Friday, June 30, 2006

The Declaration of Independence

Most Americans have never read the Declaration of Independence (at least, not since high school, and none of us remember that). So, in honor of this holiday weekend, here it is:
The Declaration of Independence:

When in the Course of human events it becomes necessary for one people to dissolve the political bands which have connected them with another and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. --That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, --That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn that mankind are more disposed to suffer, while evils are sufferable than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security. --Such has been the patient sufferance of these Colonies; and such is now the necessity which constrains them to alter their former Systems of Government. The history of the present King of Great Britain is a history of repeated injuries and usurpations, all having in direct object the establishment of an absolute Tyranny over these States. To prove this, let Facts be submitted to a candid world.

He has refuted his Assent to Laws, the most wholesome and necessary for the public good.

He has forbidden his Governors to pass Laws of immediate and pressing importance, unless suspended in their operation till his Assent should be obtained; and when so suspended, he has utterly neglected to attend to them.

He has refused to pass other Laws for the accommodation of large districts of people, unless those people would relinquish the right of Representation in the Legislature, a right inestimable to them and formidable to tyrants only.

He has called together legislative bodies at places unusual, uncomfortable, and distant from the depository of their Public Records, for the sole purpose of fatiguing them into compliance with his measures.

He has dissolved Representative Houses repeatedly, for opposing with manly firmness his invasions on the rights of the people.

He has refused for a long time, after such dissolutions, to cause others to be elected, whereby the Legislative Powers, incapable of Annihilation, have returned to the People at large for their exercise; the State remaining in the mean time exposed to all the dangers of invasion from without, and convulsions within.

He has endeavoured to prevent the population of these States; for that purpose obstructing the Laws for Naturalization of Foreigners; refusing to pass others to encourage their migrations hither, and raising the conditions of new Appropriations of Lands.

He has obstructed the Administration of Justice by refusing his Assent to Laws for establishing Judiciary Powers.

He has made Judges dependent on his Will alone for the tenure of their offices, and the amount and payment of their salaries.

He has erected a multitude of New Offices, and sent hither swarms of Officers to harass our people and eat out their substance.

He has kept among us, in times of peace, Standing Armies without the Consent of our legislatures.

He has affected to render the Military independent of and superior to the Civil Power.

He has combined with others to subject us to a jurisdiction foreign to our constitution, and unacknowledged by our laws; giving his Assent to their Acts of pretended Legislation:

For quartering large bodies of armed troops among us:

For protecting them, by a mock Trial from punishment for any Murders which they should commit on the Inhabitants of these States:

For cutting off our Trade with all parts of the world:

For imposing Taxes on us without our Consent:

For depriving us in many cases, of the benefit of Trial by Jury:

For transporting us beyond Seas to be tried for pretended offences:

For abolishing the free System of English Laws in a neighbouring Province, establishing therein an Arbitrary government, and enlarging its Boundaries so as to render it at once an example and fit instrument for introducing the same absolute rule into these Colonies

For taking away our Charters, abolishing our most valuable Laws and altering fundamentally the Forms of our Governments:

For suspending our own Legislatures, and declaring themselves invested with power to legislate for us in all cases whatsoever.

He has abdicated Government here, by declaring us out of his Protection and waging War against us.

He has plundered our seas, ravaged our Coasts burnt our towns, and destroyed the lives of our people.

He is at this time transporting large Armies of foreign Mercenaries to compleat the works of death, desolation, and tyranny, already begun with circumstances of Cruelty & Perfidy scarcely paralleled in the most barbarous ages, and totally unworthy the Head of a civilized nation.

He has constrained our fellow Citizens taken Captive on the high Seas to bear Arms against their Country, to become the executioners of their friends and Brethren, or to fall themselves by their Hands.

He has excited domestic insurrections amongst us, and has endeavoured to bring on the inhabitants of our frontiers, the merciless Indian Savages whose known rule of warfare, is an undistinguished destruction of all ages, sexes and conditions.

In every stage of these Oppressions We have Petitioned for Redress in the most humble terms: Our repeated Petitions have been answered only by repeated injury. A Prince, whose character is thus marked by every act which may define a Tyrant, is unfit to be the ruler of a free people.

Nor have We been wanting in attentions to our British brethren. We have warned them from time to time of attempts by their legislature to extend an unwarrantable jurisdiction over us. We have reminded them of the circumstances of our emigration and settlement here. We have appealed to their native justice and magnanimity, and we have conjured them by the ties of our common kindred. to disavow these usurpations, which would inevitably interrupt our connections and correspondence. They too have been deaf to the voice of justice and of consanguinity. We must, therefore, acquiesce in the necessity, which denounces our Separation, and hold them, as we hold the rest of mankind, Enemies in War, in Peace Friends.

We, therefore, the Representatives of the United States of America, in General Congress, Assembled, appealing to the Supreme Judge of the world for the rectitude of our intentions, do, in the Name, and by Authority of the good People of these Colonies, solemnly publish and declare, That these United Colonies are, and of Right ought to be Free and Independent States, that they are Absolved from all Allegiance to the British Crown, and that all political connection between them and the State of Great Britain, is and ought to be totally dissolved; and that as Free and Independent States, they have full Power to levy War, conclude Peace contract Alliances, establish Commerce, and to do all other Acts and Things which Independent States may of right do. --And for the support of this Declaration, with a firm reliance on the protection of Divine Providence, we mutually pledge to each other our Lives, our Fortunes and our sacred Honor.

An amazing document.

Two More Down: Clearing My Plate Before the Move

Ah! I finished and shipped the book chapter yesterday and the overdue referee report today. I want to move without too much "near finished" business hanging over my head. So, in the next three weeks I have to:
  1. Finish another referee report (it's for a different journal than the previous one, and it is one that's a likely outlet for some of my work)
  2. Complete final edits on an empirical piece that I've been working on for about a year with a former student. The data crunching is done, and all that's left is final polishing. I should be able to finish it with about 2 days of solid work.
  3. Finish a theoretical piece that I'm working on with a colleague at my current school.
  4. Get two Ph.D. students at my current school squared away on the projects we're working on. Both are joint projects with the colleague mentioned in #3, so she'll continue to ride herd on them after I leave. However, I'm taking the lead on both projects, so the further we can move them along the better. In addition, one of the two students needs a LOT of handholding, so it could get pretty painful doing things long distance.
I'd like to clear my plate as much as possible before I move because I know that I'll be fairly unproductive for about a month thereafter. Deadlines are good, and I know I can relax a bit after the move -- our new place is about 7 miles from the beach.

Annual Reports of Poorly Performing Firms Are Harder To Read

This is somewhat of a "dog bites man" story. Feng Li, an assistant professor of accounting at the University of Michigan did a comprehensive study (55,000 firm-year observations) on the relationship between the readability of annual reports and the level and volatility of earnings.

He found that the annual reports of companies with poorer performance and/or more volatile earnings were much less readable. He also found that good performance was more persistent for firms with more readable reports.

One obvious interpretation is that firms try to bury bad performance with abtruse writing. Another is that poor writing and poor performance are both caused by a lack of ability. A third is that poor performance is more difficult to explain than good performance.

Either way, it's an interesting study. There's a PDF version on SSRN here.

I wonder if there's a similar pattern in the annual reports of firms whose top executives are eventualy prosecuted for fraud?

HT: Marginal Revolution

Thursday, June 29, 2006

Bogle and Malkiel Discuss Fundamental Indexing

Today's Wall Street Journal has a great op-ed piece by John Bogle (former head of Vanguard funds) and Burton Malkiel (Princeton finance Professor and author of "A Random Walk Down Wall Street"). In it, they do a pretty thorough job of discussing some of the potential problems with "fundamental indexing."

For those unaware with the term, here's a little background: Indexes (and index funds) can be weighted many ways - by market capitalization (i.e. a stock with twice the market cap would have twice the weight in the portfolio), equally (all stocks have equal weight) or by some other factor. The S&P 500, for instance, is a market-cap weighted index.

Proponents of "fundamental indexing" contend that portfolios that are indexed by some fundamental factor could significantly outperform traditional cap-weighted index. For example, Eugene Fama and Kenneth French contends that portfolios of small-cap and high price-book firms would be superior, Robert Arnott proposes indexing on factors such as sales or book values, and Jeremy Siegel suggests portfolio weighting on the basis of dividends.

Bogle and Malkiel provide several good reasons why fundamental indexing is unlikely to outperform cap-weighted indexing:
  • Higher annual operating expenses
  • Higher management fees
  • Higher portfolio turnover
  • Higher tax burden tax
Read the whole thing here (note: online subscription required)

Updated 6/29: To place things in a better context (and give the other side's arguments in their own words), I thought I'd link to the op-ed piece that Jeremy Siegel wrote in the WJS on 6/14, titled "The Noisy Market Hypothesis". You can read it here (as before, online subscription required):

Tuesday, June 27, 2006

My Son Would Love This

The Unknown Son has a serious Superhero fixation, and Spider Man is his favorite. So he'll love this when he wakes up (he just went to bed).

Your results:
You are Spider-Man

The Flash
Green Lantern
Iron Man
Wonder Woman
You are intelligent, witty,
a bit geeky and have great
power and responsibility.

Click here to take the Superhero Personality Test

HT: ProfessorBainbridge

Rain: Heavy, and Blogging:Light

I doubt I'll be blogging much today (at least until late tonight, if at all). But since I've already been working since 7 today, I needed a break, and you're it..

We've had rain since Saturday, and it continues today. Normally I'd be frustrated since it keeps me from biking, but this time it worked out well because I've got a number of deadlines fast upon me.

I spent 7-8 hours yesterday on a referee report that's WAAAAAY overdue. At this point, I have all my thoughts down, but still have to finish organizing them into something coherent. I'm recommending that the paper be rejected because while the paper might potentially make a contribution, it's way too poorly done to tell- there are errors in the framing of the piece, the empirical analysis, and the "micro writing" (i.e. spelling and grammar.

In addition, there a number of years where their sample overlaps the samples of earlier pieces, and their numbers are extremely different. They don't provide any indication as to why this might be, so this makes me doubt all their results. So, as a note to any budding academics out there, make sure you compare your work to earlier similar work and explain any discreptancies.

These cases are always hard for me to review - on the one hand, I'm rejecting the paper; On the other, I hopefully can provide some comments & suggestions that will help the authors improve the paper for the next place they send it. In any event, I should have it done tonight.

In addition, I'll be working all day today with coauthors. As I mentioned previously, it's a piece from the dissertation of a former student of mine and my coauthor'. It'll go into a book of readings, and is due at the end of the week. Unfortunately, it's an invited piece (my colleague knows the editor), so it won't count as a refereed publication. But it will give our student something to show on her vita in her first semester at her new job.

Ah well, coauthor just showed up, so back to work.

Monday, June 26, 2006

Dealing With Identity Theft

The number of cases of identity theft has increased dramatically in the last few years. If you ask around, you probably know one or two people who've been victims (as an example, both the Unknown Brother-In-Law and the Unknown Son's Oncologist have been victims).

If you talk to someone who's been a victim, they'll tell you that repairing the damage can be frustrating and time consuming. The Consumerist has a good guide to what to do if you're a victim. Here's some of their points (except for the last one, which is my addition):
  1. First off, read everything on the FTC's identity theft website at -- they've got a lot of great information there.
  2. Get your credit reports (all three) and read them carefully (line by line).
  3. Others will invariably have advice for you and some judgemental comments (i.e. "this is what happens when you bank online"). Expect them, and don't let them get to you.
  4. Be disciplined-- spend some time each day working on it until it's cleaned up (expect to spend about 100 hours in all)
  5. Fill out a police report, and keep copies to send to credit bureaus, collection agencies, etc...
  6. Be organized. Keep a separate file for each creditor.
  7. Write down time, date, phone #, contact information, and a synopsis of EVERY conversation you have with someone.
  8. Contact each credit reporting agency and dispute each and every charge. Put a statement of identity theft on each credit report.
  9. Follow through relentlessly.
  10. NEVER throw away your files. These things can come back to bite your butt years later.
  11. Given all the paperwork you'll have to do (and all the records you'll need, you might want to invest in a small photocopier.
Read the whole thing here.

HT: Sound Money Tips

This Week's Carnival of The Capitalists

This week's COTC is up and running at Financial Methods. It's a big one - 60 entries this time. So, I have a few more "picks of the week" than usual. Here they are:
Moneywise of The Real Returns talks about (appropriately enough, given the name) Breakeven Point Before Real Returns.

Joshua Sharf at View From a Height has a good post on Moriningstar's style boxes in The Morningstar Empire Strikes Back.

Leon Gettler at Sox First discusses the trend of increasing numbers of shareholder resolutions in The shareholders are revolting.

Jonathan at MyMoneyBlog talks about a little known fact of 0% Financing At Retail Stores

We've all heard this before, but FMF at Free Money Finance reviews some of he evidence on the payback form going to college in College is Worth the Expense

Most of us could stand some improvement in our negotiatingskills. Peter Kua at by Peter Kua: Light Speed Personal Development offers some advice to help in 19 Steps to Power Negotiations - Part 2 and 19 Steps to Power Negotiations - Part 3.

Steve Rubel at Micro Persuasion presents UMass Study Identifies the Traits of Successful Bloggers.
As always, look around. There's always lots of good stuff at the Carnival.

Sunday, June 25, 2006

Social Isolation

This is a bit off topic compared compared to my usual blogging, but Dr. Helen (a.k.a. The Instawife) has an interesting piece on Social Isolation.

I also wonder how much this differs by gender.

Hedge Funds And Takeovers

Hedge funds are increasingly becoming the swing voters in takeover battles. Iain Dey of the Daily Telegraph has a good report on this phenomenon:
With company takeovers running at record levels, hedge funds have emerged as the behind-the-scenes power brokers who hold the key to the independence of many of the UK's largest companies.

Within minutes of takeover talks being announced - and sometimes even before any public statement has been made - hedge funds snap up big stakes in the corporate combatants and often end up controlling about 30 per cent of the target company's shares, enough to decide the outcome of the battle for control.

Read the whole thing here.

In the Telegraph piece, Dey mentions research by Bernard Black and Henry Hu of the University of Texas. Here's the abstract for the piece referenced in the Telegraph piece, titled "Hedge Funds, Insiders, and Empty Voting: Decoupling of Economic and Voting Ownership in Public Companies":
Most U.S. public companies have a single class of voting common shares: voting power is proportional to economic ownership. Linking votes to shares gives shareholders an incentive to exercise voting power well, makes possible the market for corporate control, and legitimates managerial authority over property the managers do not own. Theory and evidence generally support linking votes to economic interest, although some models suggest that vote buying can sometimes be efficient. However, certain equity derivatives and other capital market developments now allow shareholders to readily decouple voting rights from economic ownership of shares. This decoupling (the new vote buying) is largely undisclosed and unregulated. Hedge funds are prominent users of decoupling. Sometimes they hold more votes than economic ownership (empty voting). Sometimes they hold undisclosed economic ownership (hidden ownership), often with the de facto ability to acquire the votes if needed (morphable voting rights). Insiders can also engage in empty voting. Over the past few years, new vote buying has affected shareholder votes and takeover battles on four continents.

This Article analyzes the new vote buying. We offer a framework for unpacking its functional elements. We propose a disclosure-based regulatory response which would integrate and simplify five existing, inconsistent share ownership disclosure regimes. We also develop a menu of longer-term substantive responses. Two companion legal articles (Hu and Black, 2006a, 2006b) discuss in greater detail the disclosure rules and other legal rules that affect new vote buying.

In a companion paper, directed at practicing lawyers, regulators, and judges, we provide additional details on current disclosure rules, our disclosure proposal, and other possible reforms. See Hu & Black, Empty Voting and Hidden Ownership: Taxonomy, Implications, and Reforms,
You can find the full article on SSRN here.

HT: Abnormal Returns

Saturday, June 24, 2006

Getting Paid For Changing Your Flights

Here's one for all you folks who fly regularly but have some flexibility as to when you do it. Liz Pulliam Weston at MSN Money has a great piece on getting "bumped" by airlines. It breaks down the ins and outs of getting bumped (both voluntarily and involuntarily):
  • In the cases where you get bumped involuntarily, she goes into what the airline is required to give you in different circumstances.
  • If you want to give up your seat and be voluntarily bumped, she provides some good advice on how to get the most from the airline.
Finally, she gives a few hints on how to avoid an involuntary bumping (and how to have the greatest negotiating power in a "voluntary" one):
  • Pick a seat - you're less likely to get bumped if you do.
  • Check in early. Even if you do it via the Internet, get to the airport early.
  • In case of a bump, get a guaranteed seat on another flight, whether with that airline or another (yes, they can get you on another airline if they really have to).
Read the whole thing here.

I've occasionally been voluntarily bumped, and if you play the game right, you can make out pretty well. A couple hundred bucks and/or a free flight is pretty much the least you should come away with. One time I was lurking near the check-in counter when they asked for voluntary bumps. There was a significant difference in what people came away with (the seasoned travelers who knew how to play the game typically got at least $100 or $200 more for bumping than the novices).

HT: Consumerism Commentary

Friday, June 23, 2006

Is Self Discipline Like a Muscle?

Cordelia Fine has a, well, fine article in The Australian about willpower. Her basic premise is that self-discipline (willpower) is like a muscle. In other words, research seems to indicate that willpower can increase over time if "exercised."

However, willpower, like a muscle, can also get fatigued in the short term. Fine recounts an experiment where subjects were put in a room with both radishes and chocolate chip cookies. One group was told to eat only the radishes and avoid the cookies, while a second group was given free reign with the sweets. Both groups were then asked to solve a puzzle. The puzzle was unsolvable, but the researchers were actually interested in how long the subjects would keep at it before giving up. Those who had to exercise self-restraing with the cookies gave up much quicker than those who didn't.

Read the whole thing here.

So what to take away from all this? Here are a few quick thoughts:
  1. Self discipline may have just as much (if not more) to do with academic success than intelligence,
  2. Self-discipline can be trained.
  3. Being disciplined in some areas may have a spillover effect in others
  4. Sometimes when you're in the midst of a difficult task that requires self-discipline (like an extended writing project), you should cut yourself some slack in other areas.
HT: Greg Mankiw

Thursday, June 22, 2006

Please Give My Dad Some Coffee

Most of my friends know that I'm a big coffee drinker. A few years back (when Unknown Son, then age 4, was undergoing chemotherapy), we'd stop at the local Starbucks every morning for a cup of coffee before going to the hospital. One day, he said to the girl behind the counter,

"Could you PLEASE give my daddy some coffee? Because when he doesn't have his coffee he gets GRUMPY" (complete with emphasis on all the right words).

A cute kid with a bald head is pretty hard to resist, so this netted me a free large latte (and he got some free swag, too). It worked so well that we tried it at a couple other Starbucks (Yes, I'm shameless, but you might as well use what you've got, and Balding Dads aren't nearly as cute as their kids).

Now my kids will tell anyone who asks that "Daddy gets grumpy without his coffee". So, they got a big kick out of this Folgers commercial that's making the rounds of the internet. Their favorite scene was the growling dog (about a minute in) - they said it reminded them of me.

HT: Ann Althouse

Writing With Laverne and Shirley

Yesterday was an extremely productive day. I'm working on a project with a colleague and recent graduate (the first Ph.D. student to graduate from our school's new program). We're taking a few of the results from New Ph.D.'s dissertation and recasting them into a paper which will end up in a book of readings.

My colleague, New Ph.D. and I got together yesterday. The colleague had previously put together a rough draft of about 20 pages that contained a very nice game-theoretic model, but without any of the empirical results from the Ph.D.'s dissertation.

So, we met yesterday to rework the first draft. I'm convinced that rewriting goes better in a social setting. We were able to bounce multiple possible phrasings back and forth off each other, and rewrote over 14 pages in a 7-hour stretch. In addition, we had an awful lot of fun. Once we found out that New Ph.D.'s middle name was "Laverne," colleague decided to go by "Shirley" for the rest of the day. Somehow, I ended up as "Lenny" (I tried for Carmine, but it could have been worse).

We also sketched out the work necessary to finish the project, which New Ph.D. and I will try to crank out today.

Looking back, I realize that the papers that I'm most satisfied with (in terms of the quality of the writing/storytelling part) were done in a "social" setting, where one or more of my coauthors and I got together and wrote or edited the paper line by line. There's something about working side by side with coauthors which makes for a much better product (and a lot more fun).

Tuesday, June 20, 2006

The Unintended Consequences of Baggy Pants

Who says the Wall Street Journal is just another boring business paper? This story from today's paper, "Perpetrator Problem: It's Hard To Run Away In Baggy Trousers" resulted in a bit more cleanup at breakfast today (the Unknown Wife and I laughed so hard we spewed coffee on the table):
...Just about every other week, Jim Matheny, a 41-year-old police lieutenant in Stamford, Conn., says he gets into foot chases with youths. He says it's getting easier to capture them because they can't run fast or far in those loose jeans."When I catch them, I tell them they'd do much better if they had pants that fit," says Lt. Matheny, who says he has had to help hold up the pants of his suspects while patting them down to search for drugs or weapons. "It's like: 'Hey dude, buy a belt and save yourself some trouble.' "

Ill-fitting pants aren't suited for jumping, either, as Noah Donell Brown of Hendersonville, N.C., learned. The 24-year-old tried to leap over the counter of a Subway sandwich shop during a robbery attempt, but he stumbled and came crashing down in front of several startled store employees. Mr. Brown, armed with a gun, got up and fled into a nearby residential neighborhood as the police were notified.

Police didn't have to work hard to arrest him. As Mr. Brown tried to scale a picket fence in someone's backyard, he caught his pants, according to the police department. He was found dangling upside down, his pants at his ankles and tangled in the fence.

"He didn't make a good jump," said Hendersonville Police Chief Donnie Parks, who spotted Mr. Brown on the fence. "The only reason we caught the guy was because his pants fell down," he said, adding: "He was wearing underwear, thank goodness."

Hendersonville police used a knife to cut Mr. Brown free
Read the whole thing here (online subscription required).

I love the mental image of a petty thief hanging upside down from a fence in his skivvies. It's too bad no-one had a video camera handy -- it would definitely make the cut (no pun intended) on one of those TV shows.

I may not be the height of fashion, but at least my pants stay up in public.

Monday, June 19, 2006

It's Not Easy Being Blue

For years, we've had SRI (socially responsible investing) funds. These are mutual funds that invest in companies that are (by whatever standards) deemed "socially responsible." Most research seems to indicate that these funds underperform their peers.

Now, you can invest in a fund that invests according to "Democratic" (the party, not the political system) values. According to CNN Money:
Blue Investment Management said it plans offer its Blue Fund, which invests only in companies that give the majority of their political contributions to Democratic candidates and adhere to progressive values, the company announced in a SEC filing earlier this week.

... Among the 75 different companies included in the Blue Fund are eBay (Charts), Apple (Charts), Liz Claiborne (Charts), Lehman Brothers (Charts), North Fork Bank (Charts) and Starwood Hotels (Charts).
Read the whole thing here.

I guess this would be the opposite of what Steven Bainbridge suggested last year:
[A] fund whose investment portfolio consists of companies selected specifically to annoy people like, say, Kos. Of course, we'd want a diverse selection of high performers too. After all, making a lot of money off such a fund would only further annoy the socialist left.

How To Cheat Good

Now that the semester is over and I'm nice and relaxed (maybe TOO relaxed), I can better appreciate things like this. Here's a priceless piece by Alex Halavais titled How to cheat good.

And for "rookie" instructors, here's a list of ways to cheat on exams. Some are pretty lame, but I've seen others actually used. I'm a bit of a "student of cheating." As I tell my students, "I might have been born at night, but it wasn't last night."

HT: Craig Newmark

This Week's Carnival Of The Capitalists

This week's COTC is up at Blog Business World. They've done a great job of presenting this week's entries. Since (as usual) there are far too many posts, here are the ones that caught my eye from this week's selections:
Openings are important - whether an article, a class, or a sales piece Jim Logan of Direct Response talks about Direct Response letters (i.e. direct mail, or "dead tree spam) in The Workhorse Of The Letter, The Opening Paragraph.

Kevin Hillstrom of Mine That Data breaks down some of the costs of running a movie theater in Business Review: Regal Cinemas.

What's "medical tourism? Henry Stern of InsureBlog tells us in A Slick Operation.

I get a kick out of colorful Wall Street jargon. Ever heard the term "triple witching hour"? RJH Adams at Capital Chronicle discusses the historical evidence on what happens on TWH days in Triple witching, 16 June 2006: what does the historic data say?

Not to go all "Andy Rooney", but the late-night gurus with their sure-fire systems for financial success really get under my skin. Looks like Einzige at Die Eigenheit is in the same boat. In John Burley's 7 Levels of Investor he takes a few shots at Burley.

A lot of people use the PEG ratio (the relationship of a stock's P-E to it's projected earnings growth rate) as a valuation indicator. Byrne Hobart of Byrne's MarketView breaks the PEG ratio down and finds it lacking in Peg Ratios: Nonsense is still in style.

Dan Melson at Searchlight Crusade tells us why it's a really, really bad idea to pay your mortgage late in Legal Late Payments on Your Mortgage.

Finally, here are two pieces on the Estate Tax (often called the "Death Tax"). Joe Kristan at Roth & Company, P.C. - Tax Updates discusses how an estate tax could make sense in Wither The Estate Tax, while HMIL at Teapot Tantrums gives us the opposite view in Death Tax Debate.
Here's my usual disclaimer: these are ones that I found interesting. Your tastes probably differ, so look around. There's always lots of good stuff at a Carnival.

Sunday, June 18, 2006

Avoiding Spreadsheet Errors

Spreadsheets have become the indispensable tool for Finance professionals. Unfortunately, most spreadsheet users aren't formally trained as programmers -- they're self-taught, and picked spreadsheets up as they went along. Few spreadsheet users use the "test, test, and test again" approach to error checking that almost any trained programmer uses. So, not surprisingly, many spreadsheets have errors in them. Professor Ray Panko of the University of Hawaii has made a career out of studying these errors. Here's the abstract of his piece, titled "What We Know About Spreadsheet Errors":
Although spreadsheet programs are used for small "scratchpad" applications, they are also used to develop many large applications. In recent years, we have learned a good deal about the errors that people make when they develop spreadsheets. In general, errors seem to occur in a few percent of all cells, meaning that for large spreadsheets, the issue is how many errors there are, not whether an error exists. These error rates, although troubling, are in line with those in programming and other human cognitive domains. In programming, we have learned to follow strict development disciplines to eliminate most errors. Surveys of spreadsheet developers indicate that spreadsheet creation, in contrast, is informal, and few organizations have comprehensive policies for spreadsheet development. Although prescriptive articles have focused on such disciplines as modularization and having assumptions sections, these may be far less important than other innovations, especially cell-by-cell code inspection after the development phase.
According to this recent Wall Street Journal Interview of Panko, there are errors in about 1-2% of all formulas. According to other sources, there are likely errors in 20-40% of all spreadsheets. Panko's recommendation: budget about 1/4 of your time on error checking and trapping.

Ivars Peterson of MathTrek has a good post with some additional resources. One is a link to EuSpRIG a group that got its start in 1999. EuSpRIG is composed of individuals in business and academia. It promotes research on the nature and extent of risks associated with spreadsheets. Their site has got some excellent material on ways of preventing and detecting errors, techniques for limiting damage, and so on.

One excellent resource I found there is a piece titled "How do you know your spreadsheet is right? More than fifty Principles, Techniques and Practice of Spreadsheet Style". Some of it's a bit advanced for most spreadsheet users, but if you use spreadsheets on a regular basis, it's worth a read.

Friday, June 16, 2006

Son of T. Boone Pickens Charged With Burglary

Michael Pickens (son of Texas Billionaire T. Boone Pickens) is in the news again. A while back (as I previously mentioned here), he was arrested for securities fraud. Now, he's charged with the much more mundane crime of burglarizing a fly-fishing store in Cornwall, Connecticut:
Pickens stopped in at the fly fishing store Friday and Saturday, chatting about football and portraying himself as a high-powered stockbroker on a fishing vacation, Booth said Friday.

He said he was related to T. Boone Pickens, but did not say he was the billionaire's son, Booth said.

A few hours after closing the store Sunday night, Booth returned and said he discovered that someone had jimmied open a back window to break in, then tossed reels, weights and other fly-fishing items valued at about $3,000 into a cooler.

While waiting for a state trooper to respond to his call, Booth inspected the store and office to see what else was missing. He said he discovered Pickens sleeping in the fetal position under a desk, his face resting on his folded hands.
Read the whole thing here.

He seems like a troubled (and possibly not-all-there) guy. I don't buy the idea that the children of the rich and famous are more likely to grow up troubled, but when they do get in trouble, they get a LOT more publicity. I did a quick Google search and found quite a few mentions of the story.

I'm just glad my siblings and I didn't get that much media attention while going through our adolescent years.

Note: If you're new to Financial Rounds, check out the FAQ page.

Interview With Gregg Gordon of SSRN

The Social Science Research Network (SSRN) is a vast repository of working papers in the Social Sciences. At present, they have downloadable versions of over 93,000 working papers (with abstracts of another 30,000) by over 62,000 unique authors, and they receiving new pieces at the rate of about 30,000 per year. I'd argue that SSRN is one of the most significant developments in the way academic research is conducted and disseminated (at least in my field) in the last decade or so.

Statistics on the number of times an individual's papers from SSRN have been downloaded are rapidly becoming an additional measure of the scholarly impact of their work. In addition, it's now common for academics to list the URL where there SSRN papers can be downloaded.

Matt Bodie at PrawfsBlawg has a very nice interview with Gregg Gordon, the President and CEO of SSRN (and one of its founders in 1994). In it, Gordon gives some of the history of SSRN, talks about some of the ways SSRN maintains the integrity of its download statistics, and hints at some of SSRN's plans for the future.

Read the whole thing here.

Thursday, June 15, 2006

My Day(s) In Court

Sorry for not posting the last few days, but I was in court. I was called as an expert witness in a personal injury lawsuit. For those of you who are not familiar with how this works, when an individual has an injury that causes them to be unable to work (and there's someone they can sue), there are typically several areas where their award could potentially come from (that is, if they prevail in court). They are:
  1. Lost income or wages: the difference between the earnings they were expected to make but for the injury and the earnings they are expected to make following the injury.
  2. Lost retirment and fringe benefits: this is essentially the same as #1, but replace "earnings" with "fringe or retirement benefits")
  3. Lost household services: if the plaintiff has reduced capacity to perform the day-to-day activities such as cooking, cleaning, running errands, etc... because of the injury, they hve suffered an economic loss. This is based on similar reasoning to the arguments often heard in the media that "to replace all the services rendered by astay at home spouse would cost ___ (my wife shows me these pieces often).
  4. Medical care expenses: the plaintiff may have increased medical expenses for many years following the injury.
  5. Pain and suffering: Enough said.
  6. Punitive Damages: These are awarded not so much for the benefit of the plaintiff as they are to punish the offending party.
An economist is often called to calculate the "economic losses" attributable to #1, #2, #3, and #4. The procedure used is pretty similar in concept to the way securities like stocks and bonds are valued: First calculate the future dollar amount (i.,e. the wages, fringe benefits, etc... in each year untill their retirement age (or projected death) and then discount these figures back to a present value at the appropriate interest (discount) rate.

In any event, while I've done this calculation (typically for plaintiff's attorneys) in about a dozen cases, this was the first time one of my cases has gone to court. It was pretty interesting. I flew to Florida Tuesday morning (yes, to Florida at the tail end of a tropical storm), and was supposed to testify first thing in the afternoon.

So I waited in the waiting area outside the courtroom (doing various tasks, like editing a paper, working on class notes, etc...until I was called. Unfortunately, they didn't get to me that day (court ended at 5:00), and I had to stay over another day. Not a big deal, because I had a former doctorla student (and current coauthor) who lived in the area. So, I stayed there and played with his 8-month old son and 4 year old pug dog (the child was much cuter, but they both produced an incredible amount of slobber).

After all that, my testimony (I wen toff first thing Wednesday morning) lasted only a bit over an hour . It was an interesting experience, to say the least. After the plaintiff's attorney went through his paces and led me through my report for the jury (I was working for the plaintiff's side), the defense attorney proceeded to do everything he could to cast doubt on the validity of my analysis. Luckily, I grew up in a smart-assed Italian immigrant family where good natured (and not so good-natured) insults were a part of daily life, so I'm harder to rattle than most. And anyway, I was paid well for being abused.

Let's just say that I'm glad I only do a bit of this. Having my professional abilities slammed on a regular basis could lead to a serious increase in my wine consumption like a certain law professor we know.

Monday, June 12, 2006

Journal Impact Factors

Recently, I posted link to a WSJ article which showed how journals manipulate impact factors. Here's a list of business journals with the highest impact factors (dated March 27), and here's one for economics (dated June 6).

Note that these are academic journals, so this whole thing might be a bitt too much "inside baseball" for my non-acaemic readers. Having said that, I find it interestingl (but not surprising) that finance-related journals comprise 6 of the business "top-ten" list, and accounting another two (Journal of Accounting and Economics and Jurnal of Accounting Research, both of which have a heavy component of capital markets-related research).

HT: Newmark's Door

Divorce Loans and Financial Innovation

A while back, I mentioned how lawyers are now making cash advances to clients engaged in lawsuits. Here's another "legal finance" innovation. According to this story in the Financial Times (subscription required), London bankers are going after the divorcee market.

"We've been approached by three banks in the past two months," said Susie Barter, a family law specialist at Speechly Bircham, a City law firm with a private client and family practice. She added that a few private banks started to provide litigation loans for divorcees when Britain's legal regime began to shift in a "wife-friendly" direction after another law lords' decision, White v White, five years ago. But she described those firms as "pioneers". Now, she said, "it's becoming much more commonplace".

Sandra Davis, head of Mischon de Reya's family practice, agrees: "There absolutely has been an increase [in bank interest] - because it's a very soft way of ensuring that someone who has had a relationship with the bank will become a portfolio client."

Only this week, for instance, Duncan Lawrie, the Belgravia-based private bank, announced that it was introducing a "matrimonial dispute loan", which offers funds at 2 per cent over base rate, with a 1 per cent fee.

There's an interesting opportunity for financial innovation here-- why not securitize the loans? For those not familiar with the term, this would mean taking a large number of these loans, combining them into a portfolio, and writing new securities on the cash flows from the portfolio. After all, they've securitized just about everything else from mortgage loans to credit car obligations to leases, to David Bowie's song portfolio.

But what would you call the resulting bonds? Something other than "covenant" bonds, I'm sure.

HT: Daniel Gross

Saturday, June 10, 2006

Bank Accounts For the Unknown Kids

A bit of a milestone in the Unknown Household today. We just got savings accounts for the Unknown Son and the Unknown Daughter. This last week, I got an inexpensive coin sorter and we rolled up0 seeral years worth of saved coins. We then gave half to each child to start their bank accounts off on the right foot (it came to a bit over $150 each).

They already have "piggy" banks, but they're overflowing, so this seemed like the the obvious next step. The reactions of each child were right in character -- the Unknown Son was a bit blase about the whole thing, but the Unknown Daughter was pretty excited (as expected - I refer to her as "the Exclamation Point With Legs").

They've already got small mutual fund accounts set up, and I'll start letting them in on them next year.

Friday, June 09, 2006

Scratch One More Bad Guy Off The List

While I usually try not to comment on politics and war, I thought this worth mentioning.

Congratulations to our men and women in uniform for eliminating Abu Musab Al-Zarqawi, his "spiritual adisor" and several other terrorists with the aid of 2 500 lb missiles. The armed forces also conducted 56 other operations agains Iraqi terrorist groups either simultaneously or the next day.

Well done.

Wednesday, June 07, 2006

Google Spreadsheets

There's been a lot of buzz about the new Google Spreadsheets, which were announced yesterday. The product will allow people to collaborate online, and is currently being beta tested. I'm not sure if there are still slots available to get in on the limited test, but if so, you can sign up for an invitation here.

A quick look at the technical specs: the limited version currently being tested allows the creation of up to 100 spreadsheets, which may have up to 20 tabs, 50,000 cells, 256 columns and 10,000 rows. Spreadsheets can be imported from Excel and CSV formats, and can be exported to those same formats (and HTML, too).

It supports the most common functions in Excel, including the most commonly used mathematical, statistical, logical, and financial functions. However, at present, it does not have any graphing capabilities, and you can't change formats on a group of cells by highlighting and right clicking.

All in all, it's definitely worth checking out. For working on simple spreadsheets in collaboration, it's got potential (you can chat simultaneously while working on the spreadsheet). And, since it's a web-based application, it can be upgraded continuously without having to go through the hassles of having to be reinstalled each time a new version comes out.

Tuesday, June 06, 2006

Caffeine Is The Wonder Drug

Want to convince someone more easily? Buy them a large StarCrack latte before you start your pitch.

Roxanne Khamsi at reports on a study that seems to show that coffee makes people more open minded. The effect doesn't stem from coffee making people more suggestible. Instead, it seems to be that coffee improves cognitive function and mental ability. So, coffee might be even more important if your argument requires more thought.

Next thing you know, coffee sellers will be using this in their advertising.

HT: Abnormal Returns

Monday, June 05, 2006

This Week's Carnival Of The Capitalists

This week's COTC is up at Rethink(ip). They've done a great job of presentation for this week's selections. As usual, here are my picks of the week:
Personal Finance Advice talks about a new option for managing gas costs in Fuel Bank - Hedge On Gas Prices.

Nickel at FiveCentNickel talks about how banks no longer view cashiers checks the way they used to in Wire Transfers When Closing on a House

JLP provides another online calculator that lets you calculate How Much You Can Save in a Lifetime

Dan Melson of Searchlight Crusade goes through the basics of recurring and Non-Recurring Closing Costs

Finally, I've included the last piece because I'm endlessly fascinated with scams. Paul's Tips tells us the easiest way to fool smart people. The key? Appeal to their cleverness.
As always, look around to see what else is at the Carnival. You might just find a new favorite blogger.

Manipulating Journal Impact Factors

In today's Wall Street Journal (online subscription required) Sharon Begley provides a rare look into the world of academic journal rankings. She describes some of the ways that scientific journals manipulate their "impact factors".

For those of you who aren't academics, an "impact factor" is a measure of the importance or relevance of the research published in the journal. The "impact factor" was created in 1950 by Eugene Garfield, and is calculated yearly by ISI, a Thomson company. The calculation is pretty simple (at least now that everything's computerized). As an example, to calculate the 2005 impact factor for the Journal of Financial Economics (a top finance journal), ISI would calculate the number of times a 2003 or 2004 JFE article was cited in any journal in the ISI database. This number is then divided by the number of articles JFE published in those two years to get the 2005 JFE impact factor.

Impact factors are important both for "bragging rights" and for economic reasons. Since they measure the extent to which researchers think that the journal's articles are important, they are one of the major determinants of a journal's ranking. Publishing in a top-ranked journal can have a major impact on an academic's career. Particularly in the world of academic finance, this can have a significant financial impact as well, since it allows them to move up the pecking order of institutions. Even if an academic makes a lateral move, the mobility is important: if they stay at their given institution, they invariably suffer salary compression. Publishing in high-ranked journal gives academics mobility, which keeps their salaries marked to the market.
Impact factors are also important to the journal for other economics-driven reasons. Libraries use them as a major input to determine which journals they subscribe to. Since a library's subscription in some cases can run $10,000, the benefits of a higher impact feature are pretty clear - a small increase in a journal's impact factor could mean many thousands of additional dollars in subscription revenues..

The article mentions the most common tricks journal editors use to boost impact factors, and they're not limited to scientific journals. One is to ask authors to include additional citations to other pieces in the journal. I've seen this tactic used several times (both on my pieces and on those of colleagues). Typically, once a piece is either accepted or in the "last round", the editor might "suggest" other articles in the same journal which might possibly be cited. In one case, the editor gave a colleague of mine a list of eight possible citations (which would have increased the total citations in the author's bibliography by almost 50%). However, this doesn't happen as much as you'd think, because I use my bibliography as one of the criteria I use in deciding which journal to submit a piece to: if I cite a good number of articles from a particular journal, it's probably a good fit for the piece.

The other strategy journals use to pump up their impact factors is to publish "reviews." Since these types of articles have extensive bibliographies, they almost automatically increase citation counts. They also tend to get cited themselves often, which further raises impact factors.

Note: For a little more information on impact factors, here's a recent Chronicle of Higher Education piece on the topic, and here's the Wikipedia entry on the topic.

Cool Map of Gas Prices Across The Country

Here's a pretty cool map. It shows gas prices across the country in a color coded format like a weather map. We noticed the differences this past week as we drove through 6 states on our house-hunting trip. There was often be a $0.10-$0.15 difference in the price per gallon of gas from one state to another (thanks to differences in gas taxes).

HT: Newmark's Door

Saturday, June 03, 2006

The Saga Continues

It looks like I'm doing my best to perpetuate the "Absent Minded Professor" stereotype. As I already mentioned, I just forgot my laptop (which has all my data) at the hotel. Of course, I only discovered after driving 70 miles to the Unknown In-Laws' house.

And now, as Paul Harvey would say, for the rest of the story.

This morning I made the 140 mile trip to retrieve the laptop. Just as I pulled into the In-Laws' driveway, my cell phone rang. Since it was raining out (and I had things to transfer from the Rendevous to the house), I grabbed my umbrella and tossed my keys on the front seat.

I then proceeded to lock them in the SUV.

Luckily, we have AAA, so they were able to send someone out to pop the lock. But I'm sure I'll be hearing about it for the next week or so. Some days, you just can't win.

Friday, June 02, 2006

We Bought a New House!

Looks like we hit paydirt - we just put a contract on a house. It wasn't too painful (except for the price). All in all, we looked at nine houses today (2 we had already seen). Of these, we ended up buying a brand new house that was one of the last two in the development (out of about 30). We got a pretty good deal, since the buyer has been working on the development for about 1 1/2 years, and wants to be done with it. So, all in all it was a good time.

And just to prove that I'm truly an idiot, I left my laptop in the hotel room, and didn't realize it until tonight when I was at the Unknown Mother In Law's house (70 miles away). So, before we head back out to our current digs tomorrow (300 miles), I get to ride to the hotel and back, making a 250 mile trip a 400 mile one.

As Bugs would say, "What A Maroon".