Readings: Financial fiasco, BS Protection, No more Vegas
Live Science: The Financial Fiasco: Emotional, Irrational, Inevitable
James Grant, editor of Grant’s Interest Rate Observer, was quoted in The New York Times as also pointing out the irrational side of financial decisions: “People keep stepping on the same rakes because money, like romance, is only partly an intellectual experience. Money, like sex, brings out some thought — but also much heavy breathing and little stored knowledge.”
On a societal or global level, why don’t more cautious-minded people balance out those who take foolish risks? In essence, Kuhnen says, people are unwilling to bet against irrationality all the time because they might “simply run of money while betting against the irrational guys.”
Bloomberg: Taleb’s `Black Swan’ Investors Post Gains as Markets Take Dive
Universa Investments LP, the Santa Monica, California-based firm where Taleb is an adviser, has about $1 billion in accounts managed to hedge clients against big moves in financial markets. Returns for the year through Oct. 10 ranged as high as 110 percent.
The Black Swan Protection Protocol bought puts and calls on a portfolio of stocks and S&P 500 Index futures, along with some European shares. The Black Swan Protocol doesn’t rely on commodities, currencies or insurance on bonds known as credit default swaps
Forbes: Dimon, Munger, Rohatyn: No More Vegas
Munger wants Wall Street balance sheets reduced by 70% and insists that the firms “be a market maker, a broker, an underwriter and a custodian of securities but not the hedge funds they have become.” He wants to restrict leverage to 50% on every securities transaction except for the Treasury trading desk where “you’re dealing with the safest securities around.”
The abhorrent excessive compensation on Wall Street is bound to be severely reduced. If Wall Street firms can only be leveraged 10 to 1 instead of 30 to 1, then the excessive gains made on borrowed funds will be reduced by two-thirds. So the path to $5 million to $10 million annual payoffs will be more reasonable but still in the millions. Hamptons summer homes will be reduced in price. Private jets will be out of range for many. Applications to law school should go up.
Will screw up the RoI calculations for a lot of recently minted MBAs.
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