Main

October 9, 2006

Sharpe v. Markowitz - Is the Capital Asset Pricing Model washed up?

William F. Sharpe, who won a Nobel Prize in economics in 1990 along with Harry Markowitz is saying in his new book that his prize-winning Capital Asset Pricing Model may no longer be all that gol-darned cool.

Kind of tough to argue with what his allies, like Santa Clara Prof. Meir Statman, are saying about the concept of risk:

"We've come to thinking about risk as standard deviation," Mr. Statman said. "What people want is protection when the economy tanks."

though it's also kind of hard to acquaint my tiny mind with Sharpe's new best friend "state-preference theory":

"The elegance of (the state-preference model) is that you can understand the elements of the various moving parts of the optimization," said Gifford Fong, editor of the Journal of Investment Management and president of Gifford Fong Associates, a Lafayette, Calif.-based consultant on fixed income and derivatives.

Taken from research done in the 1950s by Nobel Laureate Kenneth Arrow, an economics professor emeritus at Stanford (Calif.) University, and Gerard Debreu, the late economist, state-preference theory said that there are many possible future states of the world but that only one of them actually will occur.

Investors can assign probabilities of any given state occurring. In a complete market, an investor can buy or sell a security for every possible outcome.

Guess I should put the book on my Christmas wish-list, squint real hard, and commence to cipherin'.

Meanwhile, Harry Markowitz isn't too terribly impressed, according to the same Investment News item:

"I find [the state-preference approach uses] a very general set of assumptions out of which very little specific can be deduced," said Mr. Markowitz. He and Mr. Sharpe will debate their differing views Oct. 16 at the Institute for Quantitative Research in Economics' 40th anniversary conference in Santa Barbara, Calif.

Posted by The Unknown at 9:36 PM |

February 13, 2006

Wolfie Knows Shit from Shinola: Sock it Away in that 401k!


Wolfie throws his kibbles 'n' bits in with the money wonks at the Investment Company Institute, the Employee Benefits Research Institute, and the spreadsheet jockeys at Putnam. To get anything out of that 401k, you've got to put something into it.

"My foremost advice to you is to put as much as you possibly can into your master's retirement plan/401K, up to the company's match (but not over the match! say "no" to that!). Or you can approach financial security like me, Wolfie, and find someone else to provide you with food, water and a cushion to sleep on. Good luck, Reader! Namaste!"

No doubt his advice on not exceeding the match serves retirement tax-diversification purposes: go beyond the 401k and chip in to that Roth IRA - no taxes on the Roth when you retire and start withdrawals. Tear the roof off the mothersucker!

We wait with 'bated dog breath for the next installment of The Wolfie Report. More good advice than a Psycho Suze/Dr. Phil mashup with less than 10% of the insanity, and more than 20 times the beauty and trashy celebrity magazines. Write soon, Wolfie, when you get done chillin' in the shack with Sheila E, Jazzy B, and Spoonie G, you little Metropolitician!

Posted by The Unknown at 7:22 PM |

December 7, 2005

The Strong Case for more Dart-Throwing Monkeys

Louis Menand reviews Philip Tetlock’s Expert Political Judgment: How Good Is It? How Can We Know? for the New Yorker.

Excerpt:
. . .
It is the somewhat gratifying lesson of Philip Tetlock’s new book, “Expert Political Judgment: How Good Is It? How Can We Know?” (Princeton; $35), that people who make prediction their business—people who appear as experts on television, get quoted in newspaper articles, advise governments and businesses, and participate in punditry roundtables—are no better than the rest of us. When they’re wrong, they’re rarely held accountable, and they rarely admit it, either. They insist that they were just off on timing, or blindsided by an improbable event, or almost right, or wrong for the right reasons. They have the same repertoire of self-justifications that everyone has, and are no more inclined than anyone else to revise their beliefs about the way the world works, or ought to work, just because they made a mistake. No one is paying you for your gratuitous opinions about other people, but the experts are being paid, and Tetlock claims that the better known and more frequently quoted they are, the less reliable their guesses about the future are likely to be. The accuracy of an expert’s predictions actually has an inverse relationship to his or her self-confidence, renown, and, beyond a certain point, depth of knowledge. People who follow current events by reading the papers and newsmagazines regularly can guess what is likely to happen about as accurately as the specialists whom the papers quote. Our system of expertise is completely inside out: it rewards bad judgments over good ones.

“Expert Political Judgment” is not a work of media criticism. Tetlock is a psychologist—he teaches at Berkeley—and his conclusions are based on a long-term study that he began twenty years ago. He picked two hundred and eighty-four people who made their living “commenting or offering advice on political and economic trends,” and he started asking them to assess the probability that various things would or would not come to pass, both in the areas of the world in which they specialized and in areas about which they were not expert. Would there be a nonviolent end to apartheid in South Africa? Would Gorbachev be ousted in a coup? Would the United States go to war in the Persian Gulf? Would Canada disintegrate? (Many experts believed that it would, on the ground that Quebec would succeed in seceding.) And so on. By the end of the study, in 2003, the experts had made 82,361 forecasts. Tetlock also asked questions designed to determine how they reached their judgments, how they reacted when their predictions proved to be wrong, how they evaluated new information that did not support their views, and how they assessed the probability that rival theories and predictions were accurate.

Tetlock got a statistical handle on his task by putting most of the forecasting questions into a “three possible futures” form. The respondents were asked to rate the probability of three alternative outcomes: the persistence of the status quo, more of something (political freedom, economic growth), or less of something (repression, recession). And he measured his experts on two dimensions: how good they were at guessing probabilities (did all the things they said had an x per cent chance of happening happen x per cent of the time?), and how accurate they were at predicting specific outcomes. The results were unimpressive. On the first scale, the experts performed worse than they would have if they had simply assigned an equal probability to all three outcomes—if they had given each possible future a thirty-three-per-cent chance of occurring. Human beings who spend their lives studying the state of the world, in other words, are poorer forecasters than dart-throwing monkeys, who would have distributed their picks evenly over the three choices.

Tetlock also found that specialists are not significantly more reliable than non-specialists in guessing what is going to happen in the region they study. Knowing a little might make someone a more reliable forecaster, but Tetlock found that knowing a lot can actually make a person less reliable. “We reach the point of diminishing marginal predictive returns for knowledge disconcertingly quickly,” he reports. “In this age of academic hyperspecialization, there is no reason for supposing that contributors to top journals—distinguished political scientists, area study specialists, economists, and so on—are any better than journalists or attentive readers of the New York Times in ‘reading’ emerging situations.” And the more famous the forecaster the more overblown the forecasts. “Experts in demand,” Tetlock says, “were more overconfident than their colleagues who eked out existences far from the limelight.”
. . .
much more

Posted by The Unknown at 8:46 PM |

October 20, 2005

Free Market Fetishists Against Bush

My goodness:

. . . Bush is a second-rater. He's not even a good liar. He has a tin ear and his urge to dictate is not tempered by any realistic frame of reference. He has no knowledge of economics, has never vetoed a single bill, has reportedly talked out loud of America as an "empire,' tolerated military torture, ruined even more of the country's ailing freedoms with such obviousness and carelessness that even the dimmest citizens are somewhat uneasily aware of it. In addition to all that, his designation of bureaucracies ("Homeland Security,' for instance) after 9/11 has been horrendous. Does he believe the institutional memory of World War II and Nazi terminology has faded from American consciousness? It has not. He is wrong. But he is wrong about many things.

Posted by The Unknown at 7:25 AM |

October 11, 2005

Here Come those Doggoned "Activist" Pension Funds

Reading this online at Pensions & Investments:

U.S. institutional investor ownership of the U.S. equity market rose to 59.2%, or $7.9 trillion, of outstanding U.S. equities in 2003, up of from 51.8%, or $6.6 trillion, in 1999, according to the latest data in The Conference Board’s Institutional Investment Report of U.S. institutional investor ownership and control.
. . .
“Activist public pension funds continue to amass relatively more control over companies,” a Conference Board statement said. Their public pension funds’ownership of total equities rose to 9.7% in 2003 from 7.6% in 2000, the report said.
. . .
"This means that, despite a brief hiatus, the economic power and clout of U.S. institutional investors continues," Carolyn Kay Brancato, director of The Conference Board's Global Corporate Governance Research Center, said in a statement. "These investors tend to be the most activist in demanding corporate governance reforms and will continue to have a profound impact on every company not only in the U.S. but also in global markets, since U.S. investors have tended to be out in front of global shareholder activism."

reminded me of this bit, which I read while riding the bus this morning, from William Greider's The Soul of Capitalism:

Pension funds, it is argued, must become active investors who pressure and punish copanies for their deleterious practices, not as a gestrue of social conscience, but because the corporate antisocial behavior damages a pension fund's own wealth. . .

The individual company improves its profits by "externalizing".. costs, and so these actions are accepted practice in American management. But the costs will be paid by someone and thus injure the growth and efficiency of the broader economy in which the pension fund is invested.
. . .
This new concept - understanding pension funds as the "universal owner" of America's major business corporations - provides an economic rationale, unsentimental and self-interested, for why the funds should enforce social objectives; that is, they should punish corporations for irresponsible behavior by moving their capital elsewhere. The discipline would be exercised through the stock market. The wealthy enforcers simply would be fulfilling their fiduciary duties to their beneficial owners.

Speaking of the "soul of capitalism," John Bogle has a new book out. It's called The Battle for the Soul of Capitalism, and Publisher's Weekly blurbs it as a "worthy jeremiad against corporate excess."

Posted by The Unknown at 11:35 AM |