QUOTE OF THE DAY
“Any intelligent fool can make things bigger, more complex,
and more violent. It takes a touch of genius — and a lot of courage — to move
in the opposite direction.”
RETIREMENT FINANCE AND PLANNING
What Monte Carlo Projections Leave Out (...And Why You Can Still Trust Them), Cordant Wealth Partners
these inconsistencies at the extremes are important to
acknowledge. As with any model, understanding it’s sensitivities and
limitations is essential so that we don’t use it to answer a question it isn’t
fit to reliably answer.
43 percent of retirees underestimate by at least five years,
the life expectancy for someone of their age and gender, the Society of
Actuaries reports. Planning for longevity might include working longer,
adjusting investment strategies, and planning for incapacitating health
problems.
Spending in Retirement…or not? Blackrock
Future retirees will face a much different retirement
landscape and will need to adopt new sets of skills—behavioral and
financial—that will help them systematically tap into retirement savings to
support future spending…. research conducted by the BlackRock Retirement
Institute (BRI) in conjunction with the Employee Benefit Research Institute
(EBRI) found that on average across all wealth levels, most current retirees
still have 80% of their pre-retirement savings after almost two decades in
retirement…These findings begin to challenge industry norms and academic
theories about lifecycle consumption especially during the retirement phase… Across
all wealth levels measured, more than one third of current retirees grew their
assets—leaving considerable potential consumption on the table… Late in life
out-of-pocket medical expenses—a major reason to retain assets—do not appear to
be warranted except for a very small portion of the population… The financial
landscape for future retirees will most likely be more challenging, requiring
different savings and spending behaviors.
Periodic or Generational Actuarial Tables: Which One to Choose? Swiss Finance Institute
In this paper, we demonstrate that contrary to this common
belief, institutions that use generational tables (namely, tables including
future mortality evolution) will most likely need to make more important
adjustments (positive or negative) to their liabilities than will institutions
using periodic (static) tables whenever a new table is released. By using three
very different models to project mortality, we demonstrate that our findings
are inherent in the required long horizons of the forecasts needed in the
generational approach, with the uncertainty surrounding the forecast values
increasing with the horizon. Therefore, generational tables may introduce more
instability in a pension institution’s accounts than periodic tables. [keep an
eye on one's counter-parties I say…]
MARKETS AND INVESTING
No predictive power, Star Capital
The data shows no significant statistical relationship
between forecasted and realized performance. A naive forecast, assuming a
constant annual performance of 9% led to the same forecasting error of 18%. This result
holds true for any chosen annual performance forecast between 6% and 21%
...
The Thrill of Uncertainty, Morgan Housel
The dopamine rush of obtaining something important that you
knew would eventually come but didn’t know when is what keeps you hunting for
more… [Variable interval] is at the heart of all gambling devices. It has the
same effect. A pigeon can become a pathological gambler just as a person can.”
Variable interval rewards are why we compulsively check email. Some messages
are really important, but you don’t know when the important ones will come, so
you keep checking and checking. Same with checking Twitter and Facebook. Or
watching cable news. Or waiting for a boring meeting to end. Find something
that captures people’s attention and turns them into crazed animals and you
will likely find a variable interval reward. Now let’s talk about investing.
ALTERNATIVE RISK
Cheese, sunflower seeds and rough rice sounds like an
unappetizing mix -- unless you happen to be a hedge-fund manager. A handful of
computer-driven funds had a bumper 2017 by betting on the future price of such
“exotic” assets. The success of this type of managed futures strategy, the
industry’s term for trend-following, is now drawing new entrants despite the
risks created by the low levels of liquidity.
Timing the Market: Momentum and Beyond, Pedro Barroso @ CFA
Institute.
the Sharpe ratio of investing in momentum is highly
predictable. After safe months in the strategy, the Sharpe ratio is about 1.7,
while it is only 0.28 after risky months. A naive modified momentum strategy
using this predictability has almost double the Sharpe ratio of standard
momentum with much less crash risk. This is a much deeper puzzle than original
momentum…One interesting result is that the “betting-against-beta” (BAB)
strategy has risk management benefits like those of momentum.
All but one of the index’s 19 components posted gains in
2017. The top earners were natural
resources-metals and mining, which surged 37.1%, emerging markets equity (up
36.8%), emerging markets equity-China (up 31.8%), natural resources-timber (up
29.8%), international real estate (up 26.5%), and equity-international
developed (up 26.4%). Managed futures posted the only decline among index
constituents, sliding 3.2% during the course of the year.
Tail Protection for Long Investors: Trend Convexity at Work;
Dao, Nguyen, Dreemble, Lemperierier, Bouchaud, Potters.
The performance of trend following strategies can be
ascribed to the difference between long-term and short-term realized variance. We
revisit this general result and show that it holds for various definitions of
trend strategies. This explains the positive convexity of the aggregate
performance of Commodity Trading Advisors (CTAs) which -- when adequately
measured -- turns out to be much stronger than anticipated. We also highlight
interesting connections with so-called Risk Parity portfolios. Finally, we
propose a new portfolio of strangle options that provides a pure exposure to
the long-term variance of the underlying, offering yet another viewpoint on the
link between trend and volatility.
SOCIETY AND CAPITAL
…relatively more Norwegian-born persons in Minnesota
suffered from mental illness, especially schizophrenia,in the 1920s than did
members of Norway ’s
population [hmmm. Being from Minnesota
and all…]
Complexity Bias: Why We Prefer Complicated to Simple, Farnam
Street
Complexity bias is our tendency to look at something that is
easy to understand, or look at it when we are in a state of confusion, and view
it as having many parts that are difficult to understand. We often find it
easier to face a complex problem than a simple one. “Most geniuses—especially
those who lead others—prosper not by deconstructing intricate complexities but
by exploiting unrecognized simplicities.”… The world around us is a chaotic,
entropic place. But it is rare for us to see it that way.
Given robust job growth and the prosperity generated by
several industries, it’s worth asking why California has fallen behind,
especially when the state’s per-capita GDP increased approximately twice as
much as the U.S. average over the five years ending in 2016 (12.5%, compared
with 6.27%). It’s not as though California
policymakers have neglected to wage war on poverty.
Some Economics for Martin Luther King Day, Tim Taylor
On November 2, 1983 ,
President Ronald Reagan signed a law establishing a federal holiday for the
birthday of Martin Luther King Jr., to be celebrated each year on the third
Monday in January. As the legislation that passed Congress said: "such
holiday should serve as a time for Americans to reflect on the principles of
racial equality and nonviolent social change espoused by Martin Luther King,
Jr.." Of course, the case for racial equality stands fundamentally upon
principles of justice, not economics. But here are a few economics-related
thoughts for the day from the archives:
Excerpts from the "World Inequality Report 2018,
written and coordinated by Facundo Alvaredo, Lucas Chancel, Thomas Piketty,
Emmanuel Saez, Gabriel Zucman."
Underlying these overall patterns are some shifts in
regional economic patterns that are fairly well-known, but remain striking. For
example, this figure looks at average incomes in Africa
and across Asia , and
how they compare to the average world income. In 1950, Africa
was well ahead of Asia relative to average world income,
but that pattern has dramatically reversed.
The rate of return on everything - r>>g . Everyone needs to save but the return on wealth over growth is volatile, Mark
Rzepczynski
"The rate of return on everything" shows that
"r" is greater than "g"
by a fair margin, but there are extended periods of negative returns and
the return on wealth is highly variable. If you want to join the wealthy class,
you have to save to have money to invest. As important, you have to control
your wealth return to ensure you don't lose your wealth. Inequality is a
problem but wealth-holders take on risk and the certainty of gains are not
guaranteed.
English Abstract: …It was found that the correlation of the
KOSPI-DJIM portfolio has a stronger linkage than that of the KOSPI-SHX
portfolio. From the portfolio perspective, the S&P 500 Sharia stock
index(SHX) acts as a better hedge asset than the DJIM against the risk of stock
market fluctuations. Lastly, the hedge ratio between the two Islamic stock
market and Korean stock market pairs is generally low, indicating that the
Korean stock risk can be effectively hedged by taking a short position in the
Islamic stock markets. In the comparison with these two pairs, the pair of
KOSPI-SHX shows a lower hedging cost than that of the KOSP-DJIM pair. This
evidence indicates that the S&P 500 Sharia index plays amore effective
hedging role against the risk of Korean stock market fluctuations.
Why Tech is Targeting the $15 Billion Mattress Market,
VisualCapitalist
Despite the conventional wisdom to the contrary, the $15
billion mattress industry has seen the entrance of several ambitious startup
companies, and they are starting to put a dent in market share. Today’s
infographic from Online Mattress Review tells the story of how disruption is
occurring in this unlikely space – and it all starts with big changes to the
business model to make online mattress sales more palatable for both the
company and the consumers.
A Short Introduction to the World of Crypto currencies by
Aleksander Berentsen and Fabian Schar - St Louis
Fed
we give a short introduction to cryptocurrencies and
blockchain technology. The focus of the introduction is on Bitcoin, but many
elements are shared by other blockchain implementations and alternative
cryptoassets. The article covers the original idea and motivation, the mode of
operation and possible applications of cryptocurrencies, and blockchain technology.
We conclude that Bitcoin has a wide range of interesting applications and that
cryptoassets are well suited to become an important asset class.
Will Robots Take Our Jobs? St. Louis
Fed
"Robot Apocalypse" is a modern expression that
refers to a fear of technological advance, but the anxiety goes back
centuries.1 In 1589, Queen Elizabeth refused to grant the inventor of a
mechanical knitting machine a patent for fear of putting manual knitters out of
work.
To help the least advantaged, is it enough to vote against
public policies that seem unjust, or should individuals also give from their
own pockets to charities even if they can only help a few people at a time?
Brian Berkey, Wharton professor of legal studies and business ethics, believes
giving from one’s funds to help others is a moral obligation — and folks should
channel their money toward the most effective charities. Berkey says critics of this approach would
rather attack an unjust institution or system to fix the root cause of the
social malaise. But he says they are misguided, in part because it is difficult
for their efforts to succeed. Shouldn’t a doctor still treat a wounded soldier
on a battlefield instead of just protesting against the war? Berkey spoke to
Knowledge@Wharton to discuss his reasoning in the paper, “The Institutional
Critique of Effective Altruism.”
Prostitution and House Prices: Evidence from Closing Brothels in the Netherlands,
Giambona and Ribas.
We measure the externalities of prostitution by quantifying
the discount that households require to live next to a brothel. In our tests,
we exploit a unique feature of Amsterdam 's
Red Light District (RLD), area inside a perimeter naturally delimited by canals
where private homes are located next to prostitution windows. Using a novel
two-dimensional difference-in-discontinuity (DiD) estimator, we find that
households require a discount as high as 24% on homes inside the RLD. We also
find that this discount disappears when prostitution windows are forcibly
closed by local authorities. By incorporating the exact coordinates of brothel
closings, our empirical design allows us to establish a direct link between
these closings and changes in price discontinuities. To estimate the economic
impact on households outside the RLD, we look at the closings of all brothels
in Utrecht (the fourth largest city
in the Netherlands )
in 2013. Households are found to have paid up to 12% of the value of their home
to be some distance from prostitution. In both cities, the contraction of the
paid-sex industry is also associated with a drastic reduction in crime rates.
Overall, our findings suggest that the nuisances prostitution creates do more
harm than good to residents.
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