Shortselling – why is it only limited to books?

I have been thinking about posting my comments on this short-selling for a while. But kept forgetting. This recent Economist story reminded me to write on short-selling.

You often read this in press or see on TV (this is an imaginative case):

Q: People believe that speculation has a role to play in financial markets? What is your take on it?

Economist: Speculation is good for market. And if prices are rising and are beyond fundamentals, there are short-sellers who can lead to correction in asset prices

I wish all this was true. The short-selling activity isn’t anything what we read in finance books.  After all it is central to efficient markets. However, it is lied as long as it is in books but not in practice. Short-sellers are not just in a poor minority but are often despised. Infact, in the language of Alvin Roth it is a repugnance activity and no one likes it. It is often banned in crisis times and is then revisted later.

Mostly, the blame lies on regulation for not letting short-selling flourish but even the various market participants don’t like it. Infact, in times of declining asset prices, most would like short-selling to be banned.  All like long-buyers (opposite of short-sell) but no one likes the short-sellers. After all financial markets flourish on the basis of being positive and short-sellers are anything but positive.

Just think of two scenarios- when prices are rising and when prices are falling. In first you have long-buyers and in second you should have short-sellers. However, you do see long-buyers being extremely active in the first stage but hardly see any short-sellers with all kinds of interventions. The interventions are not just because regulators feel the need but they are pushed by other stake-holders amidst cries of despair and hopelessness – small investors, market participants etc.

This is what even the Economist story says

IT IS difficult being a short-seller. Most shareholders and managers agree that you are an important part of an efficient stockmarket—until you dump shares in their company. Then things can turn nasty. “We appreciate that, ****” barked Enron’s chief executive, on a public conference call, to a suspected short-seller who had complained about the lack of a published balance sheet. Sometimes bears need even thicker skins. In 1995 Malaysia’s finance ministry reportedly proposed caning as a punishment for abusive shorting.

I don’t really know the solution. It is human nature to be proud of gains and be extremely averse to losses/declines. May be behavioral economics can provide some solutions. Because, unless we have effective short-selling mechanism in place,  you can hardly expect markets to be efficient.

Yet another search of Holy Grail

I wrote an article in Mint which summarises my thoughts over the recently released Growth Commission report. Understanding growth for economists is like understanding Holy Grail for the historians. And in both cases we see wide diverse views.

Hence, the search continues and you keep seeing newer papers/reports to understand what leads to growth and development with more new reasons. Some reasons are also recycled from the earlier dumped reasons and the search continues. So, what to expect in future:

Development economics is still a very fertile subject and, despite wide-scale efforts, we still do not know much. It is much like the Dan Brown best-seller—The Da Vinci Code—where we have lots of clues and codes (the growth factors) to lead us to the Holy Grail (what leads to growth). We will surely need a Robert Langdon to put the entire story together. But let us first have the clues and codes together.

 

Assorted Links

1. PSD Blog points microfinance is the new subprime. I agree with this. Need to write a separate post on the subject.

2. WSJ Blog says take a bow to the Potato

3. WSJ Blog points Fedspeak- Donald Kohn 

4. WSJ Blog points Easterly has developed an index ranking aid agencies. He ranks World Bank agencies as best. This is actually a surprise. Easterly is the last person you would expect to rate the agencies.

5. TTR points to recent CMIE Indian economy forecast.

6. MR points Who is the modern-day greatest thinker? It also continues 

7. NB points which labels have an impact on buying

8. Frankel revisits recession. After Mankiw, even Frankel switches off the comments section.

9. Fin Prof points to recent Bear Stearns hedge fund managers arrests

10. FC Blog points to Google stock screener. Anything Google touches turns to gold

11. DB Blog points another reason leading to commodity boom- poor infrastructure 

Mervyn King is disappointing and confusing

I have always been a big fan of Mervyn King’s speeches and especially the wit and humor he uses in his speeches. Alas, I have been very disappointed lately as his speeches have become confusing and defending BoE turnarounds especially while saving Northern Rock.

His recent speech is also disappointing. He begins like this:

Over that year, the west wind of a credit crunch emanating from the United States and the east wind of higher energy and food prices resulting from the strength of Asian economies have been stirring up the waters through which our economic ship must pass. These two challenges of rising inflation and falling economic growth have led to a crop of doom-laden predictions…

I was like yeah sure. As if all blame lies with Asia and United States. I can understand Asian economies as one of the reasons for this rising inflation but the way all these central banks put it, it looks as if they shouldn’t have grown.

And I can understand if someone in Africa etc blaming US crisis for financial market woes as they had little exposure, but not UK. The UK financial firms were very active in the US subprime space (see this paper which shows UK had the second highest exposure to mortgage assets in US after Cayman Islands) and had to fall.

What was also perplexing was his take on falling growth and rising inflation:

The fact that growth and inflation are heading in opposite directions has led some commentators to question our monetary framework. Target growth not inflation is the cry. I could not disagree more. This is precisely the situation in which the framework of inflation targeting is so necessary. Without it, what should be a short-lived, albeit sharp, rise in inflation, could become sustained.

But Sir you are already targeting growth aren’t you? I had pointeda while back that in its April meeting BoE lowered rates in wake of rising inflationary numbers and expectations. In May BoE paused but didn’t raise the rates as it was uncertain over falling growth and rising inflation. If it was targeting inflation, it would have raised rates as King says:

Price stability – returning inflation to the target – is a precondition for sustained growth, not an alternative.

So, if price stability is a precondition, why not fix it? And that too when BoE expects inflation to touch 4% (see his letter to Chancellor) and inflation has been rising for sometime now. So, it is not as if it has been a big surprise.

Improving housing market practices via banks

In his open letter to RBI Governor , V. Raghunathan (CEO, GMR Varalakshmi Foundation) starts like this:

Dear Dr Reddy, have you ever read—I mean really read— the contracts builders hand out to ordinary homebuyers to sign for a transaction worth lakhs and even crores?

People would know what is to follow next. He goes on to say the contract leaves the home buyers without any help whatsoever. He is completely at the mercy of the builder as the contract is lopsided. The builder charges a huge penalty if the buyer misses an installment on the due date but hardly any penalties are there if the builder misses his completion stages.

While the buyer will have to pay a penal interest of 18% per annum for a delay of even 15 days on his instalments to the builder, the builder has no such obligation for delaying the completion of the work by any length.

Then he points there is no say to enforce quality of construction promised. It all depends on the builder. All sellers say it is high quality stuff at time of sale but we all know how false these claims are. Other products don’t matter as much as a house. In a house most people put their lifetime savings (or are entitled to pay the bank for near life time) and there is no recourse. In Navi Mumbai for instance, whichever property you buy, it starts leaking in the first rain itself and you can’t do anything except spend more to fix it. 

The author then asks RBI Governor to use banking system to impose some standards in this industry:

Often, the agreements with the builder are linked to the loan contracts, so that the loan disbursals go directly to the builder. So it should be possible for banks providing the housing loan to require all payments from buyers to the builders to be made through an escrow account. The bank could also hold a limited power of attorney from the homebuyer (borrower) to ensure that the builders have met their obligations and once so satisfied, clears the escrow.

I must say it is a good thought. The practices in housing markets in India (particularly in metropolitan cities , where we have multi-storey apartment system) are so bad, that any help would be great. The Builder-Broker nexus is too strong and you feel duped all the time, but can’t do anything. Whether you take a house on rent or buy it ( See the economics of house-hunting in Mumbai), there are such huge transaction costs that you always feel burdened.

For instance, in Mumbai you have something called a “super built up” area which is roughly about 35%-40% of area. So, if the builder quotes 1000 sq ft area what you get is 600-650 sq ft area but you pay for the entire 1000 sq. ft. Super-built up includes area of terrace, balcony, parking, garden etc. and as this also involved development costs. the buyers have to pay for it collectively. But why 35-40% from all the buyers??  This was earlier called built up which was 15-20% but now has been extended to 35-40%. And worst of all, this has now been included for all flats. Even the old properties are selling at superbuilt up areas.  

Apart from this, Banks can also be very usefully used to do some rating of the builders. As of now, Banks just approve certain builders but there is no rating. You really do not know which builder is a good one. As a result, the apartment prices are near similar and depend on the area, not the quality of the builder. Some builders have developed a brand equity but they are very few in number.

The author also points to a problem which provides some food for thought for beh eco guys: 

And the most unfortunate thing is that most buyers do not (and others cannot) even read what they are signing on, thinking the process to be a mere formality.

This is also a big problem. The form is a mixture of legal and financial lingo and very few people have the speciality to understand both. The forms should be made simpler and shorter. But again this is a less of a problem than solving the above issues.

Housing is big problem in places like Mumbai and it is a very basic issue. If banks can help, it is most welcome. Moreover, research and debates are advocating that Central Banks need to look at asset prices (discussed here) and asking banks to monitor developments in housing markets might just be a good idea.

Assorted Links

1. WSJ Blog points Chicago Univ Professors are protesting setting up a Milton Friedman centre.

2. MR pointsto a paper which analyses the happiest looking economist. Answer- Ned Phelps

3. JRV pointsto market microstructure case study on recent Ranbaxy deal

4. ASB points to a new paper linking Legal system’s impact on finance in INdia. Looks quite interesting. He also points to the new GS paper that has another 10-reform list. My views on this paper are here. I am expecting more of these lists.

5. IDB points to a story that people use below poverty cards as collateral against loans

6. ISB points MMRDA extends monorail bid deadline

7. MR points to Beijing airport experience.

8. PSD Blog points that FDI numbers in Russia are not right.

Who developed the original Modgiliani and Miller theorem? or CAPM?

I love such papers/ideas which say original idea was actually written by such and such. You keep reading physics people accusing economists of picking up models from their field and applying it to explain economics. I r’ber reading somewhere that one of the greatest economist (any guesses??) also explained most of economics using physics models.

I came across this paperfrom Luca Barone (of Goldman Sachs) which says much of financial economics is wrongly credited. For instance Modgiliani and Miller theorem was developed by John Burr Williams, CAPM by Treynor not Sharpe, Portfolio Theory by de Finetti not Markowitz etc !!! There are many such concepts, check the list on Page 3.

Basically, Barone summarises work by Marc Rubenstein‘s book – A History of the Theory of Investments: My Annotated Bibliography. Rubenstein is one of the best financial economists around and developed the binomial options pricing model and much of financial engineering. He also developed the infamous Portfolio Insurance strategy which was criticised for its role in 1987 crash.

He has also done a lot of work on history of finance and that is what the book is about. You can see his work here. He wrote another series- Great Moments in Financial Economics Series (freely available) which explains most of the history.

Stop Jean Claude Trichet

Eurointelligence pointed to this interesting website – http://www.stoptrichet.com/ developed by a well-known French economist, Marc Touati. The website seeks signs to appeal to Trichet (ECB President) not to raise its rates in the next meeting on July 3 2008.

Basically Trichet had indicated strongly in the last meeting on 5 June 2008 that rates would be increased in the next meeting (which is July 3 2008) tracking surging inflation.  http://www.stoptrichet.com/ lists 5 reasons for raising rates (read them on the site). Already 3746 people have signed the petition.

 

A new list of reforms for Indian economy

A Mint story pointed y’day about a Goldman Sachs paper(authors GS economists- Jim O’Neill and Tushar Poddar).

The paper says India needs to do 10 reforms to achieve a per-capita GDP of $20,000 (Rs8.58 lakh today) by 2050. Currently it is around (as per wikipedia) $4,542 at PPP and $1,089 in nominal terms. These 10 reforms could also add 2.8% pa to India’s existing growth rate.

1. Improve governance
2. Raise basic education levels
3. High end education
4. Inflation targeting
5. Introduce a credible fiscal policy.
6. Liberalize financial markets.
7. Increase trade with neighbours.
8. Increase agricultural productivity.
9. Improve infrastructure.
10. Improve environmental quality.

The list of reforms reminded me of two one-time famous list of reforms- Washington Consensus (WC) which was a 10 point reform list released in 1990 and Mckinsey’s 13 reform list for India (free subscription; you can see the list of 13 reforms here as well) in 2001. WC was a set of reforms applicable to all countries that would help countries become developed and Mckinsey was focused on India that would help India achieve 10% growth rate. 

WC has been hugely criticised by wide number of people (see the wikipedia entry for its straight-jacket approach and is also called a laundry list. WC was thrashed to pieces when countries that adopted WC failed miserably- Thailand, South Korea, Argentina etc. Mckinsey report on the other hand just lost that fanfare after few days of media coverage.

On just comparing the three lists, I see only 2 common points- fiscal policy discipline and  trade liberalization (GS report only mentions trade liberalisation with neighbors). GS has got a big point – improve governance which covers most things related to government policies. On comparing McK and GS reports, I see agriculture, trade, fiscal policy, infrastructure as common points.

I really don’t understand these reform lists. It is easy to suggest reforms but many questions still remain. For instance, How do you decide, which reform is more important? No country can do all the reforms at one go and it is difficult. In practice what happens is you choose some reforms, run them parallely. Some gain momentum, some tug along and some die. So how do you decide? If we look at McK reforms it has reforms which have not been done yet- labor reforms, property rights system and GS report has new set of reforms – education, inflation targeting etc. So, if you look at the two lists what you get is something like 15 odd reforms and you don’t know where to begin. These studies are problematic and you can make n number of reform lists. A better approach is to follow Rodrik et al study – Growth Diagnostics which identifies the constraints and works on them first. Also, these studies should understand second best institutions work equally well.

Another thing I noticed is how the list changes with time and focuses on the “In things”. In 2001, you had lots of talk on SSI reservation, property rights, labor reforms etc and McK report mentions them. These days, we hear a lot about education, financial market liberalisation, inflation targeting etc and that is what we see in the GS report.

And a final most important point, most reforms in McK report have not been done at all or are moving at a slow pace. Still India has touched growth levels of nearly 10% (9.6% in 2006-07) and has been above 9% for the past 3 financial years

PS. I remember attending a talk by one of India’s eminent economists at the time this Mck report was released. He said I had asked the team to come to my office and explain their list of reforms. The team never showed up.

Assorted Links

1. WSJ Blog points markets don’ expect Fed to increase rates.  

2. Cowen (of MR) asks which was the best paper in 1958 – My vote also goes to Modigliani-Miller paper. He also points NZ economy is declining

3. Krugman points how airlines are cutting costs amidst rising oil prices

4. Mankiw points to a new Bernanke speech on healthcare. I was surprised too seeing the topic

5. NB points firefox using nudges

6. Rodrik points indutrial policy might comeback in US

7. Fin Prof points to an interesting article- Are you a stock or Bond?

8. IDB points to a bleak India picture

9. Deux Blog on banking losses in Euroarea. It is really complex to understand all this.

10. DB Blog points Romania using e-procurement to reduce corruption.

BoE writes to Chancellor for breaching its inflation target

Under the UK monetary policy framework, Bank of England Governor is supposed to write to the Chancellor if BoE deviates from its inflation target of 2% by more than 1 %. The letter explains why it happened and what BoE would do?

In their 11 year framework, the Governor has written this letter twice, both within a year. First time in April 2007 when inflation for March 2007 touched 3.1% and second now in June 2008 when May inflation touched 3.3%.

The recent Governor letter is here and Chancellor’s reply is here. Chancellor agrees to Governor’s letter and calls it a global worry. Not much he can do anyways. The Gov. letter is more interesting:

Why has inflation increased? The Gov says because of unanticipated rise in prices of fuel, food, gas and electricity? But why was it unanticipated? It has been expected for a while.

Then is the BoE policy action to control inflation. It says it has cut rates three times since December (yes to manage inflation it has cut rates) as it is balancing 2 risks: slipping growth and rising inflation. It perceives falling growth to take care of rising inflation.

Further, the letter says inflation is expected to be around 3.5% for a while now (so we should expect more of such letters, which Chancellor also acknowledges).

Buffet on derivatives

Warren Buffet’s views on derivatives are well-known- time bombs, weapons of mass destruction etc. I read Berkshire Hathaway shareholder report -2002 (page 13- 15) where these Buffet euphemisms for derivatives are mentioned.

Apart from these select words, Buffet has highlighted risks from these instruments. At hindsight, these are the very risks which have led to the recent collapse. Sample this:

Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counterparties to them. In the meantime, though, before a contract is settled, the counterparties record profits and losses – often huge in amount – in their current earnings statements without so much as a penny changing hands.

He says if you want a derivative speculating on number of twins to be born in Nebraska in 2020 you can have it

The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen). At Enron, for example, newsprint and broadband derivatives, due to be settled many years in the future, were put on the books. Or say you want to write a contract speculating on the number of twins to be born in Nebraska in 2020. No problem – at a price, you will easily find an obliging counterparty.

On mark to market:

Those who trade derivatives are usually paid (in whole or part) on “earnings” calculated by mark-to-market accounting. But often there is no real market (think about our contract involving twins) and “mark-to-model” is utilized. This substitution can bring on large-scale mischief. As a general rule, contracts involving multiple reference items and distant settlement dates increase the opportunities for counterparties to use fanciful assumptions. In the twins scenario, for example, the two parties to the contract might well use differing models allowing  both to show substantial profits for many years. In extreme cases, mark-to-model degenerates into what I would call mark-to-myth.

He then discusses how derivatives lead create a daisy chain (i call it a house of cards) leading to a collapse from A entity to Z entity. He also says they continue to expand and central banks haven’t developed ways to monitor the risks. His take on risktaking is enough of a alarm (even now):

When Charlie and I finish reading the long footnotes detailing the derivatives activities of major banks, the only thing we understand is that we don’t understand how much risk the institution is

If he doesn’t understand, I am not sure who would??

Finally the famous words:

In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.

Assorted Links

1. WSJ Blog points Fedspeak- Richard Lacker 

2. ISB points Mumbai dominates government Viability gap funding

3. Blattman points check your political compass

4. NB points out to practices in restaurants that lead to higher tips

5. Fin Prof points forget country bias, people seem to have state bias.

6. Bogle Blog points to new John Bogle speech. Must read to understand developments in finance.

7. PSD Blog points to reforms in Honduras

8. Deux Blog points to ECB worries 

Avinash Dixit- an economist by an accident!

I don’t know why but some of the best economists have become one by an accident! For instance, Paul Samuelson says he became an economist by an accidental blind chance:

From one point of view my studying economics was the result of accidental blind chance.  Prior to graduating from high school I was born again at 8:00 a.m., January 2, 1932, when I first walked into the University of Chicago lecture hall. That day’s lecture was on Malthus’s theory that human populations would reproduce like rabbits until their density per acre of land reduced their wage to a bare subsistence level where an increased death rate came to equal the birth rate. So easy was it to understand all this simple differential equation stuff that I suspected (wrongly) that I was missing out on some mysterious complexity.

I came across this Avinash Dixit interview where he also expresses the same:

Q. So why are you an economist, Avinash?
A. Largely by a series of accidents — starting out as a mathematics undergraduate who liked maths but not pure maths all that much, nor physics applications, I began hunting round for other kinds of applied maths and discovered economics. Very fortunately, my tutor at Cambridge put me onto Samuelson’s Foundations and gradually I got interested.

I am wondering how would he have fared in Mathematics as he must have spent most of his youth studying maths. I am sure he would have fared very similar or even better.

Apart from this interview has very good advice for students:

Do whatever you find most fun to do and whatever you are best at doing. I don’t see much point in torturing oneself, hating every moment of the work, just because one feels it’s got some social value somewhere out there. That’s usually a guarantee, I think, for doing mediocre work.

For economists he has a request:

A big difference that has taken place in the last 40 years is that when I started the typical working paper, double-spaced, was 20 to 25 pages. But now they are 60 to 70 pages, and as I get older and my eye sight deteriorates especially, I find this a terrible thing. I wish people would put their ideas in a punchier, simpler way.

And finally, he has some words of encouragement for beh eco:

I think trying to speculate in that way is usually a mistake. But the first thing that comes to my mind as a good thing to happen will be, so to speak, delineating the frontier between behavioural economics and conventional neoclassical economics. Behavioural economists, particularly in lab experiments, have found departures from many orthodox economic behavioural assumptions. And others, like John List in particular, have found in field experiments that among experienced traders in markets sometimes orthodox economic theory applies quite well. So a combination of experiments and theorising, one hopes, will sort that out over the coming years.

Assorted Links

1. Econbrowser has some superb graphs on how oil prices are effecting consumption. It also points to some good news – Saudis to increase their oil production from 9.5 million barrels to 10 million barrels

2. WSJ Blog points to Alan Blinder aticle on bubbles. The Blog also says Fed should manage risks on the way up too.

3. Mankiw points to politics of trade

4. Rodrik is again full of humor

5. Deux Blog summarises the recent financial stability report

6. PSD Blog points how S’pore is now becoming a global school house

7. NB points how Japan is fighting obesity using nudges. It also points how a woman is using nudges to improve financial habits in children

How alumni helps one get better stock returns

I came across this interviewwhich basically discusses a paper by 2 Harvard Professors (Laura Cohen and Chris Malloy) . The paper says:

As the researchers found, social networks in the form of school ties—bonds formed based on attendance at a common educational institution—helped equity analysts outperform on stock recommendations when the analysts enjoyed an educational link with a company’s public management. 

A simple portfolio strategy of going long the buy recommendations with school ties and going short buy recommendations without ties earns returns of 5.40% per year.

The paper is here. The authors say:

Taken together, our findings suggest that agents in financial markets can gain informational advantages through their social networks…… The magnitude of our results indicates that informal information networks are an important, yet under-emphasized channel through which private information gets revealed into prices. Identifying the types of information transferred across social networks and the extent to which social networks are important in other information environments can provide us with a richer understanding of information flow, and price evolution, in security markets.

So, this is another advantage of getting through Ivy-leagues. You have access to more information and can btter understand the managerial capabilities of companies which have their alumni members. I am actually not surprised as it is amazing to see the alumni helping people of their colleges in numerous ways.

Though, The interview also mentions similar findings from non-ivy league schools:

Although popular wisdom might suggest that Ivy League ties would come out strong, in fact ties from non–Ivy League schools were just as powerful, the researchers learned.

But I expect these kinds of analysts to be very limited. The non-ivy leagues don’t have the kind of alumni Ivy-leagues have and best jobs are usually limited to those with the connection. I am wondering what would the results of a similar study would be in an Indian setting. The Indian Ivys can then advertise this along with their placement records.

PS.

The authors have done another study on mutual fund managers and school connections. The findings are pretty similar.

 We focus on connections between mutual fund managers and corporate board members via shared education networks. We find that portfolio managers place larger bets on firms they are connected to through their network, and perform significantly better on these holdings relative to their non-connected holdings. A replicating portfolio of connected stocks outperforms a replicating portfolio of non-connected stocks by up to 8.4% per year.

Assorted Links

1. MR points to  a treat – Becker, Spence, Phelps, and Scholes discussing the crisis

2. WSJ Blog points ECB blmaes bio-fuels for food price rises

3. Mankiw points to Ricardian equivalence

4. Rodrik points The Economist evaluates radomised evaluations

5. FC Blog points to finance sayings. That one is my favorite as well

6. IDB has a superb post on payday lending and social networks

7. ISB points high steel prices threatening railway projects 

8. TTR on bank consolidation in India

Why CAPM was named CAPM?

I remember asking this question to my friends. Now Sharpe answers this in his superb interview with AFA:

Q. Continuing with our CAPM trivia quiz, over the years some of my students have wondered if the C and A are redundant.  I told them it wouldn’t have made nearly as nice of a title if we called it the AP-M.  We need the C in there. (Laugh)  But what inspired you to call it “Capital Asset Pricing”, and did you mean to communicate anything other than just asset pricing?

A.        That’s an interesting question.  I don’t know  the answer.  I wasn’t thinking about acronyms.  I think I was trying to connote the fact that we are talking about assets in capital markets.  Whereas with assets, perhaps I was thinking, you would think of cars and trucks.

Q.        So traded assets?

A.        Yes   Securities, perhaps.

 

So, that is how we have the name- CAPM, one of the most profound ideas of portfolio theory.  

 

Sharpe has a super sense of humor as well (though Avinash Dixit takes the cake when it comes to humor):

 

Q.        Well, I am glad that you [settled on capital assets]… because the buzz word is, CAP-M.   With securities, it would be SAP-M, or something. A.        Yes,            or SPAM, I’m not sure what it would have been.

 

This is a superb interview form the great mind. It tells you how the main idea came into being (Markowitz got it from a broker), how difficult it was to get the main ideas in finance across to economists, etc.

 

Highly recommended reading.

Assorted Links

1. WSJ Blog points to fedspeak- James Bullard, Kohn. It also summarisesthe proceedings a Boston Fed conference celebrating 50 years of Philips curve. It points ECB not to do a series of rate hikes

2. WSJ Blog has a fantastic post- Philips vs Friedman. You keep hearing insider stories on how certain paper was written, how this work isn’t original and was copied/stolen from someone etc.

3. Nudes has fantastic posts (as usual)- overconfidence is commonplace, nudges to improve office-life.

4. Mankiw points to Harvard/Yale duoploy in presidential elections

5. Frankel reaffirms the view that low interest rates are responsible for high commodity prices

6. TTR points to IIT expansion. I think we should leave IIT/IIM aside and focus on building other colleges in India. The standards are abysmal elsewhere and won’t improve if the focus is only on IITs etc. They are the best in the country and get the best students, faculty etc. The attention has to move to other Universities, colleges etc Otherwise name all engineering institutes as IIT.

Using behavioral economics to increase retirement savings

This is one of the most important contribution behavioral economics has made to economics – increasing savings of people. We have had theories on what leads to savings from Modigliani (life cycle hypothesis) and Friedman (Permanent income hypothesis). This led to lots of research but despite all this savings rate were much lower than what theory said.

Classical economics assumed people are rational and would save as they know they will need it on their old age. However, it was found, not only fewer number of people saved, their saving plans weer poorly allocated with most just having one kind of asset (all eggs in one basket). Then we had behavioral economics which said we need to enroll people automatically in a savings plan and the savings plan should have very few effective choices.

This note from Phil Armour and Mary Daly of San Francisco Fed is a fantastic 3 page survey on the broad findings and important papers that contributed to the thoughts.

Nudges Blog has some comments as well