The Thought Refuse

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Archive for the ‘Business’ Category

Limbaugh Victim of His Own Entertainment

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Radio talk show host Rush Limbaugh, reportedly, will be removed from a group of potential investors seeking to purchase the NFL’s St. Louis Rams according to ESPN.

Naturally, when it concerns a personality archetype the caliber of Rush Limbaugh, you have a starkly divided community on the issue.  Even more predictably is the type of response from each side.  Evidence lies in the fact that Rush Limbaugh made the trending topic list on Twitter when the story broke.

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Written by huxbux

October 16, 2009 at 5:20 pm

Study Supports Expert Bias

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ne of the more common logical mistakes we make is to turn to the expert bias, also known as the logical fallacy arguing from authority.  The logical error is committed by espousing expert credentials for sound logic, in order to make a logical argument.  A logical argument is founded on logic alone.  No amount of degrees or experience can supplant concrete logic.

Recently, a study was done on how expert advice affects the decision making part of the human brain, and lends physiological evidence that we are predisposed to experts over logic.  This has long been the contention of logical proponents, the most well known being Nicholas Nassim Taleb, who detailed in his New York Times best selling book, The Black Swan, just how detrimental and pervasive the expert bias can be.

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Written by huxbux

April 15, 2009 at 1:12 am

Why Your Blog Hits Aren’t Really Yours

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With the explosion in the number of blogs littering the internet, every blogger takes extraneous efforts to increase their visitor count.  The all important hit count is the singular indicator whether your blog is popular or not.

There are blogs dedicated soley to advising bloggers on who to get their blogs noticed, and attract a larger share of readership.  Focusing on key words, interlinking blogrolls, content distribution, and comment links in other blogs are all part of the “how to get your blog hits” mantra.

You’ve followed all the steps to get you blog hits – selected a topic to focus on, included important key words in your tags and post titles, built a nice shared blogroll with other blogs, and politely commented on other blogs to get the word out about your blog.  After all these steps your blog is averaging a couple hundred hit per day.  All things considered, you’ve done fairly well for yourself.  But your blog is middle-brow.  One of among tens of thousands of other blogs that suffer from medicrioty in terms of hits.

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Written by huxbux

January 12, 2009 at 6:57 pm

Posted in Business, Logic, Philosophy

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Cantor Fitzgerald Moving HSX Into The Real World

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The trading firm Cantor Fitzgerald will be starting a real world version of the Hollywood Stock Exchange – an online virtual trading world where players buy and sell movie and celebrity stocks.  Cantor will now offer movie studios to purchase bonds relative to a movie’s financial performance.

Cantor is actively recruiting veteran HSX traders to participate in advertising and selling these bonds to movie studios.  Cantor Fitzgerald needs “experts” to sell their product.  While there are undoubtedly individuals who have fared appreciably more successful then other traders on HSX, I’m hard pressed to say there are any “experts” in the fantasy trading game.

Let us assume the Cantor incarnation will operate similar to HSX.  A movie stocks price is based on it’s expected total gross(for wide releases four weeks, twelve weeks for limited release).  On it’s opening weekend, a movie will adjust according to it’s weekend gross along with an internal multiplier(typically 2.8).

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Written by huxbux

January 7, 2009 at 7:08 pm

Attention Main Street: Don’t Panic

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With the Dow Jones Industrial average falling 369 points today and losing 3.6% of it’s value, plenty on Main Street might feel the urge to panic after taking a look at their 401k’s and modest portfolio’s.  Maybe Main Street has already started to panic after watching the stock market lose 1,100 points and 10% of it’s value over the course of one week.

But I want to tell Main Street – Don’t Panic.

I don’t want you to panic because you should know that the market hasn’t hit bottom yet, and your investments haven’t hit their low point.  In 1929 and 1987, the two largest market crashes in American history, it took 55 and 54 days respectively for the market to reach bottom from the Black Day.  We’re only about half way through if history is trying to repeat itself here.

So, you have time to shift your investments over to low yield, low risk bonds or even gold.  Take comfort in knowing that there’s alot more you could potentially lose of that retirement nest egg.  It could always be worse, and just might get plenty worse.  Just remember – Don’t Panic.

Written by huxbux

October 6, 2008 at 5:02 pm

Assessing Risk Management As The Problem To The Economic Downturn

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The New York Times published an article yesterday detailing how, in 2004, reduced federal regulations for investment firms where in they did not have to back their mortgage backed securities with capitol reserves, and thus allowing them to utilize those reserves in the investment market.  Keep in mind that following the repeal of the Gramm-Leach-Bliley Act, the banking and investment operations of financial entities essentially became a single, connected operation through the allowance the investment arm to leverage the banking arm’s issued mortgages into mortgage backed securities.

In the preceding meeting between the the Securities and Exchange Commission, government officials, and CEOs of the five largest investment firms , only one warning was issued to the potential dangers of the regulation change.

A lone dissenter — a software consultant and expert on risk management — weighed in from Indiana with a two-page letter to warn the commission that the move was a grave mistake.

He additionally went to cite that

the computer models run by the firms — which the regulators would be relying on — could not anticipate moments of severe market turbulence.

and referenced a history of risk management model failures.

similar computer standards had failed to protect Long-Term Capital Management, the hedge fund that collapsed in 1998, and could not protect companies from the market plunge of October 1987.

One single opponent whose field was specific to the risk management field aired dissent.  I can only deduce that the majority of risk management experts within both the government, SEC, and the investment firms did not warrant the reduction in capitol backing against assets as a substantial risk.  It’s of particular note that he focused on the inadequacies of risk management software models.

The article continues focusing primarily on the SEC role in it’s lack of oversight.  The point of interest for me is the issue of risk management which I have posted about previously.  The fundamental problem is not improper oversight as much as it is the inability of risk management models to qualify risk aversion.  More precisely, the problem is that these models provide a incorrect data.

It is nearly impossible to make an informed decision when supplied with an incomplete knowledge base.  No amount of regulations and oversight will balance out the risk management models shortcomings.  If what I considered the proper operation of a motor vehicle to be that the pedal on the left is the gas, the pedal on the right is the brake, spinning the wheel left turns the vehicle right and vice versa and my conviction in this knowledge was inflappable then the success with which I operated a motor vehicle would be independent of you, who shared the same knowledge base for operating a motor vehicle, were sitting next to me in the passenger seat.

The lack of knowledge problem becomes even more acute when trying to forecast future events.  Any mathematical model requires the input of initial conditions to calculate an end point.  Not having every possible set of initial conditions, therefore restricts us to a limited number of predictable end points.  An analogous example would be the knowledge problem prediciting the future of technology.  For if I could predict future technological advancements, I would necessarily be able to create that technology in the present.

Written by huxbux

October 3, 2008 at 6:24 pm

Was The CRA A Hungry, Hungry Hippo?

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Courtesy of the Freakonomic blog, a 1999 NY Times article was dug up detailing Fannie Mae’s ease in credit requirements for low and middle income individuals.  Our good friend Frank Raines has the best line in the entire article.

“Fannie Mae has expanded home ownership for millions of families in the 1990’s by reducing down payment requirements,” said Franklin D. Raines, Fannie Mae’s chairman and chief executive officer. ”Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”

It’s astounding to hear the manager of the largest home mortgage entity in the country to ever utter the words “a notch below what our underwriting has required.”  Can I call into question Frank Raines and Fannie Mae’s risk management model?  I might not be a quant, but don’t a lending institution expose itself to more risk when it removes lending standards?

Even the Department of Housing and Urban Development encouraged lax underwriting.

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae’s and Freddie Mac’s portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

Quiz question – who bought up and now holds nearly 6 trillion of the 12 trillion outstanding in home mortgages in this country?

Sarcasm aside, I’m once again reexamining the CRA issue.  One of the changes in the CRA in 2005 was to redefine what lending institutions fell under the three levels of CRA review.  Any bank with assets below $1.06 billion did not fall under the strict CRA requrement which was a hike from the previous definition.  It set up a three tier level of federal review.  The three tiered asset levels stood at those above $1.06B, those between $1.06B and $250M, and those below $250M.  Regulations became more relaxed as you worked down the asset ladder.

In testimony by Professor of Law at the University of Michigan, Michael Barr…

…subprime lending exploded in the late 1990s, reaching over $600 billion and 20% of all originations by 2005. More than half of subprime loans were made by independent mortgage companies not subject to comprehensive federal supervision; another 30 percent of such originations were made by affiliates of banks or thrifts, which are not subject to routine examination or supervision, and the remaining 20 percent were made by banks and thrifts.

Without other additional data, this cannot be said to be a complete view of the picture.  It is alarming to discover that nearly half of all subprime mortgages issued qualified as CRA compliant to some level of supervision.  This would be another example that, just like Fannie Mae, a reduction in regulations leads to exposed risk.  I’d like to know what percentage of the 30% of lending institutions that were removed from “comphrehensive federal supervision”, and into less stringent oversight.

Minus the numbers, shifting the qualifications upwards reduced the amount of banks which fell under CRA review.  Undoubtedly, implementing a law requiring that banks meet a criteria in lending to low income individuals and then not providing proper government oversight is irresponsible.  It would akin to a supervisor at work who gave out his instructions to his employees every day then went home for the remainder.

Given the small amount that CRA loans accounted for in the subprime lending market, it wasn’t a hungry, hungry hippo.  It did suffer from a poor diet of oversight though.

Written by huxbux

October 1, 2008 at 12:52 am