Archive for December 19th, 2011

Is Daniel Kahneman the most important social scientist of his generation?

December 19, 2011

Daniel Kahneman is the flavor of the econ season as he has just released his new book – Thinking, Fast and Slow, A dear friend suggests it is a must read as it covers almost anything and everything on how human mind thinks and acts..

There are two superb profiles of the man who introduced behavioral economics to the world (alongwith Amos Tversky).

First is a profile by Michael Lewis nicely titled as King of Human Error (TGS titles it as  Great Man Kahneman). And second is this by Evan R. Goldstein is managing editor of The Chronicle Review. I learnt via this article that the name prospect theory is meaningless. Kahneman and Tversky wanted something distinctive and easy to remember. It surely has sruck in minds.

Chronicle also points to this astonishing graph which shows reach of Prospect theory. Its broad idea that people are sisk averse when they make profits and risk seekers when losing has found applications in many fields – medicine, law, political science etc. So far, there have been 8000 references in different journals and chapters across many disciplines. That is truly massive.


Asset Allocation and Risk Management in a Bimodal World

December 19, 2011

Vineer Bhansali of PIMCO writes this superb note on financial portfolios.

In finance, we assume a normal distribution of any asset price series with one peak (unimodal) and tail risks really limited and seen as a black swan event. The reality is financial time series have fatter tails implying risks have a bigger probability  of happening and hitting portfolios. Moreover, in today’s times you could actually have two peaks (called bimodal) highlighting probability of multiple equilibrium (one can look at both Eurozone crisis and US recovery for instance).

In such a scenario, building asset portfolios based on unimodal is nots just risky but dangerous as well as one might be taking higher exposures to risky assets than required:


Break up of monetary unions – A short note (including India-Pakistan in 1947)

December 19, 2011

Prof JR Varma has a superb post on the topic. Apart from providing short history on previous currency union break-ups, he links to some useful papers on the break-ups as well.

He covers following break-ups:

  • Argentina 2001-02
  • Ruble zone early 1990s
  • Pakistan/Bangladesh 1971
  • India/Pakistan 1947-48
  • Austro Hungarian Empire 1919

Very interesting. For instance Indo-Pak currency union break up in 1947:


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