The Curse of Knowledge: Price Bubbles and Airline Logos

Lufthansa terminal

 

“Why do they have pictures of knives and forks here, daddy?” My daughter, then six-years old, was gazing out of the window of the airport bus as it brought us from the aircraft to the terminal building of Frankfurt Airport. I looked up briefly from my text messages. “Where do you see knives and forks, sweetheart?” I asked. “Everywhere”, she cried. I peered out of the window more intently this time. I leaned over to align my viewpoint with hers. I looked behind to check the area the bus had just passed. I looked left and right, inside and outside. Nowhere could I see cutlery of any description. “I can’t see any knives or forks”, I said, apologetically. She grew visibly exasperated: “Look! There! And there!” I didn’t want to upset her, so I remained silent as I scrutinized our surroundings. Then I saw them. They were indeed everywhere.

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Explaining behavioural finance to a 14-year-old

Explaining behavioural finance to a 14-year-old“Can you explain behavioural finance to my 14-year-old daughter?”

As the girl’s father was a finance professor, I had the impression that he might already have tried it unsuccessfully himself. Undeterred, though, I turned to the unenthusiastic teen and asked her to imagine a prize draw with a £100 reward for the lucky person whose ticket number is randomly drawn from a basket.

There are only 100 tickets,” I explained, “so, arguably, each entry ticket is ‘worth’ £1.” She nodded in agreement. “Now suppose I offer you the chance to buy one of those tickets for 90p. Would you take it?” She nodded again, smiling. Was this going to be easier than she thought? Continue reading

The World Cup needn’t be the only gold they bring home

Despite being an Englishman, former soccer player and manager, Jack Charlton, is immensely popular in the Republic of Ireland. As manager of the national team, he led the soccer-mad nation to its first World Cup competition in 1990. He has been awarded one of the Republic’s highest honours, an honorary Irish citizenship. Cork airport even has a life-sized statue of him indulging his passion for fishing. When he goes on fishing trips to the Republic, he has been known to pay his expenses by cheque. The payees, so delighted to have the autograph of their sporting hero, sometimes never bank them. The value and, therefore, the demand for this asset can be greater than suggested by the face-value because of the signature on it. Continue reading

New evidence on the effectiveness of bonus payments in creative, analytical jobs

 

A few years ago a NY hedge fund boss asked me a strange question. I thought it strange because I believe he knew in advance how I would answer, and how he would respond to my answer. And both of us knew that nothing either he or I said would make a blind bit of difference to how hedge fund bosses ran their businesses. The question was: What do you think of individual performance bonuses? Continue reading

Straight From the Gut

In the decision sciences, a clear distinction is made between risk and uncertainty. You take a risk when you know in advance all the potential outcomes of your choice, and their respective probabilities. This risk description covers things like coin tosses, lotteries and spins of a slot machine. In such circumstances, only cold logic, statistical thinking, and possibly a pocket calculator, should influence your decision about whether to run the risk or not. As soon as some of the outcomes, and/or some of the probabilities, are not known, we enter the realm of uncertainty. In this less ordered domain, reason and statistics become less useful because there is nothing to calculate. Instead, argue decision scientists, one should rely more on one’s intuition, gut feelings and rules-of-thumb. Examples of such judgements include living to be one hundred years old, falling in love, or being killed by a terrorist. Any decision to bet on them – or insure against them – involves dealing with uncertainty… Read more on TCAM’s website

Old-Age Benefits: Are Older Investors Better?

elephants-1081749_1280At least one asset is guaranteed to enrich your portfolio this year: your investing experience. Stick at it long enough and you will encounter practically everything from start-ups to meltdowns, flashes in the pan to flash crashes, slim pickings to fat fingers. You will also discover the financial impact of earthquakes and tsunamis, of both the political and geological varieties. The wisdom of the years, one might argue, ought to make you a better investor. [Read more on TCAM’s website]

The Twin Dimensions of Trust

To trust or not to trustYour ageing smartphone has just given up the ghost. Would you chance handing it over to a stranger for repairs?

First you would think about whether its memory holds any sensitive data, and wonder what the stranger might do with it. Once you’re satisfied there are no ill intentions, you would decide whether you believe the stranger has the ability to repair smartphones. Given the success of the entire transaction depends on the latter, it seems counter-intuitive that this judgment be made only as a second step, yet this precisely what we all do. Read more on TCAM’s website

Reputations Lost

Hardly a week goes by without some sorry tale of a lost reputation. If it isn’t a politician accused of ruthless betrayal, or a bank’s name sullied by the fraudulent activities of its traders, it is the country itself that suffers the ignominy of being stripped of its triple-A sovereign debt rating. Reputations are clearly things that people, firms and nations can have, and lose. But what are they? Where do they come from? What are they worth? And what does one do to repair a tarnished one?…

Read more on TCAM’S website