The Missing Risk Premium: Why Low Volatility Investing Works by Eric Falkenstein

CHAPTER 6 Why Envy Explains More than GreedRead more at location 2143

Note: 6@@@@@@@@@@@@@@@@@@ RAGIONI X PRIVILEGIARE LA SPIEGA DELL INVIDIA. L INVIDIA RENDE IL ROSCHIO CONTESTUALE Edit

a relative utility function can explain the general absence of a risk premiumRead more at location 2146

Note: INVIDIA E RISK PREMIUM Edit

6.1 Robust Hard WiringRead more at location 2153

Note: HARD WIRED... AVVERSIONE IMPLICA UTILITÀ DECRESCENTI MA QS NN È IL CASO. SOLUZIONE: UTILITÀ RELATIVA Edit

evolution favors a relative utility function as opposed to the standard absolute utility function, and the evidence for this is found in psychology, ethology, anthropology, and neurology.Read more at location 2155

Note: EVOLUZIONE Edit

The instinctive utility that guides individual decisions under all time periods is presumably the same.Read more at location 2158

Note: UTILITÀ COSTANTE NEL TEMPO PORTAFOGLIO COSTANTE... INVECE Edit

It seems reasonable to assume the fraction of investor portfolios allocated to risky assets has remained stableRead more at location 2160

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constant—thatRead more at location 2163

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This is necessary if real interest rates are constant over the past century, as most researchers believe.Read more at location 2163

Note: INTERESSI COSTANTI Edit

This specific utility function is necessary so that when we think of a risky investment today, it means about the same thing as a risky investment to our grandparents.Read more at location 2166

Note: SIAMO COME I NS NONNI? Edit

Matthew Rabin highlighted that any risk-averse utility function extrapolates poorly. He proved that any person who turns down wagers where he stands to lose $100 or gain $110, each with 50 percent probability, must also turn down 50–50 bets of losing $1,000 or gaining any sum of money.Read more at location 2168

Note: EVIDENZA: FUNZIONI RISCHIO CONTENT SPECIFIC Edit

This is clearly absurd,Read more at location 2170

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The downside is so much more curved than the upside that the differences in utility on the upside basically become indistinguishable above a certain point, where having $1 million or $1 billion would feel the same to someone currently with only $10,000.Read more at location 2176

Note: UTILITÀ DECRESCENTE Edit

Assume you are the Intelligent DesignerRead more at location 2180

Note: INTELLIGENT DESIGNER Edit

The objective you face is to give these agents a goal, such that they are motivated to be fruitful and multiply over generations.Read more at location 2183

Note: OBBIETTIVO Edit

you can add a mechanism so that agents feel hungry if low on calories and lustful when in the presence of mating opportunitiesRead more at location 2184

Note: IL MECCANISMO Edit

you don’t want these agents eating or having sex so much they ignore everything else, such as taking care of their children,Read more at location 2185

Note: REGOLATORE Edit

a governor that signals the desire to want more “stuff”, which ensures that these beings don’t become lazy and unproductive once basic levels of material wants are satisfied,Read more at location 2187

Note: OLTRE LA SODDISFAZIONE Edit

even though compared to average wealth at the start of their existence, they are all fabulously wealthy compared to ancestors five generations prior.Read more at location 2188

Note: I PIÙ RICCHI AVIDI QUANTO I POVERI Edit

The CRRA utility function is needed so we allocate about the same amount of our wealth to risky assets over generations but implies we should be at a much higher level of happiness relative to our grandparents, which seems counterfactual (see section 6.2 below on the Easterlin paradox).Read more at location 2192

Note: EASTERLIN PARADOX Edit

A solution that would generate a more stable level of overall happiness, and still incent them to better themselves, would be to have a little governor that simply says try to be above average, to have a higher percentile of wealth among your peers.Read more at location 2194

Note: OBBIETTIVO DI ID: TRY ABOVE AVERAGE Edit

feedback mechanismRead more at location 2196

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A relative-status utility function is more of an evolutionary stable strategy than an absolute functionRead more at location 2200

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In a similar way, our sensitivity to wealth would be much more robust if we made sure agents merely monitor their relative output, not absolute.Read more at location 2209

Note: SENSIBILITÀ ALLA RICCVHEZZA Edit

Like God setting up the laws of the universe and letting them run, here the designer merely has humans want to do better than their peers, and they will continue to build, create, and multiply regardless of the technology shocks they face.Read more at location 2211

Note: ID Edit

Biologists Insel and Fernald (2004) argued that because information about social status is essential for reproduction and survival, specialized neural mechanisms have evolved to process social information,Read more at location 2215

Note: BIOLOGIA Edit

Neurologists have done experiments and found thinking about other people is biologically concentrated in a specific area of the brain (the right temporo-parietal junction), and damaging this region diminishes one’s ability to empathize and this is profoundly debilitating.Read more at location 2218

Note: NEUROLOGI Edit

In the late 1980s, researchers discovered mirror neurons that fire both when an animal acts and when the animal observes the same action performed by another.Read more at location 2222

Note: NEURONI SPECCHIO Edit

This is tied to the incessant mimicry in humans,Read more at location 2224

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Thinking relatively and socially is hardwired.Read more at location 2226

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In the book I’ll Have What She’s Having, the anthropologist authors argue that we mostly copy everyone else: first our parents, then our peers, then anyone who seems to be doing well.Read more at location 2227

Note: COPIARE Edit

Mark Pagel takes this a step further by stating emulating others is the basis for almost every idea we have,Read more at location 2230

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Most innovators spend their formative years producing derivative work: Bob Dylan’s first album contained 11 cover songs, comedian Richard Pryor began his career doing imitations of Bill Cosby,Read more at location 2234

Note: ANCHE I GENI COPIANO Edit

anthropologist Dan Brown documented a concern for status (what I am calling envy) as a “human universal”—whereas greed is not.Read more at location 2239

Note: L INVIDIA È UN UNIVERSALE. L EGO NO Edit

Status relates to longevity and health, even when factors such as income and education are controlled for.Read more at location 2241

Note: STATUS E SALUTE Edit

Lastly, greed and envy are in the seven deadly sins, but envy is more prominent in the Ten Commandments.Read more at location 2244

Note: L INVIDIA È UN PECCATO PIÙ GRAVE NEI COMANDAMENTO Edit

6.2 The Easterlin ParadoxRead more at location 2246

Note: TITOLO O EASTERLIN Edit

A fundamental problem with the standard utilityRead more at location 2247

Note: PROBLEMI CON L UTILITÁ STANDARD Edit

The Easterlin paradox (1974) highlighted that although within a society rich people are happier than poor people, rich countries are not much happier than poor countries,Read more at location 2249

Note: PERSONE E PAESI Edit

as a population gets richer, they do not get happier.Read more at location 2250

Note: DIVENTARE RICCHI E DIVENTARE FELICI Edit

A good example of this is Japan, where per capita income rose 500 percent from 1958 through 1987, yet there was little change in subjective well-being.Read more at location 2251

Note: GIAPPONE Edit

Chinese real income has risen 250 percent from 1994 through 2006, and surveyed happiness actually declined.Read more at location 2252

Note: CINA Edit

Most Western countries experienced 200 percent growth in per capita income from 1960 through 2007, without any obvious increase in happiness.Read more at location 2253

Note: OCCIDENTE Edit

Easterbrook’s The Progress Paradox, David Myers’s The American Paradox, and Barry Schwartz’s The Paradox of Choice,Read more at location 2255

Note: LIBRI Edit

Studies using functional magnetic resonance imaging (fMRI) to monitor brain activity found that social context is an important factor in processing rewards.Read more at location 2261

Note: FMRI Edit

It is important to note that Wolfers and Stevenson (2008) dispute the assertion that happiness has not increased over the past one hundred years,Read more at location 2265

Note: WOLFERS Edit

noticing that the wording of the question has changed over the decades.Read more at location 2266

Note: WORDING DELLE INTERVISTE Edit

If you adjust the time series for the way the question is worded, they found that happiness in Europe and Japan has significantly increased.Read more at location 2269

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even Wolfers and Stevenson still conceded that in the United States, Korea, and China, happiness has not trended upward over the past thirty-five years,Read more at location 2270

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taking a view of the broader scope of data and then looking at the best underlying narrative is so important, because the data are never definitive within one case, regardless of the power of the statistical technique.Read more at location 2274

Note: GUARDARE ALLA STORIA PIÙ CHE AI NUMERETTI Edit

6.3 Politics of EnvyRead more at location 2277

Note: TITOLO Edit

It is clear from extreme examples such East and West Germany and North and South Korea that individualism is more efficient than the more materially egalitarian socialist economies.Read more at location 2279

Note: INDIVIDUALISMO ED EFFICIENZA Edit

classicist Moses Finley liked to say, all revolutionary movements had a single program, “cancel the debts and redistribute the land,” the ultimate economic equalizer.Read more at location 2281

Note: PROGRAMMA RIVOLUZIONARIO: IL CONTRARIO DELL EFFICIENZA Edit

Anthropologist Christopher Boehm at UCLA notes that dominance hierarchies are a defining characteristic of every known civilizationRead more at location 2284

Note: GERARCHIE OVUNQUE Edit

It is a curious fact that dominance hierarchies are rare in the ethnographic literature describing hunting-and-gatheringRead more at location 2286

Note: RACCOGLITORI Edit

Boehm proposed the idea of a reverse dominanceRead more at location 2289

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all the lesser males in a group who were in danger of being dominated by an alpha male would form a reverse dominance hierarchy to put the would-be tyrant in his place.Read more at location 2291

Note: UOMINI BETA Edit

In this way, dominance behavior, though not eliminated, could be moderated and dispersed. Unlike gorillas, humans can do things such as get up in the middle of the night and use a spear to dispatch the most physically intimidating personRead more at location 2292

Note: CAPACITÀ DI ASSOCIARSI Edit

Leaders generally maintain their positions not by dominating but by consolidating majority opinion.Read more at location 2294

Note: IL LEADER TRA GLI UOMINI Edit

As anthropologist Harold Schneider put it, “All men seek to rule, but if they cannot, they seek to be equal.”Read more at location 2297

Note: UGUAGLIANZA SECOND BEST Edit

!Kung bushmen will mock the gift of someone because they see gift giving as an attempt to signal superior status.Read more at location 2298

Note: DONO Edit

Politics is fundamentally about redistribution and efficiency, usually with the latter a pretext for the former because no one is against efficiency.Read more at location 2302

Note: ESSENZA DELLA POLITICA Edit

The focus on outcomes and not rights is based on the idea that the market is generally a rigged game, and people become unequal mainly through forces beyond their controlRead more at location 2304

Note: FORTUNA Edit

top-down directives are generally even less fair for reasons outlined by Friedrich Hayek among others.Read more at location 2306

Note: POLITICA ANCORA PIÙ ARBITRARIA Edit

6.4 BenchmarkingRead more at location 2308

Note: TITOLO. SE BENCH ALLORA UTILITÀ RELATIVA Edit

Many people are bored by talk of utility and philosophy but readily understand benchmarking. In equity mutual funds, the practice is taken as a given—the top funds are generally given top honorsRead more at location 2309

Note: LA PRATICA DEI GESTORI Edit

obvious that adding market timing to stock selection was an inferior strategy. In the index next toRead more at location 2312

Note: TIMING Edit

if everyone is benchmarking, the result is no general risk premium,Read more at location 2314

Note: NO RISK PREMIUM Edit

Markowitz said, “Let’s look back at the last bubble—the tech bubble. People would look around and see other people making money much faster than they were, so they decided they would imitate them—a natural thing.”Read more at location 2327

Note: MIMICRY Edit

In other words, all the key academics who developed the standard model act as if they were maximizing a relative status utility function, not the one holding up their seminal papers.Read more at location 2330

Note: ACCADEMICI CHE RAZZOLANO MALE. Edit

risk, intuitively, is a return relative to a benchmark.Read more at location 2332

Note: BENCHMARK=> UTILITÁ RELATIVA Edit

6.5 Virtue Always in ModerationRead more at location 2334

Note: TITOLO... IL CONCETTO DI RISK PREMIUM È INCOMPATOIBILE COL RESOCONTO DELLE VIRTÙ Edit

Risk taking is synonymous with the virtue of courage.Read more at location 2335

Note: RISCHIO E CORAGGIO Edit

Most courage is not related to physical courage today because warfare and violence have decreasedRead more at location 2336

Note: CORAGGIO E VIOLENZA Edit

courage is even more needed intellectually when we reject the opinions of others. Often this puts one in the position of being a crank, like those who think the moon landings were faked, but other times we have heroes like Nikolai Tesla, who fought the famous Thomas Edison advocating the more efficient alternating over direct current.Read more at location 2337

Note: CORAGIOSI: PAZZI O EROI. LUNA. TESLA VS EDISON Edit

The four classic virtues are temperance, prudence, courage, and justice,Read more at location 2344

Note: 4 VIRTÙ Edit

Roman Stoic Seneca argued that all virtues are the result of prudence.Read more at location 2347

Note: SENECA Edit

Aristotle defined a virtue as a balance point between a deficiency and an excess of a trait.Read more at location 2350

Note: GIUSTO MEZZO Edit

moderation in all things.Read more at location 2352

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Tolerance is a virtue, but too much tolerance can show a lack of integrity or courage.Read more at location 2352

Note: ESEMPIO Edit

different virtues conflict at extreme points, which is why Plato stated that virtues cannot exist independently but rather like the ingredients that make a cake: all in the right amounts.Read more at location 2357

Note: CONFLITTO Edit

Note: LA TORTA Edit

There does appear to be a large wage premium differential for college graduates—about 80 percent—though it is unclear whether this reflects signaling or true increases in value. Nevertheless, this income correlation breaks down at higher levels, where PhDs involve another five years work without much increase in earnings compared to stopping at a bachelor’s degree.Read more at location 2363

Note: RELAZIONI NN LINEARI Edit

Consider anger. Aristotle noted that being angry was easy, “but to be angry with the right person and to the right degree and at the right time and for the right purpose, and in the right way”, is not easy.Read more at location 2370

Note: ANALOGIA DELLA RABBIA. IL CONTESTO È TUTTO Edit

An example of how a virtue as an explanation wealth can be wrong is the premium to courage that supposedly explained the natural position of the aristocracy.Read more at location 2373

Note: RISK PREMIUM PRETESO: ARISTOCRAZIA Edit

nobility was based on courage.Read more at location 2376

Note: MERITO: IL CORAGGIO Edit

aristocracy prior to 1900 generated their legitimacy via their willingness to lead groups into battle, often needlessly.Read more at location 2378

Note: GUERRA Edit

While they subsequently lost proportionately more of their sons than those of other classes in WW I, the decline of the aristocracy continued unabated after the Great War.Read more at location 2380

Note: DECLINO Edit

The lower classes felt no sense of gratitude toward the aristocracy, having lost enough themselves.Read more at location 2382

Note: RISENTIMENTO DEL POPOLO Edit

Battlefield courage is admirable, but it is not sufficiently rare to generate privileged status;Read more at location 2383

Note: MORIRE NN BASTA: TUTTI DESIDERANO MORIRE. NO RISK PREMIUM Edit

many would accept a probability of death for such success, so this “courage premium” was not a real equilibrium result, as WW I showed.Read more at location 2386

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Courage was a necessary, not sufficient, condition for acquiring power. Similarly, risk taking is a necessary condition to achieving riches, but that does not logically imply a positive general relation.Read more at location 2387

Note: CORAGGIO: CONDIZIONE NECESSARIA NA NN SUFF Edit

In standard financial theory, if you take risk, on average you will get rich quicker than others,Read more at location 2389

Note: ORTODOSSIA: PRENDI RISCHI E ARRICCHISCITI COL PREMIO DI RISCHIO Edit

A lot of our bad intuitions arise from bad analogies, and here the analogy is that because risk taking at some level has a positive return, it generalizes to any level of risk taking.Read more at location 2394

Note: L ERRORE Edit

Consider that professional athletes are both wealthy and risk takers. They have high levels of testosterone, which is correlated with higher-than-average financial risk taking.Read more at location 2397

Note: ATLETI Edit

The New York Times estimated that 60 percent of NBA players are broke only five years after retirement, even though the average salary was $5.85M in 2009.140 If mere risk preferences were sufficient, they should have above-average returns, but in reality their poor returns are what happens when risk taking is combined with a lack of prudence.Read more at location 2402

Note: PRENDERE RISCHI CON PRUDENZA Edit

Shane FrederickRead more at location 2406

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That is, framed probabilistically, the lower the cognitive score, the greater the chance of not accurately framing expected values.Read more at location 2408

Note: INTELLIGENZA E VALORI ATTESI Edit

This suggests less intelligent people will make more analytic mistakes,Read more at location 2409

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Grinblatt et al. (2011),Read more at location 2410

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They found that IQ was positively correlated with equity market participation, and higher IQ investors tended to be more diversified with lower beta stocks.Read more at location 2412

Note: STRATEGIA HIGH IQ Edit

If risk were the mere pain of loss, the same pain experienced by others, it would be a lot like exposing oneself to working in smelly occupations.Read more at location 2417

Note: IL RISCHIO N È IL MALE Edit

Yet septic tank work does not pay well, and the untouchables in India have long had a monopoly on cleaning sewers manually without much compensation; people get used to a lot of things.Read more at location 2418

Note: ANALOGIA CON GLI INTOCCABILI Edit

As Dan Pink noted, researchers have documented that monetary incentives work pretty easily for straightforward mechanical tasks such as keeping one’s hand in hot water for extended periods, while monetary incentives tend to not work well for creative goals.Read more at location 2420

Note: LAVORI MECCANICOI E CREATIVI Edit

Society does not pay people merely for exposing themselves to bad things such as death, smelliness, or portfolio volatility.Read more at location 2423

Note: IL RISCHIO PAGATO N È FACILE DA DEFINIRE Edit

Just like all the other virtues, risk must be pursued with moderation and prudence applied to the trade-offs with other virtues.Read more at location 2424

Note: CONCLUSIONE Edit

6.6 ConclusionRead more at location 2426

Note: TITOLO Edit

If we do not see risk premiums in general, rather than piecemeal explanations a more parsimonious solution is to change this fundamental assumption.Read more at location 2428

Note: CAMBIARE L ASSUNTO Edit

The movement from greed to envy or from absolute to relative wealth can get you there.Read more at location 2429

Note: L ALTERNATIVA Edit

only the relative wealth assumption is consistent with a missing risk premium.Read more at location 2433

Note: UTILITÀ RELATIVA Edit

Relative utility seems more evolutionarily robust, more consistent with what makes us happy, more consistent with ubiquitous benchmarking, and more consistent with research from neuroscience, ethology, anthropology, and psychology.Read more at location 2433

Note: RIASSUNTO Edit

The standard utility function, with its implication of a linear reward function, would be unprecedented within the context of all our other virtues.Read more at location 2435

Note: INCOMPATIBILITÀ COL RESOCONTO ORTODOSSO DELLE VIRTÙ Edit

CHAPTER 7 Why We Take Too Much Financial RiskRead more at location 2437

Note: 7@©©©©©©©©©©©©©©LA NATURA CI VUOLE RISK TAKER I SETTE MOTIVI CHE CI ONDUCONO A PRENDERE RISCHI OVERCONFIDENCE PREFERENZE IDENTITÁ INNAMORAMENTO FAMA FUND MANAGER TOP TEN SEGNALARE ABILITÀ INFORMAZIONE ANEDDOTO ASTA MODA 1) MOTIVI IDENTITARI 2) OVERCONFIDENCE 3) CONOSCENZA ANEDOTTICA 4) VOGLIA DI SEGNALARSI 5) NATURA MASCHILE. RISCHIO SENZA ABILITÀ 6) ASTA 7) VOGLIA DI GREGGE Edit

If risk taking did not pay off, presumably no one would do it because, by definition, risk is something we do not like.Read more at location 2439

Note: IL RISCHIO NN CI PIACE Edit

Risk taking, however, is unavoidable, and it does pay off, just not in the way implied by the standard model, where incremental amounts of risk taking, which is the same for everyone, pays off.Read more at location 2441

Note: IL RISCHIO PAGA. MA NN QLCN RISCHIO COME DICE CAPM Edit

Consider the optimal stopping problem,Read more at location 2442

Note: IL PROBLEMA DELLA FERMATA Edit

Assume you are looking to get married and have kids, and your lifetime and fertility are finite.Read more at location 2444

Note: DEVI SPOSARTI. QUANDO SMETTI DI CERCARE? Edit

The question is about the optimal strategy (stopping rule) to maximize the probability of selecting the best mate,Read more at location 2447

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your choice relative to the optimal choice seen by an omniscient deity is invariably inferior.Read more at location 2451

Note: INEVITABILMENTE SUBOTTIMI Edit

Both choosing to move on or staying with what you have involves risk; risk cannot be avoided.Read more at location 2452

Note: RISCHIO INEVITABILE Edit

Psychologist Roy BaumeisterRead more at location 2456

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historically, 80 percent of females have reproduced, but only 40 percent of males have passed on their genes. The rest of the males have been genetic dead ends.Read more at location 2456

Note: DONNE E UOMINI SENZA FIGLI Edit

Males have to beat out other males to get access to females. Thus men built ships and traveled to far-off lands because those were the guys who had more children, whereas a bunch of women could bear children just as easily staying put.Read more at location 2459

Note: L UOMO DEVE PRENDERE PIÙ RISCHI Edit

Everyone’s male ancestors have been disproportionately risk takers;Read more at location 2461

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not taking risk is genetic suicide,Read more at location 2462

Note: SUICIDIO GENETICO IL MONDO SENZA INVIDIA Edit

Risk takers dominate our lives via their disproportionate effect on our genes and their influence on our technology and culture.Read more at location 2463

Note: I DOMINATORI Edit

One might say this is not relevant to markets where rational traders at the margin determine prices and returns.Read more at location 2469

Note: IL RISCHIO AZIONARIO È ASSURDO? Edit

stupid investors do influence equilibriumRead more at location 2471

Note: LA PRESENZA DELLO STUPIDO Edit

given the multidimensional complexity of any asset class, where different trading tactics and complementary positions generate very different returns,Read more at location 2472

Note: ATTI E REGOLE. DI SOLITO SIAMO RAZIONALI NELLE REGOLE NN NEGLI ATTI Edit

The economist Robert Aumann discussed the difference between rule and act optimality and gave the following example.148 In the ultimatum gameRead more at location 2475

Note: AUMANN SU UT. REGOLE E ATTI. ULTIMATE GAME Edit

Most people reject an offer less than 20 percent of the pool. Economists see this as irrational because there is no upsideRead more at location 2480

Note: RIFIUTARE L OFFERTA. IRAZIONALE? Edit

but Aumann sees it as rational in the general sense that one does not want to appear a chump, even if the appearance is just to oneself. The chump rule overrides our act rationalityRead more at location 2482

Note: C È XRÒ UNA RAZIONALITÀ DELLE REGOLE Edit

humans have evolved to follow rules, as it is simply too costly to go through life without such heuristics.Read more at location 2483

Note: LA RAZIONALITÀ DEPLL AVERE REGOLE Edit

Our brains are only so big;Read more at location 2485

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People have an intuitive rule that risk taking is good.Read more at location 2487

Note: LA REGOLA DEL RISCHIO Edit

People should see risk taking as a process of self-discovery, becoming the best you can in that which you are best suited.Read more at location 2489

Note: RISCHIO E SCOPERTA Edit

If some risk taking demands nothing of you other than willingness, it is surely foolhardy because such willingness is hardly in short supply, so these types of risks do not generate higher-than-average-returns as a general rule.Read more at location 2491

Note: X I RISCHI SENZA ABILITÀ C È GRANDE DOMANDA Edit

7.1 Investors Ignoring the Standard TheoryRead more at location 2493

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Textbook investment choices are usually completely defined and reducible to simple logic.Read more at location 2497

Note: ORTODOSSIA E LOGICA PROB. Edit

Yet it is precisely because real risk taking is quite different, making different decisions than the consensus based on a radically different interpretation of the objective odds implicit in the investment, that we experience anxiety.Read more at location 2500

Note: PERCHÈ SIAMO ANSIOSI QUANDO RISCHIAMO? Edit

In practice, financial risk taking involves a great deal of anxiety, not about the realization of objective odds but rather sensing whether or not one has correctly ascertained the correct odds, what is called “ambiguity aversion.”Read more at location 2502

Note: NON È LA PRESENZA DI UN RISCHIO A RENDERCI ANSIOSI MA LA POSSIBILITÀ DO DEC IDERTE MALE. SE SCELGO SU UN DADO SONO MENO ANSIOSO Edit

Classic investors like J.P. Morgan and Benjamin Graham distinguished between gambling and investing, the former being simple exposure to randomness, the latter something amenable to special insight and intuition.Read more at location 2506

Note: GAMBLING E INVESTING Edit

Note: INTUIZIONE Edit

Economists have long known the behavioral implications of the CAPM were incorrect. Investors are underdiversified,Read more at location 2509

Note: PERCHÈ NN DIVERSIFICHIAMO COME CI CHIEDE CAPM? Edit

25 percent of investors have only one stock, and more than 50 percent owned fewer than three stocks.Read more at location 2511

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consider that brokerages recommend only stocks with above-average returns.Read more at location 2513

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In practice, no one, not even the high priests of this view, act as if their theory were true whenever they discover a higher-than-average returning strategy.Read more at location 2529

Note: NESSUNO SI VOMPORTA SECONDO L ORTODOSSIA Edit

doing things that generate above average returns because of perceived systematic errors made by the masses.Read more at location 2532

Note: ASSUNTO: GLI ALTRI SONO STUPIDI Edit

Of course such person could be making an error himself, which is why these choices produce anxiety;Read more at location 2533

Note: ANSIETÀ ED ERRORI Edit

Below are the several reasons that could explain this preference for highly risky assets.Read more at location 2540

Note: DI SEGUITO: XCHÈ AMIAMO I RISCHI IRRAZIONALI? Edit

7.2 Winner’s CurseRead more at location 2541

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The “wisdom of crowds” applies to the means,Read more at location 2542

Note: SAGGEZZA DRLLA MEDIA Edit

In the 1950s, they came up with the term “winner’s curse” to describe the fact that for auctions of offshore oil fields, winners were generally cursed by winning.Read more at location 2545

Note: VINCENTI DELLE ASTE E LORO ROVINA Edit

If we assume that the average bid is accurate, then the highest bidder overestimates the item’s value. Thus the auction’s winner is likely to overpay.Read more at location 2547

Note: ASTE SUPERPAGATE Edit

Over time, Miller’s winner’s curse argument has become more popular for several reasons.Read more at location 2558

Add a note

Interestingly, Ed Miller was the first to emphasize the efficacy of low-beta investing in a Journal of Portfolio Management article in 2001, noting that if the winner’s curse was responsible for the poor performance of high-beta stocks; the risk-reward ratio for low-beta stocks was obviously higher.Read more at location 2565

Note: STRATEGIA LOW BETA Edit

The effects of the winner’s curse or any of the following theories that lead to higher demand for volatile assetsRead more at location 2572

Add a note

7.3 OverconfidenceRead more at location 2578

Note: OVERCONFIDENCE Edit

Perhaps the most celebrated overconfidence anecdote is Svenson’s (1981) finding that 93 percent of American drivers rate themselves as better than the median.Read more at location 2579

Note: GUIDI MEGLIO DELLA MEDIA? Edit

94 percent of college professors think they are above-average teachers;Read more at location 2581

Note: ALTRI ESEMPI Edit

90 percent of entrepreneurs think that their new business will be a success; 98 percent of students who take the SAT say they have average or above-average leadership skills.Read more at location 2582

Add a note

Barber and Odean (1999) used overconfidence to explain why men, who psychological studies show are more overconfident than women, trade too much.Read more at location 2584

Note: L OVERCONFIDENCE CI FA COMMERCIARE DI PIÙ Edit

People who think they are better than average at stock picking or picking mutual funds, will necessarily focus on the highly volatile stocks that generate better rewards for their prescience:Read more at location 2586

Note: VERSO LE VOLATILI Edit

This involves constantly inflating our achievements and abilities and rationalizing our mistakes. For example, he noted that children not only lie, but lie more the higher their IQ.Read more at location 2593

Note: MENTIRE A SE STESSI IN CASO DI ERRORE Edit

Economist and Psychologist Danny Kahneman states this is the one bias he most wants his children to have because of its myriad benefits.Read more at location 2601

Note: I BENEFICI DRLL OTTIMISMO Edit

7.4 Risk-Loving PreferencesRead more at location 2608

Note: TITOLO AMANTI DEL RISCHIO Edit

Friedman and Savage (1948) were the first to really apply utility functions to financial decision making, and, interestingly, it was not the concept risk aversion that they concentrated upon but rather the paradox that people liked to gamble and buy insurance.Read more at location 2609

Note: UTILITÀ DEI GIOCATORI. UN CASO PARTICOLARE? Edit

Such a utility function is also present in Kahneman and Tversky’s prospect theory,Read more at location 2612

Add a note

Consider that one of prospect theory’s key implications is that our aversion to losses is much stronger than our enjoyment of gains: the basic frame for our utility functions is at our current wealth, whatever that is. On its face, this suggests not so much risk loving but loss hating,Read more at location 2617

Note: LOSS AVERSION ? Edit

This makes people willing to pay for insurance to avoid big losses, and also why they gamble, because they overweight the small probabilities of winning large amounts.Read more at location 2619

Note: LOSS AVERSION IMPLICA ASSICURAZIONI RISCHIOSE ( Edit

Risk loving shows up in the literature on skewness preference, where investors presumably pay a premium for assets with right (up) payoff skewness.Read more at location 2622

Note: PREFERENZE ASIMMETRICHE ???? Edit

Risk loving and overconfidence are difficult to distinguish in practice, as they both would explain why people prefer highly volatileRead more at location 2630

Note: OVERCON. E RISK LOVING Edit

7.5 Information CostsRead more at location 2640

Note: TITOLO COSTI D INFORMAZIONE Edit

Stocks with higher volatility generate more news than less volatile firms.Read more at location 2641

Note: IL RISCHIO FA NOTIZIA Edit

Stocks that are in the news generate lots of information that fiduciaries can use to sell their ideas to clients.Read more at location 2642

Note: PUBBLICITÀ E SEDIUZIONE Edit

it is much easier to talk about something in the news than something where everyone is fairly ignorant,Read more at location 2644

Add a note

institutional preference could be it is easy to form an opinion on companies that are moving around, generating lots of commentary and analysis.Read more at location 2648

Note: FARSI CONOSCERE Edit

7.6 Alpha DiscoveryRead more at location 2656

Note: TITOLO ALPHA Edit

Objective tests serve two purposes: to inform the test taker and those observing him. To outsiders, this is signaling and serves as useful information as to whether this person should be entrusted with greater financial responsibility,Read more at location 2657

Note: ALPHA È UN BENE IN SÈ MA ANCHE UN SEGNALE Edit

to see if an investor is able to generate a superior return. That is, does she have alpha? Many people believe they have an ability to pick stocks successfully.Read more at location 2660

Add a note

if people believe that their short-run performance signals alpha, that information would be considered valuable regardless.Read more at location 2662

Note: ALPHA SIGNALLING Edit

This biases investors toward the more volatile assets so they can assess their investing alpha more clearly,Read more at location 2663

Note: PIÙ RISCHIO Edit

Many people trade as if they might have alpha.Read more at location 2664

Note: COMPORTARSI COME SE Edit

7.7 Representativeness BiasRead more at location 2667

Note: TITOLO Edit

The idea is base rate information is neglected in a Bayesian sense relative to the ease to which some anecdotes are recalled.Read more at location 2669

Note: LA FORZA DELL ANEDDOTO Edit

Almost by definition, any stock that rose tenfold was highly volatile over much of its meteoric rise. This is implied in the saying, “To get rich, you have to take risk.”Read more at location 2671

Note: CHI NN RISICA NN ROSICA Edit

The problem with this thinking is that one needs to find all the stocks that were like Apple in 1977 or Microsoft in 1986,Read more at location 2674

Note: L INGANNO Edit

Steve Jobs and Bill Gates, both of whom dropped out of college, also contain this bias. CertainlyRead more at location 2677

Note: DROP OUT DI LUSSO Edit

People under the presumption that risky assets are in the class of assets that makes people rich are operating under this bias.Read more at location 2680

Note: BIAS Edit

7.8 Convex Payoffs to ProfessionalsRead more at location 2683

Note: TITOLO Edit

The flow of investor funds is a highly convex function of fund performance: really high for the top decile but then evening out to almost indifference below the 50th percentile, rather like a call option.Read more at location 2684

Note: SI GUARDA SOLO AL TOP Edit

The nature of this call-option type mechanism is highlighted by the standard nature of quarterly and annual reviews of portfolio managers. Generally, a top ten list is created based solely on returns.Read more at location 2692

Note: TOP TEN Edit

Bloomberg Magazine actually highlights analysts by their most profitable picks,Read more at location 2695

Note: RANKING BIAS Edit

7.9 ConclusionRead more at location 2698

Note: CONCLUSIONE Edit

Those uncertain choices we make with incomplete information are not confined to finance, and indeed surveys show that the most prominent regrets in people’s lives are not portfolio choices but choices about careers, romance, and parenting.Read more at location 2703

Note: PENTIMENTI. NN NELLA FINANZA Edit

La raffica dei boh

QUADRO 1

Cosa vuoi fare da grande? Boh.

Cosa vuoi fare dopo il Liceo? Boh.

Molti ragazzi sono così: “sdraiati”. Come consigliare lo “sdraiato”? Come reagire alla raffica dei suoi “boh”? Come aiutarlo quando le scelte di vita cominciano a fare capolino e il tempo dei selfie è scaduto?

QUADRO 2

Come si diventa ricchi in borsa?

Ortodossia: “chi non risica non rosica”.

In altri termini: alle gente non piace rischiare ma alcuni rischi non sono  eliminabili per cui la gente paga un premio per scrollarseli di dosso: assumiteli tu e diventa ricco incassandone il relativo premio.

QUADRO 3

Quando gioca la Juve mi sale l’ansia: se vince una strana  gioia mi scoppia dentro ma una sconfitta puo’ guastarmi l’intera settimana. Un bel rischio.

Potrei facilmente ridurlo scommettendo contro la Juve la cifra che ritengo più opportuna. Con Winga e Beta&Win posso farlo in tempo reale. Eppure non lo faccio, perché?

CONSIDERAZIONI

Q1 è rilevante per Q2 poiché la Borsa è il regno degli “indifferenti”: l’unica cosa che conta è guadagnare, altri valori non ce ne sono. E l’ ”indifferente” è parente stretto dello “sdraiato”.

Q3 è rilevante per Q2 poiché dimostra che l’ortodossia è sbagliata: non tutti i rischi sono uguali poiché non è sempre vero che che la gente se puo’ lo evita. A volte è normalissimo per noi rischiare, anche quando il rischio sarebbe comprimibile o perfino eliminabile.

STRATEGIA OTTIMA

All’  “indifferente” basta vedere quali rischi piace prendere alla gente e investire altrove: inutile prendere rischi per i quali non esiste alcun premio. D’altronde, se ci sono rischi per cui la gente non paga alcun premio, significa che ci sono rischi che la gente strapaga, oppure scelte relativamente sicure che non vengono penalizzate.

PERCHE’ LA GENTE RISCHIA?

1) MASCHI. Storicamente l’80% delle donne ha figli ma solo il 40% dei maschietti: poiché i maschi possono avere molti più figli delle donne per loro è razionale rischiare nella competizione. Diciamo che sono cablati per rischiare (testosterone?) e quindi non pagano premi in questo settore di loro pertinenza.

2) PRESUNZIONE. Il 93% degli automobilisti crede di essere superiore alla media quanto ad abilità nella guida. E’ chiaro che molti di loro prenderanno dei rischi che non possono permettersi. E credendo di poterseli permettere non pagheranno alcunché per sbarazzarsene.

3) PIACERE. La Juve è il senso della vita, su di lei mi piace prendere rischi. Non pago nessun premio a chi mi propone uno sgravio (per esempio a Winga o Bet&Win).

4) TOP TEN. Solo chi rischia fa notizia e fare notizia ti mette in evidenza. Figo! Pussa via tu che vorresti essere pagato per fare il figo al mio posto.

5) PECORA. Se sono nel gregge non m’importa più del rischio che corro (e non pago premi a chi rischia in mia vece): tanto mal comune mezzo gaudio.

6) INFORMAZIONE. Scegliere in base agli aneddoti ascoltati ci mette a rischio poichè solo gli aneddoti improbabili meritano di girare.

CONSIGLI ALLO “SDRAIATO”

Facciamo il caso che debba scegliere la facoltà universitaria.

1) Se sei maschio scegli una facoltà a prevalenza femminile;

2) Scegli una facoltà facile;

3) Scegli una facoltà poco attraente.

4) Scegli una facoltà poco promettente.

5) Scegli una facoltà poco frequentata.

6) Scegli una facoltà di cui non si parla.

Se scegli secondo questi criteri stai puntando su un cavallo che probabilmente è sottovalutato. Fai un affare.

CONCLUSIONE

Se invece non sei uno “sdraiato” (e in fondo nessuno lo è fino in fondo, tranne Oblomov) scegli la facoltà che più ti piace: quella che rende l’hanno già scelta gli altri per cui quando finirai  gli studi non renderà più. Lo dice sempre anche mio cugino medico.

Teachers: Much More Than You Wanted To Know

Teachers: Much More Than You Wanted To Know | Slate Star Codex: "Newspapers report that having a better teacher for even a single grade (for example, a better fourth-grade teacher) can improve a child’s lifetime earning prospects by $80,000. Meanwhile, behavioral genetics studies suggest that a child’s parents have minimal (non-genetic) impact on their future earnings. So one year with your fourth-grade teacher making you learn fractions has vast effects on your prospects, but twenty-odd years with your parents shaping you at every moment doesn’t? Huh? I decided to try to figure this out by looking into the research on teacher effectiveness more closely.

This turned out to be a mistake."



'via Blog this'

• Newspapers report that having a better teacher for even a single grade (for example, a better fourth-grade teacher) can improve a child’s lifetime earning prospects by $80,000. Meanwhile, behavioral genetics studies suggest that a child’s parents have minimal (non-genetic) impact on their future earnings. So one year with your fourth-grade teacher making you learn fractions has vast effects on your prospects, but twenty-odd years with your parents shaping you at every moment doesn’t? Huh? I decided to try to figure this out by looking into the research on teacher effectiveness more closely. This turned out to be a mistake.
• So put more simply – on average, individual students’ level of ability grit is what makes the difference. Good schools and teachers may push that a little higher, and bad ones bring it a little lower, but they generally can’t work miracles.
• Teachers account for about 10% of variance in student test scores, it’s hard to predict which teachers do better by their characteristics alone, and schools account for a little more but that might be confounded
• Add like fifty layers of incomprehensible statistics and this is the basic idea behind VAM (value-added modeling)... A claim like “VAM accurately predicts test scores” is kind of circular, since test scores are what we used to determine VAM... The answer is – they decay pretty fast. Jacob, Lefgren and Sims find that only 25% of gains carry on to the next year, and only 15% to the year after that... I expected teachers’ groups and education specialists to be pushing all the positive results. After all, what could be better for them than solid statistical proof that good teachers are super valuable? In fact, these groups are the strongest opponents of the above studies ... It’s always fun to watch rancorous academic dramas from the outside, and the drama around VAM is really a level above anything else I’ve ever seen....Historian/researcher Diane Ravitch doesn’t have quite as cute an aesthetic, but she writes things like: VAM is Junk Science
• I’ve been linking to recently suggesting that excessively early school starting ages seem to produce an ADHD-like pattern of bad behavior and later-life bad effects, which I was vaguely willing to attribute to overchallenging kids’ brains too early while they’re still developing
• n summary: teacher quality probably explains 10% of the variation in same-year test scores, which corresponds to a +1 SD better teacher causing a +0.1 SD student test score improvement, which isn’t that much. This decays quickly with time and is probably disappears entirely after four or five years, though there may also be small lingering effects. It’s hard to rule out the possibility that other factors, like endogenous sorting of students, or students’ genetic potential, contributes to this as an artifact, and most people agree that these sorts of scores combine both signal and noise. For some reason, even though teachers’ effects on test scores decay very quickly, studies have shown that they have significant impact on earning as much as 20 or 25 years later, so much so that kindergarten teacher quality can predict thousands of dollars of difference in adult income. This seemingly unbelievable finding has been replicated in quasi-experiments and even in real experiments and is difficult to banish. Since it does not happen through standardized test scores, the most likely explanation is that it involves non-cognitive factors like behavior. I really don’t know whether to believe this and right now I say 50-50 odds that this is a real effect or not – mostly based on low priors rather than on any weakness of the studies themselves. I don’t understand this field very well and place low confidence in anything I have to say about it
•  there’s strong evidence that parents have relatively little non-genetic impact on their childrens’ life outcomes, but now we’re saying that even a kindergarten teacher they only see for a year does have such an impact? And what’s more, it’s not even in the kindergarten teacher’s unique area of comparative advantage (teaching academic subjects), but in the domain of behavioral problems, something that parents have like one zillion times more exposure to and power over?

La retorica buonista partorisce il leviatano

La seconda pagina del Corriere ospita due reazioni cattoliche alla legge sulle unioni civili:

Camillo Ruini sembrerebbe opporsi: rischio di derive!

Gualtiero Bassetti sembrerebbe non opporsi: ora un impegno per le famiglie.

Ma la dichiarazione più interessante è contenuta nell’intervento  del Vescovo di Perugia: non facciamo battaglie “contro”.

Camillo Ruini e Gualtiero Bassetti non sembrano dunque in disaccordo sulla sostanza: entrambi vogliono un trattamento privilegiato per la famiglia tradizionale (FT) rispetto alla famiglia alternativa (FA). Tuttavia, Ruini sembra semplicemente opporsi ai privilegi concessi alla FA mentre Bassetti   sembra dire: concediamo pure dei privilegi alla FA ma aumentiamo quelli della FT; il sottotitolo curiale è evidente: in questo modo manterremo le distanze senza apparire “cattivi”.

Le motivazioni di Bassetti sembrerebbero quindi solo retoriche: la Chiesa persegua i suoi obbiettivi adottando una strategia buonista, ovvero evitando battaglie “contro” che ledano la sua reputazione.

Non ha tutti i torti: viviamo immersi nella “cultura del piagnisteo” e solo con la retorica buonista si fa carriera.

Ma tutto cio’ conduce all’esplosione dei privilegi: quando domani i sostenitori di FA invocheranno un adeguamento, i sostenitori di FT – ala bassettiana – pur di non fare “battaglie contro” risponderanno: “ok, purché i nostri privilegi aumentino ancora di più”.

Se questa è una delle dinamiche retoriche più consolidate, come sorprendersi se nel dopo guerra  la spesa pubblica sia letteralmente esplosa? Gli anni sessanta e la sindacalizzazione della società, d’altronde, segnano l’avvento del grande piagnisteo e il trionfo della retorica vittimista.

Bene, con queste premesse con chi deve stare un liberale? Con Ruini o con Bassetti?

Vivere come se Dio non ci fosse

Non è tanto facile.

Il credente in genere è più felice.

Vive più a lungo.

Fuma meno e fa più esercizi.

Guadagna meglio.

Ha matrimoni più stabili.

Ha una vita sessuale e affettiva più soddisfacente.

Commette meno crimini ed evita più facilmente la trappola delle droghe.

Vanta relazioni sociali più fitte e intense.

E’ più generoso: dona di più e fa più volontariato.

Ha anche più figli.

E’ meno credulone.

Emotivamente è più stabile.

Ha maggior auto-controllo.

Registra un maggior successo scolastico.

E’ meno depresso e più ottimista. E’ meno propenso al suicidio.

E’ più tollerante e meno stressato.

Affronta meglio il dolore.

E’ più propenso a riabilitarsi in seguito ad incidenti.

Possiede maggiore auto-stima.

Ha un atteggiamento maggiormente pro-social.

Gode di una più elevata salute mentale e fisica, nonchè di picchi di benessere più diffusi.

Eccetera.

Sì, lo so, ci sarebbero parecchi puntini sulle “i” da mettere, ma chi c’ha tempo? So anche che una persona già di per sè ammirevole puo’ essere attratta dalla religione. Detto questo, chi puo’ negare di fronte a certe evidenze che la religione abbia comunque un influsso benefico?

Per questo dico che “vivere come se Dio non ci fosse” è difficile.

Ma la domanda che mi interessa di più è un’altra, ovvero: il fatto che “vivere come se Dio non ci fosse” sia difficile depone a favore o contro la verità religiosa?

Alcuni ritengono che deponga a favore: la fede che ci dona un Dio buono è necessariamente a misura d’uomo.

Altri ritengono che deponga contro: se credere “conviene” il ruolo della verità si svaluta necessariamente.

A prima vista mi sembra più sensata la seconda posizione.

P.S. Si puo’ anche essere scettici sulla convivenza tra Verità e Convenienza ma cio’ non implica che si sia scettici sull’ipotesi teistica. Qualcuno, infatti, sostiene che l’ipotesi teistica seduca per la sua accattivante semplicità. Insomma, siccome è “a misura d’uomo” proprio come la “religione” di cui si è discusso nel post, allora non è credibile. Ma il parallelo non tiene: la “semplicità” (a parità di capacità esplicative) è un saldo principio epistemologico razionale in base al quale selezionare la teoria scientifica migliore: noi privilegiamo Copernico su Tolomeo per la maggior semplicità del primo.

http://www.overcomingbias.com/2012/05/what-use-far-truth.html

http://www.uccronline.it/2013/12/21/avere-fede-migliora-la-salute/

Lotta all'obesità come dominio

• Megan: An economist recently pointed out that we don’t encourage people to move to the country, even though rural people live more than three years longer than urban people, and the difference in their healthy life expectancy is even more outsized. Nor do we encourage people to find Jesus or get married. We target “unhealthy” behaviors that are already stigmatized.
• Paul: Right, as Mary Douglas the anthropologist has pointed out, we focus on risks not on the basis of “rational” cost-benefit analysis, but because of the symbolic work focusing on those risks does — most particularly signalling disapproval of certain groups and behaviors. In this culture fatness is a metaphor for poverty, lack of self-control, and other stuff that freaks out the new Puritans all across the ideological spectrum, which is why the war on fat is so ferocious — it appeals very strongly to both the right and the left, for related if different reasons. -
• Humans clearly attend closely to status, an important part of status is dominance, and a key way we show dominance is to tell others what to do. -
• it is completely crazy to imagine that fat folks have not yet heard that fat might be unhealthy or unattractive.  Believe me, they’ve heard!  If they are choosing to be fat, they are doing so reasonably informed of the consequences.  Our constant anti-fat “public health” messages are not at all kind – such messages just serve to put fat folks down, and lift the rest of us up.  If anyone is so clueless as to need constant reminders, it is those who can’t see their own over-bearing domination, such as putting down fat folks to lift themselves up -

See more at: http://www.overcomingbias.com/2009/10/denying-dominance.html#.dpuf

See more at: http://www.overcomingbias.com/2009/07/is-obesity-policy-about-health.html#.dpuf

Come dire "sporco negro" in modo educato SAGGIO

I chili di troppo mettono a rischio la nostra salute, cosicché, per quanto molesti, accettiamo come naturali i pressanti inviti a "mangiar bene" seguendo una dieta bilanciata. Persino il guru che pontificando dai media ci fa sentire in colpa perché non facciamo abbastanza moto è sopportato di buon grado. Siamo praticamente pronti per la soda-tax.

E qui cominciano i dubbi: anche abitare in campagna allunga la vita, tuttavia troveremmo alquanto singolare una propaganda civica che ci spingesse al trasloco facendo apparire come persona trascurata chi insiste a stare in città.

Ma c’è di più: sebbene religione e salute fisica vadano a braccetto, non mi attendo certo una pubblicità progresso tesa ad incrementare le conversioni. E voi?

Ultimo esempio: sembra anche che la vita coniugale sia decisamente più salubre, nonostante cio' le iniziative del Ministero della Sanità volte a sponsorizzare il  matrimonio latitano. Chissà come mai?

Perchè? Perché tante incongruenze e tanto plateali?

La risposta della sociobiologia è provocatoria ma credibile: abbiamo bisogno di qualcuno da disprezzare, abbiamo bisogno di qualcuno a cui dire più o meno velatamente “sporco negro”.

 

Le cose andrebbero all'incirca così: ognuno coltiva la sua immagine pubblica ed esprimere una forma simbolica di “dominio” è un modo per abbellirla. Dire a qualcuno cosa deve fare significa esprimere pubblicamente il nostro “dominio” su di lui.

Oggi non possiamo “dominare” figure come quelle del cittadino metropolitano o dell'ateo o del single, queste persone sono troppo ben piazzate nel’ élite e ci renderebbero pan per focaccia, per contro, nulla osta al disprezzo verso gli obesi poiché sono una buona metafora di povertà, indolenza e scarso auto-controllo. A loro possiamo tranquillamente dire dalla TV – come se non lo sapessero! - quel che devono fare mostrandoci e sentendoci superiori a loro.

Un libro per approfondire queste tematiche: The Obesity Myth di Paul Campos.

The Evidence Is Piling Up That Higher Minimum Wages Kill Jobs http://marginalrevolution.com/marginalrevolution/2016/05/the-evidence-is-piling-up-that-higher-minimum-wages-kill-jobs.html