the buck" (i.e. the highest payoff per unit of effort expended). By not backing down, you decrease the bully's payoff.
- Second, by announcing that you're going to fight back, you increse the bully's "cost" of bullying. It's not necessary to be able to beat the bully (in all likelihood you won't - he's bigger and/or stronger than you, and more used to fighting). But, at least you increase the cost.
- Finally, there's the all-important "don't back away" from the the bully. Instead, as you tell them you're not going to meekly take it, you should step forward towards them. This functions as a credible "signal" that you're willing to fight. Like the kid in Jacob's article says "There are 5 of you and 1 of me, so you can stuff me in a garbage can if you want to. But I'm not the only one coming out of this with bruises." After all, if you told them that you were going to fight back but kept running, they wouldn't believe you.
The bottom line - if the cost of bullying (from the bully's perspective) increases and the benefit decreases, the bully will "buy" less of the "good". In this case, this means that he'll engage in less bullying of your kid.
Thursday, July 21, 2005
A Brief History of Exchange Rates (via the Wall Street Journal)
If you're not a finance person, you probably don't have much of an idea what I just wrote. The exchange rate is the rate at which on currency (like dollars) can be exchanged for another (like yen, or pounds). Here are a few articles that should give you enough background so that you'll get a sense as to why people make a big deal out of this.
A primer from investopedia that explains the basics of exchange rates: how they work, and why some exchange rates fluctuate and some don'tAfter the announcement of the change, the exchange rate on the yuan (China's currency) changed from 8.28 to the dollar to 8.11 to the dollar. Prior to the change in policy, the yuan/dollar exchange rate had been set by the Chinese government. Henceforth, it will be based more on market forces.
An article from the Wall Street Journal (subscription required) that goes through a brief history of exchange rates.
In simple terms, this means that (at least for the short term) a dollar will now buy less Chinese goods, or a yuan will now buy more American goods.
Wednesday, July 20, 2005
Becoming More Productive By Getting Up Earlier
But, I've been trying to be more productive and to get more research and writing done. Unfortunately, these activities always seem to be scheduled "in a little while". As a result, it seemed like this summer has been a lot less productive than I'd hoped.
In a rare fit of self-discipline, I finally decided bite the bullet and start getting up early (before 6:00). So, for the last two weeks, I've been getting up around 5:30 and working for a couple of hours first thing in the morning. It's been great for my productivity - on most days, by noon I've already put in four or five hours. That way, no matter what comes later, I've avoided the dreaded "zero" days where I spend no time on research whatsoever.
For those who would like to try getting up earlier, there's some great advice from Steve Pavlina here and here that I found very helpful. The best nugget I got from his piece is that I should get up the same time seven days a week and to give myself some "down time" before bedtime..
In addition to more making me a lot more productive at my research, getting up earlier has also had a couple of unexpected aditional benefits. First, the Unknown Son is usually awake at 6:00. So, before I go down to my office to work, I make a large pot of coffee and we share breakfast (I don't share the coffe with him because I'm stingy about my coffee and because the thought of a 6-year old on caffeine boggles the mind). You can learn a lot about what's going on with a kid when there's just the two of you and a couple of bowls of Cheerios.
Finally, I watch a lot less television. Finally, I figured out that I tend to snack at night while watching television. Less t.v. means less time to snack. So, I'm finally starting to shed the weight I put on the last two months due to my "bone-chips-in-the-elbow induced sloth.
But I still don't like mornings...
Tuesday, July 19, 2005
T Boone Pickens' Son Charged In Stock Scam
Most of the faxes were handwritten to appear as though they were misdirected confidential notes from a stockbroker to a client, the complaint says. Some recipients of the faxes bought shares in the four touted companies, driving up prices. The shares traded on the "Pink Sheets" and OTC Bulletin Board markets, so relatively small buys and sells have an exaggerated impact on prices.
Messrs. Pickens and Yafa then sold their shares and made hundreds of thousands of dollars in illegal gains, according to the criminal complaints. The two men each face as long as 20 years in prison.
The fax didn't state that Mr. Yafa was being paid to promote the stock. Failing to disclose that a broker is being paid to promote a stock is illegal. When the stock traded higher, Mr. Yafa sold his shares for a $300,000 profit, the SEC says.Unfortunately for them, one of recipients of the fax was the Justice Department's U.S. Attorney's office for the Southern District of New York.
"I have been trying to get you for 2 hours," said the handwritten letter to a "Dr. Mitchel," which was addressed from "Chris." "I have a stock for you that will tripple [sic] in price just like the last stock I gave you 'SIRI' did. I can't get you on either phone. Either call me, or call Linda to place the new trade. We need to buy 'AVLL' now."
Click here (subscription required) for the whole article.
I read a book a couple of years ago written by someone who'd studied the culture of con men back in the 1920s from the inside. The author went at length into the operations of con men of the time. While the details of scams change over the years, they still appeal to the common desire to get something for nothing. In fact, the motto of a con man is best summed up as "You can't scam an honest person".
To that, I'd add that you can't scam a U.S. Attorney.
Remember - If it seems too good to be true, it probably is.
Note: if you're new to Financial Rounds, be sure to check out the FAQ page.
The Math Behind Loans
The other day, JLP at All Things Financial put up a post demonstrating how to calculate the present value of an annuity. In it, he demonstrated how you can use the present value formula to calculate how much you’d need to invest today at a given rate of interest in order to generate a fixed income for a number of periods.
I’d like to piggy-back on JLP’s post and show you another application where you can use this concept: to make a number of loan calculations. Once people find out I’m a finance professor, I often get questions about their mortgages. Here’s a somewhat lengthy example that shows how to use the present value of an annuity formula to do some calculations related to amortized loans (like mortgages). The following example demonstrates how to use the formula to calculate loan payments, how to calculate what the loan balance will be at any point in time, and also how to figure out how much of a given year’s payments goes towards principal and how much towards interest. It’s a bit involved, but it does work through all the basic calculations.
- On an amortized loan, payments are applied to both principal and interest (first towards interest and then principal).
- The balance on an amortized loan goes down over time. In fact, the term “amortized” comes from the Latin word for death (i.e. the loan balance “dies off” over time).
- The outstanding balance of an amortized loan at any point in time will be the Present Value of the remaining payments on the loan.
So, without further ado, let's look at a simple example that I give to students in my introductory finance class:
Assume you take out a $200,000 mortgage with a 30-year term, monthly payments, and an annual interest rate of 6%. (1) What’s the monthly payment on the loan? (2) What will the outstanding balance on the loan be in a year’s time (i.e. after you’ve made 12 payments)? (3) How much of your total payments in the first year will go towards principal (i.e. reduction of the loan balance), and (4) how much towards interest?
1) Calculating the monthly payment on the loan:
= (1/0.005) – (1/0.005) x (1/1.005)^360 = 166.7916.
NOTE: in the notation abve, “r” is the interest rate per month (since it’s a monthly loan), “n” is the number of periods covered by the loan (360 in this case, since it’s a 30-year loan and it’s paid monthly) and the “^n” means “raised to the nth power”.
When calculating a loan payment, you divide the present value factor into the $200,000 initial balance on the loan. This give us a payment of 200,000/166.7916 = $1,190.10 per month.
Note: this is for principal and interest only. Your actual payment may also include property taxes, insurance, and PMI, but those are separate from the “basic” payment on the loan.
2) Calculating the the outstanding balance on the loan be in one year’s time:
The loan balance after one year will be the present value of the remaining 348 payments (29 years times 12 months) of $1,190.10 that are still owed on the loan as of the end of the first year. To calculate this present value, first calculate the Present Value Factor using the formula from the previous section. However, after a year has goen by, “n” would be 348 instead of 360 (after a year's time, there are only 348 months remaining on the loan):
PV factor = (1/0.005) – (1/0.005) x (1/1.005)^348
In step 1, we calculated the payment based on the outstanding balance. In that step, we divided the factor into the outstanding balance of $200,000 to get the monthly payment. Now, we’re going the opposite way – we know the payment, and we want to determine the outstanding balance. So, in this case we multiply the payment of $1,190.10 by the new present value factor to get an outstanding balance of 1,190.10 x 164.7438 = $197,543.98.
Note: after two years have gone by, the calculation would be based on “n” being 336 (28 years times 12 months per year). After two years in the mortgage, the present value factor would be 162.5688, and the outstanding balance would be $194,935.47.3) Calculating how much of the total payments in the first year goes towards principal:
We began the first year with a balance of $200,000 on the loan and ended it with a balance of $197,543.98. The difference between these two numbers ($200,000 - $197,543.98) is the amount we paid towards principal during the first year. In other words, we paid off $2,456.02.
This might not seem like you've paid off a big chunk of the loan. After all, you pay almost $1200 per month, so paying off only $2,456 in a year’s time seems like a rip-off, right? Keep in mind that you’ve borrowed $200,000, and the interest on the loan is 0.5% per month (i.e. 6% per year, divided by 12). So, the interest owed on the loan in the first month is $1,000. This means that in the first month of the loan, since you paid “only” $1,199.10, the first $1,000 goes towards paying the interest on the $200,000, leaving $199.10 to go towards paying down the loan. In the second month of the loan, the amount of the payment going towards principal is a tiny bit more than $199.10, since your outstanding balance is a bit less than $200,000 (remember, you paid down the loan by $199.10 in the first month). So, looked at it this way, the $2,456 paid off in the first year doesn’t seem too far off the mark. It’s a bit more than the $199.10 you paid off in the first month times 12.
4) Calculating how much of the total payments in the first year goes towards interest:
To calculate the amount of interest paid in the first year, remember that all payments on an amortized loan go towards a combination of principal and interest. In the first year, you made total payments of $1,199.10 per month times 12 months, or $14,389.20. In Step 3, you calculated that the loan balance went down by $2,456.02 over the course of the year. So, of the $14,389.20 that you paid, $2,456.02 went towards principal repayment. This means that the remainder of $14,389.20 -$2,456.02= $11,933.18 went towards interest.
Just as a “seat of the pants” check to make sure that this is a reasonable figure, take the annual interest rate of 6% and multiply it times the initial balance of $200,000, and you’d get $12,000. The total interest paid over the first year’s time is actually a bit less than $12,000 because each payment decreases the outstanding balance a bit (remember – it’s an “amortized” loan, so the balance “dies off” over time). Therefore, since the interest owed each month is based on the outstanding balance, it goes down a bit each month, and the amount paid towards principal goes up.
So there you have it. Of course, most people don’t make loan calculations by hand – you’d use either a financial calculator or spreadsheet to do the calculations. But now (hopefully), you can see what goes on “behind the scenes) in a loan.
In a future post, I’ll show how to use the built-in functions of a spreadsheet like Microsoft Excel to do the same calculations in a much more efficient fashion.
Monday, July 18, 2005
This Week's Carnival Of The Capitalists
Coyote Blog explains why we aren't seen long gas lines like we did in the 70's (the last and most often cited gas-shortage period)As always, your mileage may vary.
Kim Snyder tells us why "Investing is a constant battle between your rational brain and your lizard brain." in a post titled The Stairway to Financial Heaven
JLP at All Things Financial has some excellent questions to ask your broker. Remember: There are agency problems everywhere.
Sunday, July 17, 2005
S.E.C. Looks At Options Trades
However, other markets are far less transparent, and spreads in those markets are often much larger. A recent example of this can be seen in a study done by Amy Edwards, Mike Piwowar and Larry Harris of the SEC, who find that spreads on corporate bond transactions are typically many times those on equities.
Now the SEC is looking at options markets. According to a New York Times Article in yesterday's paper:
The Securities and Exchange Commission is investigating whether major brokerage firms are fulfilling their obligation to secure the best price for customers who are trading options, according to a letter sent to Wall Street brokers.In many options exchanges, options are trades at nickel or dime spreads. This leaves the market maker enough money on the table that they can offer rebates to brokerage firms to take some of a trade. The SEC is investigating whether this inducement leads brokerage firms to violate their duty to act in their customers' best interest.
The letter, sent July 5, says the S.E.C. is examining whether the practice of payment for order flow - brokers and exchanges paying retail trading firms for their orders - violates a broker's fiduciary duty to secure "best execution," a vague term which essentially defines getting the best deal for a customer.
As I tell my introductory finance students, "Agency Problems Are Everywhere". Whenever a task is delegated by one party (the princiapl) to another (the agent), there's an opportunity for the agent to take advantage of the principal.
But, there's good news on the horizon. When there are abnormal profits to be made, there's an incentive for a competitor to offer the same product or service (in this case the ability to trade options) for a lower price. In this case. the International Securities and Boston Options Exchanges have started trading options at penny quotes. In short order (no pun intended), this should force the other exchanges to either follow suit or lose order flow.
Click here for the whole article.
Friday, July 15, 2005
The Real-Estate Bubble and Banks' Risk Management
One of the questions that's gotten a lot of play lately is, "If the real estate market is in a "bubble" mode, why do the banks keep lending?" The logic is as follows: if real estate is overvalued, then making floating rate loans (or non-down payment loans" will leave the banks holding the bag when mortgagees default.
The answer is, "The banks have passed the bag to someone else". Nowadays, many (if not the majority of) loans are "securitized". This means that the bank bundles a large number of loans together and then either sells them directly on the loan market, or issues securities backed by the portfolio. So, the risk is transferred to the purchasers of the loans/securities.
A recent New York Times article titled "A Hands Off Policy on Mortgage Loans" touches on this point and uses it to explain why banks have largely ignored the recent "guidance" issued by banking regulators on home-equity loans:
Click here for the whole thing.
The main issue for regulators is whether banks and other lenders are properly managing their own risk, and the lenders are looking good.
They have hedged their risks by bundling mortgages into securities that are then sold to investors around the world. And if interest rates go higher, they have shifted much of the risk onto consumers because a growing share of home buyers have taken on adjustable-rate mortgages. At the same time, they have built sturdier financial institutions through mergers and the breakdown of barriers to interstate banking.
Bert Ely, an independent banking analyst who was among the first to recognize the crisis at savings and loan institutions in the 1980's, said the banks are far sounder today. "It's a night-and-day difference," Mr. Ely said. "No comparison."
Hat tip to Calculated Risk for the link.
Thursday, July 14, 2005
High-Tech Identity Theft
The upshot of the article is that identity thieves have a lot of ways to ply their trade. While the recent database thefts got a lot of media play, there are other high-tech ways thieves can get your credit info. The article lists a few like:
- Pharming: thieves create fake Web sites similar to the Web sites of banks or credit-card companies. When consumers who don't know the difference try to log in, their account information is sent along to the thieves. They get traffic either through customers mistakes (they go to the wrong website) or through computer viruses that automatically redirect traffic from specific Web addresses, such as those for banks, credit-card companies or shopping Web sites.
- Keystroke catchers: These are small devices attached to the cable that connects your keyboard to your computer. They look like a standard connector, but have a memory chip that records everything typed. Thieves often set these up on public library computers.
- Gas stations: When you use a card at the gas pump, the information is sent by satellite feed to your bank for verification. Now, according to Truecredit, identity thieves have invented a way to hijack that information by modifying the program that carries out the data transfer so that your credit-card number is sent to them at the same time it's sent to your bank.
Not to make you paranoid, but there are a few common-sense ways to help protect yourselves. You've probably heard them many times before, but they bear repeating:
- Don't send personal financial information (or make transactions) over public computers
- Use credit cards rather than debit cards where possible (if you catch a fraudulent transaction, credit card companies credit it back faster)
- Keep an eye on your card. When making purchases in an unfamiliar restaurant (or foreign country) it might be best to use cash. If traveling overseas, use only one credit card, so it's easier to track purchases.
- Don't give out social security numbers or personal info if you don't have to. In most cases (like renting a video), they can easily use another number (like the part of your driver's license).
Wednesday, July 13, 2005
A: They're all in this piece by Mike Moffatt (economics doctoral student at the University of Western Ontario) titled How Markets Use Information To Set Prices (note: the example begins about halfway down the page). It gives a very nice explanation of the process by which market prices adjust to new information.
Moffatt provides an extended example of the price-setting process using the recent Tradesports contract for the "American League Wins The All-Star Game". He traces the price changes in the contract as the All-Star game progressed. At the end of the example, he even discusses how the contract for "The Yankees Win The World Series" went up following the American League All-Star win.
Once you're done reading the piece, go to the top of the page and click on the "economics" link. Moffatt has a number of pieces on various economics topics, like "What Is The Demand For Money" and "A Beginner's Guide To Economic Indicators". Browse around - there's lots of good stuff there, and it's all well written with the layman in mind.
Tuesday, July 12, 2005
The Nigerians Are Back (No Wait, That's The Swallows)
However, I always had a soft spot for "Nigerian" scam letters. JLP at All Things Financial just got one in his email inbox:
Hello,This is an example of what's often called an "Advance Fee Fraud" or "419" scam. The practice of referring to these types of scams as "419s" comes from the fact that the overwhelming majority of them seem to come from Nigeria (the "419" refers to the Nigerian Penal code section dealing with these scams).
I am contacting you to partner with me in respect of transfer of certain funds, which is being held in a floating account in my organization, Fountain Securities , in Madrid Spain. I am privileged to have full knowledge of the availability of this fund due to my function and position in the organization at present. I have to contact you because it is imperative for me have the cooperation of a foreigner to be able to transfer the fund out of my country.
This fund, was deposited by Mr. George Martins, who died in 1994 without leaving any information of any next of kin to inherit the fund. The account therefore has not been operated since his death.
The total amount involved is Fifteen Million American Dollars. My name is ####### ######. I would give the details of the transfer process if I receive your response and am convinced that you are willing and dependable to carry out the transaction with me in absolute confidentiality. We have to establish mutual trust such that it will be glaring to both parties that we could work with open mind. On transfer of the fund into your account, your share would be 35% of the total sum while the rest part would be for me and I intend to invest the major part of my share in your country with your assistance.
I would appreciate if you could respond to me on my more private mail: #########@k.ro. Kindly state your telephone number so that I could call you.
We used to keep a pool in one of my old offices as to who would get the first 419 email each year or semester. Hence the title of this post - the Nigerian scam letters return to my inbox each year just like the swallows return to Capistrano.
For more information on 419 scams, the Secret Service has an advisory alert here
For a much more creative (and humorous) approach, check out the gang at www.419eater.com. These folks do their best to "Scam the Scammers" - they figure that the more time they can make scammers waste on them, the less time the scammers have to spend on other people. Check out their "scam baiting hints and tips" page.
For my all-time favorite scambaiter story, "The Order of the Red Breast", click here (scroll down to the section titled "war paint"). I don't know if it's for real or not, but it's a pretty funny story regardless.
Update: here's a timely article from Yahoo! news: Nigeria jails woman in $242 million email fraud case (hat tip to Powerline for the link)
Back in the Saddle (Kind of)
Today, I'm almost as good as new, except for the big ace bandage on my right arm that'll be there for the next few days. The most interesting thing about the whole process was that instead of giving me a general anesthetic (sp?), they used what's called a "nerve block". This involved my getting an injection in the right side of my neck (luckily, they'd already given me the "don't give a damn juice") that killed all sensation to my right arm. It lasted until this morning. So, for the last 24 hours or so, my arm pretty much just hung there. About the only way I could tell what the arm was doing was to either visually check it or use my other arm. It's amazing how "simple" tasks like opening a bottle of Tylenol or getting a scoop of sherbet are so much more complicated one-handed. It definitely gave me a much better (albeit still small) insight into what people go through after small strokes that leave them with a non-functioning limb.
In any event, the Unknown Wife says I can go back to being a right-winger again (or at least having to a right wing that works).
Monday, July 11, 2005
This Week's Carnival of The Capitalists
This Week's Carnival of The Capitalists is up at Multiple Mentality. Since I just had surgery on my right elbow and the nerve block hasn't worn off yet, I'll be brief -- I don't type well with my left.
This Week's Carnival Of Personal Finance
Saturday, July 09, 2005
Don't Blog If You're Looking For A Job (via The Chronicle of Higher Education)
What is it with job seekers who also write blogs? Our recent faculty search at Quaint Old College resulted in a number of bloggers among our semifinalists. Those candidates looked good enough on paper to merit a phone interview, after which they were still being seriously considered for an on-campus interview.
That's when the committee took a look at their online activity.Click here for the full story.
In some cases, a Google search of the candidate's name turned up his or her blog. Other candidates told us about their Web site, even making sure we had the URL so we wouldn't fail to find it. In one case, a candidate had mentioned it in the cover letter. We felt compelled to follow up in each of those instances, and it turned out to be every bit as eye-opening as a train wreck.
There's a quote that's been attributed to a number of people that goes, "If you give me six lines written by the hand of the most honest of men, I will find something in them which will hang him."
This is one reason that I plan on blogging as "The Unknown Professor" for some time. Yeah, I'm wimping out, but discretion is the better part and all than. I'm not looking for a job at present, but you never know, and you never know who might get their boxers in a bunch over something I've written.
Hat tip to Joanne Jacobs for the link (which she got from Discriminations).
Update #1: Here's a link to the Metafilter discussion on the topic (courtesy of Ann Althouse).
Update #2: Ancrene Wiseass has a veritable linkfest to other bloggers' comments on this story.
Other blog posts about Tribblegate include that of our favorite e-saloniste, BitchPhD, as well as those at ABD: AlmostBloodyDone; Acephalous (who quoted me and gave me a trackback--sexy!); Badgering; Blogenspiel; The Chutry Experiment; Colin vs. Blog; Daniel W. Drezner; Financial Rounds; Frog in a Well; Information Overlord; Jess's Journal; Lawyers, Guns, and Money; The Little Professor; OneMan'sOpinion.org; Planned Obsolescence; Profgrrrrl; Six Impossible Things Before Breakfast; So, Anyway . . . ; and Yellow Dog.I wish I had the time (or energy) to do that much linking. But, thanks to the miracle of the blogoshpere, I don't have to.
Friday, July 08, 2005
Forecast For Blogging: Light
So, for the next few days I will be blogging sporadically - mostly as a break from research.
It's a good check - the more I blog, the less I'm accomplishing.
I'm trying to follow my own advice, for a change. How disgusting!
Thursday, July 07, 2005
London Terrorist Attacks
I'm glad the British have such a determined, eloquent, and resourceful leader as Blair at the helm in this trying time. There are few better.
To steal a line, "We're all British now".
Cautionary Quote Of The Day
- Professors are paid to "profess" (to talk to others about their area of expertise). We're not alone in this - judges, lawyers, and doctors* are also in this boat. Unfortunately, we also have a tendency to think that we have the "obligation" to share our opinions in areas outside our professional qualifications. Here's a great quote I should keep pasted to my computer to remind me when I talk about non-finance/econ topics:
- "I believe that a scientist looking at nonscientific problems is just as dumb as the next guy"
- Richard Feynman (1918-1988)
Q: What's the difference between God and a surgeon?
A: God doesn't think he's a surgeon.
Wednesday, July 06, 2005
The Gold Plated Trailer Park? (from Calculated Risk)
The USA Today reports Mobile home madness: Prices top $1 millionTip-o-the-hat to Calculated Risk for the link.A two-bedroom, two-bathroom mobile home perched on a lot in Malibu is selling for $1.4 million. This isn't a greedy seller asking a ridiculous amount no one will pay. (Photo gallery: Mobile home boasts of spectacular views)
Tuesday, July 05, 2005
The 10th Annual Redneck Games (From the Sports Economist)
In his garage, Melvin Davis keeps 230 trophies he's won racing motorcycles, go-karts and pickup trucks. But he's best known for a sport that earned him four trophies topped with crushed Bud Lite cans
"Yeah, looking back on it I'm proud. But when I done it I felt a little silly," said Davis, 68. "People were going, `There's the bobbing-for-pigs-feet champion!'"
Bobbing for pig feet, the mudpit belly-flop, the armpit serenade — they're all part of the Redneck Games, a series of good ole'ympic events for the ain't-so-athletic celebrating their 10th year in middle Georgia.Having lived down South for a while, I can only imagine what they use in place of the olive wreath given to the winners...
Hat tip to the The Sports Economist for the link.
This Week's Carnival of The Capitalists
How eBay spreads understanding of markets, the importance of reputation, and other good things. from Liberty Cadre.
Poor Economic Intuition, compliments of the crew at Catallarchy (the title of the post says it all).
Big Picture Small Office has an interested post titled Wendy's Queuing Theory which discusses the economics of standing in line
This Week's Carnival of Personal Finance
Tips for Deducting Donations from BluePrint For Financial Prosperity breaks down the what, when , how, and why of charitable deductions (the section on what to document is particularly good - save it in your "taxes" file)
TheHappyCapitalist explains the many designations in the financial field.
Credit Protector - The Good, Bad and Ugly from Savvy Saver goes through the various services that offer help in protecting you from identity theft.
As always, look around. In addition to finding a whole lot of information in one place, you might find a new blog (or two) to add to your list.
Monday, July 04, 2005
Happy Independence Day!
It's the first time we've done the fireworks thing in a while. So, we spent about $75 for some good ones for the kids. The "Weeping Willows", "Bling" and "Purple Haze" were the hands down favorite, but the younger barbarian (the Unknown Daughter, age 4) got just as much kick out of a string of Black Cats as she did from the more expensive variety. The Unknown Son (age 6) got bored after a while, and went inside to listen to his CDs. We'll have to work on him, I guess.
When putting my children to bed, my daughter asked me why we do fireworks. So, I told her about how long, long ago the brave heroes fought a war with the evil king so that they could be free. Five minutes after the lights went out, she ran into my room and asked, "Hey Dad - I need to know - Did the heroes win?". When told, "Yes honey, they did.", she went to sleep easily.
So, all's well that ends well.
My kids keep e tired, but seeing old things through new eyes more than makes up for the exhaustion.
Sunday, July 03, 2005
Betting On The Next Supreme Court Justice Nominee
So, rather than add my $0.02 and stump for one or another, I'd rather give the Finance Professor's spin on things. Markets are wonderful tools for processing information. Tradesports.com has just opened up prediction markets for contracts based on who will be the next nominee for the Supreme Court.
Prediction markets don't work well in predicting outcomes when information is centralized (like the recent papal election, which took place under very closed conditions). However, the information associated with the nominating process is much more dispersed in this case than it was for the passing of the papal title -- in the SCOTUS nominating process, there are a lot of individuals that each possess some piece of the puzzle. Prediction markets serve as a useful tool for aggregating all this information. So, it'll be interesting seeing how accurate they turn out to be.
For those of you that aren't familiar with how a prediction market like Tradesports works, the contract for a given nominee pays $1 if he's nominated, and $0 otherwise. With some pretty simple math, it's easy to show that the price that an individual would be willing to pay for a contract like this is the individual's subjective probability that the event will occur.
Let's take the contract for Emilio Garza as an example. It currently sells for $0.28. If an individual believes that there's actually a 35% chance of Garza being nominated, this contract is undervalued. So, the individual would purchase the contract. As they make purchases, the price will increase. As long as the price remains below $0.35, that individual would consider it a good investment, and would keep buying. Buying would continue until the price exactly matches the subjective probability of the investor "at the margin".
Likewise, if an investor thought the contract was overvalued (i.e. that the probability implied by the price was too high), they'd sell it (i.e. take the other side of the bet). This would drive prices down and would continues until the price was "fair" to the marginal investor. In other words, purchases and sales take place until both sides are "balanced".
At present, Garza leads the field at $0.28, with Luttig at $0.16 and Gonzales at $0.18.
Stay tuned. Unlike the last time there was a vacancy, there will almost round the clock coverage of the process (both in mainstream media and the blogosphere). As information changes, prices on the contracts change to reflect traders assessments of each candidate's chances. So, these contracts serve as good bellwethers as to how the candidates perceived chances are changing.
Remember - unlike polls (formal or informal), these contracts require people to "put their money where their mouth is). That's their advantage as a predictive tool.
Welcome to all the folks stopping by from ProfessorBainbridge.com . Look around a bit and see if there's anything you like.
Also, since there seems to be a bit of interest on the topic, I'll be posting more about how to interpret the information you find on Tradesports (i.e. what are the "bid and ask prices, how do you interpret the order book, and so on).
The Psychology Behind Common Investor Mistakes (via The Big Picture)
Classical finance theory assumes that investors are purely rational (i.e. calculate the costs and benefits, risk and return, etc... in a completely dispassionate manner). On the other hand, followers of the "behavioral finance" camp take an alternate tack: they bring in the possibility that investors act like ,well, normal people. In other words, they assume that investors could be prone to things like cognitive biases, overconfidence, short-sightedness, and so on.
Barry Ritholtz at the Big Picture examines the implications of this approach for investors. He looks at the psychology behind investor mistakes, and shows how six common errors of perception and judgment can hurt investment performance. In short, they are :
- Fear of regret/pain of regret
- Cognitive dissonance
- Myopic risk aversion
Auctions For Condos
Unfortunately for the developer, if it's an attractive community, the price of the units increases rapidly, so the speculators sell the units in the aftermarket. This means that the developer leaves money on the table (he could have set the price higher at the start.
Here's an alternate setup - an auction. In this condo development (on the Florida Gulf Coast), condos go to the highest bidders in a sealed bid auction. The developer has a website that lists the number of bids (but not the amount of the bids) for each parcel.
Hat tip to Market Week for the link.
I know there are a lot of other ones online also, but it's worth checking out. He's also got a few other calculators you might want to try.