March 2, 2013
Book Bits | 3.2.13
● The Affluent Investor: Financial Advice to Grow and Protect Your Wealth
By Phil DeMuth
People are always bragging about their portfolio returns, but they never mention the risks they took because they don't know what the risks are. Returns are visible; risks are the icebergs you don't see until you're Leonardo DiCaprio holding on to the plank….
Imagine that the risk/return visibility was reversed: that it was possible to find out every minute precisely how risky your investments were just by turning on CNBC, but you only learned their returns once a year. This would immediately promote a lot of sensible and productive investing behavior. People would manage their risks diligently and then settle for the returns they could get. This is exactly correct. Unfortunately, the world works otherwise. We watch performance—the bouncing ball in front of our eyes—because of an availability bias. The sadder-but-wiser investor always keeps an eye on risk, especially when he cannot see it.
● Gross Domestic Problem: The Politics Behind the World's Most Powerful Number
By Lorenzo Fioramonti
Review via Reuters
"Gross Domestic Problem: The Politics Behind the World's Most Powerful Number" argues that far from being a sign of economic progress, the growth measured by gross domestic product (GDP) comes at a cost because it is often accompanied by natural resource depletion and high income inequality.
Its author, Lorenzo Fioramonti, is associate professor of political science at South Africa's University of Pretoria.
The fixation with GDP growth compels policymakers to design policies that promote consumerism and attract short-term investment, he argues, but, as the West's economic downturn has shown, the gains are unlikely to last long.
● The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order
By Benn Steil
Review via Council on Foreign Relations
As World War II drew to a close, representatives from forty-four nations convened in the New Hampshire town of Bretton Woods to design a stable global monetary system. Leading the discussions were John Maynard Keynes, the great economist who was there to find a place for the fading British Empire, and Harry Dexter White, a senior U.S. Treasury official. By the end of the conference, White had outmaneuvered Keynes to establish a global financial framework with the U.S. dollar firmly at its core. How did a little-known American bureaucrat sideline one of the greatest minds of the twentieth century, and how did this determine the course of the postwar world?
The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order tells the story of the intertwining lives and events surrounding that historic conference. In a book the Financial Times calls "a triumph of economic and diplomatic history," author Benn Steil, CFR senior fellow and director of international economics, challenges the misconception that the conference was an amiable collaboration. He reveals that President Franklin D. Roosevelt's Treasury had an ambitious geopolitical agenda that sought to use the conference as a means to eliminate Great Britain as a rival.
● Sidetracked: Why Our Decisions Get Derailed, and How We Can Stick to the Plan
By Francesca Gino
Essay by author via Harvard Business Review blog
Compelling evidence from research in the fields of psychology and behavioral economics suggests that people behave in ways that are far from rational. For instance, we systematically underestimate task-completion times — a tendency known as "planning fallacy" — and postpone tasks repeatedly over time (i.e., procrastinate).
We also tend to overestimate the accuracy of our own thoughts and the odds of our success — that is, we tend to be overconfident. These tendencies are common, yet when we make decisions intended to improve how effectively teams perform tasks, we regularly fail to account for them.
● Improving Risk Analysis
By Louis Anthony Cox Jr.
Summary via publisher, Springer
Improving Risk Analysis discusses and illustrates practical methods for assessing, communicating, and managing uncertain risks when the probabilities of consequences caused by alternative actions cannot be quantified with useful confidence, accuracy, and precision. This monograph demonstrates how to avoid these pitfalls by using improved techniques of risk analysis. Through these improved techniques of risk analysis, readers will better understand uncertain risks and be able to make more effective decisions about how to manage them.
● Why Philanthropy Matters: How the Wealthy Give, and What It Means for Our Economic Well-Being
By By Zoltan J. Acs
Essay by author via History News Network
For wealth to invigorate the capitalist system it needs to be “kept in rotation” like the planets around the sun, and for this task American philanthropy is very well suited. Examining the dynamics of American-style capitalism since the eighteenth century, philanthropy achieves three critical outcomes. It deals with the question of what to do with wealth -- keep it, tax it, or give it away. It complements government in creating public goods. And, by focusing on education, science, and medicine, philanthropy has a positive effect on economic growth and productivity. Individuals such as Benjamin Franklin, Andrew Carnegie, Bill Gates, Michael Bloomberg and Oprah Winfrey have used their wealth to establish institutions and promote knowledge, and philanthropy has given an edge to American-style capitalism by promoting vital forces -- like university research -- necessary for technological innovation, economic equality, and economic security.
● The Bankers' New Clothes: What's Wrong with Banking and What to Do about It
By Anat Admati and Martin Hellwig
Review via The Wall Street Journal
Most basically, Ms. Admati and Mr. Hellwig point out that current regulation is focused on a bank's assets: the loans, securities and other investments that bring money in (and sometimes don't). They want us to focus instead on the bank's liabilities: the ways banks get money and the promises banks make to depositors and investors. Bank assets are not particularly risky or illiquid. Apple's profits from selling iPhones or a mutual fund's portfolio of stocks are far riskier than any bank's portfolio of loans and mortgage-backed securities, or even their much-disparaged trading books. Bank liabilities—too much debt and too much short-term debt—are the central problem that causes financial crises.
Posted by jp at March 2, 2013 1:58 AM