A race to the bottom ?

A note on competitive ads

From Knowledge@Wharton

Zhang, a Wharton marketing professor, has found that combative ads -- the sort of comparative spots that beer makers, particularly Anheuser-Busch and Miller, are famed for -- may backfire. Instead of pulling consumers to an advertiser, they may just make people indifferent to all offerings in a product category. And that, in turn, can lead to lower profits for everyone as businesses cut prices to lure these buyers.

And as a funny anecdote:

Presidents, or rather a presidential campaign, originally motivated Zhang to take a closer look at ads. He started scrutinizing them seriously six years ago, when George Bush and Al Gore squared off. He found that the negative ads that are so common in modern campaigns didn't draw him to one of the candidates, but made him uneasy about both. That got him wondering whether commercial claims might have the same effect. "Most of the political scientists say advertising doesn't play much of a role in people's voting choices," he says. "They just reinforce what people already believe, their preferences and partisanship. But sometimes you also observe that you feel a little more indifferent to the politicians after your hear their ads."

Working from home?

It is typically argued that people that work from home (or away from the office) miss out on promotions etc.. Can this example be applied in a way that solves this?

From Knowledge@Wharton

One of Yakubovich's current research projects focuses on social networking at a real-life telemarketing company that he has dubbed the Virtual Call Center to ensure its anonymity. The agents who take telephone orders from viewers of television infomercials do not work in the same office; instead, each works out of her home (most of the call-takers are women). As independent contractors rather than employees, the agents have the flexibility to schedule their work at their convenience so that they have enough time to take care of their children and do chores.

As a result of the company's virtual nature and the way its incentive system is structured, it is a challenge for the firm to get agents to sign up for work and to keep them on their shifts. An agent may decide to stop working once she feels she has made enough money for the day, even though she can earn more if she keeps going.

But Yakubovich learned that agents tend to work more when they have an opportunity to engage in social interaction by talking with other agents in chat rooms at those times when they are not on the telephone with customers. Such a social network can hold great appeal for workers who desire a place for companionship in the same way that employees at a factory or office use break rooms to socialize.

"Even though they are geographically dispersed and this is a completely new kind of workplace, these agents create social networks," Yakubovich notes. "The social interaction becomes part of the work environment. People enjoy signing up for shifts and end up working longer when they do if they have a way to socialize" -- which turns out to be an unintended benefit for the company.

Portfolio management

Diversification is always a good thing. From slate

There are some obvious differences between Van Gogh canvases and Verizon shares. Art is far less liquid than stocks: You can't simply push a button and sell a Picasso tomorrow. And while you might assume that the fortunes of the art market are closely to tied to the fortunes of the stock market, Moses found that fine art actually has a very low correlation with stocks and a negative correlation with bonds. "In some sense, it's a good portfolio diversifier," says Moses.

How to distribute students in classes?

Excerpt from new study from NBER:

We find that students benefit from having higher achieving schoolmates and from having less variation in the quality of peers in their schools.... The marginal effect of a one percent increase in the quality of peers on student achievement is equivalent to between 8−15% of a one percent increase in one’s own earlier achievement.

We find that peer effects operate in a heterogeneous manner. High ability students benefit more from having higher achieving schoolmates and from having less variation in peer quality than students of lower ability.

And what is the long term effect? ( comment from Greg Mankiws blog)

One implication of this is that parents with smart kids will always find it more in their interest to have their kid in a school with other smart kids (given the complementarity); theyll always be more willing to outbid parents of less smart kids. So, we'll end up with a kind of separating equilbrium with smart kids together, which is, broadly speaking, what we see in reality.

In fact, some of the rise in inequality in the US is attributable to this kind of sorting in the workplace. Namely, with the entry of women into the workplace, we have smart men and women meeting and forming matches, thus raising household income inequality. As such, theres nothing sinister about inequality if this is a source. Indeed, inequality starting rising in the US when female labor force participation started rising.

Still problems with the fiduciary duties

Sometimes signaling is all about covering up reality.
What can be done to alleviate the P/A problem between Investors and management?

from the age:

"Take for instance a recent University of Michigan study. Apparently there's a simple reason why annual reports are hard to read: managers, in many cases, are trying to hide something.
The study, Annual Report Readability, Earnings and Stock Returns, found that the annual reports of underperforming companies are harder to read than those of companies that are performing well."
...
"Opportunistic managers may have incentives to make the annual report harder to read, if good earnings of this year are not persistent or if poor earnings are very persistent"

A funny anecdote from the same page... :

"The old website of WorldCom, which emerged from bankruptcy due to accounting fraud as MCI Inc, is a case in point. It reportedly had a glossary of "essential terms and phrases" that included "wugga wugga" (the sound of a computer program), "blivit" (a bug in a sales pitch), "seedware" (promotional software) and WOMBAT (a bone-headed idea: a Waste Of Money, Brains And Time). "
....
"The link with deceit was made 60 years ago by George Orwell in his seminal essay, Politics And the English Language: "When there is a gap between one's real and one's declared aims, one turns, as it were, instinctively to long words and exhausted idioms, like a cuttlefish squirting out ink … Every such phrase anesthetises a portion of one's brain.""
...

So what's the effect on disclosure and the annual reports? Is increasing the demands for disclosure in the interests of investors (and society) or will it just give management another tool for covering up?

"According to deputy chairman Jeremy Cooper, issuers and advisers still had to get their heads around what disclosure actually meant. "So far, there's been a lot of 'over-disclosure' as a means of limiting liability," he said at the time."

Adaptive Markets Hypothesis - A more compelling story?

How rational are investors actually?
From Yale Economic Review..

According to the theory, the market is a dynamic ecosystem, and investors make decisions based on past experience instead of solely optimizing utility. In this framework, behavioral biases are abundant but explainable. In trying to adapt, investors replicate past successes or abandon failed strategies. But they commit apparently irrational mistakes by trying to apply old strategies to new market situations. Natural selection can also change aggregate behavior by forcing unsuccessful investors out of the market.

In the market ecology, the value of scarce resources – prices – are determined by the interaction between environmental conditions and the number of investor “species” in the market. All else being equal, the more species present, the greater the level of competition, which leaves fewer opportunities to profit and makes the market more efficient. A lack of competitors causes slower incorporation of information into prices, yielding more and longer lasting profit opportunities. In the AMH framework, the EMH is the steady-state solution of a market with an unchanging environment, whereas the findings of behavioral finance reflect dynamic adaptations which may succeed or fail.

The AMH leads to fascinating implications for financial theory. Unlike in the EMH, “history matters,” Lo asserts. Risk preferences in the AMH, for example, change according to past market prices. Current investors’ average risk preference, for example, has decreased because risk-loving investors who suffered losses in the tech stock bubble of the late 1990s left the market after its fall in 2000 and 2001.

There are also important practical applications of the AMH. In contrast to the EMH, the AMH implies that portfolio research is not completely useless, because markets can be biased by past prices. To survive market changes, innovation is also essential for survival, so investment managers must develop diverse methods suited to different environmental conditions. Knowing that behavioral biases are inevitable, good financial advisors should seek to point out harmful biases to their clients.

Efficient markets?

Does FED statements actually have any informational value? Or should they have?
A comment by Greg Mankiw

Fundamentally, Fed watching is a symptom of ambiguity in monetary policymaking. Fed insiders do not have significantly more data on the economy than everyone else. When financial markets react to Fed statements, therefore, they are not incorporating news about the economy. Instead, they are incorporating news about policymakers' intentions. So if a speech or testimony by a Fed official moves financial markets, it means that the intentions of monetary policymakers were not clear before the speech or testimony.
...
Macroeconomic data would move markets; remarks by Fed officials would not.

The ideal would be a completely boring Fed chairman whose speeches are regularly ignored by financial markets. Apparently, we are not there yet.

Further applications... The value of stock analysts etc.

Markets in everything... so you've got a guilty conscience?

An interesting business idea for private consumers... From Slate

If you're feeling guilty about driving your giant sport utility vehicle (but not so guilty that you'd ever give it up), salvation is at hand. For a yearly fee of around $80, a company called TerraPass will offset the damage your SUV does to the atmosphere by spending your money to reduce industrial carbon emissions and to promote the spread of clean energy. They'll also send you a decal and a bumper sticker, so everyone in the neighborhood will know that your gas guzzler has been sanctified.
...
Buying a TerraPass is a little like voting—irrational for any individual, given that elections are almost never decided by one vote, but collectively beneficial indeed.

Stock market crashes vs. Rationaliy

From Slate:

But conventional economics is not wrong—or at least, stock-market crashes are no evidence against it. Rational investors in an efficient market should produce frenzies and crashes from time to time. In fact, the more intelligent the investor, the more likely this is to happen.

The fundamental insight is that there is nothing irrational about trying to learn from what other people in the market are doing. Remember that shares have a true value based on the future stream of company profits. But nobody knows what that value is. Smart investors should realize that other smart investors will know things that they do not. If they don't take into account the private information held by other investors, they will make bad decisions, and they can learn only by watching what other people do.

Hedging of oil prices for consumers

A cap on gazoline spending is now available in the US.

How to prepare your kid for an ivy league college?

Start visiting museums...

found at