Professional Brokers, Retail Buyers and Logic

Logic, epistemology, and scientific evidence don't count for much when you're a professional broker, but they should doubly count if you're a retail buyer.

I have been wondering about the logic of how professional investors buy and sell stocks.  If a professional investor, Mr. A., sells stock #1 and buys stock #2, then Mr. A must think stock #1 will (with a high degree of probability) go down, while stock #2 (with high degree of probability) will go up.  Yet some other investor, Mr. B, must think the opposite of the other guy concerning stock #1, since he bought it, and likewise for stock #2, if he sold it.

Suppose I, a retail consumer, want to get advice on which stocks to buy.  Both Mr. A and Mr. B are professionals.  Yet they would advise me in exactly opposite ways concerning stock #1 and #2!  Since there are always professional buyers and sellers of any given stock in The Big Market everyday, at best I might be following the herd -- i.e., going with what the majority of professional investors are doing.  Is that the winning strategy for a retail consumer like me?

Hardly, and here is the problem:  A study of 10,000 brokerage accounts of individual investors over seven years showed that the average investor does better in selling stocks than in buying them. It is also well documented that the most active traders have the worst results, while those who trade least earn the best returns. [1]

So then, as a retail stock buyer, I am in a very precarious postion, since professionals disagree with one another, and since even they do not do well.  They certainly do well enough to convince retail stock buyers to turn over their money, but not well enough to somehow beat the market based on their (alleged) expertise.  This is why some financial advisers say one should merely buy index funds and ride the general wave of a reasonably expanding market.

I read recently that two out every three mutual funds underperform the market in a given year. Furthermore, most of the big funds that do well are, statistically speaking, only getting lucky and not getting insightful about how the market moves. Naturally, when the luck is holding, they advertise their good returns, and promote a correlation cause fallacy: we analyzed and bought this stock; the stock has been performing well.  Therefore, our analysis and timed buying shows we understand what is causing this stock to perform well. No doubt the vast majority of retails buyers are taken-in by this.  But what seems even more wondrous here is that the professionals seem to believe their own B.S.  Many of them are highly confident that they have some deep, profit-wise reliable intuition about how how stock buying and selling works, yet they have no quantifiable evidence to show this -- i.e., no evidence to separate the above correlation from causation issue about how they happened to have made their money from stocks.[2]

I've been considering buying some stocks lately.  Too bad I have no plan.  But I'm in no worse of a position than anyone else, it seems.  Maybe I'll get lucky.  Actually, it's more rational to think that I won't get lucky, and simply earn about 6% return on my money over the course of many years when taking a buy and hold strategy.

O.



REFERENCES

[image] U.S. Dept. of Labor

[1] Terry Odean, Brad Barber "Trading is Hazardous to your Wealth." (.pdf) THE JOURNAL OF FINANCE, VOL. LV, NO. 2, APRIL 2000

[2] Obviously, they know how they make their reliable money -- from trading and management fees.

On why women's salaries don't match men's when >$100K?

0. The New York Times Economix column is reporting on how Women Earn Less Than Men, Especially at the Top. Among other issues at hand regarding women and salary, the article states how, "at the top of the income scale, — jobs paying more than $100,000 — the salary gap between equally qualified men and women is still vast."

1. But to the specific issue at hand: why the break at the $100K mark? The author of the study himself suggests "that higher-paid jobs often have less concrete or quantifiable measures of productivity and duties," and that "perhaps men are subconsciously viewed as more competent than women, or are more adept at negotiating for raises." Of course these claims are a suggestion and a speculation, respectively; so, there's no weight of science, pro or con, operating in regards to such armchair sociology. I too would like to hazard a guess about the matter, but it's only that.

2. From an economic standpoint, I think there is some level of risk calculus occurring, somewhat tied to oft-stated intuitions about women's leaving and re-entering the workforce. This risk calculation is based on a subjective expectation about women and pregnancy, and I think it could be rationally motivated in terms of expectation over profit/loss when considering a pool of equally competent prospects for promotion under some circumstances.

2.1. The subjective expectation is easily captured by this question: What is the chance of the male prospects leaving (either temporarily or permanently) the position via pregnancy upon promotion versus the chance of the female prospects leaving (ditto) the position via pregnancy upon promotion? Obviously, it's essentially zero versus N, respectively; where N is greater than zero, no matter what the actual chances. So, from a strict, subjectively simple expectation of risk over profit/loss assessment, a promotion of a male from a prospect pool would be more reasonable than a promotion of a female--all other things being equal.

2.2. Granted, there's never a time where ALL other things are equal among prospects, but the subjective intuition of risk might be operating just often enough to skew promotions for higher salaried positions when, as the article states, job performance "quality measures are more subjective." After all, (a) I seem to recall that at about the 100K level, there is a slight difference in how people assess opportunity for money, and (b) I hear that for higher professional positions, it is much harder (in terms of time and money invested) to find adequate replacement of personnel with specific competencies (which is why their salaries are so high.)

3. Now, all this hardly precludes that other, outright irrational biases might also be affecting the promotion of women; but, I think the unfair leavening by nature (or by God, for you evangelicals out there) upon the woman for bearing and bringing a child to term is at play in the economics of rational risk assessment for promoting from a gender-differentiated pool of employees.

4. Well, there it is, my opinion on the matter. Yes, at the big-bucks level, women are still being treated unjustly. And, sadly, sometimes it's for irrational reasons. But now I've suggested what I take to be a rational calculus which puts not (just) the decision makers at blame, but the biology of human child-bearing itself. To be clear -- am I saying that the reason women don't get the higher paying jobs is because there is always the risk they might get pregnant? No, it's a bit more subtle than that. (i) Yes, there is a risk (given a large enough pool of applicants over time and over repeated promotions in the workforce). (ii) SOMETIMES this risk is perceived by those who promote. (iii) SOMETIMES this risk could be quantified in terms of profit/loss. (iv) Thus, such "SOMETIMES" instances are enough to skew salary differences over the 100K bracket, for reasons stated above. But, hey, at least women in liberal societies can expect to live longer!

O.

REFERENCES

[image] Kathryn Hopkins and Ruth Sunderland "Pregnant staff face new wave of bullying in recession" The Guardian (Aug. 9, 2009) { A very interesting article which seems to support the intutions I've noted above. }

Mobile Phones as Leap-Tech for Developing Nations

It's hardly news that adding technology to a developing country's infra-structure boosts its economy, but stating an exact boost for a particular items is informative. From The Economist:

"An extra ten mobile phones per 100 people in a typical developing country boosts GDP growth by 0.8 percentage points, according to the World Bank, by helping small entrepreneurs flourish."[1]

The importance of the mobile phone as a communication device is well known, but as mobile computing and mobile phone technologies fully merge, I believe that the GDP growth by countries which leverage such "leap tech" will become even more amplified. Imagine if mobile phone users in such countries were instead issued iPhones. Even if such countries don't (yet) have the bandwidth to use all of the internet features efficiently, just the presence of a mobile computing device that allows its users to download very cheap applications would have broad impact on individual entrepreneurs, and hence on the economy overall.

Also, developing nations sometimes lack a reliable or fully expanded power-grid infrastructure. Power is often generated by fuel, which supply can be iffy due to such common contingencies as localized wars and weather disasters. But the low-power requirements of devices like mobile phones and mobile computers gets around this problem, since they can be recharged by fairly cheap, reasonably efficient solar charging devices.

Finally, it is possible to determine and analyze how people move around by examining mobile phone usage. Different social groups within a country interact in different ways. Traffic and disease patterns could also be easily tracked, since governments can note such usage and report on it much more efficiently, where before the presence of these devices such information would have been practically impossible to collect. Properly data-mined, the millions of mobile phones in developing nations can function as ad hoc sensors for national data-collection networks.

Mobile devices quickly come down in price and are easily introduced into developing nations. Thus, these nations will have a much shorter path to development than would have been otherwise expected just a few years ago.


REFERENCES

[1] "Fish Out of Water" The Economist Oct. 29, 2009

[*] The trend is their friend, and ours, since commerce most benefits when everyone can participate:


O.

Is Higher Education Worth it?

Certainly here in the U.S., and across the world's developed nations, the answer is still a clear Yes.

The above image (duly lifted from The Economist) shows that in the U.S. there is an $100,000 dollar advantage to the state's coffers (even after student aid programs are taken into account) and around $165,000 dollar advantage to the individual him- or herself.

Some people have worried that there are too many college graduates, and that high supply will mean a lower demand for them from employers, but this has not been the case, so the time and money investments by a person seeking a college degree still pays off.

Also why people chose college at all is not clearly based on the calculation of these financial advantages:

Alison Wolf of King’s College London, the author of a book provocatively entitled “Does Education Matter?” says a big reason why school-leavers go to university is peer pressure. With many graduates to choose from, employers increasing turn up their noses at anyone who does not sport a degree, no matter what the job’s requirements. The result is more akin to an arms race, with everyone running to stand still, than a recipe for increasing prosperity.[1]

Finally, higher education is always a good way to ride-out times of unemployment and recession, because when the economy returns, graduates are best placed to enter the marketplace with the appropriately acquired technical skills. Of course, as a college professor, it is both prudent and enjoyable for me to purport such analysis.


O.

REFERENCES

[image] The Economist (from article below)

[1] "It still pays to study" The Economist Sept. 12, 2009.

Thoughts about veterinarian care vs health care

Yes, there are interesting economic parallels to both expenditures, but that d@#n wiener dog's days are numbered.

I saw this interesting graph at The Enterprise Blog. Andrew Biggs makes a couple of comments which are doubly insightful:

Two things are interesting here: first, the rate of growth of spending from 1984 to 2006 wasn’t all that different—and in both cases, spending grew faster than the rate of economic growth. As new technologies are developed for humans, we adopt them for Bowser and Fifi—because we can afford to and we think it’s worth it. [...] Second, the level of spending was very, very different: we spend hundreds of times more on ourselves than on our pets. The main reason for this is obvious: we value our own lives and those of our families more than we do our pets or other animals. At the same time, however, veterinary care is one of the few areas of health where we are directly confronted with difficult decisions regarding the costs and benefits of additional treatments.

Well, I can afford that my WIFE'S Wiener dog get the once-a-year shots, but that doesn't mean I WANT to. (Public notice: I don't OWN a Wiener dog; I merely live with one.) Biggs claims about difficult decisions with pets only applies to the amount of subjective value I'd impute on the pet (which ain't much).

For example, suppose that this dog of seven years suddenly takes sick with an illness. I could expend around $50 having her put to sleep, or I could borrow a friend's 12-gauge shotgun, take a short drive, to a secluded area, and for the price of one, maybe even two shells (for both barrels to assure a merciful efficiency), produce the same outcome--a dead dog. Now the cost of paying the vet to do it would be much better for my wife, but for me, it's not that big a deal. Having shot animals in past hunting trips, there would be not a millisecond of suffering on the Wiener dog's part--believe it. In fact, there would be LESS suffering, since the doofy Wiener dog would always be with her recognized pack-mates. (And not "family" which would be WAY wrongly conceived.) So for the average cost of two new factory-loaded 12 Gauge Shotgun shells i.e., 50 cents total), and about 2 miles of gas (at $2.21 in today's prices in Oklahoma, i.e., 20 cents total for the round trip), I can off the Wiener dog. That's over 50 times cheaper. I should start a blackmarket business.[1]

And then, of course, it would be my turn to get a cat!

O.

REFERENCES

[image] Andrew Biggs "A Dog in the Healthcare Fight" The Enterprise Blog July 13, 2009. (Accessed July 30, 2009)

[1] I have a close friend who at one timed lived with a cat, and with equal disdain for the animal. Upon heading out to vacation, his wife warned him that if, per chance, that cat would suddenly disappear while they were all gone, even if I were likewise gone, she would place the blame fully on him for plotting thru me to have the cat terminated. (Luckily, the cat disappeared after I was gone to Hawaii and before my return. I purported a theory from known problems.) Besides, I might have ethical qualms about killing a cat.

Gas Prices: These High School kids and their crusin' today!

In 1981, I used to get $5 bucks a week to "fill" my car up and go High School cruisin'. But would that be like getting $10 bucks a week now. Clearly, kids today have a much better economic situation to go cruisin' on the weekends than did I. In fact, they have it about twice as much better:

To be as expensive as gas in 1981, measured as the cost per 1,000 gallons as a share of per-capita net worth, gasoline today would have to sell for about $6.50 per gallon. Bottom Line: Gas today, even at $3, is relatively affordable and is actually cheaper than the decades of the 1940s, 1950s, 1960, 1970s and 1980s, when the price of gas is measured relative to our increasing household wealth. Goldilocks can handle $3 gas.[1]

Furthermore, the average car gets better gas mileage than those of 1981. So, quit all your complaining you slack-jawed whipper-snappers!! These are the good-ol'-days! (Although, about ten years ago, it was even "gooder" days for cruisin'.)

REFERENCES

[1] Mark J. Perry "Why The Goldilocks Economy Can Handle $3 Gas II" CARPE DIEM: Blog for Economics and Finance December 7, 2007 (Accessed 12/16/07)


O.

Economists: Tall guy = rich guy

Economists take pleasure in coming up with models which defy our moral sense of what should be politically logical. One claim is that tall people should be taxed more on their incomes than short people. Almost everyone has met someone with (mythical) "short-man syndrome", but in capitalist societies, there might be some basis for height-challenged anger:

"A person's height is strongly correlated with his or her income. Judge and Cable (2004) report that "an individual who is 72 in. tall could be expected to earn $5,525 [in 2002 dollars]more per year than someone who is 65 in. tall, even after controlling for gender, weight, and age." Persico, Postlewaite, and Silverman (2004) find similar results and report that "among adult white men in the United States, every additional inch of height as an adult is associated with a 1.8 percent increase in wages." Case and Paxson (2006) write that "For both men and women...an additional inch of height [is] associated with a one to two percent increase in earnings."[1]

Fortunately, I'm just under 6'2", so I'm feeling good about my economic future right now. This table[1] below shows only about 9% of the US can snub their altitudenous noses at me. Odd thing, however, among academics, I've noticed I'm not all that tall. But at the mall or at a football game, I have the better view in a crowd.



REFERENCES

[image] bedrock.deadsquid.com (Accessed 12/16/2007)

[1] N. Gregory Mankiw and Matthew Weinzierl "The Optimal Taxation of Height:A Case Study of Utilitarian Income Redistribution"

[2] Julie Wheldon "Forget Napoleon, taller men have the shorter fuse" Daily Mail March 28, 2007 (Accessed 12/16/2007)

Chimpanzees (and humans) trade for biological "services."

{ Podcast this essay } Seeing this sign reminded me of an article I recently read. Chimpanzee society shares many striking resemblances to human society. Like us, Chimps form complex social bonds, and they do so with symbolic gestures, most notably by means of sharing of prized resources. For example, though chimps will rarely share the wild plant foods which they forage, for strategic social situations they will share prized foods, such as meat or pilfered, cultivated plant foods (from human crops) as a way of reinforcing social bonds and constructing new alliances.

Most of the sharing occurs when adult males make offers to females that are in the proper cycle for reproduction -- for reference, call such females who receive these goods "hotties". Exchanging food for increase of sexual access is certainly in the male's advantage, and may showcase his suitability to sire, given that he has the capability to acquire such goods. Hotties apparently find this a fairly good indicator of male reproductive health. This activity can generalize even beyond primates as an analysis of altruism:

Food sharing has important implications for the evolution of cooperation, offering a means to evaluate the ‘paradox’ of altruism, whereby a recipient gains fitness benefits at the expense of a donor. When individuals control a highly valued resource, they may opt to use that resource as a tool for social bargaining. Thus, even acts that appear altruistic may serve to ultimately enhance one’s own fitness.[1]

What is also interesting in this study is that the sharing of prized resources was not an immediate cost-benefit payoff: "Males shared crops with a maximally swollen female in 16% of sharing events, but were never observed mating with that female immediately after sharing." I would speculate that hotties would be far better off (in terms of expected reproductive benefits) waiting to see if the pattern could be (i.e. would be) maintained over time.

Diamonds (and of course other valued stones) have been assessed by women across history as attractive gifts. It is known that primitive humans were the first mineral collectors of such stones as chert, chalcedony, and obsidian. These were shaped into arrowheads and spear points for hunting. Later in pre-history, humans used turquoise, gold, silver, and copper in religious ceremonies, for spiritual enhancement, and protection from evil. I think a reasonable speculation would be that the symbols of such stone technology could stand for the hunting capability of the man who gave such a symbol to a desired hottie. Throwing a deer carcass at a hottie would not be practical, or perhaps desirable, but bequeathing a symbol (or an actual instance) of the technology that shows clear access to a desirable resource would be a very small step from the meat-sharing behaviors of chimpanzees. (Also, it could be that good hunting technology shows intelligence, and intelligence is what is actually strongly favored by women in modern mate selection.[2]) Modern jewelery exchange seemingly begins as an abstraction of just such a process about 100,000 years ago.[3]

I've been thinking about getting my wife a necklace for Christmas, but I don't want any more children. So perhaps I should just cease this whole line of thinking.

REFERENCES

[1] Hockings KJ, Humle T, Anderson JR, Biro D, Sousa C, et al. (2007) "Chimpanzees Share Forbidden Fruit." PLoS ONE (Accessed 11/22/2007)

[2] Ray Fisman "An Economist Goes to a Bar and solves the mysteries of dating" Slate Magazine 11/7/2007 (Accessed 11/22/2007)

[3] "Researchers Identify What May Be Oldest Known Jewelry" Voice of America 6/22/2006 (Accessed 11/22/2007)


O.