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标题: Behavioral Economics [打印本页]

作者: choi 时间: 10-20-2013 12:12
标题: Behavioral Economics
(1) Alexandra Wolfe, Weekend Confidential: Alan Greenspan;The former Fed Chef on where the economy went wrong, where he went wrong--and Ayn Rand. Wall Street Journal, Oct 19, 2013.
http://online.wsj.com/news/artic ... 4579139900796324772

Quote:

(a) "In the [new] book, he also ponders why the Fed failed to predict the financial crisis, where he himself went wrong and how that discovery has completely changed his worldview.

(b) Mr Greenspan's biggest revelation [as told in the book] came one day about a year ago when he was playing with gross domestic savings numbers. What he found, to his surprise and initial skepticism, was that an increase in entitlements has closely corresponded to a decline in the country's savings. 'We had this extraordinary increase in benefits' * * * The decline in savings has been partly offset by borrowing from abroad, which brings us to our current foreign debt: '$5 trillion and counting,' he says.

(c) "'I've always considered myself more of a mathematician than a psychologist,' says Mr Greenspan. But after the Fed's model failed to predict the financial crisis, he realized that there is more to forecasting than numbers. 'It all fell apart, in the sense that not a single major forecaster of note or institution caught it,' he says. 'The Federal Reserve has got the most elaborate econometric model, which incorporates all the newfangled models of how the world works—and it missed it completely.' He says JP Morgan had put out a forecast three days before the crisis saying the economy was on the rise. And as late as 2007, the International Monetary Fund also said that global risk was declining.

(d) looking back at 2007 finalcial crisis: "First he drew the conclusion that the nonfinancial sector of the economy had been healthy. The problem lay in finance, because of its vulnerability to spells of euphoria and irrational fear. Studying the results of herd behavior provided him with some surprises. * * * He concluded that fear has at least three times the effect of euphoria in producing market gyrations. * * * He also has come to admire psychologist and Princeton University professor emeritus Daniel Kahneman's work applying psychological insights to economic theory, for which he won a Nobel Prize in 2002.

My comment:
(a) "his new book 'The Map and the Territory,' to be released on Tuesday [Oct 22]

Alan Greenspan, The Map and the Territory; Risk, human nature, and the future of forecasting. Penguin, 2013.

Alan Greenspan (1926- ; Chairman of Federal Reserver 1987-2006)
(b) Quotation (b) suggests Chinese would not save so much if Beijing started pouring entitlements on them.
(c)
(i) Daniel Kahneman-Biographical. Nobel Prize, undated.
http://www.nobelprize.org/nobel_ ... 2/kahneman-bio.html

Read only paragraphs 1, 3 and 4.
(ii) What did Kahnemann say?
(A) Deborah Smith, Psychologist wins Nobel Prize; Daniel Kahneman is honored for bridging economics and psychology. Monitor on Psychology, 33: 22 (2002).
http://www.apa.org/monitor/dec02/nobel.aspx
(B) Nobel Prize's statement is long:

Foundations of Behavioral and Experimental Economics: Daniel Kahneman and Vernon Smith. Dec 17, 2002 (Advanced information on the Prize in Economic Sciences 2002).
http://www.nobelprize.org/nobel_ ... micsciences2002.pdf
(C) Kahneman's Nobel lecture is even longer.

(d) Incidentally Monitor above asked rhetorically "why people drive to a distant store to save a few dollars on a small purchase, but not for the same discount on an expensive item."

The answer lied in an experiment that was reported in

Kahneman D & Tversky A, Choices, values and frames. American Psychologist, 39: 341-350 (1984)
(APA Award Address)

At page 347, the experiment demonstrated that most people ponder in terms of topical account, rather than minimal or comprehensive accounts.
(i) Minimal account dictated that the same percentage of buyers would drive 20 minutes to save the same amount of money ($5). (ii) Topical account said buyers would drive 20 minutes to save $5 from a $15 calculator but would NOT (drive) to save $5 from a $125 calculator. "The topical organization of mental accounts leads people to evaluate gains and losses in relative rather than in absolute terms, resulting in large variations in the rate at which money is exchanged for other things, such as the number of phone calls made to find a good buy or the willingness to drive a long distance to get one. Most consumers will find it easier to buy a car stereo system or a Persian rug, respectively, in the context of buying a car or a house than separately."
(iii) Comprehensive account posits that to decide whether to make the 20-minute trip, buyers will take into consideration of price of the jacket (which is not discounted in the other store) or even monthly expenses (how much is budgeted to spend).

"N=88" meant 88 persons participated in the experiment that set the calculator at $15.

(e) Naturally I do not know if Mr Greenspan's hindsight is correct or a mere excuse for his failure to foresee 2007 financial crisis. To be fair, commentaries before the 2007 crisis overwhelmingly argued the Fed's job, perhaps the only job, was to tame inflation, which Mr Greenspan did superbly. At most it was also argued that Fed might head off a POTENTIAL stock market bubble--much less a housing bubble. Nobody, to the best of my memory, talk about mortgage.

作者: choi 时间: 10-20-2013 12:12
(2) David R Henderson, A Nobel for the Random Walk of Stock Prices; The latest winners of the economics prize taught us about market efficiency in pricing assets. Wall Street Journal, Oct 19, 2013 (op-ed).
http://online.wsj.com/news/artic ... 4579135634030221864

Quote:

"Mr [Eugene] Fama's major contribution, notably with the 1965 paper "Random Walks in Stock Market Prices," has been to show that stock markets are very efficient. The term "efficient" here does not mean what it normally means in economics—namely, that benefits minus costs are maximized. Instead, it means that prices of stocks rapidly incorporate information that is publicly available.

"The insight has had big implications for large and small investors: Don't waste your money on professional financial managers who actively try to pick individual stocks. One high-profile beneficiary of Mr. Fama's insight was John Bogle, who started the Vanguard 500 Index Fund in the 1970s. His idea was to have a fund indexed to the overall market and save the costs of hiring experts to predict stock prices.

"Mr Fama, 74, is also skeptical of the word 'bubble,' which suggests market inefficiency by letting stock prices rise higher than justified by market fundamentals. In 2010, he told the New Yorker magazine: '* * * I think most bubbles are twenty-twenty hindsight'

"He [Fama] strongly opposed the 2008 selective bailout of Wall Street firms, arguing that, without it, financial markets would have sorted themselves out within 'a week or two.'

作者: choi 时间: 10-20-2013 12:12
(3) Jeff Sommer, A Skeptic of 'People Who Look Impressive;' Robert Shiller, Nobel winner, talks about the forces that made him a questioning, data-driven economist. New York Times, Oct 20, 2013.
http://www.nytimes.com/2013/10/2 ... a-nobel-winner.html
(introduction: "The Nobel committee described Professor Shiller as a founder of the field of behavioral finance, an innovator in incorporating psychology into economics and a pioneering analyst of speculative bubbles in the stock and real estate markets")

Quote:

(a) (Answer by Shiller

"I have the same skeptical nature. When I was a child, my Sunday school teacher complained to my parents that I had a bad attitude. I didn’t believe anything that this guy said."

(b) (A

"Also, I found there were certain gaps in the efficient-market theory, which was the orthodoxy of finance, that just didn’t make sense. The economists who came up with this theory said everybody in the markets was doing calculations, present-value calculations [of future income]. That’s crazy, because you know that 90 percent of the population doesn’t even know what this concept is: they’re not doing any calculations.

(Question by editor Sommer

"How does 'Irrational Exuberance,' the title of one of your books, affect the stock market, and how does that fit into the efficient-market theory?

(A

"Well, the efficient-market theory is a half-truth. * * * Where the theory goes wrong is that it says you should just assume that there’s no point in trying to beat the market[, concluding index funds are better] — or that you should guide economic policy under the assumption that there aren’t any market bubbles.

(Q

So, are there bubbles?

(A

"Yes, they happen all the time. * * *

(Q:)Eugene Fama is often known as the founder of the efficient-market theory, and as we’ve been discussing, you’ve been a critic of it. I’m not surprised that Gene Fama has won the Nobel or that you’ve won the Nobel. But is it odd that you’ve won it together?

(A:) "Well, Gene and I have a lot in common, more than you might think. He collects data and he shares it and I use it all the time, and I use many of his theories. Not all of them, of course. But he’s a very good guy. It’s like having a good friend who is a devout believer in another religion. You can learn a lot from a friend like that, even if you don’t pray in his church.

Mote:
(a)
(i) The German surname Sommer (German noun masculine: sommer): "summer"
(ii) The English surname Cowles means son of "Cole."
(iii) The English surname Cole has two origins: "from a Middle English pet form of Nicholas" or "from [Old English] col ‘(char)coal.’"
(iv) The Jewish (Ashkenazic) surnames Shiller/Schiller are "dialect variants of Schuler" (German: Schüler).
(v) Schuler can be
(A) a South German  surname meaning "a scholar or a student training to be a priest, from an agent derivative of Middle High German schuol(e) ‘school’"
(B) or a Jewish (Ashkenazic) surname meaning "a Talmudic scholar or the sexton of a synagogue, from an agent derivative of Yiddish shul ‘synagogue.’"
(vi) The Italian, Spanish and Portuguese surname Fama is from fama (noun feminine in Italian, Spanish etc), from Latin fama--fame or renown.

(b) "He [Shiller] is also one of a group of eminent economists who write the Economic View column for Sunday Business, and has contributed 60 of those columns since August 2007."

That is, business section of Sunday in New York Times.
(c) "Our founder, Alfred Cowles"

Presently based in Yale University, Cowles Commission for Research in Economics was founded in 1932 by Alfred Cowles
http://en.wikipedia.org/wiki/Alfred_Cowles
(Alfred Cowles III; 1891-1984; graduated from Yale in 1913; grandson of Alfred Cowles, Sr., who was a [minor] founder of the Chicago Tribune [in 1847])

(d) Sunday school is for Christians. The Jewish version is called Hebrew school or, occassionally, Jewish Sunday School.

(e)Robert J Shiller, Irrational Exuberance. various publishers, 1st ed (2000) and 2nd ed (2005).

The book title came from Alan Greenspan's 1996 speech.
(f) price/earnings ratio. Financial Times Lexicon, undated
http://lexicon.ft.com/Term?term=price/earnings-ratio
("Example[:] Often cited when looking at long term trends, Robert Shiller of Yale University calculates a cyclically adjusted p/e ratio (CAPE) which is the ratio of stock prices to the moving average of the previous 10 years’ earnings, deflated by the consumer price index")

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