Tag Archives: Finance

Get Ready for our New Book!

Yes that’s right! Our book, both new and improved at the same time, will finally be released (soon)!

Yes that’s right! Our new book still hasn’t been released!

So anyway, we figured the best way to keep every up to date would be to just shoot you an email once it is out. Then we thought, hey, if they’re really interested, we’ll let them know ahead of time so they can buy the book at a discount!

So that’s what we’re doing. Just go to www.BringingSexy.com and enter your email address, and we’ll give you early notice so you can buy our new book at a heavy discount*.

www.BringingSexy.com

* Selling or sharing email addresses is definitely NOT sexy, so we won’t engage in any of that sort of behavior.

Do you want to be Smarter?

How would you like to be smarter? How would you like to be the go-to person for every Trivia night at your local watering hole? Or maybe you’d just like to get ahead in life or learn cool new things. Regardless, you can quench this thirst for knowledge right at DumbAgent’s Amazon store, located here: http://astore.amazon.com/dumage-20.

And if you buy books via our store, you pay the same price as always but we receive a commission from Amazon, so you can help us with our expenses (like Becky’s caviar dinners and private helicopter).

We have also written book reviews for many of these books, which you can find here:

If you have any other suggestions for books that make you smarter, feel free to let us know in the comments or by sending us an email!

The Universe is inflationary

Here is a guest post by Arthur Goikhman with a great analogy about inflation. His explanation for student loans is what struck me right away. I still believe this will be our next bubble, and Arthur does a great job in showing how the student loan system makes no sense. Read the whole article, though, if you’d like a simple explanation for inflation. Below the article you will find Arthur’s bio and contact information.

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When most people think about inflation, they think about commodities such as gold and gas going up in price and currencies eroding in value.

As the speed of inflation picks up, the risk of hyperinflation occurs, with prices in supermarkets changing in front of your eyes as you shop and rotating strike cycles for workers struggling to keep up with those price increases. As workers salaries are raised by paralyzed goods producers, producer margins are squeezed, forcing producers to increase prices, and so it goes, a classic textbook economics case that that has been demonstrated, particularly in the 70s, and well studied. Recent world wide unrest is thought to be at least in part related to the inflationary commodity spikes, by analysts and economists of various stripes (i.e., it’s not meaningfully in dispute), although the Fed insists that such inflationary pressures are “transitory”.

But there’s a different way to think about inflation, and the best analogy is all around us, and it obeys well understood (or at least better understood) laws — it’s our inflationary universe. It may seem a stretch (pun intended), but it’s a great analogy. Once viewed in those terms, bubbles do in fact become more predictable.

How does the inflationary universe work? It’s expanding in all direction but, most of it,quantum foam aside, is completely empty. The interesting stuff tends to happen around sources of mass and energy, and the larger the object, the more interesting stuff happens around it, as it actually causes smaller objects, and space itself, to warp around it.

Back to the world economy. On a macro level, it’s been growing since at least the Sumerians, and just as space warps itself around sources of mass and energy, the economy warps around sources of money. This is perfectly normal, of course: a Walmart feeds over a million workers, numerous small businesses, a large range of medium size businesses, and finally dozens of large businesses (e.g. a Sony or a Kellogg). And, just like the physical universe has “unusual” objects where the laws of nature themselves get warped, such as black holes, or perhaps the even more exotic worm holes, so does the economy — the unusual objects in this case are governments with “fiat currencies”: http://en.wikipedia.org/wiki/Fiat_money.

To create warps in the economy, such governments can go way beyond printing money. They can create incentives and regulations that then rapidly attract (or divert) smaller entities (i.e. people, small businesses, large businesses and even giants). But there’s a price to be paid: this mass of people and companies, instead of being distributed “evenly”, or among naturally occurring gravity wells, streams quicker and quicker towards the source of “free lunch”, or, as another common phrase would put it, OPM or Other People’s Money. Eventually, unless the incentive is eliminated or reduced, a bubble is formed. And, since even governments must obey physical laws, the free lunch eventually ends, and poof, supernova, or worse, everything gets sucked into a black hole.

OK, so far we have a fancy analogy, what are some real world examples?
Here’s a quick list:

1. Housing bubble. Started forming on a combination of artificially low
interest rates and pressure and incentives to lenders to issue
unprofitable loans. The housing deduction in the US is a major
distortion of the market.

2. Student loans. Government mandates and participation in the market
distort the real value of loans. When you open a business and borrow
money from a bank, the rate you get (if you get the money at all) is
based on the risk of your business actually generating sufficient money
to pay it back. How can a degree in English Literature, with an average
starting salary of $30K, be worth the same, to the bank, as a degree in
mechanical engineering which might result in a starting salary of $100K?
The availability of loans, out of proportion to ability to pay,
continues to direct students to more expensive schools and academic
pursuits with dubious employment opportunities, instead of saving $100K
or more by going to a local community college

3. Medical costs. The government ostensibly tries to contain costs by
regulating prices, or at least the rate of price increases. But since
buyers are divorced from the financial impact of their choices, costs
continue to go up.

Numerous other examples abound. Bubbles (and the business cycle) cannot be wished out of existence, or repealed. Fear and greed drive the markets, and speculative excess (early notable example being the Tulip Mania during the Dutch Golden Age) will occur even without fiat currencies. But markets work. When people talk about “free markets failing” in 2007, they didn’t — what failed was the set of economy warping incentives and regulations and the Fed, which inflated the bubble. We continue to be in the “try to tear the Band-aid off slowly” phase now. It’s not going too well, because we have not let markets work.

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Arthur is a a venture investor, inventor and alchemist. His early stage investment fund, @venture.us, turns ideas jotted down on napkins into gold, and he is building his latest company, Surre.al to give the entire world rose colored glasses.

He hails from suburban New Jersey, where he arrived by way of lucky marriage, Brooklyn, Haifa and Tiraspol, Moldova, which he is quite confident he does not remember. His solid credentials as a card carrying member of the Bourgeois class are cemented by his personal twitter handle, @iamthepoint99pct and his obsession with words and ideas is best exemplified by his Halfbakery account http://www.halfbakery.com/user/theircompetitor, where he is nearing 300 posted inventions.

The Obligatory OWS post

Although we didn’t really dedicate one to the Tea Party, we thought we should dedicate an article to the Occupy Wall Street protests. We’re sure you’ve already seen these protests, or picture and videos of them, and have seen people side with them and make fun of them, as with the Tea Party. As with any protest, there are intelligent people and there are not so intelligent people. If the average reader is like the average citizen, you’ve also already made up your mind as to what you think (or whose side you’re on, since this is politics, which tends to be played out like sports).

Yeah, so: that all sounds wishy-washy of us not to take a stand, so as a cop out we’ll show you where we stand by means of Remy‘s Youtube video. Enjoy!

Also, an interesting tidbit added today: Wall Street Doesn’t Dominate the Top 1% (HT @vgr, although the Yahoo video has little to do with the article.).

The Best Example of Bad Graphs

Those of you in the UK (or elsewhere) who read the Telegraph may have noticed an article recently called “How the Fed triggered the Arab Spring uprisings in two easy graphs”. If you want the gist of it, here is the first graph:

Now, as most economists learn, correlation does not equal causation. But let’s assume for the author’s sake that he has a point. What should we think when we see commodity prices rising (starting June 2010) and the Fed’s Treasury purchases rising after the fact (around Aug-Sept 2010)? Yes, if we want to read causation, then we’d say that the rise in food prices caused the Fed Treasury purchases, and not vice versa (as the article claims).

The second graph, which we show below, displays the correlation between, well, we’re not sure. Continue reading

Why Care about Dow Jones?

Turn on CNBC, go to Yahoo Finance, or read the Wall Street Journal, and one of the most published (and sought for) indicators is the Dow Jones Industrial Average. Another is the S&P 500, along with the Nasdaq. Why is this? Is everyone who follows this number invested in the market? No, but the ups and downs of all of these indices are assumed to be a proxy for the ups and downs of the US economy. If the Dow Jones Industrial Average (DJIA) is climbing, commentators are happy. If the DJIA is losing points, however, it’s reported as bad news. Same with the S&P 500 and the Nasdaq. Is this logical?

The S&P 500 is composed of 500 companies with large market capitalization in the US, and is chosen by committee. Is is the second most followed index in the US (and possibly the world) after the DJIA, which is a composite of 30 large, publicly owned companies, also chosen by committee.

For those of you who think it might be odd that a collection of only 500 companies, let alone 30, could represent the whole economy, you’d be correct. In fact, in recent years Small and Medium Enterprises have been growing in number and are representing more and more jobs and a bigger slice of the economy. So, if over 80% of jobs are in companies that are considered SME’s and aren’t even public, why do we care so much about these indices?

The answer lies in our need for a locus of order and control. If we can equate 30 companies with the health of our economy, it is a neat and simple solution to a messy and complicated situation. It is interesting to note that this is often the same reason conspiracy theorists have their beliefs: it is easier to know someone, somewhere, is in control, than to accept randomness and chaos.

Before dipping into murky waters of psychological babble, we’d like to come back to the original idea behind what the DJIA and S&P 500 are supposed to represent, but tweak it for reality. If, (as the Economist said the Kauffman Foundation reported), nearly all job creation between 1980 and 2005 took place in firms that were less than five years old, shouldn’t we be following these sorts of entrepreneurial companies instead? Well, there is one new index that does: The Global Entrepreneurship Development Index, or The GEDI. This, as its name suggests, is a global index and divided by country (71 in total), identifying the most entrepreneurial, as well as bottlenecks impeding growth in each country. Denmark is ranked first, the United States is second, and China and India are very low on the list.

Unfortunately, for now the list is not free and is published only once a year, so chances are that CNBC and Yahoo Finance will continue monitoring 30 large companies which are of no consequence to our lives.

You can buy the Global Entrepreneurship Development Index on Amazon here.

Awake, Alive & Dumb As Ever

You must excuse our absence, and don’t believe we haven’t been thinking about you in these intervening months. But this website had not received a good scrubbing in almost two years, and we decided we needed to step back for a moment and wipe it clean.

The design is new, thank you for noticing, and vastly simplified. Stripping things down to just the core pages we present to you the new DumbAgent.com: it’s all about the articles. Starting on Tuesday, August 23rd, expect many more of them.

And we are up and running, so sign up to the RSS feed (upper right), bookmark the homepage and join in the conversation.

The Upside of Irrationality

For those of you who enjoyed Freakonomics, Super Freakonomics, The Economic Naturalist, Nudge, Bringing Sexy Back to Economics, and various other books, and therefore thought you’d seen more or less all there was to see about quirky Economics, I am sorry to disappoint you, but Dan Ariely’s “The Upside of Irrationality” turns out to have some very interesting material.

This book covers many different topics, from bankers’ bonuses to online dating to cooking to revenge to charity donations. Lately, when reading behavioral economics books, I’ve found much of the information to be duplicate. In other words, an author will mention or build upon someone else’s studies, but add very little that is new. This would give the feel that he or she is merely ‘riding the behavioral economics wave’. This is not one of those books.

Without giving too many spoilers, one of the more interesting sections regards emotions, and how they affect the way in which we make decisions. For example, a terrier left aboard a tanker that had to be abandoned in the Pacific was featured on news channels, leading to $48,000 being spent on its rescue. One might wonder if the money might not have been better spent on humans who desperately needed it. Likewise, the cost of cleaning and rehabilitating each otter after the Exxon-Valdez disaster was $80,000.

Another interesting section had to do with bankers bonuses in finance. Although it does seem like Ariely does not fully understand the motivation behind these bonuses. He quotes Barney Frank in saying “At the level of pay that those of you who run banks get, why the hell do you need bonuses to do the right thing?” Most bankers are in the business solely for the money. They don’t trouble themselves with the “right thing” and they sacrifice much in their lifestyle in order to get the highest paying jobs in the world. That, at the end of the day, is their motivation. The interesting part, however, doesn’t change, in that higher bonuses seem to lead to sub-par results. Ariely attributes this to the pressure, nervousness and distraction that exorbitant bonuses bring, thereby leading people to ‘choke’ and not perform as well. He might want to discuss this with Malcolm Gladwell, and his theories on ‘choking vs. panic’ under stress.

My favorite section was the one on online dating. Possibly because I am still single and find online dating to be a useless distraction. He tended to confirm this, equating utilizing these sites to “understanding how a cookie will taste by reading its nutrition label”. He goes on to say “In fact, without exaggerating too much, I think that the market for single people is one of the most egregious market failures in Western Society.”

In conclusion, although you may have to read through yet another explanation of how the ultimatum game works, or what game theory is, Ariely has many interesting findings to offer, which make it well worth your read.

You can purchase Dan Ariely’s “The Upside of Irrationality” here: http://www.amazon.com/exec/obidos/ASIN/0061995037/dumage-20

Calling all writers!

Are you an avid writer? Do you enjoy Economics? Do you have interesting ideas and points of view to share? If so, DumbAgent is now accepting guest article submissions to be featured on our website. If it is of interest to you, it probably interests others as well.

We are looking for articles that develop and build upon Current Events, or develop and build upon Economic theories and then relate these to Current Events or everyday life.

Please mail a copy of your article to Articles@dumbagent.com. Please send your submissions as an attachment AND copy and paste them into the e-mail. Images and links are acceptable. We ask that your submissions have a minimum of 200 words. If they are over 1,000 words we may split them into two posts (so if you have any preferred splitting point please indicate where it is).

Submissions must be the author’s original work. Submissions must relate to economics and/or finance. We will review and provide feedback to every submission. If accepted, we may recommend edits and/or minor changes.

Good luck!