A long time ago on a message board far far away…..

Many years ago, I found a newspaper forum on subject matter that interested me and I needed to discern the lay of the land quickly. Part of discerning every cyber landscape on a typical newspaper forum is to figure out which inhabitants are bat shit crazy so I put up a post along the lines of………….

Ronald Reagan gutted the nations mental health hospital system when he was President. Unfortunately, many of those poor sick people ended up in jail while others ended up here. Discuss.

Sure enough every loon that was lurking the board chimed in on the topic, imparting the information I needed in the process.  Sometimes I drop a depth charge (as such posts are known on the finance boards) by accident and the feedback I get via sonar reminds me of that old post.  Yesterday had such an accidental release and frankly what I heard back via the ol’ sonar tickled me to no end.

Slabbed lifers remember the old website had an about page and other material that disclosed certain things about your moderator Sop, two of which were that I was a devotee of Behavioral Finance/economics and not in an abstract way either.  Along those same lines I also have an interest in Game Theory and it is through that prism that I filtered information about the public companies which I blogged upon.  What I learned on the finance blogs impacts what you see here on Slabbed today.

In any event lets drop some depth charges today as I welcome all to my laboratory. ~ sop

Sop gets a cyber first: Behavioral finance/economics intersects with Slabbed. An Aaron Broussard/Trout Point Lodge Update.

Some of my better received work here on Slabbed deals with the topic of behavioral finance/economics.  That said when my curiosity compelled me to enter the laboratory I invariably would go to the Yahoo Finance Boards and issues like Allstate or the pump and dump de jour such as XING.

Cerro Coyote has changed that folks and I want to give everyone a flavor for what I am seeing by communicating with people on this topic.  After all this blog is called Slabbed, a sizable portion of our readership was slabbed by Hurricane Katrina not that long ago. Before we get to “the finance” part of behavioral finance we must start with the behavioral. Universally the investors I have heard from share 3 common traits:

1. They were sold a small stake in Cerro Coyote as evidenced by the stock purchase agreement I posted here on Slabbed last year.
2. They have found out via Slabbed the Inn at Coyote Mountain, the major asset of Cerro Coyote has been sold.
3. They have not yet received anything back on their investment.

So what do people feel upon learn such information?  The answer lies in the Kübler-Ross model and Wiki does a very good job explaining it:

The Kübler-Ross model, commonly known as The Five Stages of Grief, was a theory first introduced by Elisabeth Kübler-Ross in her 1969 book, On Death and Dying. Continue reading “Sop gets a cyber first: Behavioral finance/economics intersects with Slabbed. An Aaron Broussard/Trout Point Lodge Update.”

And the word for the day is Heuristics. My point exactly.

This post is for the departed Nowdy, a true student of human behavior as I thought of her when I read this post by NMC on a book by author Daniel Kahneman’s, Thinking, Fast and Slow. Kahneman is a behavioral economist and it just so happens we’re littered with practical applications of the marriage of human psychology to economics and the law right here on Slabbed using it to explain not only why people confess to crimes they do not commit but also how insurers managed to institutionalize fraudulent claims handling practices in the aftermath of hurricanes.

What Kahneman describes is known as heuristics and that concept underpins the legal profession and our justice system.  Evidently Kahneman explains how it leads to arbitrary and/or plain silly outcomes in the courtroom to where even the insurance defense bar can understand it.

The bottom line folks is “rational” economists are dinosaurs walking.

sop

At least he didn't upload a cock shot…….

Like one of the homies that shall remain nameless but Anthony Weiner certainly should have known better.

Petor OTOH has been sending out me$$age$ like this one for years. One of my all time favorites linked the following video. Continue reading “At least he didn't upload a cock shot…….”

Behavioral Finance 101: Expectations, Reality and the Total Return Swap.

Russell sent me this from the Wall Street Journal and it is quite good. The concept is fairly simple as Jason Zweig illustrates:

David Salem is president of the Investment Fund for Foundations, which manages $8 billion for more than 700 nonprofits. Mr. Salem periodically asks trustees and investment officers of these charities to imagine they can swap all their assets in exchange for a contract that guarantees them a risk-free return for the next 50 years, while also satisfying their current spending needs. Then he asks them what minimal rate of return, after inflation and all fees, they would accept in such a swap.

Does this concept translate to the average Joe saving for retirement? You bet it does as we continue:

Robert Veres, editor of the Inside Information financial-planning newsletter, recently asked his subscribers to estimate long-term future stock returns after inflation, expenses and taxes, what I call a “net-net-net” return. Several dozen leading financial advisers responded. Although some didn’t subtract taxes, the average answer was 6%. A few went as high as 9%.

We all should be so lucky. Historically, inflation has eaten away three percentage points of return a year. Investment expenses and taxes each have cut returns by roughly one to two percentage points a year. All told, those costs reduce annual returns by five to seven points. Continue reading “Behavioral Finance 101: Expectations, Reality and the Total Return Swap.”

OK, so the genders really do have unique viewpoints….

Who says being a financial geek is boring? As Behavioral Economist extraordinaire / Harvard University Professor Dan Ariely points out the sexes really do have different outlooks on life and he uses the google search auto complete feature to illustrate this fact. And that my friends best explains why my focus here on slabbed has been explaining the myriad of ways certain insurers f*cked us after Katrina while Nowdy’s focus has been reconciling the differing viewpoints so everyone can kiss and make up.  😉

sop

Have we seen the end of rational economics? Behavioral Economics explains the Scheme.

With the very recent publishing of yet another list of the worst bad faith insurers, this time by the American Association for Justice, the topic of why the public holds these companies in such low esteem again becomes topical.

We’ve well chronicled the dirty tricks and underhanded tactics these socially deviant companies employ to satisfy their relentless thirst for profit but that is not the thrust of this post. Rather, in keeping with today’s theme of “the why” as Nowdy linked my comment on the Yahoo Allstate message board in her Daily slab post I’m expanding on the concepts from that post and in the process explain one of the possible reasons why an insurer with a good reputation in Chubb will be inherently more profitable than one with a bad reputation in Allstate.

When I first met Nowdy and we began to get to know each other I told her my favorite hobby was investing and to that end, the fields of Game Theory and Behavioral Finance were of great interest to me along with their political first cousin Public Choice theory, the latter two economic disiplines being relative newcomers to our body of collective knowledge.

After 20 months of writing here at slabbed I finally get to indulge those passions and perhaps educate our readers on the mechanisms at work that resulted in what became known here on Slabbed as The Scheme, a series of posts by Nowdy that explained the bad behavior of the insurers here after Katrina. In short not only do we tell you who dunnit but also how it could happen in a large organization like State Farm, Nationwide, USAA, Allstate and others. We start with the July-August edition of the Harvard Business Review and Dan Ariely’s article The End of Rational Economics:

In 2008, a massive earthquake reduced the financial world to rubble. Standing in the smoke and ash, Alan Greenspan, the former chairman of the U.S. Federal Reserve once hailed as “the greatest banker who ever lived,” confessed to Congress that he was “shocked” that the markets did not operate according to his lifelong expectations. He had “made a mistake in presuming that the self-interest of organizations, specifically banks and others, was such that they were best capable of protecting their own shareholders.” Continue reading “Have we seen the end of rational economics? Behavioral Economics explains the Scheme.”

Pump Pump PUMP Allstate Up: Dump Dump See Allstate Crash

A fool and his money are soon parted.

Evidently Jon Najarian handled the pump part, now behold the dump on the announcement of Allstate’s Q1 loss. CNBC strikes again!

Predictably the sheeple that were fleeced are now taking exception. Its not that good info wasn’t posted, it was simply ignored thus my lack of sympathy.

To those that have no choice but hold due to lockups etc, you have my condolences.  Might I suggest hedging with puts next time.

sop

The End Result of Regulatory Capture: Madoff and Another Bailout

I’ve been too busy too keep up with the news but the spectacular implosion of the Madoff hedge fund caught my attention if only because it serves up another great example of regulators being asleep at the switch at the US Securities and Exchange Commission instead of protecting the investing public from fraudsters such as Bernard Madoff.  From what I’ve read and heard Madoff’s so called investment bank was nothing more than ye ole Ponzi Scheme.  Even better the toothless watchdogs at the SEC looked at Madoff multiple times and found nothing wrong.

threewisemonkey

I’ve written about the problems with regulatory capture many times here on slabbed, from our own Mississippi Insurance Commissioner Mike Chaney to big problems at the SEC involving John Mack, CEO of Morgan Stanley.  The end result is never good for the public though Mr Mack’s $40 million dollar bonus must have been nice for him.

As for the group of very distinguished bagholders that resulted from Mr Madoff’s get rich quick Ponzi Scheme, they may just get a bailout according to this AP story carried by the Sun Herald.

A federal judge on Monday threw a lifesaver to investors who may have been duped in one of Wall Street’s biggest alleged frauds, saying they need the protection of a special government reserve fund set up to help investors at failed brokerage firms.

U.S. District Judge Louis L. Stanton ordered that clients of Bernard Madoff’s private investment business seek relief under a federal statute created to rescue cheated investors. Stanton also ordered that business be liquidated under the jurisdiction of a bankruptcy court and named attorney Irvin H. Picard as trustee to oversee that process. Continue reading “The End Result of Regulatory Capture: Madoff and Another Bailout”

Jim Grant Writes About Confidence Game

I saw this in the Saturday Wall Street Journal and is well worth linking here. Our readers may recall my affinity for Jim Grant’s newsletter which I highly recommend. Jim doesn’t offer solice to the sleepwalkers or comfort to the many human ostriches who buried their heads to this budding crisis. Instead he focuses on the human behavior that got us here:

In disclosing plans to buy a quarter-trillion dollars of bank stock in the name of the American taxpayer, Treasury Secretary Hank Paulson harped on confidence. “Today, there is a lack of confidence in our financial system, a lack of confidence that must be conquered,” he said on Tuesday.

What Mr. Paulson did not get around to mentioning was the excess of confidence that preceded the shortfall. Continue reading “Jim Grant Writes About Confidence Game”