Terry Gross, the host of "Fresh Air," interviews Ed Thorp, the father of "card counting," and one of the subjects of Scott Patterson's new book The Quants, and Mr. Patterson. "Quants" are people who use math as well as other skills to predict the markets.
In this week's eSkeptic, Karen Stollznow writes about psychic advisors and the economy. People continue to seek out such advice, especially in rough times. She gives examples of individuals who rely on advice from psychics for business deals and real estate (people wanting to sell their homes sometimes bury statues of St. Joseph in their yards). She also notes the example of the recently charged Jerome Kerviel, who seems to have relied on psychic advice and ended up in a quite a financial mess. But hope endures.
I've posted about these topics a couple of times already (see here and here). But they continue to enchant.
Via the Ellusionist Blog, which is always fun to read, two particularly interesting stories today: one discussing a story from the Daily Oklahoman about a magician who uses non-disclosure agreements to try to make certain his crew doesn't reveal secrets, and another about John Hodgeman (The Daily Show)'s proposal to make Criss Angel the Treasury Secretary ("he'll levitate the economy.")An interesting idea. If we're (fancifully) going with magicians for the post, any suggestions for other nominees? David Copperfield? (he's got a metal in his name, at least). Maybe we need a magician/lawyer/mind reader.
Here's yet another news story about people who seem to be lining up to get psychic advice on what to do in a bad economy. According to CNN's Christine Romans, they're paying for this kind of prediction: "The housing crisis will deepen, the country could fall into a depression and laid-off workers may need to start their own business." Ms. Romans notes there's even a website that links up psychics and customers who want such advice.
But I'm with advisor Ryan Mack who told Ms. Romans that spending money on a psychic might be better put into a savings account. "You have the ability within yourself to save, to plan and to be diligent." In other words, you don't need someone else, either him, or a psychic, to tell you to cut back on dinners out, premium cable, or pricey vacations. Put that money away somewhere, in a bank account if you trust your local bank, or in a cookie jar if you don't.
CNN has this story on the "booming business" that the struggling economy has brought for psychics. Instead of asking about their love lives, people are asking about careers and money.This isn't the first story I've seen that details an increase in the number of folks beating a path to the door of psychics, astrologers and others promising to foretell the future. After all, economists, stock market forecasters, and other professionals, they say, haven't done such a great job. [BTW, the psychologist interviewed in the piece is, I believe, Stanley Krippner.]
What I thought was interesting was what one of the interviewees said about what the psychic told her. "Randy says I'm going to reinvent myself and have a new career." She had lost her job and was seeking advice. Well, reinventing herself and getting into a new career might be something a psychic might see in her future. But couldn't a career counselor, for example, also foresee the same outcome for her, by giving her some specific advice on how to redo her resume, repackage herself, etc.? But she looked happy with her reading, and she'll probably take affirmative steps to do just that--seek out new opportunities.
Check out my previous post on psychics and the faltering economy. The CNN story also mentions something called the American Association of Psychics. I did not know there was such a thing. You learn something new every day.
Andrian Kreye discusses the phenomenon of "genital thieves" in the early 1990s in West Africa and an economic explanation advanced to account for it and the violent response to it. Says Mr. Kreye,
[A] regional recession triggered a wave of superstition. In countries like the Ivory Coast, Burkina Faso and Senegal, the myth of the "voleurs du sexe" made the rounds. Black magicians, according to popular belief, robbed innocent men of their genitals, by chanting magic spells while shaking the hands of their victims. None of these cases of course were ever proven. However, the deadly side effect of the superstition were massive witch-hunts with angry mobs chasing alleged genital thieves across town, finally stoning them to death. Some psychiatrists in Senegal found a perfectly sound explanation for this phenomenon. The reason for the recession had been a devaluation of the West African Francs, the regional currency strongly dependent on the French Francs and the goodwill of the Banque de France.
Most people of West Africa might have encountered hardship at one point or the other. But in most cases the underlying causes had been clear–drought, floods, or wars. An economic austerity measure such as the government mandated devaluation of a currency caused widespread confusion. The superstition engendered by this economic confusion could be explained in very simple psychological terms: Because the breadwinners had been de-empowered, i.e. emasculated, their angst turned into fears of castration that were taken out on alleged genital thieves who in turn were punished by lynching.
Mr. Kreye then goes on to comment on our current world economic crisis and wonder what behavioral economics might have something to say about that as well. Is explaining the crisis a matter of "whodunit," thus solvable through legal and political, and other measurable, objective means? That is, should we take steps that will make us feel as though we have identified "what happened" and try to make certain we could head off such a crisis or minimize a future crisis? Are economic crises to some extent the result of our own behavioral nuttiness? Can behavioral economics guide reactions to economic crises to ease the pain and avoid compounding the problem? Read his column here.
I came across this post from the Tax Update Blog concerning the importance of saying (or complying with) magic words, particularly when one is dealing with the U.S. Tax Code.
As tax attorney Joe Kristan writes, "Sometimes the magic words really matter...Congress and the IRS have become less nit-picky in recent years. It is now fairly easy to make late S corporation elections good, for example. It also used to be impossible to catch a break for taking more than 60 days to roll over an IRA withdrawal; now there are good cause exceptions. Even so, there are still parts of the tax law where only the right words on a timely-filed form stand between the taxpayer and tax disaster. The Estate of John Clause learned that lesson the hard way in Tax Court yesterday. Mr. Clause wanted to take advantage of Section 1042 of the Internal Revenue Code. Section 1042 allows taxpayers who sell shares of a C corporation to the company Employee Stock Ownership Plan (ESOP) to avoid current tax on their gain if they reinvest the proceeds...if certain other requirements are met. One of the requirements is an election under Section 1042 on a timely-filed tax return. Mr. Clause did his part, reinvesting the proceeds. His CPA prepared his return excluding the gain. Unfortunately, the tax returns failed to include an election required under the Section 1042 regulations. The taxpayer failed to convince the Tax Court that "substantial" compliance had been achieved. The judge says: "Having not literally complied with the election requirements in the statute and the regulation, petitioner argues that he substantially complied with the requirements of section 1042 and should, therefore, receive the benefits of the section because the failure to file the elections was 'purely administrative in nature'. We disagree."
Mr. Clause turned out be less than Santa to his heirs, as the estate then had to contend with an almost additional $400,000 in tax liability. Read the rest of Mr. Kristan's post here.
Here's a piece I missed when it first appeared. Henry Hu, University of Texas, Austin, Law School, published "FaithandMagic: Investor Beliefs and Government Neutrality," at 78 Texas Law Review 777 (2000). Here is the abstract.
This article analyzes investor beliefs as to stocks, the inadvertent role government plays in shaping those beliefs and thereby contributes to a rise in stock prices, and the need for government "neutrality" among investor belief systems. It suggests that, contrary to conventional wisdom, there is no inherent conflict between respecting market primacy and dealing with investor demand for equities. Concerned policymakers are offered an end-run around having to determine if a bubble exists. This article has three key themes:
First, most investors have faith in the superiority of stocks as an asset class and the magic of time in dealing with the risks of stock ownership. The article shows that, in their simple strong forms, the core beliefs of the current stock-based investor "religion" are not axiomatic. Long term historical statistics, the equity premium puzzle, time diversification, current valuations, and related issues are examined, relying in small part on a hypothetical new derivative ("fountain of youth swap").
Second, the Federal Reserve Board and the Securities and Exchange Commission have acted in ways that further this religion. In departing from neutrality, they play a role in the very stock market ascent they are concerned about. At issue are SEC mutual fund performance disclosure rules and the moral hazard of Federal Reserve actions in the bailout of the hedge fund Long Term Capital Management and of use of the Exchange Stabilization Fund in international crises.
Third, regardless of whether there is "irrational exuberance," government should move toward neutrality. The SEC can consider changing mutual fund disclosure to more of an asset class focus and enhancing disclosure of liquidity risks linked to mutual fund shareholder redemptions. The Federal Reserve can consider pre-announcing policies precluding it from bailing out mutual funds and from buying equities and equity derivatives.
The article concludes, "Some magic stores offer a small prop known as a "money maker." Be it a fancy version with metal rollers or a version in cheap plastic, the prop works the same way. You insert a dollar bill, the machine whirls about, and a five dollar bill comes out. A five can be turned into a ten. No skill is required. It would be caricature to suggest that many investors think the stock market is such a "money maker." If it were, an individual would invest, wait for the stock market to process that investment, and watch a larger amount emerge. The stock market is different. Although there may be rational reasons to suspect that a desirable outcome should generally occur, such an outcome is not guaranteed. Nevertheless, the investment religion subscribed to by most ordinary investors today holds that a desirable outcome is indeed virtually guaranteed. Faith in common stocks will almost certainly be rewarded if a broad portfolio of stocks is held for the long run and the magic of time diversification is allowed to do its work. Little judgment is required. This equity-celebratory religion is not the only belief system. Whether stocks are the asset class of choice may well depend on arcane statistical assumptions, even when one assumes a frictionless world of no transaction costs or aberrant investor behavior. Some observers believe, for instance, that whether stock returns are "mean reverting" may be important in making rational asset allocation decisions. The case for stocks may also depend on assumptions about the size of the equity premium in the future. Despite a generation of work, there is little agreement on the far easier issue of explaining what the equity premium has been in the past. Moreover, the equity premium issue turns out to be inextricably linked with questions about the nature of American exceptionalism. Were the extraordinary historical returns from American stocks the result of lucky throws of ordinary dice - extraordinary realizations of a perfectly ordinary probability distribution - or did those returns flow from dice loaded in America's favor? Will the financial market god be malicious and change the dice? All equity premium studies ultimately rest on the statistical dissection of year-by-year stock market returns: what if, as a playful "counterfactual" historian may be tempted to suggest, America's entire past constitutes but one data point? The SEC and the Federal Reserve have helped establish this equity-celebratory religion. The SEC, through its own pronouncements about stocks and, more importantly, through its stock fund disclosure requirements, promotes the superiority of equities and downplays their price and liquidity risks. The Federal Reserve's impact on investor beliefs is more subtle. Through its demonstrated interest in stock price movements and its actions with respect to Long Term Capital Management, the Federal Reserve has led many investors to believe that it can and would prevent a stock market crash or ameliorate the effects of a crash. I have sketched some steps that the SEC and the Federal Reserve can take to reduce their own distortive impact on the stock market, principled steps of an incremental nature that I hope would be robust and unexpected enough to have an effect. Government has no business promoting one particular religion in a world where alternative religions also deserve consideration. Government has contributed directly to the very ascent in stock market prices that it is worried about. By intervening in the marketplace for investment belief systems, government is, in effect, tampering with the paradigmatic mechanism for resource allocation in free economies. Regardless of whether we are in a bubble, regardless of our faith, it is a dangerous game to play with loaded dice."