risk tolerance

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pages: 302 words: 84,428

Mastering the Market Cycle: Getting the Odds on Your Side by Howard Marks

activist fund / activist shareholder / activist investor, Albert Einstein, business cycle, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, financial innovation, fixed income, if you build it, they will come, income inequality, Isaac Newton, job automation, Long Term Capital Management, margin call, money market fund, moral hazard, new economy, profit motive, quantitative easing, race to the bottom, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, secular stagnation, short selling, South Sea Bubble, stocks for the long run, superstar cities, The Chicago School, The Great Moderation, transaction costs, VA Linux, Y2K, yield curve

Here’s a partial list: Government policies supported an expansion of home ownership—which by definition meant the inclusion of people who historically couldn’t afford to buy homes—at a time when home prices were soaring; The Fed pushed interest rates down, causing the demand for higher-yielding instruments such as structured/levered mortgage securities to increase; There was a rising trend among banks to make mortgage loans, package them and sell them onward (as opposed to retaining them); Decisions to lend, structure, assign credit ratings and invest were made on the basis of unquestioning extrapolation of low historic mortgage default rates; The above four points resulted in an increased eagerness to extend mortgage loans, with an accompanying decline in lending standards; Novel and untested mortgage backed securities were developed that promised high returns with low risk, something that has great appeal in non-skeptical times; Protective laws and regulations were relaxed, such as the Glass-Steagall Act (which prohibited the creation of financial conglomerates), the uptick rule (which prevented traders who had bet against stocks from forcing them down through non-stop short selling), and the rules that limited banks’ leverage, permitting it to nearly triple; Finally, the media ran articles stating that risk had been eliminated by the combination of: the adroit Fed, which could be counted on to inject stimulus whenever economic sluggishness developed, confidence that the excess liquidity flowing to China for its exports and to oil producers would never fail to be recycled back into our markets, buoying asset prices, and the new Wall Street innovations, which “sliced and diced” risk so finely, spread it so widely and placed it with those best suited to bear it. The existence of all the above elements indicated the presence of risk tolerance. In fact, they couldn’t have arisen if risk tolerance hadn’t dominated the psyches of investors, lenders, borrowers and regulators. The existence of risk tolerance like that seen in the years immediately preceding the Crisis should be very worrisome, as it implies an absence of worry, caution and skepticism. It is inescapable that these developments—and the risk tolerance or risk obliviousness that was behind them—ultimately would lead to unsafe financial behavior, particularly via the issuance of financial instruments that were unsound and likely to fail. The ability to borrow large amounts of capital at low interest rates caused asset buyers to consider the period a “golden age.”

Thus it is a direct indication of the degree of risk aversion present in the market. In times of obliviousness toward risk—or high risk tolerance—the reduced demand in terms of risk premiums causes the slope of the line to flatten and the amount of risk compensation to shrink. The lower slope of the capital market line means, by definition, that the there’s less of a return increment per unit increase in risk. In simpler terms, the payoff for risk-bearing is sub-par. In my opinion, all of the above follows logically from direct observation. The process is as follows: positive events lead to increased optimism, increased optimism makes people more risk-tolerant, an increase in risk tolerance causes lower risk premiums to be demanded, a reduction in demanded risk premiums equates to lower demanded returns on risky assets, a reduction of demanded returns on risky assets causes their prices to rise, and higher prices make assets even riskier (but also attract buying on the part of “momentum investors” who chase rising stocks).

When everything’s going well and asset prices are soaring, investors tend to view the future as rosy, risk as their friend, and profit as easily achieved. Everyone feels the same, meaning little risk aversion is incorporated in prices, and thus they’re precarious. Investors become risk-tolerant just when they should increase their risk aversion. And when events are down, so are investors. They think of the markets as a place to lose money, risk as something to be avoided at all cost, and losses as depressingly likely. As I described at the end of the last chapter, under the excess of caution that prevails, (a) no one will accept possibilities that incorporate any optimism at all and (b) they likewise cannot countenance the possibility that an assumption could be “too bad to be true.” Just as risk tolerance is unlimited at the top, it is non-existent at the bottom. This negativity causes prices to fall to levels from which losses are highly unlikely and gains could be enormous.


All About Asset Allocation, Second Edition by Richard Ferri

activist fund / activist shareholder / activist investor, asset allocation, asset-backed security, barriers to entry, Bernie Madoff, buy and hold, capital controls, commoditize, commodity trading advisor, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, equity premium, estate planning, financial independence, fixed income, full employment, high net worth, Home mortgage interest deduction, implied volatility, index fund, intangible asset, Long Term Capital Management, Mason jar, money market fund, mortgage tax deduction, passive income, pattern recognition, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, selection bias, Sharpe ratio, stocks for the long run, survivorship bias, too big to fail, transaction costs, Vanguard fund, yield curve

The advisor explains the historical returns and risks of each asset class, how modern portfolio theory works, and the necessity for annual rebalancing. The advisor asks the woman to complete a risk tolerance questionnaire to find the maximum level of risk she can deal with. The woman completes the risk tolerance questionnaire, and the financial planner calculates the results. He concludes that the woman has the risk tolerance to handle an aggressive portfolio. The advisor suggests an asset allocation of 70 percent in stocks and 30 percent in bonds. Before recommending individual investments, the planner wishes to ensure that a 70 percent stock and 30 percent bond portfolio is not above the woman’s risk tolerance. Therefore, he asks her to take an asset allocation stress test. A hypothetical portfolio is created to simulate the month-bymonth value of a 70 percent stock and 30 percent bond portfolio between the years 2000 and 2002.

Cash income created by current investments can be reinvested where needed if it is not withdrawn. Being consistent with rebalancing is also a good test of risk tolerance. Investors will rebalance at the appropriate time without hesitation if their portfolio is within their risk tolerance. A portfolio’s asset allocation may be too aggressive if an investor hesitates on rebalancing in a bear market. If you are hesitant when stocks are suffering, it may be time to rethink your plan and make a permanent adjustment to the stock and bond mix. WHEN TO USE RISK AVOIDANCE Risk avoidance is a different concept from risk tolerance. Risk avoidance is a conscious decision not to invest up to your known risk tolerance level. This is a risk control measure. You take only the amount of risk that you need to accomplish a financial objective.

Only those investors who have an asset allocation at or below their tolerance for risk survive deep bear market. Finding an investment allocation that will survive during all market cycles is not easy, but it is worth the effort. RISK TOLERANCE QUESTIONNAIRES Risk tolerance questionnaires are common in the investment industry. Questionnaires are available through all mutual fund companies, brokerage firms, and private investment advisors. In addition, you can find them in financial planning books and in some investment-related magazines. The goal of risk tolerance questionnaires is to find the maximum level of risk that an investor is capable of handling. In doing so, they ask various questions about your investment experience and try to model your risk-and-return profile. Some go as far as recommending an appropriate mix of investments based on your answers.


pages: 250 words: 77,544

Personal Investing: The Missing Manual by Bonnie Biafore, Amy E. Buttell, Carol Fabbri

asset allocation, asset-backed security, business cycle, buy and hold, diversification, diversified portfolio, Donald Trump, employer provided health coverage, estate planning, fixed income, Home mortgage interest deduction, index fund, Kickstarter, money market fund, mortgage tax deduction, risk tolerance, risk-adjusted returns, Rubik’s Cube, Sharpe ratio, stocks for the long run, Vanguard fund, Yogi Berra, zero-coupon bond

Up to Speed What’s Your Risk Tolerance? Balancing return and risk is essential, because greed and fear can mess up the best financial plans. (See page 45 to learn about psychological mistakes many people make when investing.) By matching your portfolio risk to your personal risk tolerance, you can sleep soundly while your investments are hard at work. Figuring out your true risk tolerance is more complicated than the approaches taken by most online tools. But you can get a sense of your tolerance with any of the following tests: • MSN Money offers a risk tolerance quiz (http://tinyurl.com/msnmoney-risk) that tells you two things: how comfortable you are taking risks and whether your personal circumstances are such that you can afford to take risks. • The Rutgers University website offers a risk tolerance quiz (http://tinyurl.com/ rutgers-risk) that identifies how comfortable you are with risk. • CalcXML.com (http://www.calcxml.com/do/inv08) determines your tolerance for risk by asking 10 questions about you, your financial situation, and how you would respond to several situations.

This section describes the different types of bad habits you may have as an investor and how to retrain yourself to be more successful. Which Type of Investor Are You? Researchers studying investors have categorized their behavior by risk tolerance, psychology, gender, and a gazillion other factors. However, all this research boils down to four investor types, based on the level of risk they’re willing to tolerate and on their confidence level, as the table below shows. If you recognize yourself in any of these descriptions, you can learn how to improve your investing habits. Most people see a little bit of themselves in a couple of the categories. This overlap is normal, so read all the descriptions and develop a plan that works for your personality. Insecure Confident Lower risk Protectors have low risk tolerance and are very insecure about money. They want to keep every nickel, even if it’ll be worth a penny in a few years.

They want to keep every nickel, even if it’ll be worth a penny in a few years. They’re emotional about their money, so rational arguments don’t persuade them. Higher risk Followers have a slightly higher risk tolerance, but are frightened by money. They don’t want to make bad decisions and they regret past decisions, so they want someone else to make decisions for them. Leaders are confident and willing to take risks to obtain higher returns. They’re analytical, independent thinkers. Power players have confidence and high risk tolerance, so they’re willing to take unnecessary risks just to play a hunch. Studies have shown that women are typically less confident and that men trade 45% more often than women. However, overall, men’s investment returns are 1.4% lower than women’s. Protectors Protectors hate change and they worry. If you’re a protector, you may work for the same company your whole life and keep your money in a savings account.


pages: 320 words: 33,385

Market Risk Analysis, Quantitative Methods in Finance by Carol Alexander

asset allocation, backtesting, barriers to entry, Brownian motion, capital asset pricing model, constrained optimization, credit crunch, Credit Default Swap, discounted cash flows, discrete time, diversification, diversified portfolio, en.wikipedia.org, fixed income, implied volatility, interest rate swap, market friction, market microstructure, p-value, performance metric, quantitative trading / quantitative finance, random walk, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, statistical arbitrage, statistical model, stochastic process, stochastic volatility, Thomas Bayes, transaction costs, value at risk, volatility smile, Wiener process, yield curve, zero-sum game

The answer is his absolute risk tolerance. For instance, suppose you are willing to bet 1 million on a gamble where you are returned either 2 million or 500,000 but you are not willing to bet more than this for a ‘double-or-half’ gamble. Then your coefficient of absolute risk tolerance is 106 (measured in ) and your absolute risk aversion coefficient is 10−6 (measured in −1 ). Similarly, to determine the relative risk tolerance of a risk averse investor, which is the reciprocal of his relative risk aversion coefficient, we should present him with the following question. Suppose you can gamble a certain proportion x of your wealth W on a lottery where you receive either 2(xW) or 21 xW with equal chances. What is maximum proportion x that you are willing to bet? The answer is his relative risk tolerance. For instance, suppose you are willing to bet 20% of your total net wealth on a gamble where you are returned either double your net wealth or one half of it with equal chances, but you are not willing to bet more than this for a ‘double-or-half’ gamble.

Example I.6.4: Higher moment criterion for an exponential investor Two portfolios have the returns characteristics shown in Table I.6.3. An investor with an exponential utility has 1 million to invest. Determine which portfolio he prefers when he invests: $ $ $ $ $ $ $ (i) 1 million and his absolute risk tolerance coefficient is 200,000; (ii) 1 million and his absolute risk tolerance coefficient is 400,000; (iii) 1 million and his absolute risk tolerance coefficient is 100,000; (iv) only 0.5 million and his absolute risk tolerance coefficient is 100,000. $ 11 $ This approximation only holds when x is small. It follows from the expansion of ln1 + x given in Section I.1.2.5. Introduction to Portfolio Theory 237 Table I.6.3 Returns characteristics for two portfolios Portfolio Mean A B 10% 15% Standard deviation Skewness Excess kurtosis −05 −075 2.5 1.5 12% 20% Solution (i) The absolute risk aversion coefficient, as a proportion of the amount invested, is = $1000000 = 5 $200000 In the spreadsheet for this example the certain equivalent is calculated using the approximation (I.6.23) with this value for and with the moments for each portfolio shown in Table I.6.3.

Introduction to Portfolio Theory 237 Table I.6.3 Returns characteristics for two portfolios Portfolio Mean A B 10% 15% Standard deviation Skewness Excess kurtosis −05 −075 2.5 1.5 12% 20% Solution (i) The absolute risk aversion coefficient, as a proportion of the amount invested, is = $1000000 = 5 $200000 In the spreadsheet for this example the certain equivalent is calculated using the approximation (I.6.23) with this value for and with the moments for each portfolio shown in Table I.6.3. Portfolio A has a certain equivalent of 57,700 and portfolio B has a certain equivalent of 12,500, hence portfolio A is preferred. (ii) If the risk tolerance were 400,000 instead of 200,000 then would be only 2.5 and portfolio B would be the preferred investment, with a certain equivalent of 92,188 compared with 80,763 for portfolio A. Hence, portfolio B is more attractive to a less risk averse investor. (iii) When the risk tolerance is small, i.e. the investor is very risk averse, becomes very large and then both portfolios are considered too risky. In fact, if the risk tolerance is only 100,000 then = 10 and the approximation (I.6.23) gives a negative certain equivalent for both investments. Portfolio A has a certain equivalent of − 8,000 and portfolio B has a certain equivalent of − 250,000 relative to an investment of 1 million.


pages: 368 words: 145,841

Financial Independence by John J. Vento

Affordable Care Act / Obamacare, Albert Einstein, asset allocation, diversification, diversified portfolio, estate planning, financial independence, fixed income, high net worth, Home mortgage interest deduction, money market fund, mortgage debt, mortgage tax deduction, oil shock, Own Your Own Home, passive income, risk tolerance, the rule of 72, time value of money, transaction costs, young professional, zero day

Because the question of your own personal risk tolerance revolves around human behavior and emotions, it is important to understand your own investment psychology. I consider this the investor’s psychological evaluation of his or her risk tolerance. There are many ways to measure your risk tolerance and numerous questionnaires are provided at many investment websites. You can also find one at http://finance.yahoo.com/calculator; scroll down to “Career & Education” and click on “What is my risk tolerance?” You will find 10 risk tolerance questions to help identify your comfort level with investment risk. Exhibit 9.1 provides a simplified version of a risk investment, risk profile questionnaire. Please take a few moments to answer these questions to determine your own investor risk tolerance profile and score. c09.indd 223 26/02/13 2:51 PM 224 Financial Independence (Getting to Point X ) Exhibit 9.1 Six Questions to Assess Your Investor Risk Tolerance Profile and Score 1.

This may have been best said by Warren Buffett, the primary shareholder, chairman, and CEO of Berkshire Hathaway, who is also considered by many to be the most successful investor of the twentieth century: Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value. The information and guidance on investments that I provide in this chapter is designed to help you stay the course toward financial independence and your point X. Analyzing Your Risk Tolerance Every investor has his own unique view on risk and can only tolerate a certain amount of losses before he or she becomes emotional. This ultimately leads to bad investment decisions. Of course, a higher level of risk corresponds to the potential for a higher rate of return on your investments. If your investing risk tolerance were as simple as stating you want the highest rate of return in the long run, then you would simply invest in the most speculative types of investments. But it is not that simple; instead, you need to examine your own personal tolerance to risk so that the ultimate investment portfolio you choose will have staying power in both good and bad times.

The appropriate investment plan for you should be the one that provides you with the highest potential rate of return in the long run that is within your risk tolerance. Part of determining your risk tolerance goes back to analyzing your personal behavior and how you deal with your other life issues. For example, if you typically are a nervous individual and tend to go down the straight-and-narrow path in life, then you most likely will choose a more conservative investment risk model. On the other hand, if you are fearless and like to live life in the fast lane, then you would most likely choose a more aggressive investment risk model. In evaluating your risk tolerance, you must also take into consideration what your ultimate financial goals will be. This will help you determine your time horizon. Generally, the shorter your time horizon, the less risk you should be willing to take on.


pages: 332 words: 81,289

Smarter Investing by Tim Hale

Albert Einstein, asset allocation, buy and hold, buy low sell high, capital asset pricing model, collapse of Lehman Brothers, corporate governance, credit crunch, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, eurozone crisis, fiat currency, financial independence, financial innovation, fixed income, full employment, implied volatility, index fund, information asymmetry, Isaac Newton, John Meriwether, Long Term Capital Management, Northern Rock, passive investing, Ponzi scheme, purchasing power parity, quantitative easing, random walk, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, South Sea Bubble, technology bubble, the rule of 72, time value of money, transaction costs, Vanguard fund, women in the workforce, zero-sum game

In simple terms shares should give a higher return than cash but with greater likelihood of variation above and below. Risk capacity is the amount of money you could lose without putting your important short and long term goals at risk. Risk tolerance is best understood as the amount of financial risk you would naturally be comfortable with taking, all else being equal. Risk required and risk capacity vary with individual circumstances over time whereas risk tolerance is an enduring and generally persistent personal trait. So here’s the rub. Rarely do all three line up. More often than not the risk you need to take (risk required) is more than you could afford to take (risk capacity) and more than you normally prefer to take (risk tolerance). Which is the dominant one for you? What is the right mix? Many individuals would prefer to say this is just too hard. But you and your family will live the outcomes of these decisions and they must be made based on your values and priorities, not someone else’s.

It illustrates some research work that was undertaken using the period between May 1999 and December 2008 (Davey, 2009), which captures the last desperate moments of the technology boom and subsequent bust, the rise in the markets from 2003 to 2007 and the slump from the end of 2007. The global equity markets are overlaid on top of the average risk profile from the UK, USA, Australia and New Zealand. The conclusion is obvious: risk tolerance is a pretty stable trait. Figure A1.1 Risk tolerance appears to be stable despite market crashes Source: Risk tolerance – data from UK, US, Australia and New Zealand FinaMetrica © Copyright all rights reserved 2009. Global equities – MSCI (www.msci.com) Ascertaining your risk profile If you have ever used an adviser then you will no doubt have been subjected to some form of questionnaire or discussion about your ‘attitude to risk’. Not surprising given its importance and the regulator’s requirement for advisers to do so: ‘Ascertaining a private customer’s true attitude to risk is critical for any adviser in assessing suitability and making an investment recommendation.’

Ideally, you would own shorter-dated inflation-linked bonds and shorter dated conventional bonds, again hedged back to sterling if you go global (e.g. five years) as they have lower price sensitivity to changes in yields and therefore have a low level of volatility and thus short-term risk to capital. In practice your implementation options are somewhat limited by availability of suitable products, although that is slowly changing. This is discussed in more detail in Chapter 11. The more risk tolerant long-term investor At the other end of the risk spectrum, imagine that you are a pretty risk tolerant investor comfortable with suffering interim losses in pursuit of more aggressive goals. As a consequence you own a pretty high allocation of equities/risky assets, let us say 80%. Unlike the cautious investor, you are protected reasonably well from inflation by owning equities and global commercial property in your growth-oriented mix. You are not too worried by volatility, as reflected in your risky asset mix, unlike the cautious investor.


pages: 77 words: 18,414

How to Kick Ass on Wall Street by Andy Kessler

Andy Kessler, Bernie Madoff, buttonwood tree, call centre, collateralized debt obligation, family office, fixed income, hiring and firing, invention of the wheel, invisible hand, London Whale, margin call, NetJets, Nick Leeson, pets.com, risk tolerance, Silicon Valley, sovereign wealth fund, time value of money, too big to fail, value at risk

Companies are willing to sell these shares to accelerate their business plans, build a new factory, hire 1000 new programmers, whatever. Again, risk is matched with risk tolerance. The buyer of the shares takes on the risk of future profits in exchange for their hard earned capital. It’s a decent deal, hopefully better than the short term interest rate a bank pays – a less risky return. Company shares trade every day, meaning individuals or funds of individuals can raise or lower their risk tolerance by owning shares of future profits in different industries. Getting a little old and not feeling so risky? You might buy shares in Kraft because everyone eats processed cheese. Maybe you have a higher risk tolerance? You buy shares of the future profits of Social Solar Mobility Nanoparticle Networks, hoping it becomes the next big thing.

HOW WALL STREET IS REALLY SUPPOSED TO WORK This is a little bonus (don’t roll your eyes) on the future of Wall Street. Cocktail party conversation stuff. Enjoy: It’s easy to forget how Wall Street and banks and finance are really supposed to work. Home loans and stock trading and IPOs all exist to serve the economy, it’s ALL about the best way of allocating capital, by matching risk with risk tolerance. The rest is just expensive noise. Credit crises and panics happen. Capital gets misallocated. Markets aren’t all knowing. Banks make bad loans. All the time. It used to happen more often, but the Federal Reserve and the FDIC now smooth out these cycles, often pushing problems down the road until they blow up into a full blown panic. Let’s go back to basics. Economies grow via savings, taking the profits going back to the invention of the wheel (or maybe the sale of that Eden apple) and reinvesting it in more and more productive businesses.

So banks found that longer term profit center of their own, lending you the money to buy a home, or a business the money to buy equipment, in exchange for monthly payments, a piece of the human profits you create or a piece of business profits. A pretty fair bargain – the bank takes on the risk of owning these fixed assets (if you fail to make payments) in exchange for a piece of your output. Risk tolerances are matched. Workers lower their take in exchange for ownership of a fixed asset they don’t really own outright. In fact, it’s a societal bargain as well. You gotta keep working. As Popeye’s pal Whimpie said, I’ll gladly pay you Tuesday for a hamburger today, but it meant Whimpie had to work the rest of the week to make enough money to pay off the burger if he ever wanted another one. Wall Street and investment banks are just banks for business profits instead of business assets.


Bulletproof Problem Solving by Charles Conn, Robert McLean

active transport: walking or cycling, Airbnb, Amazon Mechanical Turk, asset allocation, availability heuristic, Bayesian statistics, Black Swan, blockchain, business process, call centre, carbon footprint, cloud computing, correlation does not imply causation, Credit Default Swap, crowdsourcing, David Brooks, Donald Trump, Elon Musk, endowment effect, future of work, Hyperloop, Innovator's Dilemma, inventory management, iterative process, loss aversion, meta analysis, meta-analysis, Nate Silver, nudge unit, Occam's razor, pattern recognition, pets.com, prediction markets, principal–agent problem, RAND corporation, randomized controlled trial, risk tolerance, Silicon Valley, smart contracts, stem cell, the rule of 72, the scientific method, The Signal and the Noise by Nate Silver, time value of money, transfer pricing, Vilfredo Pareto, walkable city, WikiLeaks

If you have a healthy lifestyle, it is higher again. If you live in a town with high environmental quality, it reduces respiratory and cardiovascular illnesses and other diseases. If your runway has all the positives, you need to be planning to live longer. Consider Your Risk Tolerance Volatility around investment returns for your retirement account movements creates income uncertainty. Different individuals will have different risk tolerance for how to handle this uncertainty. If you believe you will have high longevity and you have low risk tolerance for depleting your savings, then you could consider buying an annuity that covers your lifetime and making adjustments to your budget to balance spending to income. Buying an annuity is a classic insurance policy to handle uncertainty. You get peace of mind around having savings that last a lifetime with an annuity, but trade that certainty off with lower returns.

You can use your inside knowledge about your personal level of ability, interests, and risk tolerance to guide your education and career choice decisions. Jeff Wald, the cofounder and president of WorkMarket asks, “What are you passionate about? Does that map to what skill sets are needed?”11 To do this, we begin with a simple chart to fill in. Each horizontal row in the chart represents a broad potential field or sector in which you may end up working; there are four vertical columns: The first is the current economic predictions for the field, the next are your personal assessments of your ability, interest, and ability to take risks. The first column can be completed and updated using economic predictions. For each potential field, subject area, or employment sector, you fill in your self‐assessed strength, interest, and risk‐tolerance levels in the second, third, and fourth columns.

When faced with high ability, high interest, high risk tolerance, and high economic opportunity, entrepreneurship may be calling out your name. However, it is often more likely that all your stars may not be in perfect alignment; in this case, you may need to make a no regrets move and obtain a base of education, or choose to hedge your bets across two fields with strategies such as double majoring or continued education while working. Exhibit 8.5 illustrates these strategic choices. EXHIBIT 8.5 The tree, table, and series of action trees shown in Exhibit 8.5 can easily be applied and iterated upon by an individual while they are in the process of making their education or career choice, making decisions appropriate to their passions, skills, and risk tolerance. Case Study: Will My Retirement Savings Last?


pages: 335 words: 94,657

The Bogleheads' Guide to Investing by Taylor Larimore, Michael Leboeuf, Mel Lindauer

asset allocation, buy and hold, buy low sell high, corporate governance, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, endowment effect, estate planning, financial independence, financial innovation, high net worth, index fund, late fees, Long Term Capital Management, loss aversion, Louis Bachelier, margin call, market bubble, mental accounting, money market fund, passive investing, Paul Samuelson, random walk, risk tolerance, risk/return, Sharpe ratio, statistical model, stocks for the long run, survivorship bias, the rule of 72, transaction costs, Vanguard fund, yield curve, zero-sum game

Over a 70-year period from 1935 to 2004, we can clearly see that an investor in stocks for only one year could have lost 43 percent. However, the most unlucky investor who stayed in stocks for 10 years would have only lost 1 percent. Stocks are desirable as part of a portfolio for longterm goals due to their higher expected return. What Is Your Risk Tolerance? The first thing to do when developing an allocation is to come up with a risk profile. -Errold E Moody Knowing your risk tolerance is a very important aspect of investing and one that the academics have studied extensively. Their experiments prove that most investors are more fearful of a loss than they are happy with a gain. We all know people who are afraid of investing in the stock market because they know they might lose money. Risk-averse savers keep billions of dollars in CDs and bank savings accounts, despite their low yields.

Risk-averse savers keep billions of dollars in CDs and bank savings accounts, despite their low yields. At the other extreme, we know of investors like Donald Trump who think nothing of investing hundreds of millions of dollars in speculative investments-and are seemingly unworried even when bankruptcy looms. Most of us have a risk tolerance that lies somewhere between these extremes. In order to help determine if your portfolio is suitable for your risk tolerance, you need to be brutally honest with yourself as you try to answer the question, "Will I sell during the next bear market?" Here are some stats that might help you answer that question. On March 10, 2000, the Nasdaq Composite Index reached an alltime closing high of 5,049. Thirty-two months later, on October 9, 2002, it was down to 1,224-more than a 75 percent loss for investors who sold at that time.

Over time, the longer-term bonds become intermediate-term bonds, the intermediate-term bonds become short-term bonds, and the short-term bonds eventually mature and are replaced with new bonds. Even though bond funds don't have a maturity date, they do have a measure to help bond fund investors determine if a particular bond fund might be appropriate for them, considering their time horizon and risk tolerance level. The term for that measure is duration. Duration is stated in whole and partial years, such as 4.3 years. Most nontechnical bond and bond fund investors simply use the duration figure to predict a bond or bond fund's price volatility in a rising or falling interest rate environment. The higher the duration figure, the more volatile the bond or bond fund would be in a changing interest rate environment.


pages: 317 words: 106,130

The New Science of Asset Allocation: Risk Management in a Multi-Asset World by Thomas Schneeweis, Garry B. Crowder, Hossein Kazemi

asset allocation, backtesting, Bernie Madoff, Black Swan, business cycle, buy and hold, capital asset pricing model, collateralized debt obligation, commodity trading advisor, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, fixed income, high net worth, implied volatility, index fund, interest rate swap, invisible hand, market microstructure, merger arbitrage, moral hazard, Myron Scholes, passive investing, Richard Feynman, Richard Feynman: Challenger O-ring, risk tolerance, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, statistical model, stocks for the long run, survivorship bias, systematic trading, technology bubble, the market place, Thomas Kuhn: the structure of scientific revolutions, transaction costs, value at risk, yield curve, zero-sum game

SAMPLE ALLOCATIONS The decision that drives the asset allocation process is the underlying risk tolerance of the investor. As discussed in Chapter 4, an investor’s risk tolerance may cover a range of desired risk exposures.2 Typically those ranges have included conservative, moderate, and aggressive risk based portfolios. Within each of these risk tolerance classifications, investors may decide to invest primarily in traditional security investments or they may decide to place additional investments in the alternative investment area without dramatically changing volatility characteristics. These portfolios will reflect an investor’s characteristics such as assets, liabilities, time horizon, tax status, and risk tolerance. It is fully expected that increased investment in private equity and hedge funds offer financial consultants the investment products required to provide their clients unique returns that are not available through traditional stocks and bonds; and, just as important, provide financial consultants with a set of assets that enable them to show their unique educational role.

This step begins by a description of the investor’s financial condition (assets, liabilities, financial goals, taxes, etc.) and then proceeds with an estimation of the client’s risk capacity and risk tolerance. 3. Optimal asset mix. In this final stage the above information is employed to develop an investment policy statement and to recommend a strategic optimal asset mix. If alternative investments such as private equity and hedge funds are to be included in an investor’s optimal portfolio allocation, investors need to determine: ■ ■ ■ If alternative investments such as private equity and hedge funds represent a distinct asset class and therefore should be included in the analysis taken place in Step 1. If individuals’ risk tolerance makes a compelling case for the inclusion of alternative investments in the optimal asset mix as determined from Step 2. If, as discussed in Step 3, an asset allocation process that includes investment in alternative assets fits the investment policy guidelines and presents a strategic asset mix of traditional and alternative investments that is consistent with investment policy.

For many portfolios, it is necessary to back into the asset allocation decision by first determining a reasonable set of investment vehicles with the desired liquidity and return characteristics. For most, xvi PREFACE traditional asset allocation remains the simple choice of mixing various asset classes to provide a mix of assets that offers increased expected return for a particular level of risk tolerance. However, as discussed previously there is no one definition of risk. Before risk can be managed, the fundamental risks impacting a particular investor must be understood. Chapter 9 reviews some of the major risks facing an investor as well as some common methods of managing them. Finally, we provide several examples of how simple approaches to risk management based on futures markets, options markets, and other basic forms of dynamic asset allocation can fundamentally transform the risk exposure of various investment vehicles.


No Slack: The Financial Lives of Low-Income Americans by Michael S. Barr

active measures, asset allocation, Bayesian statistics, business cycle, Cass Sunstein, conceptual framework, Daniel Kahneman / Amos Tversky, financial exclusion, financial innovation, Home mortgage interest deduction, income inequality, information asymmetry, labor-force participation, late fees, London Interbank Offered Rate, loss aversion, market friction, mental accounting, Milgram experiment, mobile money, money market fund, mortgage debt, mortgage tax deduction, New Urbanism, p-value, payday loans, race to the bottom, regulatory arbitrage, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, the payments system, transaction costs, unbanked and underbanked, underbanked

While jewelry, gold, appliances, electronics, and the contents of a bank safe deposit box may not be equally liquid in the sense that there are different transaction costs associated with converting them to cash, the wording of these questions does not permit further refinement. 12864-10_CH10_3rdPgs.indd 225 3/23/12 11:57 AM 226 michael s. barr and jane k. dokko respondent’s month-to-month income fluctuated during the year preceding the survey.9 The risk tolerance and time preference questions are similar to those in the Health and Retirement Survey and discussed by Robert Barsky and his colleagues (1997). Risk tolerance measures the probabilities at which a respondent is willing to choose a gamble with lifetime income over the certainty of his or her lifetime income. The time preference variables measure whether a respondent would rather pay for a $300 appliance today or a series of higher amounts one year in the future. Barsky and others (1997) provide evidence that the survey measure of risk tolerance identifies individuals in the Health and Retirement Survey who are more likely to engage in risky behaviors. Results The results suggest that dynamic inconsistency may best explain the heterogeneity in wanting to overwithhold across portfolio allocation groups.

Individuals with one liquid asset are also 10 percentage points more likely to want to overwithhold, but this difference is barely insignificant at the 10 percent level. This point estimate, however, is similar in magnitude to the one in column 1. 15. In addition, controlling for risk tolerance and time preference suggests that portfolio allocation is correlated with wanting to overwithhold above and beyond what is implied by the permanent-income hypothesis. If, for instance, illiquid assets are riskier, then the standard portfoliochoice paradigm suggests that the relationship between asset allocation and withholding preference is driven by risk tolerance, with more-risk-tolerant (that is, less-risk-averse) individuals holding more illiquid assets and wanting to hold more illiquid assets. 12864-10_CH10_3rdPgs.indd 232 3/23/12 11:57 AM paying to save 233 We argue that the relationship between an individual’s portfolio allocation and withholding preference is consistent with models with present-biased preferences but not with standard explanations.

A cubic in annual household income distinguishes column 5 from column 4. Income is highly correlated with the number and type of assets a tax filer holds; however, a statistically significant relationship between asset allocation and wanting to overwithhold remains. Beginning in column 6, measures of risk tolerance and time preference are included as controls. The inclusion of these control variables sheds light on whether the heterogeneity in wanting to overwithhold across the portfolio allocation groups proxies for their differences in risk tolerance and time preference. If, for instance, those with mainly illiquid assets are more risk averse, then they may have a stronger preference for overwithholding to avoid owing taxes and penalties. Alternatively, if those with one liquid asset are more likely to have negative discount rates, then they may want to overwithhold more than the other portfolio allocation groups.15 Columns 6 to 8 allow these alternative scenarios to be rejected.


pages: 407 words: 114,478

The Four Pillars of Investing: Lessons for Building a Winning Portfolio by William J. Bernstein

asset allocation, Bretton Woods, British Empire, business cycle, butter production in bangladesh, buy and hold, buy low sell high, carried interest, corporate governance, cuban missile crisis, Daniel Kahneman / Amos Tversky, Dava Sobel, diversification, diversified portfolio, Edmond Halley, equity premium, estate planning, Eugene Fama: efficient market hypothesis, financial independence, financial innovation, fixed income, George Santayana, German hyperinflation, high net worth, hindsight bias, Hyman Minsky, index fund, invention of the telegraph, Isaac Newton, John Harrison: Longitude, Long Term Capital Management, loss aversion, market bubble, mental accounting, money market fund, mortgage debt, new economy, pattern recognition, Paul Samuelson, quantitative easing, railway mania, random walk, Richard Thaler, risk tolerance, risk/return, Robert Shiller, Robert Shiller, South Sea Bubble, stocks for the long run, stocks for the long term, survivorship bias, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the rule of 72, transaction costs, Vanguard fund, yield curve, zero-sum game

Table 4-1. 1901–2000, 100-Year Annualized Return versus 1973–1974 Bear Market Return The data in Table 4-1 and the plot in Figure 4-6 vividly portray the tradeoff between risk and return. The key point is this: the choice between stocks and bonds is not an either/or problem. Instead, the vital first step in portfolio strategy is to assess your risk tolerance. This will, in turn, determine your overall balance between risky and riskless assets—that is, between stocks and short-term bonds and bills. Many investors start at the opposite end of the problem—by deciding upon the amount of return they require to meet their retirement, educational, life style, or housing goals. This is a mistake. If your portfolio risk exceeds your tolerance for loss, there is a high likelihood that you will abandon your plan when the going gets rough. That is not to say that your return requirements are immaterial. For example, if you have saved a large amount for retirement and do not plan to leave a large estate for your heirs or to charity, you may require a very low return to meet your ongoing financial needs.

Now all Ted has to do is to determine his overall stock/bond mix. First he takes a look at Figures 4-1 through 4-5. Being an analytical type, he comes up with a table that relates his risk tolerance to his overall stock allocation. This is shown in Table 13-7. Take a good look at it. Realize that this is only a starting point. Have you ever actually lost 25% of your assets? It is one thing to think about it, and quite another to actually have it happen to you. (Remember the aircraft-simulator crash versus real-aircraft crash analogy mentioned earlier.) The classic beginner’s mistake is to overestimate his risk tolerance, then decamp forever from stocks when the inevitable loss hurts more than he had ever expected. When in doubt, tone down your portfolio’s risks by shaving your exposure to stocks.

But you are also minimizing the chances of impoverishing yourself and the ones you love. CHAPTER 13 SUMMARY 1. The major stock asset classes you should own are domestic, foreign, and REITs. You may further break the domestic portion into the “four corners”: large market, small market, large value, and small value. 2. Your overall stock/bond allocation is determined by your time horizon, risk tolerance, and tax structure. Since stock and bond returns may be quite similar in the future, you should hold at least 20% in bonds, no matter how risk tolerant you think you are. 3. The stock and bond asset classes you employ are primarily dictated by the percentage of your portfolio that is tax-sheltered. 4. The easiest asset structures to design are those where more than half of assets are tax-sheltered. 5. If you have less than 50% of your assets in sheltered vehicles, you should place value stocks and REITs in them.


pages: 719 words: 181,090

Site Reliability Engineering: How Google Runs Production Systems by Betsy Beyer, Chris Jones, Jennifer Petoff, Niall Richard Murphy

Air France Flight 447, anti-pattern, barriers to entry, business intelligence, business process, Checklist Manifesto, cloud computing, combinatorial explosion, continuous integration, correlation does not imply causation, crowdsourcing, database schema, defense in depth, DevOps, en.wikipedia.org, fault tolerance, Flash crash, George Santayana, Google Chrome, Google Earth, information asymmetry, job automation, job satisfaction, Kubernetes, linear programming, load shedding, loose coupling, meta analysis, meta-analysis, microservices, minimum viable product, MVC pattern, performance metric, platform as a service, revision control, risk tolerance, side project, six sigma, the scientific method, Toyota Production System, trickle-down economics, web application, zero day

Most often, we set quarterly availability targets for a service and track our performance against those targets on a weekly, or even daily, basis. This strategy lets us manage the service to a high-level availability objective by looking for, tracking down, and fixing meaningful deviations as they inevitably arise. See Chapter 4 for more details. Risk Tolerance of Services What does it mean to identify the risk tolerance of a service? In a formal environment or in the case of safety-critical systems, the risk tolerance of services is typically built directly into the basic product or service definition. At Google, services’ risk tolerance tends to be less clearly defined. To identify the risk tolerance of a service, SREs must work with the product owners to turn a set of business goals into explicit objectives to which we can engineer. In this case, the business goals we’re concerned about have a direct impact on the performance and reliability of the service offered.

We’ll discuss the consumer and infrastructure cases in turn. Identifying the Risk Tolerance of Consumer Services Our consumer services often have a product team that acts as the business owner for an application. For example, Search, Google Maps, and Google Docs each have their own product managers. These product managers are charged with understanding the users and the business, and for shaping the product for success in the marketplace. When a product team exists, that team is usually the best resource to discuss the reliability requirements for a service. In the absence of a dedicated product team, the engineers building the system often play this role either knowingly or unknowingly. There are many factors to consider when assessing the risk tolerance of services, such as the following: What level of availability is required?

Identifying the Risk Tolerance of Infrastructure Services The requirements for building and running infrastructure components differ from the requirements for consumer products in a number of ways. A fundamental difference is that, by definition, infrastructure components have multiple clients, often with varying needs. Target level of availability Consider Bigtable [Cha06], a massive-scale distributed storage system for structured data. Some consumer services serve data directly from Bigtable in the path of a user request. Such services need low latency and high reliability. Other teams use Bigtable as a repository for data that they use to perform offline analysis (e.g., MapReduce) on a regular basis. These teams tend to be more concerned about throughput than reliability. Risk tolerance for these two use cases is quite distinct.


pages: 261 words: 70,584

Retirementology: Rethinking the American Dream in a New Economy by Gregory Brandon Salsbury

Albert Einstein, asset allocation, buy and hold, carried interest, Cass Sunstein, credit crunch, Daniel Kahneman / Amos Tversky, diversification, estate planning, financial independence, fixed income, full employment, hindsight bias, housing crisis, loss aversion, market bubble, market clearing, mass affluent, Maui Hawaii, mental accounting, mortgage debt, mortgage tax deduction, negative equity, new economy, RFID, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, side project, Silicon Valley, Steve Jobs, the rule of 72, Yogi Berra

For example, if we assume this individual had invested $500,000, he would need a rate of return of 10% each year to meet his retirement objectives. A 10% rate of return would require a substantially higher level of risk and, most likely, greater volatility. Your risk tolerance and the amount of risk you are willing to take when it comes to your retirement nest egg are important considerations when determining how much you need to invest and when you will retire. So, the less risk you can take to meet your objectives, the more comfortable you may be in meeting them. Understanding your own personal objectives and risk tolerance will help you overcome the desire to herd with the masses. Set Long-Term Financial Goals The achievement of any goal requires a plan. A goal without a plan is a wish. Where do you see yourself in 10, 20, or 30 years?

Endnotes 1 “77 Million Baby Boomers Ponder Next Career Steps,” Careers.org, October 5, 2009. What’s Your Retirementology I.Q.? Here are ten essential questions to ask yourself before reading this book: 1. When did you retire or when do you NOW expect to retire? 2. What role do you envision your house playing in your retirement? 3. What changes in your household spending if any do you think make sense today? 4. Do you believe your risk tolerance has changed in the last 18 months? 5. Do you think the likelihood of having to financially support extended family has impacted your retirement? 6. Would you be willing to put away your credit cards and use cash for just one month? 7. What is the lifestyle you expect in retirement--housing, travel, club membership, entertainment, and so on? 8. Do you have legacy plans? 9. Have you accounted for the impact of healthcare costs and taxes in retirement?

Innumerable other scenarios undoubtedly played a role, but the end result was undeniable: The bubble had burst, and a herding stampede had played a preeminent role. Improve Your Retirementology IQ These are scary times for an investor and for a retiree. But this is not the first time we’ve had an unnerving investment landscape. Understanding some retirement basics is a good start. Rather than following the herd, consider following these fundamental steps. Understand Your Objectives and Assess Your Risk Tolerance You must understand where you are in life, where you want to go with your financial future, and how much risk you are willing to take, or should take, to get you there. There are two key points to understanding your objectives: the anticipated cost of the objective and the timeframe you have to meet your objective. The absence of one of these points of reference makes it impractical to plan financially to meet your objective or to assign an appropriate level of risk to your investment decisions.


pages: 357 words: 91,331

I Will Teach You To Be Rich by Sethi, Ramit

Albert Einstein, asset allocation, buy and hold, buy low sell high, diversification, diversified portfolio, index fund, late fees, money market fund, mortgage debt, mortgage tax deduction, prediction markets, random walk, risk tolerance, Robert Shiller, Robert Shiller, shareholder value, Silicon Valley, survivorship bias, the rule of 72, Vanguard fund

Moves like this don’t bother me as much as they might bother other people (my wife, for example) because my risk tolerance is high. I have twenty or thirty years to go before retirement. That’s two or three decades to recover from any further market drops. Risk and reward go hand in hand. The historically high returns of the stock market are impossible without risk; anyone who tells you otherwise is lying. But not everyone can stomach having all of their investments in stocks and mutual funds. If your risk tolerance is low (if you’re scared of bears), or you’re approaching retirement, it’s best to keep your money someplace safe, such as bond funds or high-yield savings accounts. I keep cash equal to a few months of expenses in savings. I have a friend who is far less risk-tolerant than I am who keeps an entire year of expenses in savings.

LIFECYCLE FUNDS AUTOMATICALLY ADJUST AS YOU GET OLDER * * * Here’s a comparison of two popular lifecycle funds. These funds target roughly the same age—someone in his or her twenties—and assume retirement at age sixty-five. You should pay special attention to the minimum initial investment (it matters if you don’t have a lot of money lying around) and the asset allocation, which will help you determine which fund most suits your risk tolerance. Remember, these are only two example funds; you can choose among many lifecycle funds offered by companies like the ones I list on page 187. The major benefit to a lifecycle fund is that you set it and forget it. You just keep sending money and your fund will handle the allocation, trading, and maintenance, automatically diversifying for you. If you invest in a lifecycle fund, you could literally spend minutes per year on your investments.

One advantage is that the fund requires only a $1,000 minimum to invest if you’re doing it within a Roth IRA. Other popular companies with lifecycle funds include Schwab, Fidelity, and TIAA-CREF. Check their websites or call them up (see page 87 for some contact information). You want to look for lifecycle funds, which may also be called target-date retirement funds. Note: Those target dates are just a suggestion. You can choose any lifecycle fund, depending on your age and risk tolerance. So if you’re twenty-five and pretty risk averse, you can pick a fund designed for someone older, which will give you a more conservative asset allocation. BUYING INTO YOUR LIFECYCLE FUND Now that you’ve identified a lifecycle fund to invest in, actually buying it is an easy process. Log in to your Roth IRA (which you opened in Chapter 3). Your login information should be handy if you followed my tip on page 88.


The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk by William J. Bernstein

asset allocation, backtesting, buy and hold, capital asset pricing model, commoditize, computer age, correlation coefficient, diversification, diversified portfolio, Eugene Fama: efficient market hypothesis, fixed income, index arbitrage, index fund, intangible asset, Long Term Capital Management, p-value, passive investing, prediction markets, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, South Sea Bubble, stocks for the long run, survivorship bias, the rule of 72, the scientific method, time value of money, transaction costs, Vanguard fund, Yogi Berra, zero-coupon bond

This is essentially a recapitulation of the Chapter 5 discussion, except that I’ve changed the order of the steps: 1. Determine your basic allocation between stocks and bonds. First, answer the question, “What is the biggest annual portfolio loss I am willing to tolerate in order to get the highest returns?” Table 8-1 summarizes the process of determining your risk tolerance. In previous versions of the book, I allowed the most risk-tolerant investors 100% equity exposure. At the present time, however, it appears that expected stock and bond returns going forward may not be all that different, and a dollop of bonds is recommended for all investors. The percentage stock recommendations in Table 8-1 will need to be revised downward depending on your time horizon. Your 143 144 The Intelligent Asset Allocator Table 8-1.

Acquire an appreciation of the nature of and fundamental relationship between risk and reward in the financial markets. 3. Learn about the risk/reward characteristics of various specific investment types. 4. Appreciate that diversified portfolios behave very differently than the individual assets in them, in much the same way that a cake tastes different from shortening, flour, butter, and sugar. This is called portfolio theory and is critical to your future success. 5. Estimate how much risk you can tolerate; then learn how to use portfolio theory to construct a portfolio tailored to produce the most return for that amount of risk. 6. At this point you are finally ready to purchase individual stocks, bonds, and mutual funds. If you have succeeded in the above tasks, this is by far the easiest step. The Intelligent Asset Allocator will take you through the above steps chapter by chapter on your journey to a coherent and effective lifetime investment strategy.

Recall from Chapter 4 that international small stocks have lagged the S&P 500 by 19% per year since 1990, even though their performance over the past 30 years has been outstanding. In fact, the more exotic asset classes you add to your mix, the higher your tracking error will be. Remember, that tracking error does not mean lower returns, it just means that your portfolio will behave very differently from everyone else’s, and that it will often temporarily underperform everybody else’s. Risk Tolerance The third step in the asset allocation process is by far the easiest. You have already done the heavy lifting—deciding what stock asset classes to use, 80 The Intelligent Asset Allocator and in approximately what proportion to use them. Now all you have to determine is the overall mix of stocks and bonds. In the first versions of this book, I recommended that the most aggressive investors might consider a 100% equity portfolio.


pages: 300 words: 77,787

Investing Demystified: How to Invest Without Speculation and Sleepless Nights by Lars Kroijer

Andrei Shleifer, asset allocation, asset-backed security, Bernie Madoff, bitcoin, Black Swan, BRICs, Carmen Reinhart, cleantech, compound rate of return, credit crunch, diversification, diversified portfolio, equity premium, estate planning, fixed income, high net worth, implied volatility, index fund, intangible asset, invisible hand, Kenneth Rogoff, market bubble, money market fund, passive investing, pattern recognition, prediction markets, risk tolerance, risk/return, Robert Shiller, Robert Shiller, selection bias, sovereign wealth fund, too big to fail, transaction costs, Vanguard fund, yield curve, zero-coupon bond

Since the time horizon for those descendants can be much longer term, the portfolio could well include some equities and a generally riskier profile than if it was just for the retirees. It really does depend on your circumstances Like most things in investing, allocations are highly subject to individual circumstances and risk tolerance. Figure 10.4 shows how an investor’s allocations may change over his or her life, ignoring the complication of risky government and corporate bonds in the rational portfolio. Figure 10.4 Stages of life: moving from equities as you age Risk surveys As discussed above, getting a handle on your risk tolerances is not only critical in investment management, but also a very individual thing. In my view, far too often investors rely on their gut feelings in deciding on the risk levels in their portfolios, or are guilty of what some call ‘recency’ where we over-emphasise recent events in planning for the future.

You find them at most banks, insurance companies, asset management firms or your local regulator. As suggested, they are meant to give you an idea about your risk tolerances, often via stress tests, but in my view risk surveys often leave a lot to be desired. Risk surveys that I have completed are too simplistic to give a really detailed view of your risk profile, often because they don’t ask enough questions about your specific situation. Sometimes I find that the surveys are a prelude to someone trying to sell me a specific ‘tailor-made’ product (read: expensive), instead of objectively trying to help me understand my risk tolerance. In addition, risk surveys often fail to properly incorporate all my other assets and liabilities, including seemingly odd ones like education, inheritance, future tuition for children, or other critical things like what stage of life I’m at regarding career or retirement.

Table 3.1 The rational portfolio at different risk preferences So someone with £100 to invest and a medium ‘C’ risk profile could do as follows: Allocation Investment £33 UK government bond tracker with maturity matching investor’s time horizon £50 World equity index tracker product £7 Diversified return generating government bonds of varying maturities, countries and currencies, rated sub-AA £10 Broad range of corporate bonds of varying maturity, credit risk, currency, issuer and geography. I will discuss how I came up with the allocations above. Whilst the allocations are not an exact science and therefore do not have to be implemented in exactly the proportions illustrated, you would do very well if you implement your portfolio in a similar manner. Of course our risk tolerances differ. Let’s say that we have $100 now and need $110 in 10 years’ time, and that we invest in the world equity markets where we expect real returns of about 5% a year. If we assume that performance every year will in fact be 5% we know that in 10 years our $100 will have become $162 and be far in excess of what we need. But that is not the whole story. Since the equity markets are inherently risky, what can we say about the probability that we don’t reach $110?


pages: 337 words: 89,075

Understanding Asset Allocation: An Intuitive Approach to Maximizing Your Portfolio by Victor A. Canto

accounting loophole / creative accounting, airline deregulation, Andrei Shleifer, asset allocation, Bretton Woods, business cycle, buy and hold, buy low sell high, capital asset pricing model, commodity trading advisor, corporate governance, discounted cash flows, diversification, diversified portfolio, fixed income, frictionless, high net worth, index fund, inflation targeting, invisible hand, John Meriwether, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low cost airline, market bubble, merger arbitrage, money market fund, new economy, passive investing, Paul Samuelson, price mechanism, purchasing power parity, risk tolerance, risk-adjusted returns, risk/return, Ronald Reagan, selection bias, shareholder value, Sharpe ratio, short selling, statistical arbitrage, stocks for the long run, survivorship bias, the market place, transaction costs, Y2K, yield curve, zero-sum game

This outline, combined with the forecast of the economic indicators, suggests the portfolio tilts needed to take advantage of the foreseen economic environment. 64 UNDERSTANDING ASSET ALLOCATION Economic Drivers Asset Choices Rising Inflation Rate Real Interest Rates Inflation, Taxes, and Regulation Inflation Induced Tax Bracket Creep Foreign Exchange Value of the Dollar T-Bills Falling T-Bonds Rising Equities Falling T-Bonds Rising Small-Cap Falling Large-Cap Rising Value Falling Growth Rising Domestic Falling Foreign Figure 3.4 Economic drivers and asset choices. The final element of the cyclical strategy is to forecast the foreign-exchange market. The conviction of this forecast can then be used to tilt a portfolio in favor of the asset class favored by the exchange-rate forecast. How much of the potential gain is captured by this strategy depends on the quality of the forecast and the risk tolerance of the investor. The greater the risk aversion, the less sensitive the tilt around the long-run allocation. This approach suggests a simple way for investors to take advantage of changing conditions over business and economic cycles. Chapter 3 Thinking in Cycles 65 This page intentionally left blank 4 TAX TIPS 67 T he corporate story in recent years has been an ugly one. But most black ink dedicated to corporate accounting scandals, questionable capital structures, distorted executive-compensation packages, and rising equity risk premiums has failed to pinpoint an important source of the ugliness: Each undesirable episode was in part influenced by the tax changes that took place over the last two decades.

Allocations Based on the Last 30 Years Traditionally, developing an SAA is a two-step process, and a perilous one for the individual investor. The first step uses the asset classes’ historical returns and the variance–covariance matrix to build a combination of the various asset classes that leads one to the efficient frontier. This step also leads an investor to the point where maximum expected returns are reached for a determined risk level. The second step determines risk tolerance so an investor can choose the risk/return combination best suiting his or her preferences. I have two major objections to this process as it is currently practiced. The first objection is simply empirical: How long of a historical sample does one need to determine long-run historical returns and the variance–covariance matrix? In earlier chapters, I used traditional asset-allocation tools to decide whether individual asset classes—Treasury bonds (T-bonds), small-caps, large-caps, value stocks, growth stocks, and domestic/international stocks—would be included on the efficient frontier and thus be potentially included in an investor portfolio.

This is a daunting task for an investor, let alone an individual financial advisor. A simple way, however, exists to approach and solve the problem. The efficient market theory tells us that, in an idealized situation, the market portfolio is on the efficient frontier. If this is the case, then all asset classes should be included on the efficient frontier and, therefore, in an economy-wide (or aggregate) SAA portfolio. As it is true individuals differ regarding their risk-tolerances and investment preferences, it follows their individual asset-allocation plans differ from those of the aggregate economy. Investors, however, cannot collectively avoid economy-wide constraints. Ultimately, a weighted average of individual asset allocations must add up to the market allocation. So, the market allocation is a good place to start building an SAA program. One can argue the market allocation is the relevant allocation for an infinite number of foundations and trust funds.


pages: 249 words: 77,342

The Behavioral Investor by Daniel Crosby

affirmative action, Asian financial crisis, asset allocation, availability heuristic, backtesting, bank run, Black Swan, buy and hold, cognitive dissonance, colonial rule, compound rate of return, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, endowment effect, feminist movement, Flash crash, haute cuisine, hedonic treadmill, housing crisis, IKEA effect, impulse control, index fund, Isaac Newton, job automation, longitudinal study, loss aversion, market bubble, market fundamentalism, mental accounting, meta analysis, meta-analysis, Milgram experiment, moral panic, Murray Gell-Mann, Nate Silver, neurotypical, passive investing, pattern recognition, Ponzi scheme, prediction markets, random walk, Richard Feynman, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, science of happiness, Shai Danziger, short selling, South Sea Bubble, Stanford prison experiment, Stephen Hawking, Steve Jobs, stocks for the long run, Thales of Miletus, The Signal and the Noise by Nate Silver, tulip mania, Vanguard fund

Tyler Durden’s Fight Club rant about the duplicity of airline safety protocols could just as easily be applied to the futile dance of financial advisors giving clients risk tolerance questionnaires. Risk tolerance questionnaires (RTQs) give the illusion of safety and insight, and fly in the face of research that suggests that risk-taking behavior is domain specific, context driven and dynamic. Some academics try to skirt this point through a bit of esoteric sleight of hand that distinguishes risk tolerance from risk perception. Risk tolerance is defined as your static, long-term attitudes about risk, whereas risk perception is the dynamic, contextual piece more likely to fluctuate during periods of market upheaval. Risk tolerance, academics are quick to point out, is unchanging and they have the studies to prove it. Essentially, they say, you can have the right idea at heart about risk-reward tradeoffs (risk tolerance) even as you are engaging in the wrong behavior due to your risk perception in the heat of the moment.

In a follow-up study, he pharmacologically replicated the impact of the cortisol levels on the traders and then gauged their risk taking preferences on a gambling task. The results, published in the Proceedings of the National Academy of Sciences, found that participants’ appetite for risk fell by an incredible 44% as a result of the elevated levels of cortisol.26 Formerly thought of as primarily a mental construct, Coates’ findings turned traditional notions of risk tolerance on their head, and painted a more dynamic picture of the interplay between mind and body. As he opines in The Biology of Risk, “Most models in economics and finance assume that risk preferences are a stable trait, much like your height. But this assumption, as our studies suggest, is misleading. Humans are designed with shifting risk preferences. They are an integral part of our response to stress, or challenge.”


pages: 356 words: 51,419

The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns by John C. Bogle

asset allocation, backtesting, buy and hold, creative destruction, diversification, diversified portfolio, financial intermediation, fixed income, index fund, invention of the wheel, Isaac Newton, new economy, passive investing, Paul Samuelson, random walk, risk tolerance, risk-adjusted returns, Sharpe ratio, stocks for the long run, survivorship bias, transaction costs, Upton Sinclair, Vanguard fund, William of Occam, yield management, zero-sum game

If the road to investment success is filled with dangerous turns and giant potholes, never forget that simple arithmetic can enable you to moderate those turns and avoid those potholes. So do your best to diversify to the nth degree, minimize your investment expenses, and focus your emotions where they cannot wreak the kind of havoc that most other investors experience. Rely on your own common sense. Emphasize an S&P 500 Index fund or an all-stock-market index fund. (They’re pretty much the same.) Carefully consider your risk tolerance and the portion of your investments you allocate to equities. Then, stay the course. All index funds are not created equal. Costs to investors vary widely. I should add, importantly, that all index funds are not created equal. Although their index-based portfolios are substantially identical, their costs are anything but identical. Some have minuscule expense ratios; others have expense ratios that surpass the bounds of reason.

Chapter Eighteen Asset Allocation I: Stocks and Bonds When You Begin to Invest. As You Accumulate Assets. When You Retire. IN THIS CHAPTER AND the next, we tackle two complex issues: the general principles of asset allocation, and allocation funds specifically designed for your retirement years. These are issues that have no easy answers. Why? First, because we investors have a wide range of investment goals, risk tolerances, and behavioral characteristics. Second, because we’ve had 35 years of extraordinary returns in the stock market and the bond market alike, returns that are highly unlikely to recur in the coming decade. (See Chapter 9, “When the Good Times No Longer Roll.”) Third, authors of books on investing, are, in a real sense, captives of the eras that we have experienced. For example, when Benjamin Graham wrote The Intelligent Investor in 1949, he had never experienced a year in which the interest rate on bonds exceeded the dividend yield on stocks.

Your willingness to take risk, on the other hand, is purely a matter of preference. Some investors can handle the ups and downs of the market without worry. But if you can’t sleep at night because you’re frightened about the volatility of your portfolio, you’re probably taking more risk than you can handle. Taken together, your ability to accept risk and your willingness to accept risk constitute your risk tolerance. A basic allocation model for the investor who is accumulating assets, and the investor who is retired. Let’s begin with a basic allocation model for the accumulation of assets for the wealth-building investor. The main points to consider are merely common sense. (1) Investors seeking to accumulate assets by investing regularly can afford to take somewhat more risk—that is, to be more aggressive—than investors who have a relatively fixed pool of capital and are dependent on income and even distributions from their capital to meet their day-to-day living expenses. (2) Younger investors, with more time to let the magic of compounding work for them, can also afford to be more aggressive, while older investors will likely want to steer a more conservative course.


pages: 263 words: 89,368

925 Ideas to Help You Save Money, Get Out of Debt and Retire a Millionaire So You Can Leave Your Mark on the World by Devin D. Thorpe

asset allocation, buy and hold, call centre, diversification, estate planning, fixed income, Home mortgage interest deduction, index fund, knowledge economy, money market fund, mortgage tax deduction, payday loans, random walk, risk tolerance, Skype, Steve Jobs, transaction costs, women in the workforce, zero-sum game

These funds have virtually no credit risk and relatively modest interest rate risk, so should provide consistent, though modest returns. Choose a fifth fund to match your age or appetite. You can now choose a fifth fund to skew your portfolio in the direction that makes you most comfortable. If you are risk tolerant and sleep well knowing your funds go up and down in value, you may want to invest in a risky fund to help increase the yield in your portfolio. There are a variety of specialty funds that make concentrated investments in industries, regions and countries. These funds often beat the market one year and trail it dramatically the next. On the other hand, if you are not risk tolerant or are closer to retirement, you may want to make your final fund a short term government bond fund that invests in bonds with maturities of less than four years so there is very little interest rate risk and virtually no credit risk.

Bonds have less risk, but still have risk loss of principle and the income on bond funds varies significantly from year to year. Cash features ultra-low risk and correspondingly low returns. The goal of asset allocation is to match your risk tolerance, return on investment goals, and investment objectives to your portfolio. For short-term objectives, investing only in cash or in cash and bonds would generally make sense. For long-term objectives, like retirement, investing in a combination of all three would be considered wise. People in their twenties investing for retirement have the flexibility, if they are risk tolerant enough, to be invested 100% in equities. As people age, retirement gets closer and the pain of a major setback in investment returns looms larger so they generally shift the allocation to include more bonds and even a bit of cash.

Such bonds have no credit risk, that is no risk of not being paid on schedule, but as interest rates change, the value of the bonds will fluctuate. Each of these fund categories would make a good first fund for your retirement savings. They offer high expected returns—compared to what you can earn in a bank account. They are listed in order from most risky to least risky. You can decide which of these three best represents your risk tolerance based on your own situation. Once you’ve decided upon a category, you’ll want to choose an individual fund based primarily on the expenses. Your broker should provide you with a list of mutual funds you can purchase with no transaction fees. You’ll also want to choose a fund that doesn’t charge a “load” or upfront fee. You’ll also want to avoid marketing and distribution fees called 12b-1 fees.


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Work Optional: Retire Early the Non-Penny-Pinching Way by Tanja Hester

"side hustle", Affordable Care Act / Obamacare, Airbnb, anti-work, asset allocation, barriers to entry, buy and hold, crowdsourcing, diversification, estate planning, financial independence, full employment, gig economy, hedonic treadmill, high net worth, index fund, labor-force participation, longitudinal study, medical bankruptcy, mortgage debt, obamacare, passive income, post-work, remote working, rent control, ride hailing / ride sharing, risk tolerance, stocks for the long run, Vanguard fund

Magic number = annual spending (minus any pension payments) × inverse of safe withdrawal rate + additional expected expenses Annual spending ($): x SWR (%): SWR Inverse of SWR (100/SWR): 100/SWR Base amount (annual expenses × multiplier) ($): 100x/SWR One-time additional expenses ($): y Ballpark magic number ($): 100x/SWR + y SAMPLE FULL EARLY RETIREMENT SCENARIOS Scenario 1: Low full early retirement annual expenses of $40,000 per year, high risk tolerance, and no other anticipated large future expenses Annual spending ($): 40,000 SWR (%): 4 Inverse of SWR (100/SWR): 25 Base amount (annual expenses × multiplier) ($): 1,000,000 One-time additional expenses ($): — Ballpark magic number ($): 1,000,000 Scenario 2: $50,000 annual expenses, medium risk tolerance, and $60,000 in anticipated kids’ college costs Annual spending ($): 50,000 SWR (%): 3.5 Inverse of SWR (100/SWR): 31.25 Base amount (annual expenses × multiplier) ($): 1,562,500 One-time additional expenses ($): 60,000 Ballpark magic number ($): 1,622,500 Scenario 3: $75,000 annual expenses, low risk tolerance, and $200,000 in anticipated kids’ college costs and support to aging parents Annual spending ($): 75,000 SWR (%): 3 Inverse of SWR (100/SWR): 33.33 Base amount (annual expenses × multiplier) ($): 2,500,000 One-time additional expenses ($): 200,000 Ballpark magic number ($): 2,700,000 For a rental real estate–focused full early retirement, what you’re looking to determine is how much you’ll need to invest in properties to generate the magic money that will support your lifestyle.

In investing, average is good, just as boring is good. That said, it’s wise to do some introspection to determine how much risk you can tolerate without it stressing you out. If you know that investing your money in higher-risk vehicles will keep you from sleeping well at night, an aggressive investment strategy of 100% stock and stock funds is probably not for you. And conversely, if you don’t mind watching your account balances bob up and down a bit, then a more conservative strategy with a high percentage of bonds and cash wouldn’t suit you very well either. Every type of asset comes with its own risk profile, and in general, the more an investment stands to gain, the more it also stands to lose. But there are other ways to manage risk tolerance that aren’t strictly focused on which investment vehicles you choose. So keep an open mind as we walk through your investment tool options.

Taking all of the numbers you’ve now tallied up—your current comfortable spending level and future spending, your anticipated one-time expenses, and the safe withdrawal rate you’re comfortable with—let’s dig into the math on how much you would need to save for each form of early retirement. Full Early Retirement Magic Number For full early retirement, in which you never need to work again, your goal if you’re focusing on any form of market investing is to save between 25 and 35 times your annual expenses by the time you leave active employment, with your actual multiplier dictated by your risk tolerance (more financially conservative equals a safe withdrawal rate of 3.5% or lower). If you’re focusing on rental real estate, then your goal is to generate enough magic money after expenses and taxes to cover all of your annual spending. And if you have the benefit of a pension, subtract the amount you expect to receive each year from x in these calculations. For a quick calculation, you can ballpark a conservative full early retirement magic number as: Annual spending (x) × 30 + 10% contingency = Full early retirement magic number That formula builds in some additional buffer against sequence risk by using a lower safe withdrawal rate than 4% and provides additional padding in the form of the contingency that protects against future unknowns like higher health care and housing costs.


Trading Risk: Enhanced Profitability Through Risk Control by Kenneth L. Grant

backtesting, business cycle, buy and hold, commodity trading advisor, correlation coefficient, correlation does not imply causation, delta neutral, diversification, diversified portfolio, fixed income, frictionless, frictionless market, George Santayana, implied volatility, interest rate swap, invisible hand, Isaac Newton, John Meriwether, Long Term Capital Management, market design, Myron Scholes, performance metric, price mechanism, price stability, risk tolerance, risk-adjusted returns, Sharpe ratio, short selling, South Sea Bubble, Stephen Hawking, the scientific method, The Wealth of Nations by Adam Smith, transaction costs, two-sided market, value at risk, volatility arbitrage, yield curve, zero-coupon bond

Each trading account has (explicitly or implicitly) a finite amount of this currency, and it is vital to manage portfolio affairs in such a way that respects this resource constraint. Moreover, while the amount of risk that a given trader can responsibly assume has absolute boundaries (expressed, typically, in financial terms), within these boundaries, it is usually within the control of the individual to set his or her individual risk tolerance at levels that are likely to reach these boundaries or to exceed 1 Browning, in addition to being righteous, was quite prolific. Setting Performance Objectives 27 them by some measure, or to fall somewhere within them. The efficient use of economic stop-outs involves setting your loss-assumption tolerance at manageable levels that will afford you much greater control over the broad and diverse set of circumstances that you are likely to confront over the course of your trading career.

In particular, I recommend sitting down and performing the same type of review of markets, trading modes, and so on, that a professional institutional trader conducts. Have market conditions improved or worsened? How much time and energy can you devote to trading? Are you set up to maximize information flow and execution efficiency? Once you have answered these questions and applied them through the filter of your risk tolerance, the final piece of the puzzle will in most cases reside in your psyche. You should set your stop-out level at a figure that is large enough for you to feel that you have given your trading a fair shot but that falls short of the point where reaching it becomes demoralizing or debilitating. Whatever figure you finally identify as your largest acceptable loss, the most important thing is to live within this limit and to commit to a full-scale portfolio liquidation if you are unable to prevent this outcome.

The point here is that by combining information about your Sharpe Ratio with expectations of return, you begin to create a picture of what type of risk levels are appropriate to these objectives; volatility levels significantly below these ranges will almost guarantee a failure to achieve associated targets, whereas figures vastly above these thresholds give rise to potential inconsistencies between return targets and risk tolerances. Method 2: Managing Volatility as a Percentage of Trading Capital As you may have surmised, the Inverted Sharpe Ratio method is best adapted to determining the lower bound of exposure that is consistent with reaching your targeted objectives. The main insight that it will provide you in determining the appropriate associated upper bound is that if your volatility is too high, it will project out a return that far exceeds your objectives.


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Traders at Work: How the World's Most Successful Traders Make Their Living in the Markets by Tim Bourquin, Nicholas Mango

algorithmic trading, automated trading system, backtesting, buy and hold, commodity trading advisor, Credit Default Swap, Elliott wave, fixed income, Long Term Capital Management, paper trading, pattern recognition, prediction markets, risk tolerance, Small Order Execution System, statistical arbitrage, The Wisdom of Crowds, transaction costs, zero-sum game

What I really needed to do was hone my technical skills in reading charts. I started doing that “quest” for the Holy Grail, just like every trader does at some point in their trading career. We all begin looking for the magic setup or a magic methodology that will work in all markets and all time frames. Of course, it doesn’t exist, but you still have to find a strategy and method that fits your personal style and risk tolerance. I searched high and low for a good couple of years before I found my current methodology. I really had to work hard to make the switch from trading momentum to trading on a more technical level based on charts. The point is you really need to get more technical to trade FX, because it’s so much more of a chess game than a boxing match with an opponent [the specialist], which is what day trading equities was.

Bourquin: Let’s now talk about sizing and how you determine your position size when using options. Foster: It depends on allocation, and for my account versus some of my client accounts, I might be more aggressive. I might use more small caps if I think small caps are looking strong, or I might use a heavier allocation towards small caps because I think I am going to get better performance there than I would with the Dow. It also depends on my risk tolerance at the time. I’m usually pretty aggressive in my trades, but I do factor in current or upcoming events in my personal life and may become more hesitant to take risk under certain conditions. Bourquin: What’s an average option contract size for a trade in your personal account? Foster: I typically only use two contracts at a time, and while I might use multiple contracts in a week, in any one day I only use two contracts at once.

Not knowing, or simply guessing at, where these price points will be after you have entered a trade can lead to indecision or price targets outside of the average range of the security you are trading. Why set an arbitrary profit target of three points when the average range of that market is only two points? Furthermore, wealthy traders set position sizes and stop losses that are almost always a function of their risk tolerance for any given trade. For example, if the maximum risk on any one trade is 2 percent of their trading account, they will calculate both the number of shares they will trade (based on the price of shares) and a reasonable stop loss before they place the trade. I rarely talk with a wealthy trader who says their position size is 1,000 shares. They usually tell me it depends entirely on what security they are trading.


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Take the Money and Run: Sovereign Wealth Funds and the Demise of American Prosperity by Eric C. Anderson

asset allocation, banking crisis, Bretton Woods, business continuity plan, business process, buy and hold, collective bargaining, corporate governance, credit crunch, currency manipulation / currency intervention, currency peg, diversified portfolio, fixed income, floating exchange rates, housing crisis, index fund, Kenneth Rogoff, open economy, passive investing, profit maximization, profit motive, random walk, reserve currency, risk tolerance, risk-adjusted returns, risk/return, Ronald Reagan, sovereign wealth fund, the market place, The Wealth of Nations by Adam Smith, too big to fail, Vanguard fund

A Morgan Stanley estimate published in June 2007 largely came to the same conclusion, noting that “asset prices should depend on the willingness of investors to take risks.” As such, Morgan Stanley had argued, “the likely growth of sovereign wealth funds—and the substantially higher risk tolerance of those who will be making their asset allocation decisions—is likely to be rapid enough that it will have a material impact on the average degree of risk tolerance of investors across the globe.”139 The ultimate result? “As sovereign wealth funds grow . . . in importance, the overall global degree of risk tolerance in financial markets rises. This reduces somewhat the attractiveness of relatively safe assets— ‘bonds’—and increases the attractiveness of riskier, higher-yielding assets— ‘equities.’”140 This is a rosy scenario for share issuers and holders, but bad news for the U.S.

Treasury, a sovereign wealth fund is “a government investment vehicle which is funded by foreign reserve assets, and which manages those assets separately from the official reserves of the monetary authorities (the central bank and reserve-related functions of a finance ministry or national treasury office).”8 Efforts to refine this definition have included highlighting key traits associated with a sovereign wealth fund such as the investment vehicles’ high foreign currency exposure, lack of explicit liabilities, high risk tolerances, and long investment horizons.9 The bottom line: A sovereign wealth fund is a pool of public money that is under governmental supervision and can be invested in a manner more commonly associated with privately held capital. (Note: I do not rule out the possibility that a sovereign wealth fund ultimately has liabilities such as bondholders in the case of the China Investment Corporation, or future pensioners, as with Norway’s Government Pension Fund.)

Echoing sentiments Stephen Jen expressed during November, in early December 2007 the Journal reported, “because most sovereign wealth funds buy long-term investments, the funds could have a stabilizing influence on world markets, particularly during periods of high volatility and tight credit.” Nevertheless, the newspaper then went on to note that the lack of transparency associated with most sovereign wealth funds’ limited ability to raise risk tolerance in financial markets—because so little “is known about many of the funds’ investment strategies, structures, or holdings.”92 Not surprisingly, the fund managers are aware of this concern. The China Investment Corporation, for instance, has made a concerted effort to assure international observers that Beijing seeks to make the government investment vehicle’s operations largely transparent. This CIC campaign began in earnest in early August 2007, when Chinese authorities publicly announced the names of the fund’s core management team.93 By early September, members of this management team were reassuring reporters and foreign observers that CIC will be “a passive investor . . . most of our money will be [invested] through outsourcing to fund managers instead of . . . direct investment.”94 Staying on message, in mid-November, the new CIC chairman told an international audience in Beijing his organization would act “as a force to stabilize markets as needed.”


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Your Money or Your Life: 9 Steps to Transforming Your Relationship With Money and Achieving Financial Independence: Revised and Updated for the 21st Century by Vicki Robin, Joe Dominguez, Monique Tilford

asset allocation, Buckminster Fuller, buy low sell high, credit crunch, disintermediation, diversification, diversified portfolio, fiat currency, financial independence, fixed income, fudge factor, full employment, Gordon Gekko, high net worth, index card, index fund, job satisfaction, Menlo Park, money market fund, Parkinson's law, passive income, passive investing, profit motive, Ralph Waldo Emerson, Richard Bolles, risk tolerance, Ronald Reagan, Silicon Valley, software patent, strikebreaker, Thorstein Veblen, Vanguard fund, zero-coupon bond

But during times when inflation is high and you’ve made all the adjustments you can and still feel you need more income, you might want to consider taking more risk with your money to increase your chances of a higher return. As an FIer, you don’t want to risk your nest egg. But you are already putting the value of your nest egg at risk if your investment returns don’t at least keep pace with inflation. How exactly do you manage your money to reduce the risks associated with inflation? Risk Tolerance Any financial professional will tell you that it’s important to determine your risk tolerance before making any investments. The spectrum ranges from conservative investors who do not want to risk their capital at all to aggressive ones at the other end of the spectrum who are willing to risk all their capital for the promise of significant returns. Waaaay at the conservative end are those who’d prefer to put their nest egg in the mattress or in a sealed tin buried in the garden (make sure you make a map).

Even that bears some risk; as we said earlier, inflation could eat it even if the moths or worms don’t and your money could be worth less later. Waaaaay at the speculative end you’ll find few FIers because they usually don’t have the stomach for putting their hard-earned nest egg at risk in the stock market. Most FIers probably fall somewhere in the middle. If you’d like to learn more about what your personal investment philosophy might be, type “risk tolerance” in your browser and take one of the many free tests available on the Web. THREE PILLARS OF FINANCIAL INDEPENDENCE: CAPITAL, CUSHION AND CACHE The basic FI investment program has three elements: Capital: The sum that is invested, ultimately producing at least as much income as indicated by the Crossover Point of Chapter 8. Cushion: A cash reserve that is enough to cover your expenses for six months.

◆Duration—the range of maturities available is extensive; you can buy a note or bond that will mature in a few months or one that won’t come due for thirty years. ◆Absolute stability of income over the long run—ideal for FI. Avoids the income fluctuations that would occur with money market funds, rental real estate, etc. Treasury Bonds Treasury bonds are the ideal investment vehicle for FIers with a low risk tolerance because they protect principal, provide a steady stream of income and are relatively easy to understand. In addition, they are exempt from local and state taxes, can be bought and sold almost instantly with minimal handling charges, and are protected by the full faith and trust of the U.S. government. Treasury bonds are the government’s way of borrowing money. A new bond is issued every few months, with maturity dates ten, twenty, and thirty years into the future.


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The Gig Economy: The Complete Guide to Getting Better Work, Taking More Time Off, and Financing the Life You Want by Diane Mulcahy

Affordable Care Act / Obamacare, Airbnb, Amazon Mechanical Turk, basic income, Clayton Christensen, cognitive bias, collective bargaining, creative destruction, David Brooks, deliberate practice, diversification, diversified portfolio, fear of failure, financial independence, future of work, gig economy, helicopter parent, Home mortgage interest deduction, housing crisis, job satisfaction, Kickstarter, loss aversion, low skilled workers, Lyft, mass immigration, mental accounting, minimum wage unemployment, mortgage tax deduction, negative equity, passive income, Paul Graham, remote working, risk tolerance, Robert Shiller, Robert Shiller, Silicon Valley, Snapchat, TaskRabbit, Uber and Lyft, uber lyft, universal basic income, wage slave, Y Combinator, Zipcar

The goal of this exercise is to take our big, vague, emotional fears, separate out the concrete risks, and develop a plan of action. Beth’s case illustrates that her worst-case fears are unlikely given her situation. That’s not uncommon, but sometimes our fears are rooted in likely outcomes. In those cases, this exercise can be very helpful in identifying actions you can take to reduce risks. It’s possible that after completing this exercise, you’ve come across risks that are too big for your personal risk tolerance, even after you attempt to deal with them. In this case, you may want to consider modifying or restructuring the thing you want to do so that it’s smaller and less risky. For example, maybe after completing this exercise you determine that you really aren’t in a good financial position to start your own business. If so, can you still move forward with your plan if you start building your business on the side?

Reducing Risk The key to facing our fears is breaking them down into their component risks. Risks are concrete and specific, and once we’ve identified a risk, there are several options for evaluating it and dealing with it. Below are six possible options for dealing with risk. As you break down your fears into their underlying risks, consider each of the options below: Reduce Risk by Mitigating It If the risk you’re contemplating seems too high for your personal risk tolerance, you might be able to mitigate it. For example, John works full time at an accounting firm whose clients are medium-and large-sized businesses. If John’s employer goes out of business, John’s income would go from 100 percent to 0. John is uncomfortable with that risk, so he has developed a side business working with entrepreneurs and small businesses, helping them with their bookkeeping, financial statements, and taxes (these clients are not competitive with his employer).

Contracts can eliminate the risk and uncertainty around identifiable scenarios by negotiating the outcomes in advance. Reduce Risk by Accepting It We regularly accept risk in our lives because most activities involve some degree of risk, even if it’s remote. We make reasonable trade-offs about the size of the risk and the probability that it will occur compared to the rewards we expect from pursuing the activity. How much risk we’re willing to accept depends on our personal risk tolerance. Heli skiers and skydivers are willing to accept relatively higher levels of risk for the thrill of pursuing those activities. Most of us are willing to accept low levels of risk in our daily lives. We eat out in restaurants, even though there’s a chance of food poisoning. We go swimming, even though we could drown, and we take buses and trains that have some small chance of crashing. Be aware that our levels of risk seeking and risk aversion can vary by situation.


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MONEY Master the Game: 7 Simple Steps to Financial Freedom by Tony Robbins

3D printing, active measures, activist fund / activist shareholder / activist investor, addicted to oil, affirmative action, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, backtesting, bitcoin, buy and hold, clean water, cloud computing, corporate governance, corporate raider, correlation does not imply causation, Credit Default Swap, Dean Kamen, declining real wages, diversification, diversified portfolio, Donald Trump, estate planning, fear of failure, fiat currency, financial independence, fixed income, forensic accounting, high net worth, index fund, Internet of things, invention of the wheel, Jeff Bezos, Kenneth Rogoff, lake wobegon effect, Lao Tzu, London Interbank Offered Rate, market bubble, money market fund, mortgage debt, new economy, obamacare, offshore financial centre, oil shock, optical character recognition, Own Your Own Home, passive investing, profit motive, Ralph Waldo Emerson, random walk, Ray Kurzweil, Richard Thaler, risk tolerance, riskless arbitrage, Robert Shiller, Robert Shiller, self-driving car, shareholder value, Silicon Valley, Skype, Snapchat, sovereign wealth fund, stem cell, Steve Jobs, survivorship bias, telerobotics, the rule of 72, thinkpad, transaction costs, Upton Sinclair, Vanguard fund, World Values Survey, X Prize, Yogi Berra, young professional, zero-sum game

Boone, 47, 456, 505–13, 505, 596 Pitbull, 15 Pitt, Brad, 65 pivot, 265 plan: building, 206, 230–46, 247 choosing your adventure, 234–37 financial blueprint, 233–34 illusion of advantage, 232–33 late to the party, 242–44 playing your own hand, 231–32 proven, 187 rates of return for, 235 savings as foundation of, 56–57 speeding up, see speed it up timeline for, 292 too good to be true, 240–42 Platinum Partners, 62, 350–51, 509 population growth, 555–56 portfolio, 23, 101 All Weather, see All Seasons strategy; All Weather portfolio asset allocation in, see asset allocation balanced, 381–82, 384, 398, 412 diversity in, see diversification rebalancing, 358, 359–62, 363, 393n, 402, 613 60/40, 399 see also investments portfolio theory, 297, 379, 469 possibilities, 245 posture, improving, 197 poverty, 596–98, 599 Powell, Colin, xxvii Preisano, Michael, 115 present bias, 66 priming, 584–85 Prince, Bob, 387 private placement life insurance (PPLI), 443–48 accessing money in, 446–47 investment management, 446 probabilities, 361 probate, avoiding, 448 Protégé Partners, 95, 487 Pure Alpha, 375–76, 397 Qantas, 318 quality of life, 37, 292, 538, 576, 577, 580–82, 583 questions, wording of, 40 Quinn, Jane Bryant, 92 Ramsey, Dave, 254 Random Walk Down Wall Street, A (Malkiel), 49, 96–97 Rattner, Steven, 550 real estate: and financial meltdown, 313–14, 514–15, 516–18 first trust deeds, 286, 312–13 investment in, 283–86, 308, 323 residential real estate loan, 312–14 real estate investment trusts (REITs), 286, 323, 328, 473 rebalancing, 358, 359–62, 363, 393n, 402, 613 redemption fee, 115 Redstone, Sumner, 34 registered investment advisor (RIA), 126 repetition, 42 residential real estate loan, 312–14 retirement: automatic savings for, 64–65 being unprepared for, 90–91 contribution limits, 156 financial advisors for, 126–27 401(k)s, see 401(k)s individual management of, 140 inertia in planning for, 40 investment in mutual funds, 93, 110, 114, 141 IRAs, 93, 110, 148 money needed for, 32, 210–11 and moving to another place, 288 outliving your money in, 32, 421 pensions, 34–35, 86 quality of life in, 37, 538 saving for, 37 sequence of returns in, 412 and Social Security, 31–32, 34 and target-date funds, 158, 159, 162–63 and technology, 410 retirement communities, investment in, 284–86, 308 Retirement Savings Drain, The (Hiltonsmith), 109 retooling, 264, 265–66 return on investment, 116–20, 281–86 actual returns, 119, 414 asset allocation, 282–83 asymmetric risk/reward, 281–82 average returns, 116–18, 119, 415 diversification, 276, 282, 297 dollar-weighted returns, 118–19, 121 doubling your money, 283, 284 maximizing, 379 sequence of returns, 412 time-weighted returns, 118–19, 121 reversion to the mean, 321, 471 Richest Man in Babylon, The (Clason), 69 Riley, Theresa, 597 risk aversion, 400–401 Risk/Growth Bucket, 321–39 and asset allocation, 326, 336–39, 612 being prepared to lose, 321 collectibles, 324 commodities, 324 currencies, 324 diversification, 325–26 equities, 322–23 factors to consider, 331–36 high-yield (junk) bonds, 323 real estate, 323 structured notes, 324–25 riskless return, 174 Risk Parity, 390 risk/reward, 172–82 and asset allocation, 159, 326, 336–39, 383 asymmetric, 25, 173, 174, 180, 281–82, 283, 456, 486, 493–94, 515–16, 535–36 and balance, 382–83, 390 diversification, 297, 300, 379, 383, 456, 472–73 market-linked CDs, 178–79 market timing, 296 Risk/Growth Bucket, 321–39 security as subjective concept, 314–15 Security/Peace of Mind Bucket, 301–20 security selection, 296 structured notes, 176–78 risk tolerance, 331, 332–36, 399–401 Robbins, Bonnie Pearl, 284 Robbins, Tony: final words of advice, 607 interviews with masters, 453–55; see also specific names story of poverty to wealth, 602–6 Robin Hood Foundation, 16, 489 robotics, 562 Rockefeller, John D., 595 Roethke, Theodore, 557 Rogoff, Kenneth, 520 Rohn, Jim, 42, 246, 260–62, 263, 266, 585 role model, 206 Rolling Stones, 34 Roman Empire, annuities in, 167 Roosevelt, Eleanor, 212 Roosevelt, Franklin D., 31, 269, 409 Roosevelt, Theodore, 19, 331 Roth, Marc, 560 Roth, William, 150 Roth 401(k), 150–51, 152–53, 154, 235 Roth IRA, 150, 153–54, 236, 278, 442 Rothschild, Baron, 456, 523 Rowe, Mike, 265 Royal Bank of Canada, 177, 310 rule of 72, 283 Rutgers University, risk-tolerance scale, 332 Rwandan orphans, 592–93 S&P index funds, 92, 93–94, 95–96, 98, 99, 101, 105, 107, 182, 330, 354, 357, 383, 394–95, 396, 474 15, 173 Salesforce Foundation, xxvii Sandy Hook Elementary School, 591–92 Save More Tomorrow (SMarT), 66–68, 151, 236–37, 249 savings, 55–70 automatic, 59, 64–65, 69–70 compounding, 60, 62–65, 238, 280 creating wealth, 64 critical mass of, 90 cutting expenses, 253–56 discipline of, 543 financial plan founded on, 56–57 investment, 58, 90, 247–58, 292 mindful, 256–58 paying yourself first, 62 and pay raises, 67, 68 percentage of, 59, 63, 68–69 rate of, 37 for retirement, 37 as ultimate ATM, 55 Schilling, Curt, 52 Schwab, Charles, 10, 47, 116, 130, 235, 455, 529–39, 529 Schwed, Fred Jr., 124 Securities and Exchange Commission (SEC), 135, 530 security, subjective concept of, 314–15 Security/Peace of Mind Bucket, 301–20 annuities, 308, 438 asset allocation, 302, 310, 328–29, 338, 612 bonds, 303–5, 306, 315–20 cash/cash equivalents, 302–3 CDs, 305, 306 and compounding, 311, 312 home, 306–8 life insurance, 309 pension, 308 structured notes, 309–10 time on your side, 310–15 security selection, 471, 472 self-employment: and automatic savings, 65, 69 and Solo 401(k), 153 self-esteem, 580 self-fulfilling prophecy, 189–90 senior housing, investment in, 284–86, 308 sequence of returns, 412 serendipity, 228–29 service, 538–39, 586, 616 7 Simple Steps, 23, 41, 43–48 asset allocation, 45, 292, 295, 612–13 decide savings percentage, 45–46, 63–66, 609 invest like .001%, 46–47, 614–15 just do it, 47, 615–16 know the rules, 44, 85, 609–10 lifetime income plan, 46, 613–14 make the game winnable, 45–46, 610–12 timing, 348–49 turn dreams into reality, 212–25 shareholders, 459–60, 461, 464 Shiller, Robert, 307, 323, 501, 595 Shoven, John, 31, 139 significance, 76–77, 204 Silicon Valley, 264, 557 Sinclair, Upton, 121 60/40, 399 Slaughter, Frank, 183 slavery, child, 600 small business: and automatic savings, 65, 69 cash-balance plan for, 155 and 401(k)s, 146–48, 152, 153, 181 Social Security, 243, 409, 418 as government liability, 149 and retirement, 31–32, 34 Social Security Act, 31 soft-dollar trading, 114–15 Solo 401(k)s, 153 Soros, George, 385 South Korea, education in, 266–67 Spanx, 271 speculation, 172, 325 speed it up, 611 change your life, 287–92 and Dream Bucket, 344 earn and invest, 259–72 get better returns, 281–86 prepaying your mortgage, 251–52 reduce fees and taxes, 273–80 save and invest, 247–58 spending plan, 253–56 SPIVA, 98 stable value funds, 160 stagger (lead), 232 state, physical, changing, 196–99 stock index, 93–94 stock market: diversity in, 104 and inflation, 386 long-term investment in, 93, 104, 329–30, 351 volatility in, 104, 382, 390 stock picking, 119, 180, 296 stocks: and bonds, 158, 160, 329–30 employer’s, 162–63 foreign, 328, 473, 535 poison pills, 464 story: changing, 194–95, 249 of empowerment, 190 limiting, 188–95 new, 192 power of, 188–95 as self-fulfilling prophecy, 189–90 tipping point in, 193 strategy: breakthrough in, 187–88, 199 save more and invest the difference, 248–58 stress: emotional, 191 financial, 190–91 physical signs of, 191, 197 Stronghold Financial, 130–32, 135, 163, 236, 310, 358, 403 Stronghold Wealth Management, 25, 130 structured notes, 176–78, 309–10, 324–25 student loans, 239–40 sub accounts, 168, 424 subconscious mind, 205–6 success: clues left by, 9, 187 destroyed by emotion, 355 psychology of, 189 and unconventional wisdom, 384–85 without fulfillment, 575 suitability standard, 125–26 Summers, Larry, 454 Sun Tzu, 369, 453 survival instinct, 570, 585 Swensen, David, 91, 468, 533 on active management, 165 on asset allocation, 296, 469, 471–74 author’s interview with, 295–96, 384, 468–75 on bonds, 316, 317, 318 on brokers, 125 on ETFs, 322–23 and index funds, 92, 472 on mutual funds, 102, 110, 470–71, 472 portfolio of, 326–31, 337, 339, 473–74 on rebalancing, 359 on returns, 276–77 on reversion to the mean, 471 on risk/reward, 295–96 Unconventional Success, 469 and Yale endowment fund, 10, 101, 110, 295, 468–69 Yale model, 276, 469, 471–74 SwipeOut, 596–600, 602 Tae Kwon Do, 42–43 Takahashi, Dean, 469 target-date funds (TDFs), 157–64, 181 glide paths of, 158 low-cost, 163 misconceptions about, 159, 162–64 performance of, 161–62, 163 and retirement, 158, 159, 162–63 stable value funds vs., 160 tax-advantage accounts, 235, 472 tax efficiency, 287–89, 402 taxes, 35–37 capital gains, 277 and compounding, 235, 277–78, 279, 445–46 deferring, 235, 236, 278, 279, 408 and depreciation, 285–86 and exclusion ratio, 421n and 401(k)s, 149–50, 152, 235, 472 future, 149–50, 153, 236 and home ownership, 308 income, 277, 290 and moving to another place, 288–90 and mutual funds, 111, 114, 119, 279, 472 and planning, 235–36 and PPLI, 444 and rebalancing, 362 reducing, 273–80 tax loss harvesting, 362–63 T-bills, 316 T-bonds, 316 teachers, 266–67 technology, 87 and agriculture, 264 artificial intelligence (AI), 569, 570 cloud computing, xxvii computers “R” us, 569–71 disruption caused by, 264–65 email, 553 and energy, 556–57 exponential growth of, 564–65 food, 566 genome project, 565 as hidden asset, 549–53 and internet expansion, 560–61 jobs in, 264 and living standards, 554–55 Maker Revolution, 559–61 medical, 410, 551–52, 557–59, 562, 566–68 nanotechnology, 562, 567 robotics, 562 SwipeOut, 596–600, 602 3-D printing, 410, 561–62, 567, 568 technology wave, 562–63 TED Talks, 18, 39, 67 Templeton, Sir John, 61–62, 350, 351, 456, 524, 540 author’s interviews with, 61, 79, 455, 540–45 on gratitude, 79, 347, 544–45, 577 and philanthropy, 62, 541, 542, 602 and savings, 62, 63, 542–43 on trust, 542 1035 exchange, 171 Tepper, David, 263, 517 Teresa, Mother, 541 Tergesen, Anne, 426–27 testosterone, 197, 334 Thaler, Richard, 66–67, 249 Thatcher, Margaret, 69 Think and Grow Rich (Hill), 19 $13 trillion lie, 93, 97 Thompson, Derek, 431 Thoreau, Henry David, 341, 576 3-D printing, 410, 561–62, 567, 568 Three to Thrive, 211–12, 225–26, 292, 585 TIAA-CREF, 169, 402, 447–48, 470 Tier 1 capital, 442 time: and compounding, 311, 312 diversifying against, 355 value of, 287, 570 time-weighted returns, 118–19, 121 timing, 62, 256, 348–66 and dollar-cost averaging, 355–59, 363, 365–66, 613 getting in front of a trend, 270 and long-term investing, 351 market, 97, 296, 300, 354, 380, 471–72 mistake in, 177, 348 and mob mentality, 348–49 and patterns of investing, 359 and probabilities, 361 and rebalancing, 359–62 and tax loss harvesting, 362–63 and volatility, 363 tipping point, 90, 193 TIPS (Treasury inflation-protected securities), 305, 316–17, 328, 329, 374, 473, 474 tithing, 602 T-notes, 316 Today, 349–50, 485 tontines, 167 training, retooling our skill sets, 264, 265 transformation, 185, 195 Trebek, Alex, 301 Trichet, Jean-Claude, 518, 520 Truckmaster truck driving school, 259 Trump, Donald, 210 trust, absence of, 119–20, 125, 542 trust deeds, 313 Tubman, Harriet, 345 Tullis, Eli, 491 Turner, Ted, 595 TWA, 318 Twain, Mark, 11, 481, 566 Tyson, Mike, 6, 53, 60 uncertainty/variety, 75 Unconventional Success (Swensen), 469 unemployment, 264, 265 unicorns, 14n, 99, 180, 331, 350 United Parcel Service (UPS), 60 United States: income ladder in, 263 national debt of, 149, 236 states with no income tax, 290 Unleash the Power Within (UPW), 15, 194, 559 Unlimited Power (Robbins), 18 255–56 Uram, Matt, 551–52 Usher, 15, 18 Ustinov, Peter, 549 US Treasury bonds, 305, 316–18, 328–29, 400, 473, 474 US Treasury money market fund with checking privileges, 303 V2MOMs, xxvi value, added, 193, 261, 262–63, 265, 268, 269, 272, 343, 595, 611 value investing, 486 Vanguard Group: annuities, 169, 402 founding of, 470, 476–78 index funds, 95, 97, 113, 143, 144, 157, 472 mutual funds, 10, 477 return after taxes, 235 target-date fund, 163, 181 variety/uncertainty, 75 Venter, Craig, 566–67 Vichy-Chamrond, Marie de, 238 Virgin Airways, 173 volatility, 104, 301, 321, 356, 358, 363, 382, 390 wage, minimum, 263 Walton, Sam, 76 Ward, William A., 54 Warren, Doug, 138 water, potable, 565–66, 599–600 wealth: creation of, 64 final secret of, 588–606 growing, 176 keeping, 295 kinds of, 576 and living trust, 448–49 secrets of ultrawealthy, 442–49, 614 tithing, 602 without risk, 181 wealth calculator, 234, 236, 611 Wealth Mastery seminars, 332–33 Weissbluth, Elliot, 128–31 whale blubber, 556 Where Are the Customers’ Yachts?

It’s the need for basic comfort, the need to avoid pain and stress, and also to create pleasure. Does this make sense? Our need for certainty is a survival mechanism. It affects how much risk we’re willing to take in life—in our jobs, in our investments, and in our relationships. The higher the need for certainty, the less risk you’ll be willing to take or emotionally bear. By the way, this is where your real “risk tolerance” comes from. But what if you’re totally certain all the time? If you knew what was going to happen, when it was going to happen, how it was going to happen. You knew what people were going to say before they said it. How would you feel? At first you’d feel extraordinary, but eventually you’d be what? Bored out of your mind! NEED 2: UNCERTAINTY/VARIETY So, God, in Her infinite wisdom, gave us a second human need, which is Uncertainty.

Wait a second: How could it be more than 100%? Because those fees, taxes, and losses that come along with stock picking and market timing put a drag on your profits. Asset allocation is more than diversification. It means dividing up your money among different classes, or types, of investments (such as stocks, bonds, commodities, or real estate) and in specific proportions that you decide in advance, according to your goals or needs, risk tolerance, and stage of life. Wow, that’s a mouthful, isn’t it? Yet it’s the key to success or failure for the world’s best financial players, including every single one of the investors and traders I interviewed for this book. Paul Tudor Jones swears by it. Mary Callahan Erdoes, perhaps the most powerful woman on Wall Street, leads 22,000 financial professionals whose livelihoods depends on it. Ray Dalio, who founded the largest hedge fund in the world and is now worth $14 billion personally, lives it.


pages: 482 words: 121,672

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Eleventh Edition) by Burton G. Malkiel

accounting loophole / creative accounting, Albert Einstein, asset allocation, asset-backed security, beat the dealer, Bernie Madoff, bitcoin, butter production in bangladesh, buttonwood tree, buy and hold, capital asset pricing model, compound rate of return, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, Detroit bankruptcy, diversification, diversified portfolio, dogs of the Dow, Edward Thorp, Elliott wave, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial innovation, financial repression, fixed income, framing effect, George Santayana, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Long Term Capital Management, loss aversion, margin call, market bubble, money market fund, mortgage tax deduction, new economy, Own Your Own Home, passive investing, Paul Samuelson, pets.com, Ponzi scheme, price stability, profit maximization, publish or perish, purchasing power parity, RAND corporation, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, stocks for the long run, survivorship bias, the rule of 72, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond, zero-sum game

Bonds (and bond-like securities to be covered in Part Four) have proved their worth as an effective diversifier. Source: Vanguard. In summary, the timeless lessons of diversification are as powerful today as they were in the past. In Part Four, I will rely on this discussion of portfolio theory to craft appropriate asset allocations for individuals in different age brackets and with different risk tolerances. *Statisticians use the term “covariance” to measure what I have called the degree of parallelism between the returns of the two securities. If we let R stand for the actual return from the resort and R – be the expected or average return, whereas U stands for the actual return from the umbrella manufacturer and U – is the average return, we define the covariance between U and R (or COVUR) as follows: COVUR = Prob. rain (U, if rain – U –) (R, if rain – R –) + Prob. sun (U, if sun– U – ) (R, if sun – R –).

A typical response was that a personal contact, such as a friend or relative, had recommended the purchase. Hong, Kubik, and Stein provided more systematic evidence as to the importance of friends in influencing investors’ decisions. They found that social households—those who interact with their neighbors, or attend church—are substantially more likely to invest in the market than nonsocial households, controlling for wealth, race, education, and risk tolerance. Any investment that has become a topic of widespread conversation is likely to be especially hazardous to your wealth. It was true of gold in the early 1980s and Japanese real estate and stocks in the late 1980s. It was true of Internet-related stocks in the late 1990s and early 2000 and condominiums in California, Nevada, and Florida in the first decade of the 2000s. Invariably, the hottest stocks or funds in one period are the worst performers in the next.

On the other hand, if you are in a low tax bracket and need high current income, you should prefer taxable bonds and high-dividend-paying common stocks so that you don’t have to incur the transactions charges involved in selling off shares periodically to meet income needs. The two steps in this exercise—finding your risk level, and identifying your tax bracket and income needs—seem obvious. But it is incredible how many people go astray by mismatching the types of securities they buy with their risk tolerance and their income and tax needs. The confusion of priorities so often displayed by investors is not unlike that exhibited by a young woman whose saga was recently written up in a London newspaper: RED FACES IN PARK London, Oct. 30 Secret lovers were locked in a midnight embrace when it all happened. Wedged into a tiny two-seater sports car, the near-naked man was suddenly immobilized by a slipped disc, according to a doctor writing in a medical journal here.


pages: 416 words: 118,592

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing by Burton G. Malkiel

accounting loophole / creative accounting, Albert Einstein, asset allocation, asset-backed security, backtesting, beat the dealer, Bernie Madoff, BRICs, butter production in bangladesh, buy and hold, capital asset pricing model, compound rate of return, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dogs of the Dow, Edward Thorp, Elliott wave, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial innovation, fixed income, framing effect, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Long Term Capital Management, loss aversion, margin call, market bubble, money market fund, mortgage tax deduction, new economy, Own Your Own Home, passive investing, Paul Samuelson, pets.com, Ponzi scheme, price stability, profit maximization, publish or perish, purchasing power parity, RAND corporation, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, stocks for the long run, survivorship bias, The Myth of the Rational Market, the rule of 72, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond

Domestic stocks: 1926–1970 S&P 500 Index (monthly reinv); 1971–4/22/2005 Dow Jones Wilshire 5000 Index; 4/22/2005 – present MSCI US Broad Market Index. In summary, the timeless lessons of diversification are as powerful today as they were in the past. In Part Four, I will rely on this discussion of portfolio theory to craft appropriate asset allocations for individuals in different age brackets and with different risk tolerances. REAPING REWARD BY INCREASING RISK Theories that are right only 50 percent of the time are less economical than coin-flipping. —George J. Stigler, The Theory of Price AS EVERY READER should know by now, risk has its rewards. Thus, both within academia and on the Street, there has long been a scramble to exploit risk to earn greater returns. That’s what this chapter covers: the creation of analytical tools to measure risk and, with such knowledge, reap greater rewards.

A typical response was that a personal contact, such as a friend or relative, had recommended the purchase. Harrison Hong, Jeffrey Kubik, and Jeremy Stein provided more systematic evidence as to the importance of friends in influencing investors’ decisions. They found that social households—those who interact with their neighbors, or attend church—are substantially more likely to invest in the market than nonsocial households, controlling for wealth, race, education, and risk tolerance. Any investment that has become a topic of widespread conversation is likely to be especially hazardous to your wealth. It was true of gold in the early 1980s and Japanese real estate and stocks in the late 1980s. It was true of Internet-related stocks in the late 1990s and early 2000 and condominiums in California, Nevada, and Florida in the first decade of the 2000s. Invariably, the hottest stocks or funds in one period are the worst performers in the next.

On the other hand, if you are in a low tax bracket and need high current income, you should prefer taxable bonds and high-dividend-paying common stocks so that you don’t have to incur the transactions charges involved in selling off shares periodically to meet income needs. The two steps in this exercise—finding your risk level, and identifying your tax bracket and income needs—seem obvious. But it is incredible how many people go astray by mismatching the types of securities they buy with their risk tolerance and their income and tax needs. The confusion of priorities so often displayed by investors is not unlike that exhibited by a young woman whose saga was recently written up in a London newspaper: RED FACES IN PARK London, Oct. 30 Secret lovers were locked in a midnight embrace when it all happened. Wedged into a tiny two-seater sports car, the near-naked man was suddenly immobilised by a slipped disc, according to a doctor writing in a medical journal here.


pages: 1,088 words: 228,743

Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen

Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, Bernie Madoff, Black Swan, Bretton Woods, business cycle, buy and hold, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, central bank independence, collateralized debt obligation, commoditize, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, G4S, George Akerlof, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, information asymmetry, interest rate swap, invisible hand, Kenneth Rogoff, laissez-faire capitalism, law of one price, London Interbank Offered Rate, Long Term Capital Management, loss aversion, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, Myron Scholes, negative equity, New Journalism, oil shock, p-value, passive investing, Paul Samuelson, performance metric, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, Robert Shiller, savings glut, selection bias, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, stocks for the long run, survivorship bias, systematic trading, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond, zero-sum game

Either way, time-varying opportunities may not justify active trading for an investor who is similar to the market. Buying opportunities tend to be greater in bad times just when the risk or risk aversion is commensurately higher. Contrarian market timing is not for everyone (and cannot be—or contrarian investors would have no one to trade with). Investors who differ from the market by having a longer investment horizon and greater risk tolerance than most investors may be natural risky asset buyers during bad times when valuations are attractive. (This last statement is based more on strong intuition than on existing theoretical models; see note 5 in Chapter 28.) Time-varying risk premia can generate a “discount rate effect”: changes in the market’s required returns cause opposite-signed moves in realized returns. This effect makes extrapolation of past returns doubly dangerous.

In equilibrium, the expected total cost of renting and owning a house should be equal over the life of the house, after accounting for the above features. Thus, higher price-to-rent ratios may reflect lower financing costs or changes in any of the features listed above. Such comparisons are one way to assess how much of the housing market rally was based on fundamentals and how much was irrational, perhaps reflecting extrapolative expectations and the naive belief that house prices cannot fall. General liquidity, high risk tolerance (complacency), securitization innovations in mortgage markets, and lax lending standards also contributed. Wallison (2009) has also blamed government policy intended at expanding the proportion of homeowners, but his argument explains only the housing boom in the U.S.—not the rest of the world. Rajan (2010) argues that U.S. politicians promoted home ownership and, especially, abundant mortgage financing among low-income households as a palliative against stagnating real wages and rising income inequality.

These studies identify expected returns by the ability of some countercyclical indicator (such as yield curve steepness or consumption–wealth ratio) to predict near-term returns—and assume that fitted realized returns in a regression are the expected returns of a rational market. Based on this logic, rational investors may foresee low expected returns near a cyclical peak and accept these as fair, thanks to their higher risk tolerance amidst abundant wealth. However, even if predictability regressions capture objectively feasible near-term returns, survey evidence raises doubts about whether most investors subjectively expect such countercyclic patterns. Individual investor surveys, especially, suggest that at the end of expansions (near cyclical peaks), optimistic investors have subjectively high expected returns or a high risk appetite, which boosts today’s prices for risky assets and reduces their prospective feasible returns.


pages: 572 words: 94,002

Reset: How to Restart Your Life and Get F.U. Money: The Unconventional Early Retirement Plan for Midlife Careerists Who Want to Be Happy by David Sawyer

Airbnb, Albert Einstein, asset allocation, beat the dealer, bitcoin, Cal Newport, cloud computing, cognitive dissonance, crowdsourcing, cryptocurrency, David Attenborough, David Heinemeier Hansson, Desert Island Discs, diversification, diversified portfolio, Edward Thorp, Elon Musk, financial independence, follow your passion, gig economy, hiring and firing, index card, index fund, invention of the wheel, knowledge worker, loadsamoney, low skilled workers, Mahatma Gandhi, Mark Zuckerberg, meta analysis, meta-analysis, mortgage debt, passive income, passive investing, Paul Samuelson, pension reform, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, Silicon Valley, Skype, smart meter, Snapchat, stakhanovite, Steve Jobs, Tim Cook: Apple, Vanguard fund, Y Combinator

Even under RESET, sometimes your portfolio will drop ten, 20, even 50%. If you can’t handle that, and would change course were it to happen, stock market investing may not be for you. (Google “Risk Tolerance Calculator”.) I wouldn’t blame you. There’s oodles of research showing that the Chimp side of our nature is unsuited to the vicissitudes of the stock market. Nobel prize for economics-winning economists such as Robert Shiller have found that: “Put concisely – it’s actually much smarter to admit that you aren’t perfectly rational, and to plan and invest accordingly, rather than deny your true nature[347].” Read up on risk tolerance, take into account your circumstances, work out your goals and timings based on how old you are, and see what you can afford to lose. Know thyself. But most of all, don’t let your emotions guide your investments: be a rational investor. 5.

However, I’d rather be erring on the side of caution when making decisions about money. Better to be safe than sorry, don’t you think? No, it doesn’t, for these reasons: You can only go on what has happened in the past for predicting what happens in the future. Use 3.5% as an expertly researched planning guide if you’re based in the UK. It’s not the be-all and end-all and you may decide to pick anything between 3% and 6.5% depending on where you live and your risk tolerance. All I ask is do your research first, pick a number and reassess every year; the blog Early Retirement Now has a 23-part series on the topic, a good place to start[337]. We’ve already identified that the biggest factor in your SWR is the first ten years after you achieve your stash target. If you reach ten years of financial independence with half or more of your stash intact you’re in clover.

In the spirit of the Oscars, finally, I’d like to pay tribute to my hairdresser, Michael Dooey (and his erstwhile nextdoor neighbour, Matthew Casserly), who gets more of my money for less work the older I get. P.P.S. Spotlight down. Over to you… Glossary of Terms Asset allocation: an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon. Bonds: loans made to large organisations. These include corporations, cities and national governments. A bond is a piece of a big loan. Careerist: a professional person who has fallen into the habit of putting their career before their life. CETV: stands for Cash Equivalent Transfer Value, the monetary value of your final salary pension. Defined Contribution (DC) and Defined Benefit (DB): the former refers to work pensions run by your employers where they contribute a set percentage every month, and you do, too.


pages: 206 words: 70,924

The Rise of the Quants: Marschak, Sharpe, Black, Scholes and Merton by Colin Read

"Robert Solow", Albert Einstein, Bayesian statistics, Black-Scholes formula, Bretton Woods, Brownian motion, business cycle, capital asset pricing model, collateralized debt obligation, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, discovery of penicillin, discrete time, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial innovation, fixed income, floating exchange rates, full employment, Henri Poincaré, implied volatility, index fund, Isaac Newton, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Arrow, Long Term Capital Management, Louis Bachelier, margin call, market clearing, martingale, means of production, moral hazard, Myron Scholes, Paul Samuelson, price stability, principal–agent problem, quantitative trading / quantitative finance, RAND corporation, random walk, risk tolerance, risk/return, Ronald Reagan, shareholder value, Sharpe ratio, short selling, stochastic process, Thales and the olive presses, Thales of Miletus, The Chicago School, the scientific method, too big to fail, transaction costs, tulip mania, Works Progress Administration, yield curve

These qualities can be superimposed on the Markowitz bullet and the capital allocation line. Markowitz’s model is most profound if we accept the assumptions that a security can be priced based on its mean historic return and its Expected return Capital allocation line Efficient portfolio frontier Risk-free return Risk Figure 10.1 The capital allocation line 64 The Rise of the Quants Expected return High risk tolerance Capital allocation line Efficient portfolio frontier Low risk tolerance Risk-free return Risk Figure 10.2 Various choices of risk and return along the capital allocation line variance or standard deviation. However, it also acted as a springboard to an equally elegant interpretation from one of Markowitz’s associates, William Forsyth Sharpe. The Sharpe insight By the time William Forsyth Sharpe introduced himself to Markowitz in 1960 at the RAND Corporation, at the behest of a mentor, Fred Weston at UCLA, Modern Portfolio Theory was still a relatively theoretical insight.

The firm’s rejection of their insights elicited the same reaction from Black as any such rejection had had on him since adolescence – it made him believe his hypothesis with even greater fervor. Undaunted, Black began to think more about the optimal investment portfolio that could beat the market. He saw options as one way to adjust investment risk exposure at a given time. This is in contrast to the Samuelson approach, which saw options as a discounting problem to settlement based on an individual investor’s risk tolerance. The former is a market-based approach, while the latter is the economist’s representative agent approach. Black started with the assumption that an option price is simply a function of the underlying stock price and the amount of time remaining until settlement. Rewriting in modern standard notation the warrant denotation that Samuelson had used in 1965, we can express Black’s relationship as C(S,t).

He succeeded in creating a continuous-time dynamic portfolio theory that was much more elegant and general than the discrete versions that others were producing. A month after presenting the paper co-authored with Samuelson to the faculty seminar, he presented his own paper to the Harvard/MIT graduate student seminar. This paper was published the following summer as the other bookend to a paper that Samuelson had written on the life cycle of portfolio risk tolerance. In fact, Merton later admitted that his strategy was to learn the mathematics he needed rather than the economics his professors taught, much like Albert Einstein had done as a graduate physics 144 The Rise of the Quants student. He agreed that this was not the best strategy to secure superior grades. However, the proof is in the pudding. He produced five essays for his PhD thesis, three of which were published by refereed finance and economics journals even before his dissertation team could witness his PhD defense.


Buy Then Build: How Acquisition Entrepreneurs Outsmart the Startup Game by Walker Deibel

barriers to entry, Clayton Christensen, commoditize, deliberate practice, discounted cash flows, diversification, Elon Musk, family office, financial independence, high net worth, intangible asset, inventory management, Jeff Bezos, knowledge worker, Lean Startup, Mark Zuckerberg, meta analysis, meta-analysis, Network effects, new economy, Peter Thiel, risk tolerance, risk/return, rolodex, software as a service, Steve Jobs, supply-chain management, Y Combinator

In entrepreneurship, action is rewarded over perfection. Extreme attention to detail tends to keep action at bay indefinitely, or at least results in delayed implementation. 48 Entrepreneurship is almost synonymous with a high-risk tolerance. It’s one of the first things people think of when startups are mentioned. Indeed, people who have a tolerance for risky endeavors will eventually find themselves participating in all-or-nothing type activities, and the startup model emulates the high risk-high return profile. That said, most startups fail, and the ones with high risk tolerance tend to fall in that category. Successful entrepreneurs tend to consider themselves comfortable with a certain amount of risk, but are extremely calculated in their efforts. We can’t go so far to claim that entrepreneurs are risk averse because practicing business has a certain level of risk associated by nature—debt financing and decision making with limited information, for example—but many entrepreneurs actually consider themselves risk averse, despite the reputations they hold publicly.

A few of them seem like they would be characteristics of strong entrepreneurs, but they actually are not. As you read through it, consider how strongly you see each attribute in yourself and what traits might be missing. Also consider what might be missing from the list. Strategic-thinking skills Interpersonal skills Intellectual ability Industry experience Ability to deal with ambiguity Tenacity Organized Laser-focused Achievement-oriented Thick-skinned Risk tolerant 41 Self-confident Creative Optimistic Assertive Decisive Methodical Perfectionistic Got it? Before reviewing the results, I want you to understand that data suggests that the number one characteristic of being successful is not on this list at all. It’s not a skill we would see in a job description or resume. Instead of looking at how we work and what we do, the key to success is in how we think.

David Weller, founder of Leadership Alliance and a true expert in assessing top talent, told me that about a third of the variants for success are simple competencies. These include, but are not limited to: 49 Possessing a drive for results and being able to get results from others The ability to make decisions, including unpopular decisions Strategic agility when dealing with ambiguity A certain level of risk tolerance Financial acumen Critical thinking, which is an innate trait Tactical ability Perseverance Self-awareness, which includes the ability to work through your weaknesses and not have blind spots Interpersonal skills The last one is worth noting. When you are CEO of a company, you must be able to sell; it’s a requirement. This does not mean that you need to commit your time to being a salesperson—that will depend on the type of opportunity you choose.


file:///C:/Documents%20and%... by vpavan

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, asset allocation, Berlin Wall, business cycle, buttonwood tree, buy and hold, corporate governance, corporate raider, disintermediation, diversification, diversified portfolio, Donald Trump, estate planning, fixed income, index fund, intangible asset, interest rate swap, margin call, money market fund, Myron Scholes, new economy, price discovery process, profit motive, risk tolerance, shareholder value, short selling, Silicon Valley, Small Order Execution System, Steve Jobs, stocks for the long run, stocks for the long term, technology bubble, transaction costs, Vanguard fund, women in the workforce, zero-coupon bond, éminence grise

The answer: $378,000. To get there, Bob will need to save about $7,500 a year. You can do a similar calculation by going to the American Savings Education Council Web site, www.asec.org. Click on the "Ballpark Estimate" retirement planning worksheet, and plug in your own numbers. Now you're ready to take the next crucial steps: determining how much risk you can tolerate and how to allocate your funds among the many investment options. Risk tolerance and asset allocation go hand in hand. Risk is the possibility that your investment won't produce the level of returns that you were expecting. All investments are risky, and some are riskier than others. But in general, the higher the risk, the greater the potential reward. Higher risk also carries higher potential for loss and greater uncertainty about the level of return.

But if you can lose 10 percent or 25 percent and take it in stride— hoping that the market will bounce back as it has done historically— then your appetite for risk is greater and you should consider investing a portion of your funds in smaller, fast-growing companies. Brokers also use this information to make sure they are complying with NASD "suitability" rules. These require brokers to recommend only securities that are suitable for your risk tolerance, financial situation, and investment objectives. In general, the higher the risk, the greater the potential for reward and for losses. Shares of start-up companies, or of companies in emerging markets such as Asia and Latin America, are considered high-risk. Low-risk investments, such as government bonds, are guaranteed to return a steady stream of interest, plus your initial investment. Government bonds, and many corporate bonds, are thus useful for those approaching or already in retirement as a steady source of income.

"The biggest change over the next five years will be the emergence of what I call the final choice— delegating asset allocation to someone else," says David Wray, director of the Profit Sharing/401(k) Council of America, an industry-funded association. One such development is the so-called life-cycle fund. Rather than offering a confusing menu of investments, these options offer pre-set mixes of securities aimed at making it easy for workers to match investment choices to age and risk tolerance— that is, to their place in the life cycle. Such funds are professionally managed, with adjustments in portfolio holdings made over time, as appropriate. For example, a life-cycle account for younger investors, who can afford to be more aggressive, would hold more stocks than an account for workers nearing retirement. But as the worker ages, the proportion of stocks would decline while the proportion of bonds would grow.


pages: 503 words: 131,064

Liars and Outliers: How Security Holds Society Together by Bruce Schneier

airport security, barriers to entry, Berlin Wall, Bernie Madoff, Bernie Sanders, Brian Krebs, Broken windows theory, carried interest, Cass Sunstein, Chelsea Manning, commoditize, corporate governance, crack epidemic, credit crunch, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Graeber, desegregation, don't be evil, Double Irish / Dutch Sandwich, Douglas Hofstadter, experimental economics, Fall of the Berlin Wall, financial deregulation, George Akerlof, hydraulic fracturing, impulse control, income inequality, invention of agriculture, invention of gunpowder, iterative process, Jean Tirole, John Nash: game theory, joint-stock company, Julian Assange, longitudinal study, mass incarceration, meta analysis, meta-analysis, microcredit, moral hazard, mutually assured destruction, Nate Silver, Network effects, Nick Leeson, offshore financial centre, patent troll, phenotype, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, profit motive, race to the bottom, Ralph Waldo Emerson, RAND corporation, rent-seeking, RFID, Richard Thaler, risk tolerance, Ronald Coase, security theater, shareholder value, slashdot, statistical model, Steven Pinker, Stuxnet, technological singularity, The Market for Lemons, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, too big to fail, traffic fines, transaction costs, ultimatum game, UNCLOS, union organizing, Vernor Vinge, WikiLeaks, World Values Survey, Y2K, zero-sum game

For these and other reasons, we exaggerate the risk and end up spending much too much on security to mitigate it. Another example is computer crime. It's pedestrian, common, slowly evolving, affecting others, increasingly familiar, and (at least by techies) well-understood. So it makes sense that we understate the risks and underfund security. There are cultural biases to risk as well. According to one study conducted in 23 countries, people have a higher risk tolerance in cultures that avoid uncertainty or are individualistic, and a lower risk tolerance in cultures that are egalitarian and harmonious. Also—and this is particularly interesting—the wealthier a country is, the lower its citizens' tolerance for risk. Along similar lines, the greater the income inequality a society has, the less trusting its citizens are. Creating a dilemma that encourages deception. Think back to the two prisoners for a minute.

Sometimes we need the dispassionate lens of history to judge famous defectors like Oliver North, Oskar Schindler, and Vladimir Lenin. Part I The Science of Trust Chapter 2 A Natural History of Security Our exploration of trust is going to start and end with security, because security is what you need when you don't have any trust and—as we'll see—security is ultimately how we induce trust in society. It's what brings risk down to tolerable levels, allowing trust to fill in the remaining gaps. You can learn a lot about security from watching the natural world. Lions seeking to protect their turf will raise their voices in a “territorial chorus,” their cooperation reducing the risk of encroachment by other predators for the local food supply. When hornworms start eating a particular species of sagebrush, the plant responds by emitting a molecule that warns any wild tobacco plants growing nearby that hornworms are around.

(Large, long-term risks like nuclear weapons, genetic engineering, and global warming are much harder for us to comprehend, and we tend to minimize them as a result.) Today, societal scale continues to grow as global trade increases, the world's economies link up, global interdependencies multiply, and international legal bodies gain more power. On a more personal level, the Internet continues to bring distant people closer. Our risk tolerance has become so low that we have a fetish for eliminating—or at least pretending to eliminate—as much risk as possible from our lives. Let's get back to societal pressures as a series of knobs. Technology is continuously improving, making new things possible and existing things easier, cheaper, better, or more reliable. But these same technological advances result in the knobs being twiddled in unpredictable ways.


Demystifying Smart Cities by Anders Lisdorf

3D printing, artificial general intelligence, autonomous vehicles, bitcoin, business intelligence, business process, chief data officer, clean water, cloud computing, computer vision, continuous integration, crowdsourcing, data is the new oil, digital twin, distributed ledger, don't be evil, Elon Musk, en.wikipedia.org, facts on the ground, Google Glasses, income inequality, Infrastructure as a Service, Internet of things, Masdar, microservices, Minecraft, platform as a service, ransomware, RFID, ride hailing / ride sharing, risk tolerance, self-driving car, smart cities, smart meter, software as a service, speech recognition, Stephen Hawking, Steve Jobs, Steve Wozniak, Stuxnet, Thomas Bayes, Turing test, urban sprawl, zero-sum game

According to Rogers, five distinct adopter categories could be distinguished:Innovators – Will adopt almost anything as long as it has potential. This group uses the bleeding edge technologies that are experimental and unproven. It also has a high-risk tolerance. Early adopters – Are more selective than the innovators but put high emphasis in being first. They often look for a first-mover advantage in terms of adopting technology. Early majority – This group is open to innovation but likes to see it demonstrated by others first. This is one of the largest groups. Late majority – Adopt innovation after half of the market has already adopted it. They are skeptical and are also often driven by very low-risk tolerance in terms of technology. Laggards – Are the ones buying legacy technologies when most others have gotten rid of them. They have an aversion to change. This is also a small group.

In order to be successful with smart city initiatives, it is necessary for a city to understand where it is and where it wants to be on the technology adoption curve. When technology implementations are being considered, their respective position on the technology adoption curve should be matched against the city’s. It is not a good idea for a laggard city to engage in bleeding edge projects. The probability of success will be low because it takes a special way of management and risk tolerance to be successful with that. There is also a good chance that employees will not feel confident when they suddenly have to do a lot of unknown tasks. A city that is just getting ready to move some things off the mainframe may not be an ideal candidate for a block chain implementation. Conversely, cities that are innovators may not have motivation to implement technologies that provide only incremental gains.


Risk Management in Trading by Davis Edwards

asset allocation, asset-backed security, backtesting, Black-Scholes formula, Brownian motion, business cycle, computerized trading, correlation coefficient, Credit Default Swap, discrete time, diversified portfolio, fixed income, implied volatility, intangible asset, interest rate swap, iterative process, John Meriwether, London Whale, Long Term Capital Management, margin call, Myron Scholes, Nick Leeson, p-value, paper trading, pattern recognition, random walk, risk tolerance, risk/return, selection bias, shareholder value, Sharpe ratio, short selling, statistical arbitrage, statistical model, stochastic process, systematic trading, time value of money, transaction costs, value at risk, Wiener process, zero-coupon bond

Instead of investing in just one strategy, it is possible for trading desks to invest in multiple strategies. As long as the strategies are not highly correlated, traders can use diversification to reduce the overall risk of the portfolio. Not only does this lead to a potentially improved risk/return relationship, this has a big impact on profitability since the size of the portfolio is typically measured as a VAR number. KEY CONCEPT: TRADING DESKS AND RISK TOLERANCE Trading desks are typically limited by risk tolerance rather than capital. This is due to the fact that most trading desks can achieve a high degree of leverage by borrowing money, taking on leveraged trades, and similar activities. 112 RISK MANAGEMENT IN TRADING For example, if a trading desk with a $1 million VAR limit is trying to allocate investment between two uncorrelated strategies with the same Sharpe Ratio, the VAR limit for each investment (the size of the investment) will not be $500,000 each.

See probability density function percent returns, 148–150 phi, 203, 232–234 Index portfolio value-at-risk, calculating, 161–164 position limits, 142–143 setting, 2, 11 potential future exposure, current exposure and, 260 pre-trade monitoring, 117–118 preferred stock, 44–45 price of underlying asset, 201 prices, 21 probability density function, 64–65 probability of default, 240–241, 247–254 cumulative, 248–250 loss given default and, 254–255 market-based, 252–254 processing, 14 profits calculating, 2, 10–11 losses and, 121–123 prospective testing, 188 put/call parity and gamma, 225–226 305 Q quotes, 21 return, risk and, 99 reviewers, 115 reward, risk and, 26–27 rho, 203, 232–234 time value of money and, 232 right-way risk, 255 risk avoidance, 28–29 risk management, 9–10, 23, 116 risk, managing, 28–29 risk tolerance, trading desks and, 111 risk caused by value adjustment, 263 cost of eliminating, 229–230 defined, 23–25 holistic view of, 115–117 model, 107–108 monitoring, 27–28 removing, 180 return and, 99 reward and, 26–27 right- and wrong-way, 255 settlement, 262–263 trading decisions and, 10–11 transfer via hedging, 178 types of, 25 rogue trading, 113–114 R random numbers, 63–66 random walks, 72–75 randomness, results and, 111 real assets, 35–36 real estate investment trusts, 45 recursive calculations, 158 reduction, risk, 29, 267 regression tests, 191–194 REIT.

See real estate investment trusts reputational risk, 25 results, randomness and, 111 retrospective testing, 188 S sales, 13 scheduling, 13 second derivative, 84–85 securities, 22 settlement risk, 262–263 Sharpe Ratio, 109–110 short selling, regulations about, 16 shortfall, expected, 172–173 shorting, 4 simulation accuracy, 98 skew, 70–72 slippage, 101–105 social activity, trading as, 238 306 speculators, market stability and, 136 spot prices, 21 statistics, 66–67 stochastic processes, 64, 72–75 stocks, 42, 44–45 stop limit orders, 19 stop orders, 18–19 strategic risk, 25 strategies, 6–8 combining, 111–112 comparing, 108–111 strategy testing, 97–101 support and control, 13–14 systematic trading, 95–96 T Taylor Series Expansion, 89–90, 203–204 testing hedge effectiveness, 187–189 strategy, 97–101 tests, regression, 191–194 theta, 202, 226–230 time until expiration, 201 time value of money, 90–92 rho and, 232 time, vega and, 232 timing, 101 trade forensics, 1–2, 10 trade surveillance, 112–118 trading, 12–16 as social activity, 238 requirements for, 16 systematic, 95–96 trading decisions, risk and, 10–11 trading desks, 2–3 risk tolerance and, 111 trading limits, 147–148 trading positions, 20–21 INDEX trading risk, managing, 21–23 transactions, 130 transactions costs, 101–105 transfer, risk, 29, 267 Treasury bills, 49 U UL. See unexpected loss unexpected loss, 240–241 V validation, data, 96–97 value of options, 204–207 value-at-risk limits, in practice, 170 value-at-risk sensitivity, 162–163 value-at-risk as size measure, 147 defined, 143–147 misuse of, 171–173 non-parametric, 167–169 parametric, 150–161 zero and, 164 VAR.


pages: 345 words: 87,745

The Power of Passive Investing: More Wealth With Less Work by Richard A. Ferri

asset allocation, backtesting, Bernie Madoff, buy and hold, capital asset pricing model, cognitive dissonance, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, endowment effect, estate planning, Eugene Fama: efficient market hypothesis, fixed income, implied volatility, index fund, intangible asset, Long Term Capital Management, money market fund, passive investing, Paul Samuelson, Ponzi scheme, prediction markets, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, survivorship bias, too big to fail, transaction costs, Vanguard fund, yield curve, zero-sum game

The questionnaire approach probably works better on young investors, who have a lot more in common with one another than people in their 50s and 60s. More established investors should not rely solely on questionnaires for determining their risk level. More thought and attention should be given to their unique situation. Finding a person’s maximum tolerance for risk requires soul-searching. We tend to feel brave when prices are going up, which means that it’s not the ideal time to decide our risk tolerance level. Perhaps the best time to decide is after the market has dropped 20 or 30 percent when we’re likely to be more honest with ourselves. No one can guarantee that any investment strategy will achieve its stated objective. However, emotionally-charged selling in a bear market will almost guarantee that an investment plan will be derailed. The level of risk in an investment plan needs to be at a low enough level so that the plan will be diligently followed in all market conditions.

registered investment advisor (RIA) An investment professional who is registered—but not endorsed—by the Securities and Exchange Commission (SEC) and may recommend certain types of investment products. reinvestment Use of investment income to buy additional securities. Many mutual fund companies and investment services offer the automatic reinvestment of dividends and capital gains distributions as an option to investors. return of capital A distribution that is not paid out of earnings and profits. It is a return of the investor’s principal. risk tolerance An investor’s ability or willingness to endure declines in the price of investments while waiting for them to increase in value. R-squared A measure of how much of a portfolio’s performance can be explained by the returns on the overall market (or a benchmark index). If a portfolio’s total return precisely matched the return on the overall market or benchmark, its R-squared would be 1.00.

active management of benchmark tracking and brokerage use of first of the growth in market introduction of taxes and turnover within U.S. equity Index investing, Wall Street’s battle against IndexUniverse.com Individual investor(s): asset allocation for asset side and assets to obligations beginning at the end hiring an advisor human vs. monetary capital investment decisions needs identification and obligations, estimation of risk tolerance of Individual Retirement Account (IRA) Inflation expectation Inheritances Institutional investors Insurance, types of Internal Revenue Service (IRS) International equity funds International risk premiums Internet investment resources Intrinsic value of stocks Invesco PowerShares Investment Advisers Act of 1940 Investment advisors Investment Company Act of 1940 Investment monitoring Investment Performance Measurement Investment policy changes Investment Policy Statement (IPS): as guidebook life obligations and rebalancing and steps leading to Investment pyramid Investments, savings and Investment selection: asset classes and commodities and inflation rate and low-cost index funds/EFTs Investment strategy options Investors.


pages: 257 words: 13,443

Statistical Arbitrage: Algorithmic Trading Insights and Techniques by Andrew Pole

algorithmic trading, Benoit Mandelbrot, constrained optimization, Dava Sobel, George Santayana, Long Term Capital Management, Louis Pasteur, mandelbrot fractal, market clearing, market fundamentalism, merger arbitrage, pattern recognition, price discrimination, profit maximization, quantitative trading / quantitative finance, risk tolerance, Sharpe ratio, statistical arbitrage, statistical model, stochastic volatility, systematic trading, transaction costs

Our aversion to risk is then taken to be a constant multiple of that variance. Thus, the goal becomes: Maximize expected return subject to a limit on expected variance of return. Let us express these results in mathematical form. First, definition of terms: n fi ip k Number of stocks in investment universe Expected forecast return for stock i; f = (f1 , . . . , fn ) Expected variance of returns, V[f ] Value to be invested in stock i; p = (p1 , . . . , pn ) Risk tolerance factor Now the goal is expressed as: maximize p f − kp p 29 Statistical Arbitrage 2.5.1 Exposure to Market Factors Statistical arbitrage fund managers typically do not want a portfolio that takes long positions only: Such a portfolio is exposed to the market. (A pairs trading scheme, by definition, will not be biased but statistical arbitrage models more generally readily generate forecasts that, unless constrained, would lead to a portfolio with long or short bias.)

A big win pays for many small losses. The significance of this fact is in directing a manager to construct stop loss rules (early exit from a bet that is not working according to forecast expectation) that curtail losses without limiting gains. Where this is possible, a model with seemingly textbook sized relative odds in favor of winning forecasts can be profitably traded within prescribed risk tolerances. Technically, such rules modify the utility function of a model by altering the characteristics of the outcome set by employing a procedure in which the forecast model is only one of several elements. A warning: Beware of being fooled by purveyors of tales of randomness. A strategy that offers bets that typically generate a small loss and occasionally a whopping gain sounds alluring when proffered as relief after a cunningly woven web of disaster shown to seemingly inevitably follow plays where the odds are conventionally in favor of winning.

However, looking at returns between events, the correlation is much higher at 0.7. Event correlation 70 SAI FRE 60 50 40 30 20 10 19960102 19961231 19971231 FIGURE 8.1 Adjusted price histories for FRE and SAI 19980806 143 Nobel Difficulties 70 SAI FRE 60 50 40 30 20 10 19960102 19961231 19971231 19980806 FIGURE 8.2 Adjusted price histories for FRE and SAI to August 1998 indicates what might be expected to trade well in groups within prescribed risk tolerances (see Chapter 2). Visually and statistically, it looks as though the pair [FRE, SAI] will trade profitably in a simple spread reversion model. Simulation of a basic popcorn process model (see Chapter 2) demonstrates that was indeed the case. Figure 8.2 shows the adjusted price series for FRE and SAI extended through the second quarter of 1998 to August 6. Interesting? The spread widened considerably to more than double the recent historical maximum.


Smart Cities, Digital Nations by Caspar Herzberg

Asian financial crisis, barriers to entry, business climate, business cycle, business process, carbon footprint, clean water, cloud computing, corporate social responsibility, Dean Kamen, demographic dividend, Edward Glaeser, Edward Snowden, hive mind, Internet of things, knowledge economy, Masdar, megacity, New Urbanism, packet switching, QR code, remote working, RFID, rising living standards, risk tolerance, Ronald Reagan, shareholder value, Silicon Valley, Silicon Valley startup, smart cities, Smart Cities: Big Data, Civic Hackers, and the Quest for a New Utopia, smart meter, social software, special economic zone, Stephen Hawking, telepresence, too big to fail, trade route, transcontinental railway, upwardly mobile, urban planning, urban sprawl, women in the workforce, working poor, X Prize

Insigma’s success working for city governments has allowed them to refine the delivery and maintenance of IoE technology even as it continues to be refined. CCI will continue to participate in consulting projects and maintain Cisco’s alignment with this quiet, steady rollout of smart city services. China may have a great many services to refine, and delivery of anything—tangible or intangible—to 1.6 billion people will never be simple. But the combination of aggressiveness, high risk tolerance, concentrated power, and key partnerships means that Cisco’s work will continue to be innovative, even when the headlines of the day turn bleak. The inevitable signs of economic slowdown began to appear in 2012–2013; by the next year, a wild card news item assured that Cisco’s efforts in China would be a rough ride for the next few years. LESSONS LEARNED By 2014, the political winds, far stronger than any experienced in Songdo, were buffeting Cisco’s business strategy and results in China.

Bo was willing to take risks and think about his city in the grandest terms. It is precisely this boldness that will underpin any greenfield smart and connected city of the future; it also will characterize the actions of any leader who is willing to break with past methods and embrace IoE solutions with shorter success trails but extensive potential to make a city work better for more people. Those who believe such imagination and risk tolerance are rare finds in China likely have given the market only a cursory glance. This is a nation of ambition on many levels; the ambition runs deep enough for opportunity to exist for motivated outsiders as well as the burgeoning national suppliers. But sales and consulting arms will have to be aggressive in courting them. • Seek co-creation partnerships. The Insigma partnership continues to provide Cisco with legitimacy, business opportunity, and productive, collaborative competition.

After an initial setback in Saudi Arabia, the group needed a new place to continue the digital city experiment; South Korea was ready to engage and take the idea further. In China, the team found scale; in India, digital nation building. All the while, the parent corporate structure allowed the author and his peers to experiment, while demanding accountability, progress, and the application of lessons learned. This culture that fosters ambition, risk tolerance, and collaboration with new partners is critical to the success of future city-building projects. The third and most personal theme is linked directly to the second: facing failure, which is an inevitable byproduct of engineering on the scale of cities. There is a corollary need to recognize success that goes beyond the surface or real time. Too often in corporate hierarchies—and politics—failures are dressed up as successes, and real successes are not understood or exploited, since the big organization feels the need to move to the next market or opportunity.


Early Retirement Guide: 40 is the new 65 by Manish Thakur

"side hustle", Airbnb, diversified portfolio, financial independence, hedonic treadmill, index fund, Lyft, passive income, passive investing, risk tolerance, Robert Shiller, Robert Shiller, time value of money, uber lyft, Vanguard fund, Zipcar

If the entirety of your money is in monthly income generating investments, such as rental properties, then the amount invested could vary greatly from this 25x rule. If you're more risk averse and will worry about having enough, you can use a higher multiplier, such as 30, to calculate your required amount. For people who are more tolerant of risk and believe they can easily become employed if their money runs out, the multiplier could be lower, around 20x yearly spending. For less risk tolerant people, this multiplier will be anywhere from 30-50x. Challenges: 1. Based on a quick calculation of your yearly expenses, determine how much money you would need at this moment to become financially independent. 2. Calculate how much you would need to save to reach this number based on what you've already saved. Practical Steps to Early Retirement Now that we've gone through the fundamentals for the why and how of early retirement, well start looking at the practical steps we can take to become free of money and the need to trade our time to obtain more of it.


pages: 470 words: 144,455

Secrets and Lies: Digital Security in a Networked World by Bruce Schneier

Ayatollah Khomeini, barriers to entry, business process, butterfly effect, cashless society, Columbine, defense in depth, double entry bookkeeping, fault tolerance, game design, IFF: identification friend or foe, John von Neumann, knapsack problem, MITM: man-in-the-middle, moral panic, mutually assured destruction, pez dispenser, pirate software, profit motive, Richard Feynman, risk tolerance, Silicon Valley, Simon Singh, slashdot, statistical model, Steve Ballmer, Steven Levy, the payments system, Y2K, Yogi Berra

In terms of risk, organized crime is what you get when you combine lone criminals with a lot of money and organization. These guys know that you have to spend money to make money, and are willing to invest in profitable attacks against a financial system. They have minimal expertise, but can purchase it. They have minimal access, but they can purchase it. They often have a higher risk tolerance than lone criminals; the pecking order of the crime syndicate often forces those in the lower ranks to take greater risks, and the protection afforded by the syndicate makes the risks more tolerable. POLICE You can think of the police as kind of like a national intelligence organization, except that they are less well funded, less technically savvy, and focused on crimefighting. Understand, though, that depending on how benevolent the country is and whether or not they hold occasional democratic elections, “crimefighting” could cover a whole lot of things not normally associated with law enforcement.

An insider can use the system’s own resources against itself. In extreme cases the insider might have considerable expertise, especially if he was involved in the design of the systems he is now attacking. Revenge, financial gain, institutional change, or even publicity can motivate insiders. They generally also fit into another of the categories: a hacker, a lone criminal, or a national intelligence agent. Malicious insiders can have a risk tolerance ranging from low to high, depending on whether they are motivated by a “higher purpose” or simple greed. Of course, insider attacks aren’t new, and the problem is bigger than cyberspace. If the e-mail system hadn’t been there, the Schwab employees might have used the telephone system, or fax machines, or maybe even paper mail. INDUSTRIAL ESPIONAGE Business is war. Well, it’s kind of like war, but it has referees.

Industrial espionage can be well-funded; an amoral but rational company will devote enough resources toward industrial espionage to achieve an acceptable return on investment. Even if stealing a rival’s technology costs you half a million dollars, it could be one-tenth the cost of developing the technology yourself. (Ever wonder why the Russian Space Shuttle looks a whole lot like the U.S. Space Shuttle?) This kind of adversary has a medium risk tolerance because a company’s reputation (an intangible but valuable item) will be damaged considerably if it is caught spying on the competition—but desperate times can bring desperate measures. PRESS Think of the press as a subspecies of industrial spy, but with different motivations. The press isn’t interested in a competitive advantage over its targets;it is interested in a “newsworthy” story.This would be the Washington City Pages publishing the video rental records of Judge Bork (which led to the Video Privacy Protection Act of 1988), the British tabloids publishing private phone conversations between Prince Charles and Camilla Parker Bowles, or a newspaper doing an exposé on this company or that government agency.


Capital Ideas Evolving by Peter L. Bernstein

Albert Einstein, algorithmic trading, Andrei Shleifer, asset allocation, business cycle, buy and hold, buy low sell high, capital asset pricing model, commodity trading advisor, computerized trading, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, diversification, diversified portfolio, endowment effect, equity premium, Eugene Fama: efficient market hypothesis, financial innovation, fixed income, high net worth, hiring and firing, index fund, invisible hand, Isaac Newton, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Arrow, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, market bubble, mental accounting, money market fund, Myron Scholes, paper trading, passive investing, Paul Samuelson, price anchoring, price stability, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, statistical model, survivorship bias, systematic trading, technology bubble, The Wealth of Nations by Adam Smith, transaction costs, yield curve, Yogi Berra, zero-sum game

As far back as 1989, he put it this way: bern_c09.qxd 3/23/07 9:06 AM Page 115 Myron Scholes 115 If the only reason people trade is that they believe they know more than the next person—e.g., have better information— there would be no gains from trade. . . . There have to be other reasons for trade. Although some price moves occur because of changes in information, other price changes take place because of changes in the risk tolerance or liquidity preferences of certain investors.1 Grossman cites two examples of price changes taking place because of changes in risk tolerance or liquidity preferences. The first example involves a pension fund aiming to improve the match between its assets and liabilities by shifting out of stocks into an immunized bond portfolio. The second example involves investors who desire immediacy of execution. To carry out their objectives, these investors must accept adverse equity prices to persuade other investors to cooperate by taking the equities off their hands.

In addition to providing a benchmark for how the university chooses to trade off risk versus expected return, the Policy Portfolio also serves as the overall yardstick against which the Investment Committee can judge the actual performance of Swensen and his staff. Jack Meyer, Swensen’s counterpart at Harvard from 1990 to 2005, sees the Policy Portfolio in the same light: “If you use a policy portfolio that doesn’t align precisely with your return goals, risk tolerance, and basic asset mix, no amount of clever trading will save you.”3 Nevertheless, the Yale committee’s attachment to the Policy Portfolio has an aggressive as well as a defensive f lavor. As the 1995 report describes it, “Because of the importance of maintaining policy targets, the Investment Office closely monitors deviations of actual from target allocations in the Endowment. When markets rise and fall, the portfolio is rebalanced; that is, securities are bought and sold to maintain actual allocations at the policy targets.

And in addition to that unhappy eventuality, return expectations could turn out to have been exaggerated because the bern_c14.qxd 3/23/07 9:11 AM Page 211 Martin Leibowitz 211 arrival of too many investors drives up asset prices and reduces prospective returns. In an ironic sense, the Capital Asset Pricing Model and the Efficient Market Hypothesis would become descriptions of reality rather than abstract models. Everybody would want to own the same portfolio, and that portfolio in effect would become The Market. Then all prices would clear without variation, everyone would have the same risk tolerance, everyone would earn same rate of return, and everyone would be taking on the same level of risk. To some extent, this process is already well under way. REITs are a conversion of real estate from an asset you can kick to a piece of paper trading in the financial markets. Private equity used to be priced in a negotiation between seller and buyer; now private equity is priced in auction markets.


pages: 741 words: 199,502

Human Diversity: The Biology of Gender, Race, and Class by Charles Murray

23andMe, affirmative action, Albert Einstein, Alfred Russel Wallace, Asperger Syndrome, assortative mating, basic income, bioinformatics, Cass Sunstein, correlation coefficient, Daniel Kahneman / Amos Tversky, double helix, Drosophila, epigenetics, equal pay for equal work, European colonialism, feminist movement, glass ceiling, Gunnar Myrdal, income inequality, Kenneth Arrow, labor-force participation, longitudinal study, meta analysis, meta-analysis, out of africa, p-value, phenotype, publication bias, quantitative hedge fund, randomized controlled trial, replication crisis, Richard Thaler, risk tolerance, school vouchers, Scientific racism, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, social intelligence, statistical model, Steven Pinker, The Bell Curve by Richard Herrnstein and Charles Murray, the scientific method, The Wealth of Nations by Adam Smith, theory of mind, Thomas Kuhn: the structure of scientific revolutions, twin studies, universal basic income, working-age population

Cognitive disorders were autism spectrum disorder or schizophrenia, bipolar disorder, depression, depressive symptoms, major depressive disorder, neuroticism, schizophrenia, and “worry.” Mental abilities (combined sample = 5,715). Mental abilities were cognitive performance, educational attainment, general cognitive ability, highest math class taken, intelligence, and self-reported math ability. Personality features (combined sample = 1,319). Personality features were adventurousness, alcohol consumption (drinks per week), general risk tolerance, risk-taking tolerance, life satisfaction, positive affect, subjective well-being, and well-being spectrum. 14. The choice of the particular traits used for this illustrative table doesn’t make much difference. If all of the SNPs in the GWAS Catalog are used, 32 percent of the physiological traits and 34 percent of the cognitive traits have target allele differences that qualify as “large.” 15. The following traits consisted of the SNPs under the same label in the GWAS Catalog: Adventurousness, Positive affect, Life satisfaction, and Schizophrenia.

Depression: Depressed affect, Depression, Depression (quantitative trait), Depressive symptoms, Depressive symptoms (MTAG), Depressive symptoms (SSRI exposure interaction), Depressive symptoms (stressful life events interaction), Major depressive disorder, Major depressive disorder (broad), Major depressive disorder (probable), Current major depressive disorder. Neuroticism: Neuroticism, Neuroticism (MTAG). Worry: Feeling worry, Worry, Worry too long after an embarrassing experience. Risk tolerance: General risk tolerance (MTAG), Risk-taking tendency (4-domain principal component model). Well-being: Eudaimonic well-being, Hedonic well-being, Subjective well-being, Subjective well-being (MTAG), Well-being spectrum (multivariate analysis). Autism: Autism, Autism spectrum disorder, Obsessive-compulsive disorder or autistic spectrum disorder, Social autistic-like traits. ADHD: Attention function, Attention function in attention deficit hyperactive disorder, Attention deficit hyperactivity disorder, Attention deficit hyperactivity disorder (combined symptoms), Attention deficit hyperactivity disorder (hyperactivity-impulsivity symptoms), Attention deficit hyperactivity disorder (inattention symptoms), Attention deficit hyperactivity disorder (time to onset), Attention deficit hyperactivity disorder and conduct disorder, Attention deficit hyperactivity disorder motor coordination, Attention deficit hyperactivity disorder symptom score, Attention deficit hyperactivity disorder (maternal expressed emotions interaction).

The following table shows the results for 112 phenotypic traits grouped into three types of noncognitive traits and three types of cognitive traits. The noncognitive traits are major diseases such as breast cancer and Parkinson’s disease, physiological biomarkers such as height and weight, and blood parameters such as red cell count and metabolite levels. The cognitive traits are cognitive disorders such as depression, cognitive ability (both IQ and neurocognitive functioning), and personality features such as risk-taking tolerance and life satisfaction. The note gives details.[13] TARGET ALLELE DIFFERENCES QUALIFYING AS “LARGE” (.20+) Physiological Traits No. of Unique SNPs: 13,431 Total: 33% African-Asian: 37% European-African: 33% Asian-European: 30% Diseases No. of Unique SNPs: 3,718 Total: 33% African-Asian: 38% European-African: 33% Asian-European: 30% Biomarkers No. of Unique SNPs: 5,298 Total: 35% African-Asian: 39% European-African: 35% Asian-European: 31% Blood parameters No. of Unique SNPs: 4,415 Total: 31% African-Asian: 35% European-African: 31% Asian-European: 28% Cognitive Traits No. of Unique SNPs: 9,628 Total: 36% African-Asian: 39% European-African: 37% Asian-European: 32% Cognitive disorders No. of Unique SNPs: 2,594 Total: 35% African-Asian: 38% European-African: 37% Asian-European: 31% Mental abilities No. of Unique SNPs: 5,715 Total: 36% African-Asian: 39% European-African: 36% Asian-European: 32% Personality features No. of Unique SNPs: 1,319 Total: 38% African-Asian: 42% European-African: 38% Asian-European: 35% Source: Author’s analysis, GWAS Catalog and Phase 1 of the 1000 Genomes Project.


pages: 194 words: 59,336

The Simple Path to Wealth: Your Road Map to Financial Independence and a Rich, Free Life by J L Collins

"side hustle", asset allocation, Bernie Madoff, buy and hold, compound rate of return, diversification, financial independence, full employment, German hyperinflation, index fund, money market fund, nuclear winter, passive income, payday loans, risk tolerance, Vanguard fund, yield curve

You might leave a high-paying job to work for less at something you love. In my own career there were many times I chose to step away from working for months or even years at a time. Each time changed my stage. Using this framework of two stages and two funds, you have all the tools you need to find your own balance. In determining that balance you’ll also want to consider two additional factors: How much effort you are willing to apply and your risk tolerance. Effort For the wealth accumulation stage an allocation of 100% stocks using VTSAX is the soul of simplicity. But as we’ve seen, some studies suggest that adding a small percentage of bonds—say 10-25%—actually outperforms 100% stocks. You can see this effect by playing with the various calculators found on the internet. As you do, you’ll notice that adding much beyond 25% bonds begins to hurt results.

After considering effort and risk, here are some questions you’ll want to consider. When should I make the shift into bonds? This is very much a function of your tolerance for risk and your personal situation. For the smoothest transition, you might start slowly shifting into your bond allocation 5 or 10 years before you are fully retired. Especially if you have a fixed date firmly in mind. But if you are flexible as to your retirement date and more risk tolerant, you might stay fully in stocks right up until you make the change. In doing so the stronger potential of stocks could get you there sooner. But if the market moves against you, you’ll have to be willing to push your retirement date back a bit. Of course, any time you shift between the accumulation and preservation stages, you’ll want to reassess and possibly adjust your allocation. Balance and choice.


pages: 278 words: 84,002

Strategy Strikes Back: How Star Wars Explains Modern Military Conflict by Max Brooks, John Amble, M. L. Cavanaugh, Jaym Gates

a long time ago in a galaxy far, far away, British Empire, data acquisition, invisible hand, risk tolerance, South China Sea, Steven Pinker, Stuxnet, Yogi Berra

This illustrates an important point: for Rebels, separatists, and weaker nations, strategic shifts are always higher-risk ventures, since their aggregate power inferiority means that they have less of a cushion if the shift turns out to be unwise, undertaken too soon, or undertaken too late. Weaker parties must have a greater risk tolerance than stronger ones, but this makes them more susceptible to disaster. Unsurprisingly, though, the Star Wars metaphor is incomplete when it comes to understanding strategic shifts. Its mythological universe is missing some of the things that can drive strategic shifts, such as the ascension to power of a new leadership cadre with different priorities, objectives, value systems, and risk-tolerance levels and domestic factors like deep social, demographic, and political change or altered economic conditions. In the real world, economics always affects politics and hence strategy, while in Star Wars economics are nearly irrelevant, with ideological value structures—freedom versus oppression—being all that really matter.

But ultimately a strategic shift, like the creation of strategy itself, is more art than science, demanding psychological acuity; cross-cultural perceptiveness; an ability to peer through the fog of the future; and, most of all, the boldness to abandon something that had been working and strike out into the unknown with only a blurry, prediction-dependent map. A number of things can inspire an empire, state, or protostate to consider a strategic shift. None is more powerful than a defeat or disaster that proves that the old strategy was bankrupt and compels the boldness and risk tolerance that strategic shifts demand. Think Britain after Dunkirk or the United States after Pearl Harbor and the loss of the Philippines.2 Samuel Johnson once said that the prospect of being hanged concentrates the mind wonderfully. So does defeat or disaster. Even short of this, though, major change in the security situation can inspire or compel a strategic shift. Take the emergence of a new enemy.


pages: 312 words: 83,998

Testosterone Rex: Myths of Sex, Science, and Society by Cordelia Fine

assortative mating, Cass Sunstein, credit crunch, Donald Trump, Downton Abbey, Drosophila, epigenetics, experimental economics, gender pay gap, George Akerlof, glass ceiling, helicopter parent, longitudinal study, meta analysis, meta-analysis, phenotype, publication bias, risk tolerance

Perhaps women and non-white men see the world as more dangerous because in many ways they are more vulnerable, because they benefit less from many of its technologies and institutions, and because they have less power and control.38 This point was neatly demonstrated by some statistical fun, inspired by Nelson’s insight that we tend to think risk, think male. Yale Law School academic Dan Kahan showed that, when asked about the risks to human health, safety, or prosperity arising from high tax rates for business, now it was the women’s and minority men’s turn to be sanguine. This, he notes, beautifully illustrates Nelson’s point: It confirms that men are more risk tolerant than women only if some unexamined premise about what counts as a “risk” excludes from assessment the sorts of things that scare the pants off of white men (or at least hierarchical, individualistic ones).39 The white male effect in the United States, viewed alongside the similar risk perceptions of native Swedish men and women, suggests that it can at least sometimes be the different social place, identities, and experiences of men and women in the world, rather than some enduring dissimilarity of biology, that underlie sex differences in risk perception.

In fact, in the United States, the “masculinity gap” has been closing over time, in step with women’s changing roles and status in society.43 If risk taking is an integral part of a masculine identity, then we can predict that men should take greater financial risks when that identity, or the norms associated with it, are made salient. Viennese academics Katja Meier-Pesti and Elfriede Penz found exactly that. They primed young women and men with either masculine, feminine, or (in a control condition) gender-neutral stimuli. Men primed with masculinity gave the most risk-tolerant responses on a questionnaire assessing attitudes toward risk taking in investments.44 A more recent study also explored the importance of masculine identity for financial risk taking, by exploiting a rather depressing phenomenon known as the “failure-as-an-asset” effect. It turns out that presenting men with evidence that they have done poorly at something at which women tend to excel provides a little boost to their self-esteem, because incompetence in low-status femininity helps establish high-status manliness.

Gender differences in evaluation of new business opportunity: A sterotype threat perspective Journal of Business Venturing, 29, 273–288. 41. Gupta, V. K., Turban, D. B., Wasti, S. A., & Sikdar, A. (2009). The role of gender stereotypes in perceptions of entrepreneurs and intentions to become an entrepreneur. Entrepreneurship Theory and Practice, 33(2), 397–417. 42. Lemaster, P., & Strough, J. (2014). Beyond Mars and Venus: Understanding gender differences in financial risk tolerance. Journal of Economic Psychology, 42, 148–160; Meier-Pesti, K., & Penz, E. (2008). Sex or gender? Expanding the sex-based view by introducing masculinity and femininity as predictors of financial risk taking. Journal of Economic Psychology, 29(2), 180–196. 43. Twenge, J. (1997). Changes in masculine and feminine traits over time: A meta-analysis. Sex Roles, 36(5–6), 305–325. 44. Meier-Pesti & Penz (2008), ibid.


pages: 519 words: 118,095

Your Money: The Missing Manual by J.D. Roth

Airbnb, asset allocation, bank run, buy and hold, buy low sell high, car-free, Community Supported Agriculture, delayed gratification, diversification, diversified portfolio, estate planning, Firefox, fixed income, full employment, hedonic treadmill, Home mortgage interest deduction, index card, index fund, late fees, mortgage tax deduction, Own Your Own Home, passive investing, Paul Graham, random walk, Richard Bolles, risk tolerance, Robert Shiller, Robert Shiller, speech recognition, stocks for the long run, traveling salesman, Vanguard fund, web application, Zipcar

As with so many aspects of investing, there's no one option that works for every person. One factor that can help you decide how to invest your money is risk tolerance. That's a measure of how much uncertainty—and possible loss—you're willing to deal with in your investments. If your risk tolerance is high, you can handle big fluctuations in your investment returns in exchange for the possibility of large gains. If your tolerance is low, on the other hand, you'd rather not deal with the ups and downs—even if that means giving up a chance at making higher returns. Some of your portfolio should be in fixed-income investments like bonds and CDs, which pay interest on a regular schedule. How much depends on your goals, needs, and risk tolerance. A common rule of thumb is that the percentage of fixed-income investments in your portfolio should be equal to your age.

Lifecycle funds are perfect for investors who don't want to worry about all the jargon and nonsense that usually come with investing. If you decide to buy a lifecycle fund, buy only that fund. If you spread your money around (especially to other lifecycle funds), you defeat the whole purpose of this kind of investment. Note You don't have to pick a lifestyle fund that matches your likely retirement date. Instead, choose one that matches your risk tolerance. If the Fidelity Freedom 2035 is too aggressive for you, for example, go with the Fidelity Freedom 2025 instead. You can read more about lifecycle funds in this New York Times article: http://tinyurl.com/NYT-tdfunds. All-in-one funds If you like the idea of investing in just one fund but you don't want its asset allocation to change over time, you have a handful of other single-fund options, including: Vanguard STAR Fund (VGSTX), a collection of 11 other Vanguard mutual funds.


pages: 490 words: 117,629

Unconventional Success: A Fundamental Approach to Personal Investment by David F. Swensen

asset allocation, asset-backed security, buy and hold, capital controls, cognitive dissonance, corporate governance, diversification, diversified portfolio, fixed income, index fund, law of one price, Long Term Capital Management, market bubble, market clearing, market fundamentalism, money market fund, passive investing, Paul Samuelson, pez dispenser, price mechanism, profit maximization, profit motive, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, shareholder value, Silicon Valley, Steve Ballmer, stocks for the long run, survivorship bias, technology bubble, the market place, transaction costs, Vanguard fund, yield curve, zero-sum game

Seduced by the appeal of security-trading decisions and the allure of market-timing moves, investors tend to focus on unproductive and expensive portfolio-churning activities. While hot stocks and brilliant timing make wonderful cocktail party chatter, the conversation-stopping policy portfolio proves far more important to investment success. The essence of the process that leads to creation of viable portfolio targets involves knowledge of basic investment principles, definition of specific investment goals, and understanding of individual risk tolerances. Fundamental investment tenets provide the framework upon which investors build portfolios with the greatest probability of meeting investor needs. Clear articulation of goals defines the task that investors desire to accomplish, while explicit specification of risk preferences outlines the parameters within which investors sensibly operate. Investors armed with basic investment principles, well-defined goals, and reasonable self-awareness increase the likelihood of investment success.

Fully 70 percent of assets promise equity-like returns, meeting the requirement of equity orientation. Asset-class weights range from 5 to 30 percent of assets, meeting the requirement of diversification. A portfolio with assets allocated according to fundamental investment principles establishes a strong starting point for individual investment programs. Ultimately, successful portfolios reflect the specific preferences and risk tolerances of individual investors. Understanding the quantitative and qualitative characteristics of asset-class exposure creates a basis for determining which asset classes to include and in which proportions to invest. Chapter 2, Core Asset Classes, offers a primer on those asset classes likely to contribute to investor goals. Chapter 3, Portfolio Construction, outlines a methodology that blends science and art in combining the core asset classes to produce a portfolio.

Diversification provides the free lunch of improved return and risk characteristics, while equity orientation promises the possibility of greater wealth accumulation. Personal preferences play a critical subjective role in portfolio decision making. Unless an investor embraces wholeheartedly a particular portfolio structure, failure awaits. Lightly held positions invite casual reversal, exposing vacillating investors to the costly consequences of market whipsaw. By adopting asset-allocation targets that dovetail with personal risk tolerances, investors vastly increase the odds of investment success. Individual circumstances introduce important considerations to the portfolio structuring process. Nonfinancial assets, such as homes and privately held businesses, influence an investor’s desired portfolio composition. Financial liabilities, such as mortgages and personal loans, factor into investor decisions regarding asset allocation, particularly with respect to holdings of fixed income.


pages: 416 words: 106,532

Cryptoassets: The Innovative Investor's Guide to Bitcoin and Beyond: The Innovative Investor's Guide to Bitcoin and Beyond by Chris Burniske, Jack Tatar

Airbnb, altcoin, asset allocation, asset-backed security, autonomous vehicles, bitcoin, blockchain, Blythe Masters, business cycle, business process, buy and hold, capital controls, Carmen Reinhart, Clayton Christensen, clean water, cloud computing, collateralized debt obligation, commoditize, correlation coefficient, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, disintermediation, distributed ledger, diversification, diversified portfolio, Donald Trump, Elon Musk, en.wikipedia.org, Ethereum, ethereum blockchain, fiat currency, financial innovation, fixed income, George Gilder, Google Hangouts, high net worth, Jeff Bezos, Kenneth Rogoff, Kickstarter, Leonard Kleinrock, litecoin, Marc Andreessen, Mark Zuckerberg, market bubble, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Network effects, packet switching, passive investing, peer-to-peer, peer-to-peer lending, Peter Thiel, pets.com, Ponzi scheme, prediction markets, quantitative easing, RAND corporation, random walk, Renaissance Technologies, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ross Ulbricht, Satoshi Nakamoto, Sharpe ratio, Silicon Valley, Simon Singh, Skype, smart contracts, social web, South Sea Bubble, Steve Jobs, transaction costs, tulip mania, Turing complete, Uber for X, Vanguard fund, WikiLeaks, Y2K

The only difference this time was that it was bitcoin. MODERN PORTFOLIO THEORY When evaluating any investment decision, the starting point is always an individual’s financial goals, time horizon, and risk tolerance. Goals are what the funds will be used for, and the time horizon reveals when they will be used. Risk tolerance takes a bit more analysis. Each investor has a unique tolerance for the ongoing gyrations of the value of his or her portfolio. For example, do people lose sleep when their portfolio fluctuates, or do they slumber through ups and downs, dreaming of long-term gains? Once goals, time horizon, and risk tolerance are determined, one can proceed to developing an investment portfolio that maximizes returns while staying within the bounds of these parameters. Nobel Prize winner Harry Max Markowitz defined an approach to constructing portfolios in 1952 that has been the model that most advisors and investors have followed since.

Cold storage might impact the ability to access assets quickly, but what you lose in accessibility you gain in security. THE WORLD OF CRYPTOASSET WALLETS Storing cryptoassets on an exchange may not always be the safest option. The risk is lower for those exchanges that have insurance, keep the majority of their assets in cold storage, and employ other best-in-class security measures like penetration testing and regular audits. For other exchanges, the risk should only be tolerated if the innovative investor is trading regularly and making use of the exchange’s capabilities, such as offering newer cryptoassets. If not trading regularly, investors should consider one of the following wallet options to store their assets safely. Broadly speaking, there are five kinds of wallets: web (cloud), desktop, mobile, hardware, and paper. For the sake of brevity, we use bitcoin to illustrate these examples as it provides the scaffolding necessary to investigate similar options for other cryptoassets.


pages: 252 words: 70,424

The Self-Made Billionaire Effect: How Extreme Producers Create Massive Value by John Sviokla, Mitch Cohen

business cycle, Cass Sunstein, Colonization of Mars, corporate raider, Daniel Kahneman / Amos Tversky, Elon Musk, Frederick Winslow Taylor, game design, global supply chain, James Dyson, Jeff Bezos, John Harrison: Longitude, Jony Ive, loss aversion, Mark Zuckerberg, market design, old-boy network, paper trading, RAND corporation, randomized controlled trial, Richard Thaler, risk tolerance, self-driving car, Silicon Valley, smart meter, Steve Ballmer, Steve Jobs, Steve Wozniak, Tony Hsieh, Toyota Production System, young professional

MORE EVIDENCE THAT BILLIONAIRES ARE NOT BIG RISK TAKERS We were surprised, and somewhat skeptical, by our finding that billionaires do not possess a greater tolerance for risk than the average businessperson—the cliché of the entrepreneur as risk taker is so strong and pervasive in business culture. Yet as we thought about it more and did more research, it became clear that the issue is not risk tolerance but risk attitudes. Billionaires do not overweigh failure, nor do they take irrational risks. One story that Dean Spanos, son of the billionaire Alex Spanos, shared with us when we sat down with him and his siblings in Stockton, California, underscores this idea of the kind of risks billionaires are—and are not—willing to take. “We were interested in buying a savings and loan about twenty years ago in Florida,” Dean Spanos began, “so Jerry Murphy, the CFO, and Dad and I flew to Florida and we went into this meeting where there was a conference table as long as the room filled with attorneys and investment bankers.

Look for ways to challenge your talent. Give emergent Producers projects or roles that stretch their skills. The ones you think have huge potential should be given a chance to try out important roles that you aren’t sure they can handle yet. You are not setting up anyone to fail. On the contrary, you are challenging them to succeed. When you give people something they have to reach for, their risk tolerance increases and you give them a chance to show themselves what they are capable of. Ideally, the Producers you challenge have either a proven track record or a palpable ability to see the upside—opportunities lost should be as salient to them as risks avoided. When deciding who should get what role or opportunity, make sure as well that the managers and leaders evaluating the options also have the appropriate risk balance in mind.


pages: 353 words: 88,376

The Investopedia Guide to Wall Speak: The Terms You Need to Know to Talk Like Cramer, Think Like Soros, and Buy Like Buffett by Jack (edited By) Guinan

Albert Einstein, asset allocation, asset-backed security, Brownian motion, business cycle, business process, buy and hold, capital asset pricing model, clean water, collateralized debt obligation, computerized markets, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, fixed income, implied volatility, index fund, intangible asset, interest rate swap, inventory management, London Interbank Offered Rate, margin call, money market fund, mortgage debt, Myron Scholes, passive investing, performance metric, risk tolerance, risk-adjusted returns, risk/return, shareholder value, Sharpe ratio, short selling, statistical model, time value of money, transaction costs, yield curve, zero-coupon bond

Fixed assets are expected to provide benefits beyond one year: manufacturing equipment, buildings, and real estate. Related Terms: • Balance Sheet • Depreciation • Tangible Asset • Current Assets • Intangible Asset 14 The Investopedia Guide to Wall Speak Asset Allocation What Does Asset Allocation Mean? An investment strategy that aims to balance risk and reward by spreading investments across three main asset classes—equities, bonds, and cash—in accordance with an individual’s goals, risk tolerance, and investment horizon. Historically, different asset classes have varying degrees of risk and return and therefore behave differently over time. Investopedia explains Asset Allocation There is no simple formula to determine the proper asset allocation for every individual. However, the consensus among financial professionals is that asset allocation is one of the most important investment components.

A group of investments such as stocks, bonds and cash equivalents, mutual funds, exchange-traded funds, and closed-end funds that are selected on the basis of an investor’s short-term or long-term investment goals. Portfolios are held directly by investors and/or managed by financial professionals. Investopedia explains Portfolio Prudence suggests that investors construct an investment portfolio in accordance with their risk tolerance and investment objectives. One should think of an investment portfolio as a pie that is divided into pieces of varying sizes that represent a variety of asset classes and/or types of investments to accomplish an appropriate riskadjusted return. For example, a conservative investor may favor a portfolio with large-cap value stocks, broad-based market index 226 The Investopedia Guide to Wall Speak funds, investment-grade bonds, and cash.

Low levels of uncertainty (low risk) are associated with low potential returns, whereas high levels of uncertainty (high risk) are associated with high potential returns. According to the risk-return trade-off, invested money can render higher profits only if it is subject to the possibility of being lost. Investopedia explains Risk-Return Trade-Off Because of the risk-return trade-off, investors must recognize their personal risk tolerance when choosing investments. Taking on additional risk is the price of achieving potentially higher returns; therefore, if an investor wants to make money, he or she cannot cut out all risk. The goal instead is to find an appropriate balance that generates some profit but allows the investor to sleep at night. Related Terms: • Modern Portfolio Theory—MPT • Return • Risk-Free Rate of Return • Opportunity Cost • Risk Risk-Weighted Assets What Does Risk-Weighted Assets Mean?


The Manager’s Path by Camille Fournier

failed state, fear of failure, hiring and firing, hive mind, interchangeable parts, job automation, Larry Wall, microservices, pull request, risk tolerance, Schrödinger's Cat, side project, Steve Jobs, WebSocket

Finally, you graduate to a spaceship, where you can’t make quick moves and the course is set long in advance, but you’re capable of going very far and taking tons of people along for the ride. Assessing Your Role Recognize the size of the vessel you’re steering. This will be determined by a combination of the number of people in the company, the age of the company, the size of the existing business infrastructure (software, processes, and the like), and risk tolerance: 196 | THE MANAGER’S PATH People The more people you have, the more thoughtful structure you need to get everyone moving in the right direction. Leaders who want a high degree of control over their organization tend to need more structure in place to make sure their wishes are enacted. Modern companies often put their structural focus on goal setting instead of trying to make all decisions from the top, but don’t underestimate the structure you need to successfully set and communicate goals.

On the other hand, the longer a company has been around, the more likely it is to continue to survive. Size of existing infrastructure If you have few established business rules (such as “this is how we determine what to charge our customers”) and little code or physical infrastructure (like stores, warehouses, or inventory), there is less need for structure. On the other hand, the more existing business rules and infrastructure you have, the more you’ll need clarity on how to handle them. Risk tolerance Are you in a highly regulated industry? Do you have a lot to lose if certain types of mistakes are made? Or are you in an unregulated industry, with little on the line? Your structures and processes should reflect this. In general, the more people you have depending on you and the larger the business is, the less risk you’ll be willing to take even without regulatory requirements. Structure grows as the company grows and ages.

Engineering processes are the place where the rubber meets the road when it comes to structure. Career ladders, values, team structures—all of those are easy compared to the general angst and frustration that you can cause by adopting the wrong engineering processes for your teams. Without any process, your teams will struggle to scale. With the wrong process, they will be slowed down. Balancing the current size and risk tolerance of your team with the processes at hand is the essence of guiding good software development and operational guidelines. 212 | THE MANAGER’S PATH Ask the CTO: Engineering Process I’m the head of engineering at a small but quickly growing startup. We have very little process right now: there are no code reviews, we use Trello to manage tasks but rarely put everything into that system, and our architecture decisions tend to be made by whomever is working on the project at the time, with my sign-off.


pages: 304 words: 22,886

Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. Thaler, Cass R. Sunstein

Al Roth, Albert Einstein, asset allocation, availability heuristic, call centre, Cass Sunstein, choice architecture, continuous integration, Daniel Kahneman / Amos Tversky, desegregation, diversification, diversified portfolio, endowment effect, equity premium, feminist movement, fixed income, framing effect, full employment, George Akerlof, index fund, invisible hand, late fees, libertarian paternalism, loss aversion, Mahatma Gandhi, Mason jar, medical malpractice, medical residency, mental accounting, meta analysis, meta-analysis, Milgram experiment, money market fund, pension reform, presumed consent, price discrimination, profit maximization, rent-seeking, Richard Thaler, Right to Buy, risk tolerance, Robert Shiller, Robert Shiller, Saturday Night Live, school choice, school vouchers, transaction costs, Vanguard fund, Zipcar

To test this prediction, Benartzi and Thaler (2001) examined behavior in retirement saving plans of 170 companies. They found that the more stock funds the plan offered, the greater was the percentage of participants’ money invested in stocks. Many plans have attempted to help participants deal with the difficult problem of portfolio construction by offering “lifestyle” funds that blend stocks and bonds in a way designed to meet the needs of different levels of risk tolerance. For example, an employer might offer three lifestyle funds: conservative, moderate, and aggressive. These funds are already diversified, so individuals need pick only the fund that fits their risk preference. Some funds also adjust the asset allocation with the age of the participant. Such a fund assortment is a good idea and represents an excellent set of default options (if the fees are reasonable).

INDEX AARP ABBA, Gold: Greatest Hits “above average” effect Abu Ghraib prison accessibility accountability, in schools acid deposition program acid rain air conditioners, filters for air pollution alcohol abuse Ambient Orb American dream American Express anchoring and adjustment angels annual percentage rate (APR) anonymity arbitrage opportunity arousal, power of asbestos, warnings about Asch, Solomon aspects, elimination by asset allocation, company stock, diversification heuristic, and loss aversion, and market timing, mutual funds, and rates of return, and risk tolerance, rules of thumb for, stocks and bonds asymmetric paternalism ATM cards attention, lack of Attila the Hun Austria, organ donations in autokinetic effect automatic pilot Automatic System, and Doers, mindless choosing by, and priming, and risk, in Stroop test, and temptation Automatic Tax Return automobiles: buying, catalytic converters for, emissions from, fuel economy standards for, gas tank caps, user-friendly, Zipcar rentals autopsies, corneas removed in availability bias Ayres, Ian “back to zero” option Barrera, Ramiro basketball: “hot hands” in, “streak shooting,” behavior: dynamically inconsistent, risk-related Benartzi, Shlomo Bennett, Robert Bettinger, Eric Big Blue birth control pills Bismarck, Otto von boomerang effect borrowing, see also credit markets Boston, school system in Boston Research Group brain, functioning of Brandeis, Louis brand switching Breman, Anna broadcast programming Burke, Edmund Bush, George H.

., status quo bias in, use of term, variations on a theme McAllen, Texas, Medicare Part D in McFadden, Daniel Medicaid, and Medicare Part D Medicare Advantage Medicare Part D, see prescription drug plan Medicare Web site mental accounting mere-measurement effect Merrell, Katie Métro, Le, Paris Meulbroek, Lisa microfinance loans mistakes, learning from MIT, Poverty Action Lab money: borrowing, as fungible, liquid assets of households, personal savings, for retirement, see retirement plans; Save More Tomorrow money illusion money market accounts Montana, social influence in mortgage brokers mortgages, and the American dream, annual percentage rate (APR), costs of, fees, fixed-rate, and foreclosures, “good-faith estimate” in, interest-only, online shopping for, points, prepayment penalties, and RECAP, research findings about, in sub-prime market, and teaser rates, and Truth in Lending Act, variable-rate motorcycle helmets music downloads mutual funds MySpace nail polish, no-bite National Association of Chain Drug Stores National Community Pharmacists Association National Environmental Policy Act (1972) Nazism negligence: defined, right to sue for negotiations, opening offers in Nelson, Willie neutrality New Deal No Child Left Behind Act noodge, meaning of term Norman, Don, The Design of Everyday Things nudge, use of term, nudges, evaluation of obesity, and conformity, and self-control, and social influence Occupational Safety and Health Administration (OSHA) One Size Fits All optical illusions optimism “opt-in” policy “opt-out” policy Oreopoulos, Phil organ donations, “brain dead” sources of, complexities in, default rule in, explicit consent in, inertia in, mandated choice, market in, presumed consent, rejection rate in, routine removal, social norms overconfidence ozone layer painting a ceiling paint store Parker, Tom, Rules of Thumb parking garages paternalism: asymmetric, and coercion, of government, “one-mouse-click,”; One Size Fits All, rejection of, stopping point for, use of term pedestrians peer pressure Pension Protection Act (2006) pensions, see retirement plans pesticides, warnings about Petrified Forest National Park, Arizona Planners planning fallacy pluralistic ignorance politics: brand switching in, libertarian paternalism in, predictions in, private-sector interests in, probability of voting, Third Way in, voting patterns pollution popcorn portfolio theory postcompletion errors practice, and feedback preferences Prelec, Drazen prescription drug plan, available alternative plans, confusing choices in, coverage in, defects of, design of, “doughnut hole” in, and drug prices, dual eligibles in, enrollment routes, failure to serve, flexible switching option in, individuals with no coverage, intelligent assignment in, key features of, lessons to be learned from, as Medicare Part D, minimum coverage requirements for, non-enrollment as default option, and pharmacy networks; poor choices made in, price differences in, random default, RECAP proposal for, restructuring of, simplicity needed in, Web site as tool for Prestwood, Charlie presumed consent, and organ removal prices, and incentives priming procrastination publicity principle public policy, and framing random processes: neutrality in, patterns in, “streak shooting,” Rawls, John Read, Daniel RECAP (Record, Evaluate, Compare Alternative Prices), and credit cards, and Medicare Part D, and mortgages, and student loans, and transparency recycling redistribution Reflective System, and Planners Regulation Z (Truth in Lending Act) representativeness required choice restaurant health inspection retirement plans: automatic enrollment in, automatic savings for, choice architecture in, choosing, complex choices in, conflicts of interest in, contribution rates, default options in, defined-benefit, defined-contribution, discretionary contributions to, diversification rule of, education about, enrollment decisions, ERISA, errors expected in, exclusive benefit rule of, feedback in, forced choice in, “free money” in, and government, incentives in, investments for, see investments; and job switching, mappings in, matching contributions to, and mindless choosing, obstacles to saving for, portable, postretirement income needed in, prudence rule of, “safe harbor status” for, Save More Tomorrow, saving for, simplicity in, status quo bias in, synchronized to pay raises, tax-favored savings accounts right to be wrong risk assessment risk-related behavior risk tolerance Robur Aktiefond Contura, Sweden Rogers, Kenny, “The Gambler,” Romalis, John Roosevelt, Franklin D. Roth, Al rules of thumb, anchoring, availability, in investments, representativeness, systematic biases in Rules of Thumb (Parker) Rumsfeld, Donald saccharine, warnings about Saks, Michael Salganik, Matthew salience same-sex relationships Samuelson, William San Marcos, California, energy use in San Marcos, Texas, schools Santorum, Rick Save More Tomorrow, and automatic enrollment, contributions synchronized to pay raises, government role in, obstacles to saving, and Pension Protection Act scents, as cues Schiphol Airport, Amsterdam, men’s rooms in Sears, profit-sharing plan Seattle Windshield Pitting Epidemic self-control: with credit cards, and gambling, market-driven, and mindless choosing, and Save More Tomorrow, sinful goods, strategies for, and temptation, two-system conception of Sell More Tomorrow Shaikh, Altaf Shea, Dennis Shepard, Roger Sherif, Muzafer Shu, Suzanne Silverstein, Shel, “Smart,” similarity heuristic Simister, Duncan simplifying strategies sinful goods slippery-slope argument smoking: CARES, intrusive paternalism vs., quitting without a patch, risks of, and self-control, and social influence Snow, Tony social influences, as choice architecture, conformity, and cultural change, in health care, and information, in Jonestown, learning from others, in peer pressure, power of, priming, spotlight effect, and unpredictability “social norms” approach Social Security, and advertising, default fund for, lessons learned from the Swedish experience, simplified choice process, Swedish privatization of, and timing Souleles, Nick Southern California Edison Spain, organ donations in spotlight effect Stafford loans status quo bias: and default option, in education, as inertia, and lack of attention, and magazine subscriptions, in marriage, in retirement savings Stewart, Potter Stickk.com Stigler, George stimulus response compatibility stocks and bonds, company stock, diversification of, and environmental blacklist, market timing, Sell More Tomorrow strategic misrepresentation Stroop test student loans, avoiding, college savings accounts (529 plans), expected family contribution in, FAFSA for, as opportunity to fleece confused consumers, from private sector, RECAP applied to subliminal advertising subprime mortgages sunlamps supply and demand Sweden, in world economy Swedish Social Security, active choosers in, advertising, asset allocation in, availability bias in, default fund of, inertia in, Just Maximize Choices in, lessons learned from table test “target maturity funds,” tax-favored savings accounts Tax Return, Automatic teenage pregnancy television, default option in temptation, and arousal, cashew phenomenon, and “hot-cold empathy gap,”; and mental accounting, and mindless choosing, and packaging, and self-control, sinful goods, of Ulysses terror alert system tetanus shots Texas, anti-littering campaign in Thaler, Richard H., and Save More Tomorrow thinking, in Reflective System Third Way Thompson, Clive TIAA-CREF Tierney, John Toxic Release Inventory tragedy of the commons transparency Truth in Lending Act (Regulation Z) Tversky, Amos Ulysses, resisting temptation unpredictability, user ratings, U.S.


pages: 417 words: 103,458

The Intelligence Trap: Revolutionise Your Thinking and Make Wiser Decisions by David Robson

active measures, Affordable Care Act / Obamacare, Albert Einstein, Alfred Russel Wallace, Atul Gawande, availability heuristic, cognitive bias, corporate governance, correlation coefficient, cuban missile crisis, Daniel Kahneman / Amos Tversky, dark matter, deliberate practice, dematerialisation, Donald Trump, Flynn Effect, framing effect, fundamental attribution error, illegal immigration, Isaac Newton, job satisfaction, knowledge economy, lone genius, meta analysis, meta-analysis, Nelson Mandela, obamacare, pattern recognition, price anchoring, Richard Feynman, risk tolerance, Silicon Valley, social intelligence, Steve Jobs, the scientific method, theory of mind, traveling salesman, ultimatum game, Y2K, Yom Kippur War

Before we end our conversation, Tinsley emphasises that some risks will be inevitable; the danger is when we are not even aware they exist. She recalls a seminar during which a NASA engineer raised his hand in frustration. ‘Do you not want us to take any risks?’ he asked. ‘Space missions are inherently risky.’ ‘And my response was that I’m not here to tell you what your risk tolerance should be. I’m here to say that when you experience a near miss, your risk tolerance will increase and you won’t be aware of it.’ As the fate of the Challenger and Columbia missions shows, no organisation can afford that blind spot. In hindsight, it is all too easy to see how Deepwater Horizon became a hotbed of irrationality before the spill. By the time of the explosion, it was six weeks behind schedule, with the delay costing $1 million a day, and some staff were unhappy with the pressure they were subjected to.

In both lab experiments and data gathered during real NASA projects, Tinsley has found that people are far more likely to note and report near misses when safety is emphasised as part of the overall culture, in its mission statements – sometimes with as much as a five-fold increase in reporting.21 As an example, consider one of those scenarios involving the NASA manager planning the unmanned space mission. Participants told that ‘NASA, which pushes the frontiers of knowledge, must operate in a high-risk, risk-tolerant environment’ were much less likely to notice the near miss. Those told that ‘NASA, as a highly visible organization, must operate in a high-safety, safety-first environment’, in contrast, successfully identified the latent danger. The same was also true when the participants were told that they would need to justify their judgement to the board. ‘Then the near miss also looks more like the failure condition.’


pages: 345 words: 84,847

The Runaway Species: How Human Creativity Remakes the World by David Eagleman, Anthony Brandt

active measures, Ada Lovelace, agricultural Revolution, Albert Einstein, Andrew Wiles, Burning Man, cloud computing, computer age, creative destruction, crowdsourcing, Dava Sobel, delayed gratification, Donald Trump, Douglas Hofstadter, en.wikipedia.org, Frank Gehry, Google Glasses, haute couture, informal economy, interchangeable parts, Isaac Newton, James Dyson, John Harrison: Longitude, John Markoff, lone genius, longitudinal study, Menlo Park, microbiome, Netflix Prize, new economy, New Journalism, pets.com, QWERTY keyboard, Ray Kurzweil, reversible computing, Richard Feynman, risk tolerance, self-driving car, Simon Singh, stem cell, Stephen Hawking, Steve Jobs, Stewart Brand, the scientific method, Watson beat the top human players on Jeopardy!, wikimedia commons, X Prize

She says, “I’m thinking of creating a naked version of an ape, one that’s weak, exposes its genitals and soft underbelly by walking upright, and depends on its parents for years before it can fend for itself. What do you think?” You wouldn’t guess that creature would take over the planet. As with Mother Nature, we can’t know what our world will look like in the future; we don’t know what new ideas will prosper. This is why we need to water the seeds all around us, in every neighborhood. We need to establish classrooms in which options are proliferated, risk-tolerance is enabled, wrong answers are creatively mined and children are engaged and inspired to send trial balloons into the future. We need to shape individuals and build companies in which new ideas blossom, different distances are explored, trimming is part of the process and change is the norm. We don’t know where an investment in creativity will take us. But if we could see the future, its flourishes would surely stagger us.


pages: 412 words: 115,266

The Moral Landscape: How Science Can Determine Human Values by Sam Harris

Albert Einstein, banking crisis, Bayesian statistics, cognitive bias, end world poverty, endowment effect, energy security, experimental subject, framing effect, hindsight bias, impulse control, John Nash: game theory, longitudinal study, loss aversion, meta analysis, meta-analysis, out of africa, pattern recognition, placebo effect, Ponzi scheme, Richard Feynman, risk tolerance, scientific worldview, stem cell, Stephen Hawking, Steven Pinker, the scientific method, theory of mind, ultimatum game, World Values Survey

In evaluating the problem of global warming, one must weigh the risk of melting the polar ice caps; in judging the ethics of capital punishment, one must consider the risk of putting innocent people to death. However, people differ significantly with respect to risk tolerance, and these differences appear to be governed by a variety of genes—including genes for the D4 dopamine receptor and the protein stathmin (which is primarily expressed in the amygdala). Believing that there can be no optimal degree of risk aversion, Burton concludes that we can never truly reason about such ethical questions. “Reason” will simply be the name we give to our unconscious (and genetically determined) biases. But is it really true to say that every degree of risk tolerance will serve our purposes equally well as we struggle to build a global civilization? Does Burton really mean to suggest that there is no basis for distinguishing healthy from unhealthy—or even suicidal—attitudes toward risk?

See cultural relativism; moral relativism religion: afterlife and, 18, 33 belief in God’s existence, 6–7, 25, 158, 159, 165–66 belief in Jesus, 137–38 brain science and, 128, 152–54, 232n37, 233nn 48–49, 234n54 Burton on, 129 children and, 151 cognitive templates for, 150–51 corporal punishment in schools and, 3 Einstein on, 202n18, 236n77 in Europe, 145–46 evolution and, 147–52 God as Creator, 164 Golden Rule and, 78, 209n45 happiness from, 231–32n15 industrialization and, 145 Jesus as Son of God, 162–63, 167–68 of Judaism, 33, 38 miracles and, 167–68, 237n82 moral law and, 33, 38, 161, 169–70 morality and, 2, 33, 46, 62–63, 78, 146, 191 mysticism and, 128, 235n76 prayer and, 148, 152, 168 problems of, 6, 22–25, 157, 203n19, 227n45 prophecies and, 154–55 reason versus, 158–76 religious practices, 148–49 resurrection of the dead, 166–67 revelation and, 78 science versus, 6, 24–25 scientists’ belief in, 159–76, 237–38n99 scriptures of, 78, 89, 150, 236–37n82 sexual abuse scandal in Catholic Church, 35, 199–201n14 significance of, 154–58, 199n9 social health of least religious countries, 146–47 societal insecurity and, 146–47 soul and, 110, 158–59, 171, 179, 235n66 states of mind at core of, 165 in United States, 145–47, 149–50, 158, 234–35n64 witchcraft compared with, 129–30 See also Catholic Church; Islam religious conservatives, 5–6, 46, 53, 86, 89, 90, 158, 180–81 remembering self, 184–87 Repugnant Conclusion argument, 71 responsibility. See moral responsibility retributive justice, 1, 106, 109, 110–11 reverse inference problem, 212n71, 224n34 right and wrong. See evil; good/goodness; morality; values risk and risk tolerance, 128, 143, 226n35 Rosenhan, David L., 141–42 Ruse, Michael, 48 Rushdie, Salman, 46 Russell, Bertrand, 78 Sai Baba, Sathya, 167–68 Salk Institute, 23–24 sanity, legal definition of, 98 Savoy, R. L., 229n62 schadenfreude, 113, 222n18 schizophrenia, 127, 142, 152, 162, 195n3, 205n24 Schrödinger, Erwin, 213n77 science: belief and, 144 bias of, 47–48 concessions made to religious dogmatism by, 5–6, 22–23 consensus versus controversy in, 31, 198n6 “consilience” in, 8 definition of, 37 doubts about authority of, 47–48 Einstein on religion and, 202n18, 236n77 epistemic values of, 202n16 funding for, 24 growth of scientific knowledge, 124 hostility against, by general public and governments, 24 humility of scientists, 124 hypothesis testing in, 116 moral truth and, 1–4, 28, 46–53 narrow definition of, 29 objectivity and, 29–30, 47, 48 philosophy and, 179–81 religion versus, 6, 24–25 religious beliefs of scientists, 159–76, 237–38n99 reluctance of, to take stand on moral issues, 6–7, 10–11, 22–25, 191 tools of, 29 validity in, 143–44 values and, 1–4, 11, 28, 49–53, 143–44, 189–91, 202n16 See also brain science; brain structures; facts; neuroimaging research; and specific scientists scientism, 46–47 SCNT.


pages: 339 words: 109,331

The Clash of the Cultures by John C. Bogle

asset allocation, buy and hold, collateralized debt obligation, commoditize, corporate governance, corporate social responsibility, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, estate planning, Eugene Fama: efficient market hypothesis, financial innovation, financial intermediation, fixed income, Flash crash, Hyman Minsky, income inequality, index fund, interest rate swap, invention of the wheel, market bubble, market clearing, money market fund, mortgage debt, new economy, Occupy movement, passive investing, Paul Samuelson, Ponzi scheme, post-work, principal–agent problem, profit motive, random walk, rent-seeking, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, shareholder value, short selling, South Sea Bubble, statistical arbitrage, survivorship bias, The Wealth of Nations by Adam Smith, transaction costs, Vanguard fund, William of Occam, zero-sum game

In the fund industry, service excellence is becoming a commodity—as it must be for any service industry. Both organizational structures honor the tenet, “Treat your customers as if they were your owners.” But only the mutual organization can, with accuracy, tack on the phrase, “because your customers are your owners.” Risk Management Strategy. In conventionally operated mutual funds, investment strategy can, in the search for higher returns, be risk-tolerant, so long as a fund’s risk—usually measured by its short-term price volatility—is consistent with the risks assumed by its peer funds. A mutual organization’s investment strategy can afford to be risk-intolerant. With costs far below competitive norms, there is little need to reach for slightly higher returns on stock funds or higher yields on bond funds. Assuming portfolio quality is held constant, higher yields can be easily generated simply by lower costs.

So this massive transfer of the two great risks of retirement plan savings—investment risk and longevity risk—from corporate balance sheets to individual households will relieve pressure on corporate earnings, even as it will require our families to take responsibility for their own retirement savings. A further benefit is that investments in properly designed DC plans can be tailored to the specific individual requirements of each family—reflecting its prospective wealth, its risk tolerance, the age of its bread-winner(s), and its other assets (including Social Security). DB plans, on the other hand, are inevitably focused on the average demographics and average salaries of the firm’s work force in the aggregate. The 401(k) plan, then, is an idea whose time has come. That’s the good news. We’re moving our retirement savings system to a new paradigm, one that ultimately will efficiently serve both our nation’s employers—corporations and governments alike—and our nation’s families.

Also, little thought has been given to the design of the post-work asset decumulation phrase. As a result, DC plan investing has been unfocused, and post-work financial outcomes have been, and continue to be highly uncertain, raising fundamental questions about the effectiveness and sustainability of this individualistic pension model. 2. Traditional DB plans lump the young and the old on the same balance sheet, and unrealistically assume they have the same risk tolerance and that property rights between the two groups are clear. These unrealistic assumptions have had serious consequences. Over the course of the last decade, aggressive return assumptions and risk-taking—together with falling asset prices, falling interest rates, and deteriorating demographics—have punched gaping holes in many DB plan balance sheets, to which unfocused responses have ranged the full spectrum—from complete de-risking at one end to piling on more risk at the other . . .


pages: 333 words: 76,990

The Long Good Buy: Analysing Cycles in Markets by Peter Oppenheimer

"Robert Solow", asset allocation, banking crisis, banks create money, barriers to entry, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, business cycle, buy and hold, Cass Sunstein, central bank independence, collective bargaining, computer age, credit crunch, debt deflation, decarbonisation, diversification, dividend-yielding stocks, equity premium, Fall of the Berlin Wall, financial innovation, fixed income, Flash crash, forward guidance, Francis Fukuyama: the end of history, George Akerlof, housing crisis, index fund, invention of the printing press, Isaac Newton, James Watt: steam engine, joint-stock company, Joseph Schumpeter, Kickstarter, liberal capitalism, light touch regulation, liquidity trap, Live Aid, market bubble, Mikhail Gorbachev, mortgage debt, negative equity, Network effects, new economy, Nikolai Kondratiev, Nixon shock, oil shock, open economy, price stability, private sector deleveraging, Productivity paradox, quantitative easing, railway mania, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, Simon Kuznets, South Sea Bubble, special economic zone, stocks for the long run, technology bubble, The Great Moderation, too big to fail, total factor productivity, trade route, tulip mania, yield curve

As Howard Marks, the co-chairman and cofounder of Oaktree Capital Management, notes in his book Mastering the Market Cycle,8 ‘Economics and markets have never moved in a straight line in the past, and neither will they do so in the future. And that means investors with the ability to understand cycles will find opportunities for profit.’ Over the long run, even accepting the fluctuations caused by cycles, investing can be extremely profitable. Different assets tend to perform best at different times, and returns will depend on the risk tolerance of the investor. But for equity investors in particular, history suggests that, if they can hold their investments for at least five years and, especially, if they can recognise the signs of bubbles and of inflection points in the cycle, they can benefit from the ‘long good buy’. Notes 1 Under European Community guidelines, France and Italy were required to end all exchange controls by 1 July 1990 but France implemented these six months earlier in order to show its commitment to the principles of free movement of goods, capital and people in Europe. 2 Stone, M. (2015).

Within 15 years, it should be possible not only to deliver renewable electricity at prices that are fully competitive with fossil-fuel-based power but also to provide the low-cost backup and storage required to make it possible to run power systems that are 80%–90% reliant on intermittent renewables.2 Over the long run, even accepting the fluctuations caused by cycles, investing can be extremely profitable. Different assets tend to perform best at different times, and returns will depend on the risk tolerance of the investor. But for equity investors in particular, history suggests that, if they can hold their investments for at least 5 years and, especially, if they can recognise the signs of bubbles and of changes in the cycle, they really can enjoy a ‘long good buy’. Notes 1 SINTEF. (2013). Big data, for better or worse: 90% of world's data generated over last two years. ScienceDaily [online].


The Smartest Investment Book You'll Ever Read: The Simple, Stress-Free Way to Reach Your Investment Goals by Daniel R. Solin

asset allocation, buy and hold, corporate governance, diversification, diversified portfolio, index fund, market fundamentalism, money market fund, Myron Scholes, passive investing, prediction markets, random walk, risk tolerance, risk-adjusted returns, risk/return, transaction costs, Vanguard fund, zero-sum game

Brokerage fees charged by U.S. brokers for ETF trades are generally lower than fees charged in Canada. 3. Invest the stock and bond portions of your portfolio in the ETFs described in this book. lllO The Heal Way Smart Investors Beat 95%of the ~Pros" 4. RebaJance your portfolio twice a year to keep your portfolio either aJigned with your original asset aJlocarion or with a new asset allocation that meets your changed investment objectives and/or risk tolerance. T hat's it. Read on for more details on each step. Chapter 34 Step 1: Determine Your Asset Allocation Over 90% ofinvestment returns are determined by how investors allocate their assets versus security selection, market timing and other foctors. -Brinson, Singer and Beebower, "Determinants of Portfolio Performance II : An Update, n Financial Analysts JournaL. May-June 1991 Asset allocation is the division of an investment portfolio among three rypes of invc.


pages: 247 words: 68,918

The End of the Free Market: Who Wins the War Between States and Corporations? by Ian Bremmer

affirmative action, Asian financial crisis, banking crisis, Berlin Wall, BRICs, British Empire, centre right, collective bargaining, corporate governance, creative destruction, credit crunch, Credit Default Swap, cuban missile crisis, Deng Xiaoping, diversified portfolio, Doha Development Round, Exxon Valdez, failed state, Fall of the Berlin Wall, Francis Fukuyama: the end of history, global reserve currency, global supply chain, invisible hand, joint-stock company, Joseph Schumpeter, Kickstarter, laissez-faire capitalism, low skilled workers, mass immigration, means of production, megacity, Mikhail Gorbachev, mutually assured destruction, Naomi Klein, Nelson Mandela, new economy, offshore financial centre, open economy, race to the bottom, reserve currency, risk tolerance, shareholder value, South Sea Bubble, sovereign wealth fund, special economic zone, spice trade, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, trade route, tulip mania, uranium enrichment, Washington Consensus, Yom Kippur War, zero-sum game

Problems with enforcement of contracts will continue without much greater transparency in Saudi Arabia, limiting foreign investment. International investors also await the chance to invest freely in the Saudi stock market, but the 2008 financial crisis may have convinced Saudi leaders that the more connected they are to international markets, the greater their risks of economic (and political) instability. The famously low risk tolerance of senior royals and the strength of their grip on power ensure that Saudi state capitalism won’t be going away any time soon. United Arab Emirates No Middle Eastern country has profited more handsomely as a fashionable international business destination than the United Arab Emirates (UAE), thanks mainly to the determination of powerful political officials among the various ruling families to drive and control the local and federal economies.

The Egyptian economy navigated the global recession relatively well, largely because its trade ties with the outside world remain relatively weak, giving it little exposure to the slowdown in Europe and America. But if future market volatility generates large-scale social unrest, as it did briefly during a bout of global food inflation in 2008, Hosni Mubarak has both the power and the personal inclination to tighten the state’s grip on Egypt’s economic development. When it comes to reform, the president lacks his son’s risk tolerance, and market-friendly government ministers have no popular support base of their own. For the moment, Egypt is moving cautiously from state dominance of the economy toward a tentative embrace of free markets. Algeria Not so in Algeria, where the state’s grip on economic policy is tighter than ever. Since winning independence from France in 1962, Algeria’s government has dominated its economy, directing economic policy via Soviet-style five-year plans.


pages: 44 words: 13,346

Extreme Early Retirement: An Introduction and Guide to Financial Independence (Retirement Books) by Clayton Geoffreys

asset allocation, dividend-yielding stocks, financial independence, index fund, passive income, risk tolerance

Throughout the next pages, you will be learning more about passive income but the basic idea is to couple your active income with various sources of passive income. Two of the most common sources that early retirees can live with are dividend-yielding stocks and rental properties. However, every source of passive income requires an investment and nearly all kinds of investments involve risk. It is important for you to calculate your risk tolerances and consider safer options so you do not end up burning your savings. 5 Reasons You Should Consider Extreme Early Retirement You Will Have More Time Enjoying the Goodness in Life The average age when people retire is 65 or 70, and if you think about it, people spend more time working instead of living. Our life is centered on work and oftentimes, it almost feels like we only ‘live to work’.


Stocks for the Long Run, 4th Edition: The Definitive Guide to Financial Market Returns & Long Term Investment Strategies by Jeremy J. Siegel

addicted to oil, asset allocation, backtesting, Black-Scholes formula, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, capital asset pricing model, cognitive dissonance, compound rate of return, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, Eugene Fama: efficient market hypothesis, Everybody Ought to Be Rich, fixed income, German hyperinflation, implied volatility, index arbitrage, index fund, Isaac Newton, joint-stock company, Long Term Capital Management, loss aversion, market bubble, mental accounting, Myron Scholes, new economy, oil shock, passive investing, Paul Samuelson, popular capitalism, prediction markets, price anchoring, price stability, purchasing power parity, random walk, Richard Thaler, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, stocks for the long run, survivorship bias, technology bubble, The Great Moderation, The Wisdom of Crowds, transaction costs, tulip mania, Vanguard fund

By finding the points on the longerterm efficient frontiers that have a slope equal to the slope on the one-year frontier, one can determine the allocations that represent the same risk-return trade-offs for all holding periods. 34 PART 1 The Verdict of History RECOMMENDED PORTFOLIO ALLOCATIONS What percentage of an investor’s portfolio should be invested in stocks? The answer can be seen in Table 2-2, which is based on standard portfolio models incorporating both the risk tolerance and the holding period of the investor.7 Four classes of investors are analyzed: the ultraconservative investor who demands maximum safety no matter the return, the conservative investor who accepts small risks to achieve extra return, the moderate-risk-taking investor, and the aggressive investor who is willing to accept substantial risks in search of extra returns. The recommended equity allocation increases dramatically as the holding period lengthens.

Given these striking results, it might seem puzzling that the holding period has almost never been considered in portfolio theory. This is 7 The one-year proportions (except minimum risk point) are arbitrary and are used as benchmarks for other holding periods. Choosing different proportions as benchmarks does not qualitatively change the analysis. TABLE 2–2 Portfolio Allocation: Percentage of Portfolio Recommended in Stocks Based on All Historical Data Risk Tolerance 1 Year Holding Period 5 Years 10 Years 30 Years Ultraconservative (Minimum Risk) 9.0% 22.0% 39.3% 71.4% Conservative 25.0% 38.7% 59.6% 89.5% Moderate 50.0% 61.6% 88.0% 116.2% Aggressive Risk Taker 75.0% 78.5% 110.1% 139.1% CHAPTER 2 Risk, Return, and Portfolio Allocation 35 because modern portfolio theory was established when the academic profession believed in the random walk theory of security prices.

Campbell, Strategic Asset Allocation: Portfolio Choice for Long-Term Investors, New York: Oxford University Press, 2002. Also see Nicholas Barberis, “Investing for the Long Run When Returns Are Predictable,” Journal of Finance, vol. 55 (2000), pp. 225–264. Paul Samuelson has shown that mean reversion will increase equity holdings if investors have a risk aversion coefficient greater than unity, which most researchers find is the case. See Paul Samuelson, “Long-Run Risk Tolerance When Equity Returns Are Mean Regressing: Pseudoparadoxes and Vindications of ‘Businessmen’s Risk’” in W. C. Brainard, W. D. Nordhaus, and H. W. Watts, eds., Money, Macroeconomics, and Public Policy, Cambridge: MIT Press, 1991, pp. 181–200. See also Zvi Bodie, Robert Merton, and William Samuelson, “Labor Supply Flexibility and Portfolio Choice in a Lifecycle Model,” Journal of Economic Dynamics and Control, vol. 16, no. 3 (July–October 1992), pp. 427–450.


Science Fictions: How Fraud, Bias, Negligence, and Hype Undermine the Search for Truth by Stuart Ritchie

Albert Einstein, anesthesia awareness, Bayesian statistics, Carmen Reinhart, Cass Sunstein, citation needed, Climatic Research Unit, cognitive dissonance, complexity theory, coronavirus, correlation does not imply causation, COVID-19, Covid-19, crowdsourcing, deindustrialization, Donald Trump, double helix, en.wikipedia.org, epigenetics, Estimating the Reproducibility of Psychological Science, Growth in a Time of Debt, Kenneth Rogoff, l'esprit de l'escalier, meta analysis, meta-analysis, microbiome, Milgram experiment, mouse model, New Journalism, p-value, phenotype, placebo effect, profit motive, publication bias, publish or perish, race to the bottom, randomized controlled trial, recommendation engine, rent-seeking, replication crisis, Richard Thaler, risk tolerance, Ronald Reagan, Scientific racism, selection bias, Silicon Valley, Silicon Valley startup, Stanford prison experiment, statistical model, stem cell, Steven Pinker, Thomas Bayes, twin studies, University of East Anglia

She recommended that just before you enter a stressful situation, such as an interview, you should find two minutes in a private place (such as a bathroom stall) to stand in an open, expansive posture: for example, with your legs apart and your hands on your hips. This powerful posture would give you a psychological – and hormonal – boost. An experiment by Cuddy and her colleagues in 2010 had found that, compared to those who were asked to sit with arms folded or slouched forward, people who were made to power-pose not only felt more powerful, but had higher risk tolerance in a betting game and had increased levels of testosterone and decreased levels of the stress hormone cortisol.15 Cuddy’s message that people who used the two-minute power pose could ‘significantly change the outcomes of their life’ struck a chord: hers became the second-most-watched TED talk ever, with over 73.5 million views in total.16 It was followed in 2015 by Cuddy’s New York Times-bestselling self-help book, Presence, whose publisher informed us that it presented ‘enthralling science’ that could ‘liberate [us] from fear in high-pressure moments’.17 Provoking quite some degree of mockery, the UK’s Conservative Party seemed to take Cuddy’s message to heart, with a spate of photos appearing that same year of their politicians adopting the wide-legged stance at various conferences and speeches.18 Alas, also in 2015, when another team of scientists tried to replicate the power-posing effects, they found that while power-posers did report feeling more powerful, the study ‘failed to confirm an effect of power posing on testosterone, cortisol, and financial risk’.19 The critical spotlight that was activated in the replication crisis has also been aimed at older pieces of psychology research, with similarly worrying results.

Alison McCook, ‘“I Placed Too Much Faith in Underpowered Studies:” Nobel Prize Winner Admits Mistakes’, Retraction Watch, 20 Feb. 2017; https://retractionwatch.com/2017/02/20/placed-much-faith-underpowered-studies-nobel-prize-winner-admits-mistakes/. Kahneman also wrote an open letter to social psychologists, telling them that he saw a ‘train wreck looming’ and urged them to change the way they went about their research. A copy can be found at the following link: https://go.nature.com/2T7A2NV 15.  Dana R. Carney et al., ‘Power Posing: Brief Nonverbal Displays Affect Neuroendocrine Levels and Risk Tolerance’, Psychological Science 21, no. 10 (Oct. 2010): pp. 1363–68; https://doi.org/10.1177/0956797610383437 16.  The total of the 56 million views on the TED website and the additional 17.6 million views on YouTube – numbers at the time of writing in February 2020. The talk was originally titled ‘Your Body Language Shapes Who You Are’ but at some point, post-replication crisis, it has been renamed ‘Your Body Language May Shape Who You Are’.

The quotation is from the publisher page at the following link: https://www.littlebrown.com/titles/amy-cuddy/presence/9780316256575/ 18.  Homa Khaleeli, ‘A Body Language Lesson Gone Wrong: Why is George Osborne Standing like Beyoncé?’ Guardian, 7 Oct. 2015; https://www.theguardian.com/politics/shortcuts/2015/oct/07/who-told 19.  Eva Ranehill et al., ‘Assessing the Robustness of Power Posing: No Effect on Hormones and Risk Tolerance in a Large Sample of Men and Women’, Psychological Science 26, no. 5 (May 2015): pp. 653–56; https://doi.org/10.1177/0956797614553946, p. 655.The power-posing debate has gone on and on since then. A 2017 review concluded that power-posing effects are ‘hypotheses currently lacking in empirical support’. See Joseph P. Simmons & Uri Simonsohn, ‘Power Posing: P-Curving the Evidence’, Psychological Science 28, no. 5 (May 2017): pp. 687–93; https://doi.org/10.1177/0956797616658563.


pages: 733 words: 179,391

Adaptive Markets: Financial Evolution at the Speed of Thought by Andrew W. Lo

"Robert Solow", Albert Einstein, Alfred Russel Wallace, algorithmic trading, Andrei Shleifer, Arthur Eddington, Asian financial crisis, asset allocation, asset-backed security, backtesting, bank run, barriers to entry, Berlin Wall, Bernie Madoff, bitcoin, Bonfire of the Vanities, bonus culture, break the buck, Brownian motion, business cycle, business process, butterfly effect, buy and hold, capital asset pricing model, Captain Sullenberger Hudson, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, corporate governance, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, Daniel Kahneman / Amos Tversky, delayed gratification, Diane Coyle, diversification, diversified portfolio, double helix, easy for humans, difficult for computers, Ernest Rutherford, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, Fractional reserve banking, framing effect, Gordon Gekko, greed is good, Hans Rosling, Henri Poincaré, high net worth, housing crisis, incomplete markets, index fund, interest rate derivative, invention of the telegraph, Isaac Newton, James Watt: steam engine, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, longitudinal study, loss aversion, Louis Pasteur, mandelbrot fractal, margin call, Mark Zuckerberg, market fundamentalism, martingale, merger arbitrage, meta analysis, meta-analysis, Milgram experiment, money market fund, moral hazard, Myron Scholes, Nick Leeson, old-boy network, out of africa, p-value, paper trading, passive investing, Paul Lévy, Paul Samuelson, Ponzi scheme, predatory finance, prediction markets, price discovery process, profit maximization, profit motive, quantitative hedge fund, quantitative trading / quantitative finance, RAND corporation, random walk, randomized controlled trial, Renaissance Technologies, Richard Feynman, Richard Feynman: Challenger O-ring, risk tolerance, Robert Shiller, Robert Shiller, Sam Peltzman, Shai Danziger, short selling, sovereign wealth fund, Stanford marshmallow experiment, Stanford prison experiment, statistical arbitrage, Steven Pinker, stochastic process, stocks for the long run, survivorship bias, Thales and the olive presses, The Great Moderation, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Malthus, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Triangle Shirtwaist Factory, ultimatum game, Upton Sinclair, US Airways Flight 1549, Walter Mischel, Watson beat the top human players on Jeopardy!, WikiLeaks, Yogi Berra, zero-sum game

However, we also understand that not everyone has the same level of risk aversion and tolerance: there are conservative investors who put their money in T-Bills, and then there are hedge fund managers who make billiondollar bets on the future price of a security. What determines an individual’s level of risk aversion? The traditional economist’s response is that risk aversion is a “deep parameter,” a fundamental trait of an individual. The starting point for most economic analysis is the individual’s “utility function,” a mathematical yardstick that measures a consumer’s level of happiness or satisfaction as a function of the amount consumed. The standard definition of risk aversion is embedded in this function. Some people have very risk-averse utility functions, while others have very risk-tolerant functions, but economists rarely ask why or how.

This gave rise to the common 60/40 rule: put 60 percent of your portfolio in stocks and 40 percent in bonds. There are fancier heuristics that attempt to reduce your risk as you get closer to retirement, like investing a percentage of 100-minus-your-age in stocks and the rest in bonds, so a twenty-yearold will have 80 percent in stocks, while a sixty-five-year-old will only Adaptive Markets in Action • 253 have 35 percent in stocks. The idea is to adjust your asset allocation to suit your risk tolerance and your long-run investment objectives. Principle 5 makes your asset allocation decision even simpler: just hold stocks for the long run. This principle is based on the hugely influential book Stocks for the Long Run, written by the Wharton financial economist Jeremy Siegel.2 First published in 1994, this book is now in its fifth edition, and has become the “buy and hold Bible” of the investment management industry.

As the financial analyst A. Gary Shilling said, “The market can remain irrational a lot longer than you and I can remain solvent.” The Adaptive Markets Hypothesis tells us that risk isn’t necessarily always rewarded—it depends on the environment. Investing in stocks for the long run may or may not be good advice, depending on where Adaptive Markets in Action • 263 you’re investing, for how long, and what your risk tolerance is. John Maynard Keynes famously said, “In the long run, we are all dead,” but it was a hedge fund manager who added the important coda, “Make sure the short run doesn’t kill you first.” THE DEMOCRATIZATION OF INVESTING Passive investing—the idea that you can’t beat the market and should invest in index funds—is now such an important part of the traditional investment paradigm, it’s hard to appreciate just how revolutionary the idea of an index fund once was.


Triumph of the Optimists: 101 Years of Global Investment Returns by Elroy Dimson, Paul Marsh, Mike Staunton

asset allocation, banking crisis, Berlin Wall, Bretton Woods, British Empire, buy and hold, capital asset pricing model, capital controls, central bank independence, colonial rule, corporate governance, correlation coefficient, cuban missile crisis, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, European colonialism, fixed income, floating exchange rates, German hyperinflation, index fund, information asymmetry, joint-stock company, negative equity, new economy, oil shock, passive investing, purchasing power parity, random walk, risk tolerance, risk/return, selection bias, shareholder value, Sharpe ratio, stocks for the long run, survivorship bias, technology bubble, transaction costs, yield curve

The latter is equal to the equity market risk premium, scaled up or down by the asset’s beta. Beta measures the risk of the asset relative to the market portfolio, and beta estimates are widely available in most stock markets. The average beta for all stocks in a market is, by definition, equal to one. So the equity market risk premium is fundamental in determining CAPM expected returns. The CAPM links the equity market risk premium to the risk tolerance of investors. The historical reward to equity market investment has, in the United States, looked large. But has it been excessive? The CAPM emphasizes how stock market investments contribute to the level of and uncertainty about an investor’s wealth. To say whether the premium has been excessive, we need to look beyond fluctuations in an investor’s wealth. What value is wealth unless it is consumed: spent on oneself, spent on others, or given as a bequest?

We explore some of the implications of our research below. 14.4 Implications for individual investors In every country studied in this book, equities have over the long haul beaten bonds and bills. This outperformance is not simply a pattern from the past; it reflects the theory that risky securities should command a lower price than otherwise similar safe securities. Risky equities can therefore be expected to offer a higher expected return. For risk-tolerant investors, that makes equities a desirable long-term investment. On the other hand, we have provided new estimates of equity risk premia that are, on balance, lower than previous research had suggested. What does this suggest for financial markets? We conclude this chapter with a set of implications of our research for investors. To highlight the importance of our broad, long-term view we start with the tale of the stockbroker who visits the countryside and sees a shepherd with his flock.

These issues are (4) indexation, (5) active management, (6) anomalies and regularities in stock returns, and (7) international diversification. We start with the implications of our work for asset allocation. The classic US asset allocation, as described by Loeb (1996) and others, is one-tenth in cash, with risky assets split roughly 60 percent in stocks and 40 percent in bonds. While most advisors will then modify such recommendations in the light of an investor’s risk tolerance and investment horizon, many observers have puzzled about this 60:40 stock:bond mix. The fact is, almost any analysis of the historical record suggests allocating more than 60 percent to stocks, and less than 40 percent to bonds. Stocks have displayed a high average return, and low-return bonds have been too volatile to justify a large weighting in an optimized portfolio. Persistently, advisors and investors appear to have selected too little to invest in equities, and too much in bonds.


pages: 87 words: 25,823

The Politics of Bitcoin: Software as Right-Wing Extremism by David Golumbia

3D printing, A Declaration of the Independence of Cyberspace, Affordable Care Act / Obamacare, bitcoin, blockchain, Burning Man, crony capitalism, cryptocurrency, currency peg, distributed ledger, Elon Musk, en.wikipedia.org, Ethereum, ethereum blockchain, Extropian, fiat currency, Fractional reserve banking, George Gilder, jimmy wales, litecoin, Marc Andreessen, money: store of value / unit of account / medium of exchange, Mont Pelerin Society, new economy, obamacare, Peter Thiel, Philip Mirowski, risk tolerance, Ronald Reagan, Satoshi Nakamoto, seigniorage, Silicon Valley, Singularitarianism, smart contracts, Stewart Brand, technoutopianism, The Chicago School, Travis Kalanick, WikiLeaks

If Bitcoin becomes regulated enough to serve as a stable store of value and to ensure that debacles like Mt. Gox don’t happen in the future, it may be useful as a global system of payments (but so are generally non-transformative technologies like PayPal and Dwolla). But that will hardly shake world political structures at their foundations. If it remains outside of all forms of both value and transactional regulation, Bitcoin will continue to be a very dangerous place for any but the most risk-tolerant among us (i.e., the very wealthy, whose interest in Bitcoin should indicate to advocates how and why it cannot be economically transformative) to put their hard-earned money. It is beyond ironic, indeed it is symptomatic, that Bitcoin has experienced dramatic deflationary and inflationary spirals just as it is being promoted as a corrective to inflation and deflation. Politically, this points to the resistance of ideologies to being disproven by contrary facts.


pages: 297 words: 91,141

Market Sense and Nonsense by Jack D. Schwager

3Com Palm IPO, asset allocation, Bernie Madoff, Brownian motion, buy and hold, collateralized debt obligation, commodity trading advisor, computerized trading, conceptual framework, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, fixed income, high net worth, implied volatility, index arbitrage, index fund, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, market fundamentalism, merger arbitrage, negative equity, pattern recognition, performance metric, pets.com, Ponzi scheme, quantitative trading / quantitative finance, random walk, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, selection bias, Sharpe ratio, short selling, statistical arbitrage, statistical model, survivorship bias, transaction costs, two-sided market, value at risk, yield curve

Figure 8.1 Two Paths to Return Figure 8.2 Doubling the Exposure of the Lower-Risk Manager What if leverage is not available as a tool? For example, what if investors have a choice between Managers C and D in Figure 8.1, but there are practical impediments to increasing the exposure of Manager D? Now return and risk are inextricably bundled, and investors must choose between the higher-return/higher-risk profile of Manager C and the lower-return/lower-risk profile of Manager D. It might seem that risk-tolerant investors would always be better off with Manager C. Such investors might say, “I don’t care if Manager C is riskier, as long as the end return is higher.” The flaw in this premise is that investors who start with Manager C at the wrong time—and that is easy to do—may actually experience significant losses rather than gains, even if they maintain the investment, and especially if they don’t.

The underwater curve for Manager F remains subdued in the 2DUC chart with a still very low average value of 3 percent. The 2DUC chart implies that the average worst-case scenario for investors with Manager E is 10 times worse than with Manager F; that is a lot of extra risk for a 1.3 percent difference in the average annual compounded return. Based on performance, it would be difficult to justify choosing Manager E over Manager F, even for the most risk-tolerant investor. Figure 8.12 2DUC: Manager E versus Manager F Investment Misconceptions Investment Misconception 23: The average annual return is probably the single most important performance statistic. Reality: Return alone is a meaningless statistic because return can always be increased by increasing risk. The return/risk ratio should be the primary performance metric. Investment Misconception 24: For a risk-seeking investor considering two investment alternatives, an investment with expected lower return/risk but higher return may often be preferable to an equivalent-quality investment with the reverse characteristics.


pages: 389 words: 109,207

Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street by William Poundstone

Albert Einstein, anti-communist, asset allocation, beat the dealer, Benoit Mandelbrot, Black-Scholes formula, Brownian motion, buy and hold, buy low sell high, capital asset pricing model, Claude Shannon: information theory, computer age, correlation coefficient, diversified portfolio, Edward Thorp, en.wikipedia.org, Eugene Fama: efficient market hypothesis, high net worth, index fund, interest rate swap, Isaac Newton, Johann Wolfgang von Goethe, John Meriwether, John von Neumann, Kenneth Arrow, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Myron Scholes, New Journalism, Norbert Wiener, offshore financial centre, Paul Samuelson, publish or perish, quantitative trading / quantitative finance, random walk, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, Rubik’s Cube, short selling, speech recognition, statistical arbitrage, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, traveling salesman, value at risk, zero-coupon bond, zero-sum game

Any long-term “investor” who keeps letting money ride on the second wheel must eventually go bust. The second wheel’s geometric mean is zero. What does mean-variance analysis say? To answer that, you have to compute the variance of the wheels’ returns. I’ll spare you the trouble—the variance of the wheels increases from left to right. So does the arithmetic mean return. Consequently, Markowitz theory refuses to decide among these three wheels. All are legitimate choices. A risk-tolerant investor looking for the highest return might choose the third wheel. A conservative investor willing to sacrifice return for security might choose the first. The middle wheel is good, too, for people in the middle. The last bit of advice is particularly hard to swallow. Most would agree that the middle wheel is the riskiest because it alone poses the danger of total loss. Yet the middle wheel has a lower variance than the third because its outcomes are less dispersed.

If correct, that would imply that the fund’s true compound growth rate was hovering near zero. The familiar mean-variance mapping is not a good way of visualizing this type of problem, noted the University of North Carolina’s Richard McEnally. In the mean-variance mapping (left), return rises as a straight line as leverage increases. Risk rises, too, but this diagram shows no reason why a very aggressive and risk-tolerant trader should not increase leverage to any degree obtainable. In the Kelly mapping (right), the line of return is a curve that boomerangs back to zero and negative returns. Two Views of Risk and Return It is not a question of which mapping is “right.” Both mappings are right for different contexts. The highly leveraged overbettor is likely to do well on many bets that are not parlayed.


pages: 1,164 words: 309,327

Trading and Exchanges: Market Microstructure for Practitioners by Larry Harris

active measures, Andrei Shleifer, asset allocation, automated trading system, barriers to entry, Bernie Madoff, business cycle, buttonwood tree, buy and hold, compound rate of return, computerized trading, corporate governance, correlation coefficient, data acquisition, diversified portfolio, fault tolerance, financial innovation, financial intermediation, fixed income, floating exchange rates, High speed trading, index arbitrage, index fund, information asymmetry, information retrieval, interest rate swap, invention of the telegraph, job automation, law of one price, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, market clearing, market design, market fragmentation, market friction, market microstructure, money market fund, Myron Scholes, Nick Leeson, open economy, passive investing, pattern recognition, Ponzi scheme, post-materialism, price discovery process, price discrimination, principal–agent problem, profit motive, race to the bottom, random walk, rent-seeking, risk tolerance, risk-adjusted returns, selection bias, shareholder value, short selling, Small Order Execution System, speech recognition, statistical arbitrage, statistical model, survivorship bias, the market place, transaction costs, two-sided market, winner-take-all economy, yield curve, zero-coupon bond, zero-sum game

The first tranche has the highest claim on the mortgage payments and therefore is the least risky, When its claims are satisfied, the next tranche is paid, and so on until the available funds are exhausted. The last tranche, which is usually called the Z tranche, gets whatever is left over. It is obviously the most risky tranche. CMOs are also called real estate mortgage investment conduits (REMICs). Companies issue CMOs to distribute mortgage prepayment risk and interest rate risk among investors with varying degrees of risk tolerance. All debt instruments are collectively known as fixed-income products. 3.3.3 Derivative Contracts Derivative contracts are instruments that derive their values from the values of the underlying instruments upon which they are based. They are contractual agreements between buyers and sellers that specify the exchange of certain privileges and liabilities. Derivative contracts include forward contracts, futures contracts, options, and swaps.

. ◀ * * * All utilitarian traders want to trade in liquid markets, which allow them to achieve their objectives at low cost. Economists sometimes call utilitarian traders liquidity traders because they need liquidity to accomplish their goals. TABLE 8-3. Utilitarian Trader Summary Utilitarian traders want to trade instruments that best solve their problems. Investors trade only instruments that expose them to risks they can tolerate. Asset exchangers trade only for assets that they need. Hedgers trade instruments that are closely correlated to the risks they face. Gamblers trade instruments that excite them. 8.2 PROFIT-MOTIVATED TRADERS Profit-motivated traders trade only because they expect to profit. Like all traders, they profit if they buy low and sell high. The key to trading profitably is to trade only when you have reason to believe that you will profit.

• The inferences dealers make about future order flows create a spread between their bid and ask prices. This spread is called the adverse selection spread component. • The adverse selection spread component increases with trade size. 13.15 QUESTIONS FOR THOUGHT • Which traders do you expect are more risk averse, dealers or brokers? • Which traders do you expect make better dealers, risk tolerant (mildly risk-averse) individuals or very risk-averse individuals? • Are preferencing arrangements good for brokerage customers? • How can dealers control the risk of trading with informed traders? • Could a proprietary trading firm program a computer to trade profitably as a dealer? What risks would such a trading operation encounter? In what markets would such systems be most successful?


pages: 354 words: 26,550

High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems by Irene Aldridge

algorithmic trading, asset allocation, asset-backed security, automated trading system, backtesting, Black Swan, Brownian motion, business cycle, business process, buy and hold, capital asset pricing model, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, computerized trading, diversification, equity premium, fault tolerance, financial intermediation, fixed income, high net worth, implied volatility, index arbitrage, information asymmetry, interest rate swap, inventory management, law of one price, Long Term Capital Management, Louis Bachelier, margin call, market friction, market microstructure, martingale, Myron Scholes, New Journalism, p-value, paper trading, performance metric, profit motive, purchasing power parity, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, short selling, Small Order Execution System, statistical arbitrage, statistical model, stochastic process, stochastic volatility, systematic trading, trade route, transaction costs, value at risk, yield curve, zero-sum game

Order processing costs specific to the market maker’s own trading mechanism—these costs may involve exchange fees, settlement and trade clearing costs, and transfer taxes, among other charges. 3. The information asymmetry cost—a market maker trading with wellinformed traders may often be forced into a disadvantaged trading position. As a result, Stoll’s (1978) model predicts that the differences in bidask spreads between different market makers are a function of the market makers’ respective risk tolerances and execution set-ups. In Ho and Stoll (1981), the market maker determines bid and ask prices so as to maximize wealth while minimizing risk. The market maker controls his starting wealth positions, as well as the amounts of cash and inventory held on the book at any given time. As in Garman (1976), the arrival rates 138 HIGH-FREQUENCY TRADING of bid and ask orders are functions of bid and ask prices, respectively.

The losses may be due to a wide range of events, such as unforeseen trading model shortcomings, market disruptions, acts of God (earthquakes, fire, etc.), compliance breaches, and similar adverse conditions. Determining organizational goals for risk management is hardly a trivial endeavor. To effectively manage risk, an organization first needs to create clear and effective processes for measuring risk. The risk management goals, therefore, should set concrete risk measurement methodologies and quantitative benchmarks for risk tolerance associated with different trading strategies as well as with the organization as a whole. Expressing the maximum allowable risk in numbers is difficult, and obtaining organization-wide agreement on the subject is even more challenging, but the process pays off over time through quick and efficient daily decisions and the resulting low risk. A thorough goal-setting exercise should achieve senior management consensus with respect to the following questions: r What are the sources of risk the organization faces?


The Permanent Portfolio by Craig Rowland, J. M. Lawson

Andrei Shleifer, asset allocation, automated trading system, backtesting, bank run, banking crisis, Bernie Madoff, buy and hold, capital controls, correlation does not imply causation, Credit Default Swap, diversification, diversified portfolio, en.wikipedia.org, fixed income, Flash crash, high net worth, High speed trading, index fund, inflation targeting, margin call, market bubble, money market fund, new economy, passive investing, Ponzi scheme, prediction markets, risk tolerance, stocks for the long run, survivorship bias, technology bubble, transaction costs, Vanguard fund

If you want to, use any market-timing scheme you think will work or maybe just follow the advice you see on TV or read in a magazine. If you're not a market timer but you really think stocks are a good deal, then buy some extra of a total stock market index fund. Or if you feel like doing nothing, then hold it all in cash until something catches your attention. A word of warning though: All investors have different risk tolerances and unfortunately many investors don't find out what their risk tolerance actually is until after it has been exceeded by unforeseen losses. The Variable Portfolio should be approached with caution and an investor should make sure that the money he allocates to it is money that he truly can afford to lose if his speculative bets don't turn out as expected. Why a Variable Portfolio? The Variable Portfolio can complement the Permanent Portfolio strategy for some.


pages: 571 words: 106,255

The Bitcoin Standard: The Decentralized Alternative to Central Banking by Saifedean Ammous

Airbnb, altcoin, bank run, banks create money, bitcoin, Black Swan, blockchain, Bretton Woods, British Empire, business cycle, capital controls, central bank independence, conceptual framework, creative destruction, cryptocurrency, currency manipulation / currency intervention, currency peg, delayed gratification, disintermediation, distributed ledger, Ethereum, ethereum blockchain, fiat currency, fixed income, floating exchange rates, Fractional reserve banking, full employment, George Gilder, global reserve currency, high net worth, invention of the telegraph, Isaac Newton, iterative process, jimmy wales, Joseph Schumpeter, market bubble, market clearing, means of production, money: store of value / unit of account / medium of exchange, moral hazard, Network effects, Paul Samuelson, peer-to-peer, Peter Thiel, price mechanism, price stability, profit motive, QR code, ransomware, reserve currency, Richard Feynman, risk tolerance, Satoshi Nakamoto, secular stagnation, smart contracts, special drawing rights, Stanford marshmallow experiment, The Nature of the Firm, the payments system, too big to fail, transaction costs, Walter Mischel, zero-sum game

A currency that appreciates in value incentivizes saving, as savings gain purchasing power over time. Hence, it encourages deferred consumption, resulting in lower time preference. A currency that depreciates in value, on the other hand, leaves citizens constantly searching for returns to beat inflation, returns that must come with a risk, and so leads to an increase in investment in risky projects and an increased risk tolerance among investors, leading to increased losses. Societies with money of stable value generally develop a low time preference, learning to save and think of the future, while societies with high inflation and depreciating economies will develop high time preference as people lose track of the importance of saving and concentrate on immediate enjoyment. Further, an economy with an appreciating currency would witness investment only in projects that offer a positive real return over the rate of appreciation of money, meaning that only projects expected to increase society's capital stock will tend to get funded.

The debates of academia are almost entirely irrelevant to the real world, and its journals' articles are almost never read by anyone except the people who write them for job promotion purposes, but the government bezzle indefinitely rolls on because there is no mechanism by which government funding can ever be reduced when it does not benefit anybody. In a society with sound money, banking is a very important and productive job, where bankers perform two highly pivotal functions for economic prosperity: the safekeeping of assets as deposits, and the matching of maturity and risk tolerance between investors and investment opportunities. Bankers make their money by taking a cut from the profits if they succeed in their job, but make no profit if they fail. Only the successful bankers and banks stay in their job, as those that fail are weeded out. In a society of sound money, there are no liquidity concerns over the failure of a bank, as all banks hold all their deposits on hand, and have investments of matched maturity.


pages: 483 words: 141,836

Red-Blooded Risk: The Secret History of Wall Street by Aaron Brown, Eric Kim

activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, Asian financial crisis, Atul Gawande, backtesting, Basel III, Bayesian statistics, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Black Swan, business cycle, capital asset pricing model, central bank independence, Checklist Manifesto, corporate governance, creative destruction, credit crunch, Credit Default Swap, disintermediation, distributed generation, diversification, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, experimental subject, financial innovation, illegal immigration, implied volatility, index fund, Long Term Capital Management, loss aversion, margin call, market clearing, market fundamentalism, market microstructure, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, natural language processing, open economy, Pierre-Simon Laplace, pre–internet, quantitative trading / quantitative finance, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, special drawing rights, statistical arbitrage, stochastic volatility, stocks for the long run, The Myth of the Rational Market, Thomas Bayes, too big to fail, transaction costs, value at risk, yield curve

However, it could not achieve its full power until it was linked with Markowitz’s work, something that did not happen until the late 1980s. This chapter explains the two ideas and their interaction in a historical counterfactual. What if Kelly had been in the University of Chicago library one fateful afternoon when Harry was musing over some stock tables? What if Harry had met Kelly? Kelly Conventional wisdom says risk decisions should be made by subjective preference: your risk tolerance or your utility function. But in 1956, John Kelly published a contrary result: that there is a calculable amount of risk that always does best in the long run. Most people think that taking more risk increases the probability of both very good and very bad outcomes. Kelly showed that beyond a certain point, more risk only increases the probability of bad outcomes. Moreover, taking less than optimal risk actually guarantees doing worse in the long run; it only appears to be a safer course.

A Sharpe ratio of 0.1 produces a 1 percent excess return; a Sharpe ratio of 0.2 gives about 4 percent; a Sharpe ratio of 0.5 gives about 25 percent. Since the high Sharpe ratio strategies have limited capacity but grow so quickly that initial investment is almost irrelevant, they are appropriate for people investing their own money. Sharpe ratios around 0.5 make good hedge fund strategies. The lower Sharpe ratios are useful for large institutions with cheap capital and high risk tolerance. Card counters gravitated to very high Sharpe ratio strategies. When I say these have limited capacity, I don’t mean there are always opportunities to invest a small amount in them. More commonly, opportunities come up unpredictably. For that reason the strategies are sometimes referred to as “event driven.” They require a lot of investment in time and money to prepare. You can make this large investment to be ready to exploit the strategy, and then wait for years during which no appropriate opportunities come up.


pages: 153 words: 12,501

Mathematics for Economics and Finance by Michael Harrison, Patrick Waldron

Brownian motion, buy low sell high, capital asset pricing model, compound rate of return, discrete time, incomplete markets, law of one price, market clearing, Myron Scholes, Pareto efficiency, risk tolerance, riskless arbitrage, short selling, stochastic process

PORTFOLIO THEORY 115 Theorem 6.3.2 ∃ Two fund monetary separation i.e. Agents with different wealths (but the same increasing, strictly concave, VNM utility) hold the same risky unit cost portfolio, p∗ say, (but may differ in the mix of the riskfree asset and risky portfolio) i.e. ∀ portfolios p, wealths W0 , ∃λ s.t. h E u W0 rf + λW0 p∗ > (r̃ − rf 1) i h i ≥ E u W0 rf + p> (r̃ − rf 1) (6.3.22) ⇐⇒ Risk-tolerance (1/RA (z)) is linear (including constant) i.e. ∃ Hyperbolic Absolute Risk Aversion (HARA, incl. CARA) i.e. the utility function is of one of these types: • Extended power: u(z) = 1 (A (C+1)B + Bz)C+1 • Logarithmic: u(z) = ln(A + Bz) A • Negative exponential: u(z) = − B exp{Bz} where A, B and C are chosen to guarantee u0 > 0, u00 < 0. i.e. marginal utility satisfies u0 (z) = (A + Bz)C or u0 (z) = A exp{Bz} (6.3.23) where A, B and C are again chosen to guarantee u0 > 0, u00 < 0.


pages: 464 words: 117,495

The New Trading for a Living: Psychology, Discipline, Trading Tools and Systems, Risk Control, Trade Management by Alexander Elder

additive manufacturing, Atul Gawande, backtesting, Benoit Mandelbrot, buy and hold, buy low sell high, Checklist Manifesto, computerized trading, deliberate practice, diversification, Elliott wave, endowment effect, loss aversion, mandelbrot fractal, margin call, offshore financial centre, paper trading, Ponzi scheme, price stability, psychological pricing, quantitative easing, random walk, risk tolerance, short selling, South Sea Bubble, systematic trading, The Wisdom of Crowds, transaction costs, transfer pricing, traveling salesman, tulip mania, zero-sum game

We'll focus on risk and money management in a later chapter when I discuss the concept of “The Iron Triangle of risk control.” At this point, I only want to make clear that risk management is the essential part of serious trading. Forget the days when you would look at the ceiling and say, “I'll trade 500 shares,” “I'll trade a thousand shares,” or any other arbitrary number. Later in this book, you'll learn a simple formula for sizing your trades, based on your account and risk tolerance. At the time of this writing, I have three strategies that I trade. My favorite is a false breakout with a divergence. My second choice is a pullback to value during a powerful trend—that's the strategy of the trade shown on the screen (Figure 38.1). Last, I occasionally “fade an extreme”—bet on a reversal of an overstretched trend. Each of these strategies has its rules, but the key point is this—I'll only take a trade that fits one of them.

Decide in advance what percentage you'll protect. For example, you may decide that once the breakeven stop is in place, you'll protect a third of your open profit. If the open profit on the trade described above rises to $600, you'll move up your stop, so that the $200 profit is protected. These levels aren't set in stone. You may choose different percentages, depending on your level of confidence in a trade and risk tolerance. As a trade moves in your favor, your remaining potential gain begins to shrink, while your risk—the distance to the stop—keeps increasing. To trade is to manage risk. As the reward-to-risk ratio for your winning trades slowly deteriorates, you need to begin reducing your risk. Protecting a portion of your paper profits will keep your reward-to-risk ratio on a more even keel. Move Your Stop Only in the Direction of Your Trade You buy a stock and, being a disciplined trader, put a stop underneath.


pages: 176 words: 55,819

The Start-Up of You: Adapt to the Future, Invest in Yourself, and Transform Your Career by Reid Hoffman, Ben Casnocha

Airbnb, Andy Kessler, Black Swan, business intelligence, Cal Newport, Clayton Christensen, commoditize, David Brooks, Donald Trump, en.wikipedia.org, fear of failure, follow your passion, future of work, game design, Jeff Bezos, job automation, Joi Ito, late fees, lateral thinking, Marc Andreessen, Mark Zuckerberg, Menlo Park, out of africa, Paul Graham, paypal mafia, Peter Thiel, recommendation engine, Richard Bolles, risk tolerance, rolodex, shareholder value, side project, Silicon Valley, Silicon Valley startup, social web, Steve Jobs, Steve Wozniak, Tony Hsieh, transaction costs

Just as financial advisors counsel young people to invest in stocks more than bonds, it’s important to be especially aggressive accepting career risk when you are young. This is a main reason many young people start companies, travel around the world, and do other relatively “high-risk” career moves: the downside is lower. If something worthwhile will be riskier in five years than it is now, be more aggressive about taking it on now. As you age and build more assets, your risk tolerance shifts. Pursue Opportunities Where Others Misperceive the Risk There will be times when what’s risky to someone else is not risky to you because your particular characteristics and circumstances make it a different analysis. Risk is personal. But there will also be times when people like you—people with similar assets, aspirations, and operating within the same market realities—will perceive something as riskier than it actually is.


pages: 212 words: 70,224

How to Retire the Cheapskate Way by Jeff Yeager

asset allocation, car-free, employer provided health coverage, estate planning, financial independence, fixed income, Pepto Bismol, pez dispenser, rent control, ride hailing / ride sharing, risk tolerance, Ronald Reagan, Zipcar

There are four aspects to this rule: Develop a proclivity for safe(r) investments over more risky ones. After all, if you can live comfortably on less money, you don’t need to gamble so aggressively on high-risk investments. The preservation of capital becomes the overriding consideration. Create an individualized asset allocation plan, a plan for what types of investments make sense for you and involve whatever level of risk you can tolerate and still sleep well at night. Remember, in the very act of diversification there is, almost without exception, greater security. “Ton-tog-an-y. Isn’t that Lakota for ‘Don’t put all your eggs in one basket’?” Maintain appropriate insurances to protect yourself and your assets. Take care of your stuff. Investing time and money to maintain the possessions you already own—from your house and car, to your wardrobe and the kids’ bicycles—is one of the best investments you can make. 4.

That’s when I started to think of it as ‘making at a living’ … starting small, risking nothing but my time, and not worrying about whether I’d ever earn a nickel at it. It was the most refreshing, exciting feeling,” Dan says, adding with a quick smile, “but then again, I was an accountant for almost forty years, so I’m easily excited.” With “an investment of absolute zero … just my level of risk tolerance,” Dan relied on word of mouth and a few flyers posted in businesses around the neighborhood to advertise his pet sitting and pet walking services. “To be honest with you, at first I felt a little silly doing it … like a sixty-year old kid starting a lemonade stand. I was thinking I might get a call or two out of it, but that would be about it.” Well, in fact, Dan got seven calls, and that was just in the first two days of announcing his selfish employment venture.


pages: 141 words: 40,979

The Little Book That Builds Wealth: The Knockout Formula for Finding Great Investments by Pat Dorsey

Airbus A320, barriers to entry, business process, call centre, creative destruction, credit crunch, discounted cash flows, intangible asset, knowledge worker, late fees, low cost airline, low cost carrier, Network effects, pets.com, price anchoring, risk tolerance, risk/return, rolodex, shareholder value, Stewart Brand

The best investors are always looking for the best places for their money. Selling a modestly undervalued stock to fund the purchase of a supercheap stock is a smart strategy. So is selling an overvalued stock and parking the proceeds in cash if there aren’t any attractively priced stocks at the time. 4. Selling a stock when it becomes a huge part of your portfolio can make sense, depending on your risk tolerance. Conclusion More than Numbers I LOVE THE STOCK MARKET. I don’t love all the raving and ranting about job reports and Federal Reserve meetings, nor the breathless discussions of quarterly earnings reports minutes after they hit the newswires. Most if this is just noise, anyway, and has little bearing on the long-term value of individual companies. I largely ignore it, and so should you.


pages: 321

Finding Alphas: A Quantitative Approach to Building Trading Strategies by Igor Tulchinsky

algorithmic trading, asset allocation, automated trading system, backtesting, barriers to entry, business cycle, buy and hold, capital asset pricing model, constrained optimization, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, discounted cash flows, discrete time, diversification, diversified portfolio, Eugene Fama: efficient market hypothesis, financial intermediation, Flash crash, implied volatility, index arbitrage, index fund, intangible asset, iterative process, Long Term Capital Management, loss aversion, market design, market microstructure, merger arbitrage, natural language processing, passive investing, pattern recognition, performance metric, popular capitalism, prediction markets, price discovery process, profit motive, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk tolerance, risk-adjusted returns, risk/return, selection bias, sentiment analysis, shareholder value, Sharpe ratio, short selling, Silicon Valley, speech recognition, statistical arbitrage, statistical model, stochastic process, survivorship bias, systematic trading, text mining, transaction costs, Vanguard fund, yield curve

Every period has its own market and its own unique market opportunities. Each generation of algorithmic modelers has an opportunity set that includes the possibility of discovering powerful market forecasts that will generate significant profit. THE OPPORTUNITY Exploitable price patterns and tradable forecasting models exist because market participants differ in their investment objectives, their preferences (such as risk tolerance), and their ability to process information. Participants work with a finite set of resources and aim to optimize their investment strategies subject to the limits imposed by those resources. They leave to others the chance to take advantage of whatever trading opportunities they haven’t had the bandwidth or ability to focus on. Market participants with long-term investment horizons tend not to pay the same attention to short-term price variations as participants with short-term investment horizons.

Published 2020 by John Wiley & Sons, Ltd. 242 Finding Alphas who focus exclusively on particular sets of futures and currencies; the hedgers seek to control their exposure to the risks of particular factors. Commodity futures provide a good example, as producers and consumers of physical commodities use futures to hedge their risk on specific commodities. Each group of traders can have its own characteristic risk limits, tolerances, and trading behavior, which in turn can give rise to qualitatively different market behavior. For example, the farmers and food-producing corporations that use the agricultural markets to control their risks have little in common with the airlines that employ energy futures to hedge their future fuel costs. As a result, in contrast to the equities universe, where the core liquid assets are all traded by the same population of investors for the same purposes, many properties are much less comparable across the entire universe of futures or forwards.


The Art of Scalability: Scalable Web Architecture, Processes, and Organizations for the Modern Enterprise by Martin L. Abbott, Michael T. Fisher

always be closing, anti-pattern, barriers to entry, Bernie Madoff, business climate, business continuity plan, business intelligence, business process, call centre, cloud computing, combinatorial explosion, commoditize, Computer Numeric Control, conceptual framework, database schema, discounted cash flows, en.wikipedia.org, fault tolerance, finite state, friendly fire, hiring and firing, Infrastructure as a Service, inventory management, new economy, packet switching, performance metric, platform as a service, Ponzi scheme, RFC: Request For Comment, risk tolerance, Rubik’s Cube, Search for Extraterrestrial Intelligence, SETI@home, shareholder value, Silicon Valley, six sigma, software as a service, the scientific method, transaction costs, Vilfredo Pareto, web application, Y2K

The business rules very likely will include limiting changes during peak utilization of your platform or system. If you have the heaviest utilization between 10 AM and 2 PM C HANGE M ANAGEMENT and 7 PM and 9 PM, it probably doesn’t make sense to be making your largest and most disrupting changes during this timeframe. You might limit or eliminate altogether changes during this timeframe if your risk tolerance is low. The same might hold true for specific times of the year. Sometimes though, as in very high volume change environments, we simply don’t have the luxury of disallowing changes during certain portions of the day and we need to find ways to manage our change risks elsewhere. The Business Change Calendar Many businesses, from large to small, put the next three to six months and maybe even the next year’s worth of proposed changes into a shared calendar for internal viewing.

You could argue that risk demonstrates a Markov property, meaning that the future states are determined by the present state and are independent of past states. We would argue that risk is cumulative to some degree, perhaps with an exponential decay but still additive. A risky event today can result in failures in the future, either because of direct correlation such as today’s change breaks something else in the future, or via indirect methods such as an increased risk tolerance by the organization leading to riskier behaviors in the future. Either way, actions can have near- and long-term consequences. Because risk management is important to scalability, we need to understand the components and steps of the risk management process. We’ll cover this in more detail M EASURING R ISK in this chapter but a high-level overview of the risk management process entails first and foremost as accurately as possible determining the risk of a particular action.

If the development team has been working in a development environment with a single database and two days before the release the database is split into a master and read host, it’s pretty likely that the next release is going to have a problem unless there has been a ton of coordination and remediation work done. The second factor that should be considered in the overall risk analysis is the human factor. As people perform riskier and riskier activities, their level of risk tolerance goes up. This human conditioning can work for us very well when we need to become adapted to a new environment, but when it comes to controlling risk in a system, this can lead us astray. If a sabre-toothed tiger has moved into the neighborhood and you still have to leave your cave each day to hunt, the ability to adapt to the new risk in your life is critical to your survival. Otherwise, you might stay in your cave all day and starve.


pages: 669 words: 210,153

Tools of Titans: The Tactics, Routines, and Habits of Billionaires, Icons, and World-Class Performers by Timothy Ferriss

Airbnb, Alexander Shulgin, artificial general intelligence, asset allocation, Atul Gawande, augmented reality, back-to-the-land, Ben Horowitz, Bernie Madoff, Bertrand Russell: In Praise of Idleness, Black Swan, blue-collar work, Boris Johnson, Buckminster Fuller, business process, Cal Newport, call centre, Charles Lindbergh, Checklist Manifesto, cognitive bias, cognitive dissonance, Colonization of Mars, Columbine, commoditize, correlation does not imply causation, David Brooks, David Graeber, diversification, diversified portfolio, Donald Trump, effective altruism, Elon Musk, fault tolerance, fear of failure, Firefox, follow your passion, future of work, Google X / Alphabet X, Howard Zinn, Hugh Fearnley-Whittingstall, Jeff Bezos, job satisfaction, Johann Wolfgang von Goethe, John Markoff, Kevin Kelly, Kickstarter, Lao Tzu, lateral thinking, life extension, lifelogging, Mahatma Gandhi, Marc Andreessen, Mark Zuckerberg, Mason jar, Menlo Park, Mikhail Gorbachev, MITM: man-in-the-middle, Nelson Mandela, Nicholas Carr, optical character recognition, PageRank, passive income, pattern recognition, Paul Graham, peer-to-peer, Peter H. Diamandis: Planetary Resources, Peter Singer: altruism, Peter Thiel, phenotype, PIHKAL and TIHKAL, post scarcity, post-work, premature optimization, QWERTY keyboard, Ralph Waldo Emerson, Ray Kurzweil, recommendation engine, rent-seeking, Richard Feynman, risk tolerance, Ronald Reagan, selection bias, sharing economy, side project, Silicon Valley, skunkworks, Skype, Snapchat, social graph, software as a service, software is eating the world, stem cell, Stephen Hawking, Steve Jobs, Stewart Brand, superintelligent machines, Tesla Model S, The Wisdom of Crowds, Thomas L Friedman, Wall-E, Washington Consensus, Whole Earth Catalog, Y Combinator, zero-sum game

You limit angel investment funds to 10 to 15% or less of your liquid assets. I subscribe to the Nassim Taleb “barbell” school of investment, which I implement as 90% in conservative asset classes like cash-like equivalents and the remaining 10% in speculative investments that can capitalize on positive “black swans.” Even if the above criteria are met, people overestimate their risk tolerance. Even if you have only $100 to invest, this is important to explore. In 2007, I had one wealth manager ask me, “What is your risk tolerance?” and I answered honestly: “I have no idea.” It threw him off. I then asked him for the average of his clients’ responses. He said, “Most answer that they would not panic up to about 20% down in one quarter.” My follow-up question was: “When do most actually panic and start selling low?” His answer: “When they’re down 5% in one quarter.”

They’re attractive for many reasons: developing new business skills, developing a better business network, or—most often—taking what is effectively a 2-year vacation that looks good on a résumé. In 2001, and again in 2004, I wanted to do all three things. This short chapter will share my experience with MBA programs and how I created my own. My hope is that it will make you think about real-world experiments versus theoretical training, untested assumptions (especially about risk tolerance), and the good game of business as a whole. There is no need to spend $60K per year to apply the principles I’ll be discussing. Last caveat: Nothing here is intended to portray me as an investing expert, which I am not. Beginnings * * * Ah, Stanford Graduate School of Business (GSB). Stanford, with its palm tree–lined avenues and red terra cotta roofing, always held a unique place in my mind.


Mastering Private Equity by Zeisberger, Claudia,Prahl, Michael,White, Bowen, Michael Prahl, Bowen White

asset allocation, backtesting, barriers to entry, Basel III, business process, buy low sell high, capital controls, carried interest, commoditize, corporate governance, corporate raider, correlation coefficient, creative destruction, discounted cash flows, disintermediation, disruptive innovation, distributed generation, diversification, diversified portfolio, family office, fixed income, high net worth, information asymmetry, intangible asset, Lean Startup, market clearing, passive investing, pattern recognition, performance metric, price mechanism, profit maximization, risk tolerance, risk-adjusted returns, risk/return, shareholder value, Sharpe ratio, Silicon Valley, sovereign wealth fund, statistical arbitrage, time value of money, transaction costs

The pool of investors active in real assets is deep, ranging from the largest global PE firms (such as Blackstone, KKR and Partners Group), to funds specializing in one specific real asset class, to LPs providing direct investment capital. PE funds finance the full range of underlying real assets, from the development of greenfield projects to the improvement of existing facilities to the operation of mature assets. The maturity or stage of the development has of course a distinct impact on the risk−return profile of the underlying investment: a pre-completion project requires a higher risk tolerance but offers the greatest potential for price appreciation, while an investment in mature projects provides exposure to stable, long-term cash flows.5 Leverage is typically employed at all stages of development to enhance returns, with the physical assets themselves serving as collateral. Exhibit 5.4 provides a simple overview of the two project stages (early stage and mature) and the risk−return characteristics of real estate, infrastructure and natural resources projects.

This includes raising sector or thematic funds with the explicit promise of high industry expertise and operating value creation and a distinct, less correlated strategy. GPs may also define their niche by focusing on smaller, more complex deals, including restructuring activities or frontier market investing. Fundraising needs to be tailored to these strategies, for instance by targeting smaller investors such as high-net worth individuals and family offices, who have a higher risk tolerance and remain willing to invest in the original PE model. Where does this leave the industry? We expect several distinct segments to emerge: For lower risk (e.g., infrastructure or secondary buys from PE firms) and larger bilateral transactions, we expect to see more investors attempt to deploy capital directly, to save on the layer of fees and gain more control over their exposure. Whether investors will be able to set up the independent processes and develop the teams needed, in the context of large organizations, and stomach the concentration risk associated with such a strategy, especially in a volatile environment, remains to be seen.


Design of Business: Why Design Thinking Is the Next Competitive Advantage by Roger L. Martin

asset allocation, Buckminster Fuller, business process, Frank Gehry, global supply chain, high net worth, Innovator's Dilemma, Isaac Newton, mobile money, QWERTY keyboard, Ralph Waldo Emerson, risk tolerance, six sigma, Steve Ballmer, Steve Jobs, supply-chain management, Wall-E, winner-take-all economy

A reliable system can generate tremendous time savings; once designed, it eliminates the need for subjective and thoughtful analysis by an expensive and time-pressed manager or professional. Hence the appeal of automated asset-allocation systems at investment advisory firms: before new clients even meet an adviser, the clients complete a questionnaire designed to reliably assess their investment horizons, risk tolerance, and investment goals. The data feeds into a program that impersonally graphs the recommended mix of stocks, bonds, and other investments. It takes the massively complex job of understanding individual investment needs out of the hands of the adviser. Where there was once an adviser consulting with clients at length and depth, and then tailoring a portfolio by applying a heuristic and subjective judgment, there is now an algorithm that quickly produces reliable answers.


pages: 318 words: 77,223

The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse by Mohamed A. El-Erian

activist fund / activist shareholder / activist investor, Airbnb, balance sheet recession, bank run, barriers to entry, break the buck, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, collapse of Lehman Brothers, corporate governance, currency peg, disruptive innovation, Erik Brynjolfsson, eurozone crisis, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, fixed income, Flash crash, forward guidance, friendly fire, full employment, future of work, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, income inequality, inflation targeting, Jeff Bezos, Kenneth Rogoff, Khan Academy, liquidity trap, Martin Wolf, megacity, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, Norman Mailer, oil shale / tar sands, price stability, principal–agent problem, quantitative easing, risk tolerance, risk-adjusted returns, risk/return, Second Machine Age, secular stagnation, sharing economy, sovereign wealth fund, The Great Moderation, The Wisdom of Crowds, too big to fail, University of East Anglia, yield curve, zero-sum game

Many, including the least creditworthy ones that could ill afford commercial borrowing terms, were tempted by the easy availability of debt financing as creditors rushed to provide financing at ever more lenient terms. With the private sector credit factories working at feverish levels of activity, the notion of proper creditworthiness analysis gave way to an emphasis on driving lending volumes ever higher. As such, a crazy culture of risk tolerance and spread convergence took hold. Even the worst-managed countries found themselves able to access large loans on terms (interest rate and maturity) that no longer diverged materially from those offered to the best-managed ones (Figure 1, illustrating the extent to which the spread on Greek bonds relative to German ones was compressed for many years). (Data from Thomson Reuters) Figure 1.


pages: 261 words: 79,883

Start With Why: How Great Leaders Inspire Everyone to Take Action by Simon Sinek

Apple II, Apple's 1984 Super Bowl advert, Black Swan, business cycle, commoditize, hiring and firing, John Markoff, low cost airline, Nick Leeson, RAND corporation, risk tolerance, Ronald Reagan, shareholder value, Steve Ballmer, Steve Jobs, Steve Wozniak, The Wisdom of Crowds, trade route

They need to know someone else has tested it. They need that trusted, personal recommendation. According to the Law of Diffusion, mass-market success can only be achieved after you penetrate between 15 percent to 18 percent of the market. That’s because the early majority won’t try something new until someone else has tried it first. This is why we have to drop our price or offer value-added services. We’re attempting to reduce the risk tolerance of these practical-minded people until they feel comfortable to buy. That’s what a manipulation is. They may buy, but they won’t be loyal. Don’t forget, loyalty is when people are willing to suffer some inconvenience or pay a premium to do business with you. They may even turn down a better offer from someone else—something the late majority rarely does. The ability to get the system to tip is the point at which the growth of a business or the spreading of an idea starts to move at an extraordinary pace.


pages: 241 words: 78,508

Lean In: Women, Work, and the Will to Lead by Sheryl Sandberg

affirmative action, business process, Cass Sunstein, constrained optimization, experimental economics, fear of failure, gender pay gap, glass ceiling, job satisfaction, labor-force participation, longitudinal study, Mark Zuckerberg, meta analysis, meta-analysis, old-boy network, Richard Thaler, risk tolerance, Silicon Valley, social graph, women in the workforce, young professional

Bowden, “Gender Differences in Self-Perception: Convergent Evidence from Three Measures of Accuracy and Bias,” Personality and Social Psychology Bulletin 23, no. 2 (1997): 169. 11. Nicole Perlroth and Claire Cain Miller, “The $1.6 Billion Woman, Staying on Message,” New York Times, February 4, 2012, http://​www.​nytimes.​com/​2012/​02/​05/​business/​sheryl-​sandberg-​of-​facebook-​staying-​on-​message.​html?page​wanted=​all. 12. Dana R. Carney, Amy J. C. Cuddy, and Andy J. Yap, “Power Posing: Brief Nonverbal Displays Affect Neuroendocrine Levels and Risk Tolerance,” Psychological Science 21, no. 10 (2010): 1363–68. 13. Bianca Bosker, “Cisco Tech Chief Outlines the Advantages of Being a Woman in Tech,” The Huffington Post, October 27, 2011, http://​www.​huffington​post.​com/​2011/​10/​27/​cisco-​chief-​technology-​officer-​woman-​in-​tech_​n_​1035880.​html. 14. Claire Cain Miller, “For Incoming I.B.M. Chief, Self-Confidence Is Rewarded, New York Times, October 27, 2011, http://​www.​nytimes.​com/​2011/​10/​28/​business/​for-​incoming-​ibm-​chief-​self-​confidence-​rewarded.​html. 15.


pages: 255 words: 55,018

Architecting For Scale by Lee Atchison

Amazon Web Services, business process, cloud computing, continuous integration, DevOps, Internet of things, microservices, platform as a service, risk tolerance, software as a service, web application

If AWS did not do this artificial remapping, AZs earlier in the alphabet would be overloaded, whereas AZs later in the alphabet would be less loaded. By creating this artificial mapping, they are able to load balance usage more effectively. Maintaining Location Diversity for Availability Reasons How do you ensure that AWS resources you launch have redundant components that are guaranteed to be located in different data centers and therefore risk tolerant to outages? There are a couple things you can do. First, make sure that you maintain redundant components in distinct AZs within a single account. If you have redundant components that are in multiple accounts, make sure you maintain redundancy in multiple AZs within each account individually. Don’t compare AZs across accounts. 1 EU Safe Harbor is a set of EU privacy principles that govern the transmission of data about EU citizens to locations outside of the EU.


pages: 209 words: 53,175

The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness by Morgan Housel

"side hustle", airport security, Amazon Web Services, Bernie Madoff, business cycle, computer age, coronavirus, discounted cash flows, diversification, diversified portfolio, Donald Trump, financial independence, Hans Rosling, Hyman Minsky, income inequality, index fund, invisible hand, Isaac Newton, Jeff Bezos, Joseph Schumpeter, knowledge worker, labor-force participation, Long Term Capital Management, margin call, Mark Zuckerberg, new economy, Paul Graham, payday loans, Ponzi scheme, quantitative easing, Renaissance Technologies, Richard Feynman, risk tolerance, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, Stephen Hawking, Steven Levy, stocks for the long run, the scientific method, traffic fines, Vanguard fund, working-age population

This is also close to indefensible on paper, and I’m not recommending it to others. It’s just what works for us. We do it because cash is the oxygen of independence, and—more importantly—we never want to be forced to sell the stocks we own. We want the probability of facing a huge expense and needing to liquidate stocks to cover it to be as close to zero as possible. Perhaps we just have a lower risk tolerance than others. But everything I’ve learned about personal finance tells me that everyone—without exception—will eventually face a huge expense they did not expect—and they don’t plan for these expenses specifically because they did not expect them. The few people who know the details of our finances ask, “What are you saving for? A house? A boat? A new car?” No, none of those. I’m saving for a world where curveballs are more common than we expect.


pages: 459 words: 144,009

Upheaval: Turning Points for Nations in Crisis by Jared Diamond

anti-communist, Asian financial crisis, Berlin Wall, British Empire, California gold rush, clean water, correlation coefficient, cuban missile crisis, Dissolution of the Soviet Union, Gini coefficient, illegal immigration, interchangeable parts, invention of writing, Jeff Bezos, medical malpractice, mutually assured destruction, Nelson Mandela, nuclear winter, oil shale / tar sands, peak oil, post-work, purchasing power parity, rising living standards, risk tolerance, Ronald Reagan, The Spirit Level, traffic fines, transcontinental railway, women in the workforce, World Values Survey

To understand the fundamental benefits of an immigrant population, imagine that you could divide the population of any country into two groups: one consisting on the average of the youngest, healthiest, boldest, most risk-tolerant, most hard-working, ambitious, and innovative people; the other consisting of everybody else. Transplant the first group to another country, and leave the second group in their country of origin. That selective transplanting approximates the decision to emigrate and its successful accomplishment. Hence it comes as no surprise that more than one-third of American Nobel Prize winners are foreign-born, and over half are either immigrants themselves or else the children of immigrants. That’s because Nobel Prize–winning research demands those same qualities of boldness, risk tolerance, hard work, ambition, and innovativeness. Immigrants and their offspring also contribute disproportionately to American art, music, cuisine, and sports.


Investment: A History by Norton Reamer, Jesse Downing

activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, asset allocation, backtesting, banking crisis, Berlin Wall, Bernie Madoff, break the buck, Brownian motion, business cycle, buttonwood tree, buy and hold, California gold rush, capital asset pricing model, Carmen Reinhart, carried interest, colonial rule, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, debt deflation, discounted cash flows, diversified portfolio, dogs of the Dow, equity premium, estate planning, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, family office, Fellow of the Royal Society, financial innovation, fixed income, Gordon Gekko, Henri Poincaré, high net worth, index fund, information asymmetry, interest rate swap, invention of the telegraph, James Hargreaves, James Watt: steam engine, joint-stock company, Kenneth Rogoff, labor-force participation, land tenure, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, margin call, means of production, Menlo Park, merger arbitrage, money market fund, moral hazard, mortgage debt, Myron Scholes, negative equity, Network effects, new economy, Nick Leeson, Own Your Own Home, Paul Samuelson, pension reform, Ponzi scheme, price mechanism, principal–agent problem, profit maximization, quantitative easing, RAND corporation, random walk, Renaissance Technologies, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Sand Hill Road, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spinning jenny, statistical arbitrage, survivorship bias, technology bubble, The Wealth of Nations by Adam Smith, time value of money, too big to fail, transaction costs, underbanked, Vanguard fund, working poor, yield curve

However, in the following decades, many employers shifted away from defined benefit plans and toward defined contribution plans. By the end of 2012, defined contribution plans held $5.1 trillion in assets.5 These plans, such as 401(k) plans, 403(b) plans, and 457 plans, are not managed by a single sponsor managing one fund. Instead, each employee controls his or her own account; the individual makes allocation decisions in accordance with his or her own risk tolerance and savings needs. This mitigates the risks associated with unfunded pension liabilities in many defined benefit plans, but it shifts the risk of investment loss and the management of the New Clients and New Investments 123 assets to the beneficiary. Very likely defined contribution plans will continue to be the employers’ retirement plan of choice because then employers are able to avoid the liabilities and risks associated with defined benefit plans.

Asian sovereign wealth funds, by contrast, have foreign reserves due to positive trade balances as their source; thus their focus is more about diversifying away from the currency price risk to which they are exposed.33 The investment strategies of sovereign wealth funds also tend to align with the fundamental reasons for their creation. Most sovereign wealth funds tend to be slightly more interested in capital preservation, whereas ones that are centrally concerned with growing the assets often have a slightly higher risk tolerance. But in general, New Clients and New Investments 131 sovereign wealth funds are widely diversified and can manage a wide liquidity spectrum, since they do not have explicitly dated liabilities. Given the historical trend and the broadening of the conviction in the merits of these funds, the future seems bright for sovereign wealth funds. They are likely to become more plentiful as countries seek to monetize their resources, diversify away risk, and orient the revenue of the country toward a wider stream of income sources.


pages: 477 words: 144,329

How Money Became Dangerous by Christopher Varelas

activist fund / activist shareholder / activist investor, Airbnb, airport security, barriers to entry, basic income, bitcoin, blockchain, Bonfire of the Vanities, California gold rush, cashless society, corporate raider, crack epidemic, cryptocurrency, discounted cash flows, disintermediation, diversification, diversified portfolio, Donald Trump, dumpster diving, fiat currency, fixed income, friendly fire, full employment, Gordon Gekko, greed is good, interest rate derivative, John Meriwether, Kickstarter, Long Term Capital Management, mandatory minimum, mobile money, mortgage debt, pensions crisis, pets.com, pre–internet, profit motive, risk tolerance, Saturday Night Live, shareholder value, side project, Silicon Valley, Steve Jobs, technology bubble, The Predators' Ball, too big to fail, universal basic income, zero day

It instilled a new Wild West culture at Salomon Brothers, ushering in an every-man-for-himself atmosphere, in which individual employees made colossal gambles for the possibility of lucrative payouts. The central reason for this massive shift in risk was that Salomon traders had essentially started playing with house money, the balance sheet of the public company, rather than using their own personal capital. Not using their own money led to higher risk tolerance and larger losses when things didn’t go right. Investment banks went public for multiple reasons. A primary reason was access to the capital needed to scale the business in response to customer demand for bigger financings and underwritings. Globalization and the creation of mega-international corporations demanded financial institutions that could underwrite larger and larger debt and equity issuances, as well as institutions that could support those issuances with trading and analysis on a level that a traditional partnership could not.

The lawyers, bankers, and business development teams from each of the firms were there at the table, with people raising this and that issue. Every new point would have ripple effects on the closing terms, which kept compounding: working-capital adjustments, reps and warranties, who would be responsible for this or that happening. Each party had different personalities and levels of sophistication, different deal appetites and risk tolerances. Not to mention, the companies at the table were geographically and culturally diverse—from Japan, North Carolina, and upstate New York. Every time you asked the Japanese team a question, they said yes, even when the answer should absolutely have been no. For example, we’d ask, “Is it possible that Furukawa could do the entire deal?” And they’d nod and reply, “Yes.” “Great!” we’d say. But there was no way they could do the entire deal.


pages: 201 words: 62,593

The Automatic Millionaire, Expanded and Updated: A Powerful One-Step Plan to Live and Finish Rich by David Bach

asset allocation, diversified portfolio, financial independence, index fund, job automation, late fees, money market fund, Own Your Own Home, risk tolerance, transaction costs, Vanguard fund

Finally, for larger accounts over $100,000, they offer a direct investment approach of individual stocks with tax-loss harvesting features. IMPORTANT—WARNING! If you use an online tool from any of these firms (large or small) to build your automatic portfolio, please take time to go through the questionnaires carefully. Don’t just fly through the questions and click away. Most of these firms determine the mix of investments based on what you tell them about your time horizon and your risk tolerance. If you click on one wrong button, your entire portfolio can be built incorrectly, with either too much risk or not enough. When in doubt, call the company and talk to one of their advisors. I want you to be safe, prepared, and knowledgable about the decisions you make on this. GOING TO A BROKERAGE FIRM OR BANK After looking at the company web sites I just described, you may want to do even more research.


Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals by David Aronson

Albert Einstein, Andrew Wiles, asset allocation, availability heuristic, backtesting, Black Swan, butter production in bangladesh, buy and hold, capital asset pricing model, cognitive dissonance, compound rate of return, computerized trading, Daniel Kahneman / Amos Tversky, distributed generation, Elliott wave, en.wikipedia.org, feminist movement, hindsight bias, index fund, invention of the telescope, invisible hand, Long Term Capital Management, mental accounting, meta analysis, meta-analysis, p-value, pattern recognition, Paul Samuelson, Ponzi scheme, price anchoring, price stability, quantitative trading / quantitative finance, Ralph Nelson Elliott, random walk, retrograde motion, revision control, risk tolerance, risk-adjusted returns, riskless arbitrage, Robert Shiller, Robert Shiller, Sharpe ratio, short selling, source of truth, statistical model, stocks for the long run, systematic trading, the scientific method, transfer pricing, unbiased observer, yield curve, Yogi Berra

It is far more realistic to assume a world of investors with highly diverse attitudes toward risk. In such a world, some investors would be more adverse to risk than others, and they would be willing to pay other investors to accept the burden of additional risk. Also, there would likely be risk-tolerant investors looking to profit from the opportunity to assume additional risk. All that would be needed in such a world is a mechanism by which risk can be transferred from the risk adverse to the risk tolerant and for compensation to be paid to those willing to accept said risk. Let’s step away from markets for a moment to consider one mechanism by which the risk adverse can compensate the risk inclined—the insurance premium. Homeowners dread the possibility of a fire, so they enter into a transaction with a fire insurance company.


pages: 523 words: 61,179

Human + Machine: Reimagining Work in the Age of AI by Paul R. Daugherty, H. James Wilson

3D printing, AI winter, algorithmic trading, Amazon Mechanical Turk, augmented reality, autonomous vehicles, blockchain, business process, call centre, carbon footprint, cloud computing, computer vision, correlation does not imply causation, crowdsourcing, digital twin, disintermediation, Douglas Hofstadter, en.wikipedia.org, Erik Brynjolfsson, friendly AI, future of work, industrial robot, Internet of things, inventory management, iterative process, Jeff Bezos, job automation, job satisfaction, knowledge worker, Lyft, natural language processing, personalized medicine, precision agriculture, Ray Kurzweil, recommendation engine, RFID, ride hailing / ride sharing, risk tolerance, Rodney Brooks, Second Machine Age, self-driving car, sensor fusion, sentiment analysis, Shoshana Zuboff, Silicon Valley, software as a service, speech recognition, telepresence, telepresence robot, text mining, the scientific method, uber lyft

What is it like to work at Stitch Fix? Its more than twenty-eight hundred stylists log in at their own computers, which become a digital console of sorts, and then click around an interface that’s designed to help them make quick, relevant styling decisions. Options are automatically sorted so they waste no time searching through wrong-sized items. The interface also provides client information like risk tolerance and feedback history. Interestingly, the interface is designed to help stylists overcome biases; it can vary the information they see to test for and nudge them out of recommendation ruts.3 Even with constant monitoring and algorithms that guide decision making, according to internal surveys, Stitch Fix stylists are mostly satisfied with the work. And this type of work, built around augmented creativity and flexible schedules, will indeed play an important role in the workforce of the future.


pages: 272 words: 64,626

Eat People: And Other Unapologetic Rules for Game-Changing Entrepreneurs by Andy Kessler

23andMe, Andy Kessler, bank run, barriers to entry, Berlin Wall, Bob Noyce, British Empire, business cycle, business process, California gold rush, carbon footprint, Cass Sunstein, cloud computing, collateralized debt obligation, collective bargaining, commoditize, computer age, creative destruction, disintermediation, Douglas Engelbart, Eugene Fama: efficient market hypothesis, fiat currency, Firefox, Fractional reserve banking, George Gilder, Gordon Gekko, greed is good, income inequality, invisible hand, James Watt: steam engine, Jeff Bezos, job automation, Joseph Schumpeter, Kickstarter, knowledge economy, knowledge worker, libertarian paternalism, low skilled workers, Mark Zuckerberg, McMansion, Netflix Prize, packet switching, personalized medicine, pets.com, prediction markets, pre–internet, profit motive, race to the bottom, Richard Thaler, risk tolerance, risk-adjusted returns, Silicon Valley, six sigma, Skype, social graph, Steve Jobs, The Wealth of Nations by Adam Smith, transcontinental railway, transfer pricing, wealth creators, Yogi Berra

If you don’t have enough, you need to attract it, like my Net Net example raising capital and going public. But how? Fortunately, money sloshes around the globe seeking its highest return. To be a true Free Radical, be the highest return. Money goes wherever it damn pleases. Moving around the globe, pulsing through electronic networks and bank databases, seeking to maximize its risk-adjusted return. Maybe someone’s risk tolerance is low so they invest their money in U.S. Treasury Bills. So be it. Others (like me) think that teams of smart people inventing the future are actually less risky than big corporations that are or will soon be under attack from these entrepreneurs, so I invest in small companies and start-ups. That’s me and my money’s prerogative. Others are even more daring and invest in Estonia or the Congo or even Venezuela, places with potentially high returns but huge political or physical risks.


pages: 276 words: 64,903

Built for Growth: How Builder Personality Shapes Your Business, Your Team, and Your Ability to Win by Chris Kuenne, John Danner

Airbnb, Amazon Web Services, Berlin Wall, Bob Noyce, business climate, call centre, cloud computing, disruptive innovation, don't be evil, Fall of the Berlin Wall, Gordon Gekko, Jeff Bezos, Kickstarter, Lean Startup, Mark Zuckerberg, pattern recognition, risk tolerance, Sand Hill Road, self-driving car, Silicon Valley, Steve Jobs, Steve Wozniak, supply-chain management, zero-sum game

For this book, we applied the same methodology to answer a question further upstream: who builds the businesses that sell those products and services in the first place, and why? Whom We Focused On Building a successful business and growing it to large scale is a marathon effort. We do not focus here on the general personality characteristics that might differentiate the runners of that race from the public at large—things like risk tolerance, comfort with ambiguity, ambition, a sense of independence, and personal initiative. You can read elsewhere about those traits that are shared by most entrepreneurs the world over, whether they are successful or not. We concentrate instead on the winners of the marathon—the successful men and women who have built businesses that have survived and grown. These entrepreneurs are, and have, built for growth.


pages: 228 words: 68,315

The Complete Guide to Property Investment: How to Survive & Thrive in the New World of Buy-To-Let by Rob Dix

buy and hold, diversification, diversified portfolio, Firefox, risk tolerance, TaskRabbit, transaction costs, young professional

In terms of diversification, this isn’t a terrible idea. If you could make roughly the same net return from a couple of unencumbered properties or a globally diversified portfolio of stocks and bonds, the latter might give you better peace of mind. Restructure The options above are all totally valid strategies, but the best option of all is likely to be a mix-and-match of all of them, depending on your risk tolerance and income requirements. For example, you could: Sell a couple of properties to raise cash to put into stocks and bonds for diversification. Sell another to reduce your loan-to-value. Keep the rest for income, with very low mortgages so you’re not overly worried about changes to interest rates. If you’re relying on income from your portfolio in retirement, there’s a strong argument for restructuring in some way.


pages: 214 words: 71,585

Selfish, Shallow, and Self-Absorbed: Sixteen Writers on the Decision Not to Have Kids by Meghan Daum

delayed gratification, demographic transition, Donald Trump, financial independence, happiness index / gross national happiness, index card, Joan Didion, Mason jar, peak oil, Ponzi scheme, risk tolerance, Skype, women in the workforce

My partner knew well what I had discovered about nicotine and pregnancy. She knew everything that I (and science) knew about prenatal drug abuse. But she scoffed when I reminded her. She also knew what Hugh Laurie’s character had said in nearly every episode of House: “Everybody lies.” And addicts lie the most. Some people are energized by risk. There’s no reason why they shouldn’t be. But in a relationship, the risk tolerance of partners should match. To draw upon the wisdom of Aesop, ants should not marry grasshoppers. I am an unglamorous ant—deferring gratification, socking away money religiously and investing it prudently. My partner was a grasshopper—seeking what she wants when she wants it, unconcerned by the threat of a rainy day. I suspect that when she flew from Los Angeles to meet the pregnant woman, she was fueled as much by risk as by her urge to be a mother.


pages: 224 words: 13,238

Electronic and Algorithmic Trading Technology: The Complete Guide by Kendall Kim

algorithmic trading, automated trading system, backtesting, commoditize, computerized trading, corporate governance, Credit Default Swap, diversification, en.wikipedia.org, family office, financial innovation, fixed income, index arbitrage, index fund, interest rate swap, linked data, market fragmentation, money market fund, natural language processing, quantitative trading / quantitative finance, random walk, risk tolerance, risk-adjusted returns, short selling, statistical arbitrage, Steven Levy, transaction costs, yield curve

Predictability The degree of predictability governs the degree to which horizon and schedule should be implemented. This consideration requires the use of properties of the distribution estimates, in addition to averages, such as standard deviation measures. 4. Price sensitivity As price sensitivity increases, structure becomes less useful, due to the need to advertise willingness to trade. Short-term volatility history and real-time deviation are inputs along the dimension. 5. Risk tolerance Refers to execution risks versus the benchmark. Greater tolerance generates less need for a structured horizon and schedule. Pre-trade information can map out optimal tradeoffs between risk, cost, and alpha for varying trade horizons.2 6.3 Algorithmic Feasibility Not all trade orders are suitable for an algorithmic strategy. Two questions must be answered before any further consideration for analysis 2 Ian Domowitz and Henry Yegerman, ‘‘Measuring and Interpreting the Performance of Broker Algorithms,’’ in Algorithmic Trading: A Buy-Side Handbook, 67–70 (London: The Trade Ltd., 2005).


pages: 253 words: 65,834

Mastering the VC Game: A Venture Capital Insider Reveals How to Get From Start-Up to IPO on Your Terms by Jeffrey Bussgang

business cycle, business process, carried interest, digital map, discounted cash flows, hiring and firing, Jeff Bezos, Kickstarter, Marc Andreessen, Mark Zuckerberg, Menlo Park, moveable type in China, pattern recognition, Paul Graham, performance metric, Peter Thiel, pets.com, risk tolerance, rolodex, Ronald Reagan, Sand Hill Road, selection bias, shareholder value, Silicon Valley, Skype, software as a service, sovereign wealth fund, Steve Jobs, technology bubble, The Wisdom of Crowds

They are much more likely to start something that has a reasonably clear path to success and can generate income within a year or two (particularly rare for start-ups involving sophisticated technology with a long development cycle). Or they may tinker with their idea, hire an employee or two, and dribble in money as needed, working out of their basement or garage or in a corner of somebody else’s office. Entrepreneurs often also raise money from family and friends but, again, the amounts available and the risk tolerances are relatively low. Some large companies, especially technology companies like Microsoft, IBM, and Siemens, can also be seen as a type of VC, because they invest funds in what might be thought of as start-up technology ventures within their organizations. They extol the virtues of entrepreneurship, work to instill the spirit of individual enterprise within their employees, and would dearly love to create breakthrough products in their own research and development (R&D) labs—and sometimes do.


Principles of Corporate Finance by Richard A. Brealey, Stewart C. Myers, Franklin Allen

3Com Palm IPO, accounting loophole / creative accounting, Airbus A320, Asian financial crisis, asset allocation, asset-backed security, banking crisis, Bernie Madoff, big-box store, Black-Scholes formula, break the buck, Brownian motion, business cycle, buy and hold, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, carried interest, collateralized debt obligation, compound rate of return, computerized trading, conceptual framework, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-subsidies, discounted cash flows, disintermediation, diversified portfolio, equity premium, eurozone crisis, financial innovation, financial intermediation, fixed income, frictionless, fudge factor, German hyperinflation, implied volatility, index fund, information asymmetry, intangible asset, interest rate swap, inventory management, Iridium satellite, Kenneth Rogoff, law of one price, linear programming, Livingstone, I presume, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, market bubble, market friction, money market fund, moral hazard, Myron Scholes, new economy, Nick Leeson, Northern Rock, offshore financial centre, Ponzi scheme, prediction markets, price discrimination, principal–agent problem, profit maximization, purchasing power parity, QR code, quantitative trading / quantitative finance, random walk, Real Time Gross Settlement, risk tolerance, risk/return, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, short selling, Silicon Valley, Skype, Steve Jobs, The Nature of the Firm, the payments system, the rule of 72, time value of money, too big to fail, transaction costs, University of East Anglia, urban renewal, VA Linux, value at risk, Vanguard fund, yield curve, zero-coupon bond, zero-sum game, Zipcar

Thus the corporation’s financial manager faces two broad financial questions: First, what investments should the corporation make? Second, how should it pay for those investments? The investment decision involves spending money; the financing decision involves raising it. A large corporation may have hundreds of thousands of shareholders. These shareholders differ in many ways, such as their wealth, risk tolerance, and investment horizon. Yet we shall see that they usually share the same financial objective. They want the financial manager to increase the value of the corporation and its current stock price. Thus the secret of success in financial management is to increase value. That is easy to say, but not very helpful. Instructing the financial manager to increase value is like advising an investor in the stock market to “buy low, sell high.”

On the other hand, the financial manager deals with investors—not just with shareholders but also with financial institutions such as banks and with financial markets such as the New York Stock Exchange. 1-2 The Financial Goal of the Corporation Shareholders Want Managers to Maximize Market Value Walmart has nearly 300,000 shareholders. There is no way that these shareholders can be actively involved in management; it would be like trying to run New York City by town meetings. Authority has to be delegated to professional managers. But how can Walmart’s managers make decisions that satisfy all the shareholders? No two shareholders are exactly the same. They differ in age, tastes, wealth, time horizon, risk tolerance, and investment strategy. Delegating the operation of the firm to professional managers can work only if the shareholders have a common objective. Fortunately there is a natural financial objective on which almost all shareholders agree: Maximize the current market value of shareholders’ investment in the firm. BEYOND THE PAGE ● ● ● ● ● B-corporations brealey.mhhe.com/c01 A smart and effective manager makes decisions that increase the current value of the company’s shares and the wealth of its stockholders.

Maximizing shareholder wealth is a sensible goal when the shareholders have access to well-functioning financial markets.6 Financial markets allow them to share risks and transport savings across time. Financial markets give them the flexibility to manage their own savings and investment plans, leaving the corporation’s financial managers with only one task: to increase market value. A corporation’s roster of shareholders usually includes both risk-averse and risk-tolerant investors. You might expect the risk-averse to say, “Sure, maximize value, but don’t touch too many high-risk projects.” Instead, they say, “Risky projects are OK, provided that expected profits are more than enough to offset the risks. If this firm ends up too risky for my taste, I’ll adjust my investment portfolio to make it safer.” For example, the risk-averse shareholders can shift more of their portfolios to safer assets, such as U.S. government bonds.


pages: 272 words: 19,172

Hedge Fund Market Wizards by Jack D. Schwager

asset-backed security, backtesting, banking crisis, barriers to entry, beat the dealer, Bernie Madoff, Black-Scholes formula, British Empire, business cycle, buy and hold, Claude Shannon: information theory, cloud computing, collateralized debt obligation, commodity trading advisor, computerized trading, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, diversification, diversified portfolio, Edward Thorp, family office, financial independence, fixed income, Flash crash, hindsight bias, implied volatility, index fund, intangible asset, James Dyson, Jones Act, Long Term Capital Management, margin call, market bubble, market fundamentalism, merger arbitrage, money market fund, oil shock, pattern recognition, pets.com, Ponzi scheme, private sector deleveraging, quantitative easing, quantitative trading / quantitative finance, Right to Buy, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Rubik’s Cube, Sharpe ratio, short selling, statistical arbitrage, Steve Jobs, systematic trading, technology bubble, transaction costs, value at risk, yield curve

In reality, the entry size is often more important than the entry price because if the size is too large, a trader will be more likely to exit a good trade on a meaningless adverse price move. The larger the position, the greater the danger that trading decisions will be driven by fear rather than by judgment and experience. According to Clark, one way of knowing your position is too large is if you wake up thinking about it. You also need to be sure that your methodology is consistent with your risk tolerance. For example, if your trade implementation strategy allows for building a three-unit position, but your natural risk tolerance is only one unit, you can easily end up panicking out of good positions because you are trading larger than your comfort level. Trading size needs to be kept small enough so that fear does not become the prevailing instinct guiding your judgment. As Clark says, you have to “trade within your emotional capacity.” Position size is important not only in avoiding trading too large, but also in trading larger when warranted.


The Handbook of Personal Wealth Management by Reuvid, Jonathan.

asset allocation, banking crisis, BRICs, business cycle, buy and hold, collapse of Lehman Brothers, correlation coefficient, credit crunch, cross-subsidies, diversification, diversified portfolio, estate planning, financial deregulation, fixed income, high net worth, income per capita, index fund, interest rate swap, laissez-faire capitalism, land tenure, market bubble, merger arbitrage, negative equity, new economy, Northern Rock, pattern recognition, Ponzi scheme, prediction markets, Right to Buy, risk tolerance, risk-adjusted returns, risk/return, short selling, side project, sovereign wealth fund, statistical arbitrage, systematic trading, transaction costs, yield curve

Investors’ goals and aspirations, as well as their immediate and longer-term needs, should of course be fully appreciated, but an investor profile should also include insight into the boundaries at which their comfort with risk is drawn. Profiling the investor should not be an afterthought. Any assessment that falls short is fruitless, not to be mention potentially damaging to the attainment of the investor’s financial targets. The primary profiling considerations are summarized in Figure 1.1.2. ឣ 10 PORTFOLIO INVESTMENT _________________________________________________ Investors risk tolerances Tolerance to loss of capital Volatility (ability to withstand fluctuations in returns) Return objectives Return target over specified time frame Time horizon Time expectation for goal achievement Income The requirement for cash flow (coupons, dividends) Could be tied to liability management Liquidity requirements and illiquidity tolerance Tolerance to illiquidity Consideration to future portfolio evolution/cash needs Currency Base currency or basket of currencies reference Hedging requirements Taxation considerations/advice being taken Specific areas of awareness – universe restrictions Capital vs income return derivation Further preferences and constraints Specific/important/ancillary information Source: Citi Private Bank Figure 1.1.2 Profiling considerations A well-constructed portfolio plan is the end result of extensive profiling and holistic review.


pages: 236 words: 77,735

Rigged Money: Beating Wall Street at Its Own Game by Lee Munson

affirmative action, asset allocation, backtesting, barriers to entry, Bernie Madoff, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, call centre, Credit Default Swap, diversification, diversified portfolio, estate planning, fiat currency, financial innovation, fixed income, Flash crash, follow your passion, German hyperinflation, High speed trading, housing crisis, index fund, joint-stock company, money market fund, moral hazard, Myron Scholes, passive investing, Ponzi scheme, price discovery process, random walk, risk tolerance, risk-adjusted returns, risk/return, stocks for the long run, stocks for the long term, too big to fail, trade route, Vanguard fund, walking around money

Why not sell that broad-based mutual fund and get with blue chip dividend payers? Let’s not even get into the world of commodities or complex strategies. If the industry can convince you only to think of the asset class’s expected return, you are then tuned into their prognostications of what those returns will be. The pie chart is just the delivery system, like a cigarette. Now, with your handy little allocation and risk tolerance given to you by a trusted adviser, you are free to roam the garbage dumps of Wall Street noise to find your golden goose. Will it be Eastern Europe that boosts your returns this year, or perhaps a bet on China? What would otherwise look like reckless abandon is now fully sanctioned by Wall Street. You have a pie chart, so why worry? I will tell you why to worry: Risk, correlation, and the false sense of security that you can drop anything into your pie chart as long as the asset class matches the slot.


pages: 225 words: 11,355

Financial Market Meltdown: Everything You Need to Know to Understand and Survive the Global Credit Crisis by Kevin Mellyn

asset-backed security, bank run, banking crisis, Bernie Madoff, bonus culture, Bretton Woods, business cycle, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, disintermediation, diversification, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Francis Fukuyama: the end of history, George Santayana, global reserve currency, Home mortgage interest deduction, Isaac Newton, joint-stock company, Kickstarter, liquidity trap, London Interbank Offered Rate, long peace, margin call, market clearing, mass immigration, money market fund, moral hazard, mortgage tax deduction, Northern Rock, offshore financial centre, paradox of thrift, pattern recognition, pension reform, pets.com, plutocrats, Plutocrats, Ponzi scheme, profit maximization, pushing on a string, reserve currency, risk tolerance, risk-adjusted returns, road to serfdom, Ronald Reagan, shareholder value, Silicon Valley, South Sea Bubble, statistical model, The Great Moderation, the new new thing, the payments system, too big to fail, value at risk, very high income, War on Poverty, Y2K, yield curve

History has not ended, it has been rewound to the 1970s and before, all the way back to the post-war socialist consensus that lonely voices like Ayn Rand railed against. YOU AND YOUR MONEY This brings us back to you and your money. The balance of risk and return in a market can be reasonably gauged when the rules are known. We can’t anticipate exactly what the market will do tomorrow, but we can hedge our bets and act on our own risk tolerance. We Conclusion can make our own decisions like grown-ups and take responsibility for the ones that go wrong. If something sounds too good to be true, it probably is, and those who are not skeptical of the claims of financial professionals can end up at the wrong end of a Ponzi scheme or an exploding interest-only mortgage. However, nobody is compelled to do anything. Markets are about choice.


pages: 280 words: 79,029

Smart Money: How High-Stakes Financial Innovation Is Reshaping Our WorldÑFor the Better by Andrew Palmer

Affordable Care Act / Obamacare, algorithmic trading, Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, Black-Scholes formula, bonus culture, break the buck, Bretton Woods, call centre, Carmen Reinhart, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Graeber, diversification, diversified portfolio, Edmond Halley, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, eurozone crisis, family office, financial deregulation, financial innovation, fixed income, Flash crash, Google Glasses, Gordon Gekko, high net worth, housing crisis, Hyman Minsky, implied volatility, income inequality, index fund, information asymmetry, Innovator's Dilemma, interest rate swap, Kenneth Rogoff, Kickstarter, late fees, London Interbank Offered Rate, Long Term Capital Management, longitudinal study, loss aversion, margin call, Mark Zuckerberg, McMansion, money market fund, mortgage debt, mortgage tax deduction, Myron Scholes, negative equity, Network effects, Northern Rock, obamacare, payday loans, peer-to-peer lending, Peter Thiel, principal–agent problem, profit maximization, quantitative trading / quantitative finance, railway mania, randomized controlled trial, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, short selling, Silicon Valley, Silicon Valley startup, Skype, South Sea Bubble, sovereign wealth fund, statistical model, Thales of Miletus, transaction costs, Tunguska event, unbanked and underbanked, underbanked, Vanguard fund, web application

That night the disgruntled gang members seized Oldfield and bundled him into a small, enclosed square in central Moscow, where they fired bullets into the earth around his feet. He escaped by jumping a wall topped with razor wire—and still has the scars on his hand and leg to prove it. The aim was to scare him, not kill him. “They succeeded,” he says ruefully. Oldfield abandoned his Russian adventure and headed back to London. That first abrupt experience gave him a feel for his own levels of risk tolerance. It also educated him on how mortgage markets in general work. One feature of the housing-finance market in particular bothered him: home ownership requires both the borrowers and the lenders to take on an awful lot of risk. Borrowers must face up to the possibility of unemployment, negative equity, and rising interest rates; lenders must cope with the threat of defaulting borrowers and declining asset values.


pages: 266 words: 79,297

Forge Your Future with Open Source by VM (Vicky) Brasseur

AGPL, anti-pattern, Benevolent Dictator For Life (BDFL), call centre, continuous integration, Debian, DevOps, don't repeat yourself, en.wikipedia.org, Firefox, Guido van Rossum, Internet Archive, Larry Wall, microservices, Perl 6, premature optimization, pull request, Richard Stallman, risk tolerance, Turing machine

While you could just whip up a project and throw it out on a code forge somewhere, you’ll get a lot better results if you pay attention to the small but important details that make a project worth using and worth contributing to in the first place. This chapter assumes you want to release a personal project. Releasing a project for work may share a lot of the same steps, but it’s a different matter entirely and is covered in the next chapter. Company-released projects often differ in scope, but they always differ in risk tolerance, intellectual property considerations, and strategic reasons for releasing the project. These characteristics make a very large difference in how you approach releasing a FOSS project, and messing them up can result in enormous costs. Which is to say: This chapter is for your own personal use. If you would like to release a project for your company, seek professional (FOSS, not psychiatric) help.


pages: 326 words: 74,433

Do More Faster: TechStars Lessons to Accelerate Your Startup by Brad Feld, David Cohen

augmented reality, computer vision, corporate governance, crowdsourcing, disintermediation, hiring and firing, Inbox Zero, Jeff Bezos, Kickstarter, knowledge worker, Lean Startup, Ray Kurzweil, recommendation engine, risk tolerance, Silicon Valley, Skype, slashdot, social web, software as a service, Steve Jobs

It is very likely that one or more co-founders will be putting in some cash in the early stages of the company. It is critical to decide up front how this cash will be treated. Is it debt? Is it convertible debt? Does it buy a different class of shares? What happens if the company raises follow-on funding? What will we pay ourselves? Who gets to change this in the future? This can be a touchy issue. Risk tolerance varies by individual and it is a good idea to factor this into determining the compensation plan for the founders. The issue can be clouded sometimes when one of the founders is investing significant cash into the enterprise. What are the financing plans for the company? Will the company be self-funded and bootstrapped? Raise angel funding? Raise venture capital funding? What happens if this doesn't occur?


pages: 280 words: 71,268

Measure What Matters: How Google, Bono, and the Gates Foundation Rock the World With OKRs by John Doerr

Albert Einstein, Bob Noyce, cloud computing, collaborative editing, commoditize, crowdsourcing, Firefox, Frederick Winslow Taylor, Google Chrome, Google Earth, Google X / Alphabet X, Haight Ashbury, Jeff Bezos, job satisfaction, Khan Academy, knowledge worker, Menlo Park, meta analysis, meta-analysis, PageRank, Paul Buchheit, Ray Kurzweil, risk tolerance, self-driving car, side project, Silicon Valley, Silicon Valley startup, Skype, Steve Jobs, Steven Levy, subscription business, web application, Yogi Berra, éminence grise

Nor can it be imposed from on high without regard to realities on the ground. Stretch your team too fast and too far, and it may snap. In pursuing high-effort, high-risk goals, employee commitment is essential. Leaders must convey two things: the importance of the outcome, and the belief that it’s attainable. Few entities have Google’s resources to fall back upon when a moonshot crashes. Organizations have a range of risk tolerance, which may change over time. The greater the margin for error, the more a company can extend itself. For example, a 40 percent OKR failure rate might seem too risky—and too discouraging, no matter what leadership says. For high achievers, anything shy of perfection can sap morale. At Risk Management Solutions in California, there are “more degrees than employees,” says Amelia Merrill, a former HR leader.


pages: 407 words: 109,653

Top Dog: The Science of Winning and Losing by Po Bronson, Ashley Merryman

Asperger Syndrome, Berlin Wall, Charles Lindbergh, conceptual framework, crowdsourcing, delayed gratification, deliberate practice, Edward Glaeser, experimental economics, Fall of the Berlin Wall, fear of failure, game design, industrial cluster, Jean Tirole, knowledge worker, longitudinal study, loss aversion, Mark Zuckerberg, meta analysis, meta-analysis, Mikhail Gorbachev, phenotype, Richard Feynman, risk tolerance, school choice, selection bias, shareholder value, Silicon Valley, six sigma, Steve Jobs, zero-sum game

Puxeddu, R. Anand, L. Cascarini, J. S. Brown, C. M. Avery, R. T. M. Woodwards, & D. A. Mitchell, “Serum Testosterone Levels in Surgeons during Major Head and Neck Cancer Surgery: A Suppositional Study,” British Journal of Oral & Maxillofacial Surgery, vol. 49(3), pp. 190–193 (2011) Carney, Dana R., Amy J. C. Cudy, & Andy J. Yap, “Power Posing: Brief Nonverbal Displays Affect Neuroendocrine Levels and Risk Tolerance,” Psychological Science, vol. 21(10), pp. 1363–1368 (2010) Carré, Justin M., Jenna D. Gilchrist, Mark D. Morrissey, & Cheryl M. McCormick, “Motivational and Situational Factors and the Relationship between Testosterone Dynamics and Human Aggression during Competition,” Biological Psychology, vol. 84(2), pp. 346–353 (2010) Carré, Justin M., & Pranjal J. Mehta, “Importance of Considering Testosterone–Cortisol Interactions in Predicting Human Aggression and Dominance,” Aggressive Behavior, vol. 37(6), pp. 489–491 (2011) Carré, Justin M., Susan K.


pages: 1,380 words: 190,710

Building Secure and Reliable Systems: Best Practices for Designing, Implementing, and Maintaining Systems by Heather Adkins, Betsy Beyer, Paul Blankinship, Ana Oprea, Piotr Lewandowski, Adam Stubblefield

anti-pattern, barriers to entry, bash_history, business continuity plan, business process, Cass Sunstein, cloud computing, continuous integration, correlation does not imply causation, create, read, update, delete, cryptocurrency, cyber-physical system, database schema, Debian, defense in depth, DevOps, Edward Snowden, fault tolerance, fear of failure, general-purpose programming language, Google Chrome, Internet of things, Kubernetes, load shedding, margin call, microservices, MITM: man-in-the-middle, performance metric, pull request, ransomware, revision control, Richard Thaler, risk tolerance, self-driving car, Skype, slashdot, software as a service, source of truth, Stuxnet, Turing test, undersea cable, uranium enrichment, Valgrind, web application, Y2K, zero day

It’s technically feasible to introduce a specific API in the self-updating component and receive a command from the centralized deployment management system to increment ComponentState[MASVN]. With that command, you might raise ComponentState[MASVN] on components that receive an update late in the deployment pipeline, after qualifying the release on enough devices that you have high confidence that it will work as planned. An API like this may be useful when you’re responding to an active compromise or a particularly severe vulnerability, where velocity is critical and risk tolerance is higher than normal for availability issues. So far, this example has avoided introducing a dedicated API to mutate ComponentState. ComponentState is a delicate collection of values that impacts your ability to recover systems through updates or rollbacks. It is component-local, and external to the configured intent that a centralized piece of automation directly controls. The actual sequence of software/firmware versions experienced by each individual component may vary across a fleet of similar or identical devices, in the face of concurrent development, testing, canary analysis, and rollout.

Embedding these people directly into the attack team—for example, via a small-scoped project—will give them firsthand insight into how attackers scrutinize a system for possible vulnerabilities and work around defenses. They can inject this knowledge into their team’s development process later on. Engaging with a Red Team helps you better understand your organization’s security posture and develop a roadmap for implementing meaningful risk reduction projects. By understanding the implications of your current risk tolerance, you can determine whether you need to make adjustments. External Researchers Another way to examine and improve your security posture is to work closely with outside researchers and enthusiasts who find vulnerabilities in your systems. As we mentioned in Chapter 2, this can be a useful way to get feedback about your systems. Many companies work with outside researchers by establishing Vulnerability Reward Programs (VRPs), also colloquially referred to as bug bounty programs.


When Free Markets Fail: Saving the Market When It Can't Save Itself (Wiley Corporate F&A) by Scott McCleskey

Asian financial crisis, asset-backed security, bank run, barriers to entry, Bernie Madoff, break the buck, call centre, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, financial innovation, fixed income, information asymmetry, invisible hand, Isaac Newton, iterative process, Long Term Capital Management, margin call, money market fund, moral hazard, mortgage debt, place-making, Ponzi scheme, prediction markets, risk tolerance, shareholder value, statistical model, The Wealth of Nations by Adam Smith, time value of money, too big to fail, web of trust

C01 06/16/2010 11:13:51 Page 5 How Systemic Risk Works & 5 unintended consequence of spreading the panic, and, as was the case with Bear Stearns, a rating agency downgrade can easily turn into the tipping point from which there is no return. One of the lessons of the financial crisis is that avoiding this tipping point is crucially important. This is how a firm can find itself falling from the top of the heap to the bottom of the pile with dizzying speed. Still, in many cases the problem corrects itself eventually when an investor with a higher risk tolerance sees the value of the collateral as undervalued, or the higher interest rates extorted from the failing firm as a good investment. The market creates a floor at which point investors come in, and the market stabilizes. Of course, if all else fails, the government could step in and play this supporting role—in other words, give a bailout. Either way, once the market sees that the firm is not on the verge of collapsing overnight, the process tends to reverse slowly.


pages: 287 words: 81,014

The Charisma Myth: How Anyone Can Master the Art and Science of Personal Magnetism by Olivia Fox Cabane

airport security, cognitive dissonance, Elon Musk, en.wikipedia.org, hedonic treadmill, Lao Tzu, Nelson Mandela, Parkinson's law, Peter Thiel, placebo effect, Ralph Waldo Emerson, randomized controlled trial, risk tolerance, social intelligence, Steve Jobs

., “Neural Correlates of Focused Attention and Cognitive Monitoring in Meditation,” Brain Research Bulletin 82, nos. 1–2 (2010): 46–56. 11. Paul Gilbert, Mark W. Baldwin, Chris Irons, Jodene R. Baccus, and Michelle Palmer, “Self-Criticism and Self-Warmth: An Imagery Study Exploring Their Relation to Depression,” Journal of Cognitive Psychotherapy 20, no. 2 (2006): 183–200. 12. D. R. Carney, A. J. C. Cuddy, and A. J. Yap, “Power Posing: Brief Nonverbal Displays Affect Neuroendocrine Levels and Risk Tolerance,” Psychological Science OnlineFirst, September 21, 2010, http://www.people.hbs.edu/acuddy/in%20press,%20carney,%20cuddy,%20&%20yap,%20psych%20science.pdf. 13. R. F. Baumeister, “Ego Depletion and Self-Regulation Failure: A Resource Model of Self-Control,” Alcoholism: Clinical and Experimental Research 27, no. 2 (2003): 281–84. 14. M. T. Gailliot, R. F. Baumeister, C. N. DeWall, J. K. Maner, E.


pages: 292 words: 85,151

Exponential Organizations: Why New Organizations Are Ten Times Better, Faster, and Cheaper Than Yours (And What to Do About It) by Salim Ismail, Yuri van Geest

23andMe, 3D printing, Airbnb, Amazon Mechanical Turk, Amazon Web Services, augmented reality, autonomous vehicles, Baxter: Rethink Robotics, Ben Horowitz, bioinformatics, bitcoin, Black Swan, blockchain, Burning Man, business intelligence, business process, call centre, chief data officer, Chris Wanstrath, Clayton Christensen, clean water, cloud computing, cognitive bias, collaborative consumption, collaborative economy, commoditize, corporate social responsibility, cross-subsidies, crowdsourcing, cryptocurrency, dark matter, Dean Kamen, dematerialisation, discounted cash flows, disruptive innovation, distributed ledger, Edward Snowden, Elon Musk, en.wikipedia.org, Ethereum, ethereum blockchain, game design, Google Glasses, Google Hangouts, Google X / Alphabet X, gravity well, hiring and firing, Hyperloop, industrial robot, Innovator's Dilemma, intangible asset, Internet of things, Iridium satellite, Isaac Newton, Jeff Bezos, Joi Ito, Kevin Kelly, Kickstarter, knowledge worker, Kodak vs Instagram, Law of Accelerating Returns, Lean Startup, life extension, lifelogging, loose coupling, loss aversion, low earth orbit, Lyft, Marc Andreessen, Mark Zuckerberg, market design, means of production, minimum viable product, natural language processing, Netflix Prize, NetJets, Network effects, new economy, Oculus Rift, offshore financial centre, PageRank, pattern recognition, Paul Graham, paypal mafia, peer-to-peer, peer-to-peer model, Peter H. Diamandis: Planetary Resources, Peter Thiel, prediction markets, profit motive, publish or perish, Ray Kurzweil, recommendation engine, RFID, ride hailing / ride sharing, risk tolerance, Ronald Coase, Second Machine Age, self-driving car, sharing economy, Silicon Valley, skunkworks, Skype, smart contracts, Snapchat, social software, software is eating the world, speech recognition, stealth mode startup, Stephen Hawking, Steve Jobs, subscription business, supply-chain management, TaskRabbit, telepresence, telepresence robot, Tony Hsieh, transaction costs, Travis Kalanick, Tyler Cowen: Great Stagnation, uber lyft, urban planning, WikiLeaks, winner-take-all economy, X Prize, Y Combinator, zero-sum game

Product management, marketing and sales are often aligned vertically, and support functions such as legal, HR, finance and IT are usually horizontal. So the person handling legal for a product has two reporting lines, one to the head of product, who has revenue accountability, and the other to the head of legal, whose job it is to ensure consistency across numerous products. This is great for command and control, but it’s terrible for accountability, speed and risk tolerance. Every time you try to do something, you have to get authorization from all the muckety-mucks in HR, legal, accounting and so on, which takes time. Another major issue Salim has observed with matrix structures is that, over time, power accrues to the horizontals. Often, HR or legal have no incentive to say yes, so their default answer becomes no (which is why HR is often referred to as “inhuman resources”).


pages: 353 words: 81,436

Buying Time: The Delayed Crisis of Democratic Capitalism by Wolfgang Streeck

activist fund / activist shareholder / activist investor, banking crisis, basic income, Bretton Woods, business cycle, capital controls, Carmen Reinhart, central bank independence, collective bargaining, corporate governance, creative destruction, David Graeber, deindustrialization, Deng Xiaoping, Eugene Fama: efficient market hypothesis, financial deregulation, financial repression, fixed income, full employment, Gini coefficient, Growth in a Time of Debt, income inequality, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, knowledge economy, labour market flexibility, labour mobility, late capitalism, liberal capitalism, means of production, moral hazard, Myron Scholes, Occupy movement, open borders, open economy, Plutonomy: Buying Luxury, Explaining Global Imbalances, profit maximization, risk tolerance, shareholder value, too big to fail, union organizing, winner-take-all economy, Wolfgang Streeck

That price – of labour-power as a commodity – is independent of the profit that may or may not be obtained from its deployment. In the psychologistic worldview of labour economics, the distinction between residual capital income and contractually fixed labour income – between profits and wages – is associated with different ‘risk propensities’: ‘risk-averse’ individuals prefer to be workers, with a low but secure labour income, while the more ‘risk-tolerant’ become entrepreneurs, with a less secure but potentially high capital income. Whereas recipients of residual income seek the highest possible yield on their capital investment, earners of fixed income try to keep as low as possible the input required of them.41 Distribution conflicts arise from the fact that, other things being equal, higher residual income for the profit-dependent entails lower wages for the wage-dependent, and vice versa.42 For a theory of political economy in which capital is an actor and not just machinery, the seemingly technical ‘functioning’ of the ‘economy’ – above all, growth and full employment – is in reality a political matter.


pages: 402 words: 110,972

Nerds on Wall Street: Math, Machines and Wired Markets by David J. Leinweber

AI winter, algorithmic trading, asset allocation, banking crisis, barriers to entry, Big bang: deregulation of the City of London, business cycle, butter production in bangladesh, butterfly effect, buttonwood tree, buy and hold, buy low sell high, capital asset pricing model, citizen journalism, collateralized debt obligation, corporate governance, Craig Reynolds: boids flock, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Danny Hillis, demand response, disintermediation, distributed generation, diversification, diversified portfolio, Emanuel Derman, en.wikipedia.org, experimental economics, financial innovation, fixed income, Gordon Gekko, implied volatility, index arbitrage, index fund, information retrieval, intangible asset, Internet Archive, John Nash: game theory, Kenneth Arrow, load shedding, Long Term Capital Management, Machine translation of "The spirit is willing, but the flesh is weak." to Russian and back, market fragmentation, market microstructure, Mars Rover, Metcalfe’s law, moral hazard, mutually assured destruction, Myron Scholes, natural language processing, negative equity, Network effects, optical character recognition, paper trading, passive investing, pez dispenser, phenotype, prediction markets, quantitative hedge fund, quantitative trading / quantitative finance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Renaissance Technologies, risk tolerance, risk-adjusted returns, risk/return, Robert Metcalfe, Ronald Reagan, Rubik’s Cube, semantic web, Sharpe ratio, short selling, Silicon Valley, Small Order Execution System, smart grid, smart meter, social web, South Sea Bubble, statistical arbitrage, statistical model, Steve Jobs, Steven Levy, Tacoma Narrows Bridge, the scientific method, The Wisdom of Crowds, time value of money, too big to fail, transaction costs, Turing machine, Upton Sinclair, value at risk, Vernor Vinge, yield curve, Yogi Berra, your tax dollars at work

For a simple linear cost model, we explicitly construct the efficient frontier in the space of time-dependent liquidation strategies, which have minimum expected cost for a given level of uncertainty. We may then select optimal strategies either by minimizing a quadratic utility function, or minimizing Value at Risk . . . , that explicitly considers the tradeoff between volatility risk and liquidation costs. Figure 3.2 is worth many words in understanding this trading model, and the intuitively appealing implications of its results for traders of different risk tolerances. Trader A is realistically risk-averse, accelerating to reduce risk at the cost of higher impact. Trader B is patient and risk-neutral, executing only to reduce expected costs. Trader C is an unrealistic trader who likes risk and who slows down the execution to get more risk, also incurring more impact cost. The faster trading in path A, to reduce risk, is also what a trader who believed that he had short-term alpha would do to reduce opportunity cost.


pages: 393 words: 115,263

Planet Ponzi by Mitch Feierstein

Affordable Care Act / Obamacare, Albert Einstein, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Bernie Madoff, break the buck, centre right, collapse of Lehman Brothers, collateralized debt obligation, commoditize, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, disintermediation, diversification, Donald Trump, energy security, eurozone crisis, financial innovation, financial intermediation, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, high net worth, High speed trading, illegal immigration, income inequality, interest rate swap, invention of agriculture, light touch regulation, Long Term Capital Management, low earth orbit, mega-rich, money market fund, moral hazard, mortgage debt, negative equity, Northern Rock, obamacare, offshore financial centre, oil shock, pensions crisis, plutocrats, Plutocrats, Ponzi scheme, price anchoring, price stability, purchasing power parity, quantitative easing, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, too big to fail, trickle-down economics, value at risk, yield curve

Governments bailed out the banks. Main Street paid for Wall Street’s excesses. But that doesn’t mean that the scheme is dead and finished with. It just means that the public sector chose to swallow the private sector’s debts. The debts are still there. The bad assets are still there. The same corrupt incentives are still in place. The same degree of profiteering. The same blindness to risk. The same astonishing tolerance for ever-increasing debt. But don’t think all this means that things are as bad as they ever were. They’re not. They’re worse‌—‌much worse. Remember: Ponzi schemes can only operate because of their merry-go-round nature. New dummies providing the influx of funds to pay out the old dummies. But with each cycle, you need more and more dummies‌—‌and sooner or later, you’ll be all out of idiots.

I personally regard them as a lower-risk long-term investment, in the sense that a rising world population and strong growth in the emerging markets will over time force the price of physical commodities (including food) ever higher, especially as currency values erode due to debasement, inflation, and excessive debt (which ultimately will be have to be monetized). If you fancy treading still higher on the risk–reward ladder, there are additional steps which may appeal to a minority of confident investors. If you’re inclined to explore these upper steps, go ahead and do so‌—‌but always bearing in mind that as the opportunity for reward increases, so the risk of loss increases too. You need to evaluate your investments against your own risk tolerance‌—‌very low, low, medium, high, or very high. In general, younger folk can afford to invest a small proportion of their assets in well-researched medium- to high-risk opportunities; but no matter who you are, if you are attracted to high-risk opportunities, make sure you never invest money you can’t afford to lose. I’d say there will be three major themes between now and the end of 2013, or thereabouts.


pages: 496 words: 154,363

I'm Feeling Lucky: The Confessions of Google Employee Number 59 by Douglas Edwards

Albert Einstein, AltaVista, Any sufficiently advanced technology is indistinguishable from magic, barriers to entry, book scanning, Build a better mousetrap, Burning Man, business intelligence, call centre, commoditize, crowdsourcing, don't be evil, Elon Musk, fault tolerance, Googley, gravity well, invisible hand, Jeff Bezos, job-hopping, John Markoff, Kickstarter, Marc Andreessen, Menlo Park, microcredit, music of the spheres, Network effects, PageRank, performance metric, pets.com, Ralph Nader, risk tolerance, second-price auction, side project, Silicon Valley, Silicon Valley startup, slashdot, stem cell, Superbowl ad, Y2K

To allow the publication of unscreened ads was a classic marketing crisis in the making. Any fool could see that. Evidently, I was that fool. Others shared my incredulity. One engineer was so appalled by the plan that he considered writing a letter to the VCs on the board informing them we were about to lose all the money they had invested in us. Chad Lester—the omnivore engineer—however, celebrated our founder's risk tolerance. "I was excited about it," Chad told me after the fact. "It was like high school and TP-ing someone's house. Why not try it and see what happens?" I'd seen managers build consensus before moving ahead with unpopular decisions, and I knew bosses who dipped their toes in untested waters, fully prepared to pull out quickly if the temperature rose above or dropped below their comfort level. This was a different kind of leadership.


pages: 346 words: 90,371

Rethinking the Economics of Land and Housing by Josh Ryan-Collins, Toby Lloyd, Laurie Macfarlane

"Robert Solow", agricultural Revolution, asset-backed security, balance sheet recession, bank run, banking crisis, barriers to entry, basic income, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, collective bargaining, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, debt deflation, deindustrialization, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, garden city movement, George Akerlof, ghettoisation, Gini coefficient, Hernando de Soto, housing crisis, Hyman Minsky, income inequality, information asymmetry, knowledge worker, labour market flexibility, labour mobility, land reform, land tenure, land value tax, Landlord’s Game, low skilled workers, market bubble, market clearing, Martin Wolf, means of production, money market fund, mortgage debt, negative equity, Network effects, new economy, New Urbanism, Northern Rock, offshore financial centre, Pareto efficiency, place-making, price stability, profit maximization, quantitative easing, rent control, rent-seeking, Richard Florida, Right to Buy, rising living standards, risk tolerance, Second Machine Age, secular stagnation, shareholder value, the built environment, The Great Moderation, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, universal basic income, urban planning, urban sprawl, working poor, working-age population

In reality, empirical research shows that there are, again, asymmetries of information between lenders and borrowers; generally a borrower always has more information about their future ability to repay a loan than a bank (Stiglitz and Weiss, 1981). Under such circumstances, it becomes difficult for the bank to estimate an interest rate that comfortably reflects the (unknowable) risk associated with the loan. An interest rate that covers this type of risk is likely to be very high and may lead to many reliable borrowers being priced out and only people with very high risk tolerance – ‘gamblers’ – choosing to take out loans. This problem is known as ‘adverse selection’ in the economics literature (Akerlof, 1970). Instead of using interest rates to determine borrowing decisions, the evidence suggests banks simply ration their lending quantitatively according to other criteria (Werner, 2005, pp. 194–196). The decision to extend a loan for house purchase then becomes subject to a number of more idiosyncratic variables not related to the price of credit but often related to the borrower’s circumstances.


pages: 400 words: 88,647

Frugal Innovation: How to Do Better With Less by Jaideep Prabhu Navi Radjou

3D printing, additive manufacturing, Affordable Care Act / Obamacare, Airbnb, Albert Einstein, barriers to entry, Baxter: Rethink Robotics, Bretton Woods, business climate, business process, call centre, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, cloud computing, collaborative consumption, collaborative economy, Computer Numeric Control, connected car, corporate social responsibility, creative destruction, crowdsourcing, disruptive innovation, Elon Musk, financial exclusion, financial innovation, global supply chain, IKEA effect, income inequality, industrial robot, intangible asset, Internet of things, job satisfaction, Khan Academy, Kickstarter, late fees, Lean Startup, low cost airline, low cost carrier, M-Pesa, Mahatma Gandhi, megacity, minimum viable product, more computing power than Apollo, new economy, payday loans, peer-to-peer lending, Peter H. Diamandis: Planetary Resources, precision agriculture, race to the bottom, reshoring, risk tolerance, Ronald Coase, self-driving car, shareholder value, sharing economy, Silicon Valley, Silicon Valley startup, six sigma, smart grid, smart meter, software as a service, standardized shipping container, Steve Jobs, supply-chain management, TaskRabbit, The Fortune at the Bottom of the Pyramid, The Nature of the Firm, transaction costs, Travis Kalanick, unbanked and underbanked, underbanked, women in the workforce, X Prize, yield management, Zipcar

As part of its OpenXC initiative, Ford is fully committed to making vehicle data widely accessible in an open-source format to external developers so they can easily integrate it in their innovative apps. Within one year of its launch, more than 1,000 Ford employees had benefited from the TechShop membership. During this time, these tinkerers have helped Ford boost patentable ideas by over 100% (and the quality of patents has also risen) without having to spend significantly more on R&D. The more entrepreneurial and innovative culture has made Ford more open, agile and risk tolerant. Bill Coughlin, CEO of Ford Global Technologies (Ford’s intellectual property arm), who made it all happen, explains how TechShop has radically shifted the corporate culture:17 There is now greater appreciation for the value of new inventions. Killing a concept that’s only on paper is relatively easy, even a disruptive or breakthrough concept. But the chances of gaining serious consideration are markedly higher when you can quickly prototype it, such as at TechShop, and show it to others.


pages: 323 words: 92,135

Running Money by Andy Kessler

Andy Kessler, Apple II, bioinformatics, Bob Noyce, British Empire, business intelligence, buy and hold, buy low sell high, call centre, Corn Laws, Douglas Engelbart, family office, full employment, George Gilder, happiness index / gross national happiness, interest rate swap, invisible hand, James Hargreaves, James Watt: steam engine, joint-stock company, joint-stock limited liability company, knowledge worker, Leonard Kleinrock, Long Term Capital Management, mail merge, Marc Andreessen, margin call, market bubble, Maui Hawaii, Menlo Park, Metcalfe’s law, Mitch Kapor, Network effects, packet switching, pattern recognition, pets.com, railway mania, risk tolerance, Robert Metcalfe, Sand Hill Road, Silicon Valley, South China Sea, spinning jenny, Steve Jobs, Steve Wozniak, Toyota Production System, zero-sum game

It’s not because we somehow insist on those dollars back or beg for those dollars back; they naturally return. Most of those returning dollars buy U.S. Treasuries, which are backed by the tax payments from the high wages that high-margin businesses pay to programmers and engineers versus low-paid factory workers. So far, so good. Foreigners own something like 45% of all Treasuries, some as reserves for their central banks in lieu of gold. Some of those dollars, which are more risk tolerant, buy corporate debt. But the real smart dollars are invested in the highmargin businesses directly. Those dollars can and do buy Intel stock or Microsoft stock. Directly and indirectly, those dollars invest in a high-margin economy. In fact, when they don’t, and invest at home, they almost always screw up. Not just the bank loan problems of Japan, but witness the Korean mess in 1998, which helped provide an introduction for me to Ssangyong.


pages: 342 words: 94,762

Wait: The Art and Science of Delay by Frank Partnoy

algorithmic trading, Atul Gawande, Bernie Madoff, Black Swan, blood diamonds, Cass Sunstein, Checklist Manifesto, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, Daniel Kahneman / Amos Tversky, delayed gratification, Flash crash, Frederick Winslow Taylor, George Akerlof, Google Earth, Hernando de Soto, High speed trading, impulse control, income inequality, information asymmetry, Isaac Newton, Long Term Capital Management, Menlo Park, mental accounting, meta analysis, meta-analysis, MITM: man-in-the-middle, Nick Leeson, paper trading, Paul Graham, payday loans, Ralph Nader, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, six sigma, Spread Networks laid a new fibre optics cable between New York and Chicago, Stanford marshmallow experiment, statistical model, Steve Jobs, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, upwardly mobile, Walter Mischel

The brain scans of the subjects showed that they made superficial judgments primarily in the amygdalae, the neural regions that specialize in automatic processing, while individuated judgments were spread around a neural network of several other brain regions. It appears from this research that the amygdalae, though important and useful in numerous ways, also play a major role when we form implicit biases. 33. Dana R. Carney, Amy J. C. Cuddy, and Andy Yap, “Power Posing: Brief Nonverbal Displays Affect Neuroendocrine Levels and Risk Tolerance,” Psychological Science 21(10, 2010): 1363–1368. 34. Ibid., p. 9. Testosterone has been shown to blunt social emotions such as guilt, embarrassment, and anxiety; it makes both men and women feel less empathy. See Erno Jan Hermans, Peter Putman, and Jack van Honk, “Testosterone Administration Reduces Empathetic Behavior: A Facial Mimicry Study,” Psychoneuroendocrinology 31(2006): 859–866; Erno Jan Hermans, Peter Putman, Johanna M.


pages: 313 words: 92,053

Places of the Heart: The Psychogeography of Everyday Life by Colin Ellard

augmented reality, Benoit Mandelbrot, Berlin Wall, Broken windows theory, Buckminster Fuller, carbon footprint, commoditize, crowdsourcing, Frank Gehry, Google Glasses, Guggenheim Bilbao, haute couture, Howard Rheingold, Internet of things, Jaron Lanier, mandelbrot fractal, Marshall McLuhan, Masdar, mass immigration, megastructure, more computing power than Apollo, Oculus Rift, Peter Eisenman, RFID, Richard Florida, risk tolerance, sentiment analysis, smart cities, starchitect, the built environment, theory of mind, urban decay, urban planning, urban sprawl, Victor Gruen

The phenomenon has been repeated many times in many laboratories, including my own where we use the demonstration to interest students in issues related to embodiment. 7A technical account of remapping of space using pointers is provided by Longo and Lourenco of the University of Chicago in a paper titled “On the nature of near space: Effects of tool use and the transition to far space,” in Neuropsychologia (2006, Volume 44, pages 977–981). 8Amy Cuddy’s fascinating and popular TED talk can be found at http://www.ted.com/talks/amy_cuddy_your_body_language_shapes_who_you_are?language=en A technical paper describing some of the findings she discusses in the talk can be found in a paper titled “Power Posing: Brief Nonverbal Displays Affect Neuroendocrine Levels and Risk Tolerance,” in Psychological Science (2010, Volume 21, pages 1363–1368). 9Maarten Bos and Amy Cuddy describe the effects of use of electronic devices of varying size on power postures and, through this our behavior in a paper titled “iPosture: The Size of Electronic Consumer Devices Affects Our Behavior,” in Harvard Business School Working Paper (2013, No. 13-097). The paper is available at: http://www.hbs.edu/faculty/Pages/item.aspx?


pages: 302 words: 95,965

How to Be the Startup Hero: A Guide and Textbook for Entrepreneurs and Aspiring Entrepreneurs by Tim Draper

3D printing, Airbnb, Apple's 1984 Super Bowl advert, augmented reality, autonomous vehicles, basic income, Berlin Wall, bitcoin, blockchain, Buckminster Fuller, business climate, carried interest, connected car, crowdsourcing, cryptocurrency, Deng Xiaoping, discounted cash flows, disintermediation, Donald Trump, Elon Musk, Ethereum, ethereum blockchain, family office, fiat currency, frictionless, frictionless market, high net worth, hiring and firing, Jeff Bezos, Kickstarter, low earth orbit, Lyft, Mahatma Gandhi, Mark Zuckerberg, Menlo Park, Metcalfe's law, Metcalfe’s law, Mikhail Gorbachev, Minecraft, Moneyball by Michael Lewis explains big data, Nelson Mandela, Network effects, peer-to-peer, Peter Thiel, pez dispenser, Ralph Waldo Emerson, risk tolerance, Robert Metcalfe, Ronald Reagan, Rosa Parks, Sand Hill Road, school choice, school vouchers, self-driving car, sharing economy, short selling, Silicon Valley, Skype, smart contracts, Snapchat, sovereign wealth fund, stealth mode startup, stem cell, Steve Jobs, Tesla Model S, Uber for X, uber lyft, universal basic income, women in the workforce, Y Combinator, zero-sum game

The experiences I have had with Bob and other Startup Heroes helped define me as a venture capitalist. My mission has been to support them; to support these people who may be misunderstood, may be willing to take the company further to the edge of the cliff than their boards do, but still have the heart and vision that may change the world. They need the respect and protection to overcome nervous boards like ours that might not have the same vision or risk tolerance that they do. This one is for you, Bob, and for all of those entrepreneurs like you out there who make extraordinary sacrifices for their businesses, some coming up short and some going the distance. ✽✽✽ The Riskmaster *All Rights Reserved. Lyrics by Tim Draper Invested all his mattress money Divorced his prom queen hometown honey Scraping up his alimony Friends think he’s a little funny Needs a “world class CEO.”


Learn Algorithmic Trading by Sebastien Donadio

active measures, algorithmic trading, automated trading system, backtesting, Bayesian statistics, buy and hold, buy low sell high, cryptocurrency, DevOps, en.wikipedia.org, fixed income, Flash crash, Guido van Rossum, latency arbitrage, locking in a profit, market fundamentalism, market microstructure, martingale, natural language processing, p-value, paper trading, performance metric, prediction markets, quantitative trading / quantitative finance, random walk, risk tolerance, risk-adjusted returns, Sharpe ratio, short selling, sorting algorithm, statistical arbitrage, statistical model, stochastic process, survivorship bias, transaction costs, type inference, WebSocket, zero-sum game

Command and control Command and control is an interface between traders and the trading system. It can be a command-line system or a user interface receiving the commands from the traders and sending the messages to the appropriate components. Let's have a look at the following diagram: As shown in the diagram, if we need to update the trading strategy parameters, the trader can use a text field on a web-based application to specify the risk tolerance the trading strategy can take. The number (corresponding to the tolerance limit) will be sent to the appropriate trading strategy. Services Additional components may be added to the trading system. We will talk about the following components (it is not an exhaustive list): Position server: This keeps track of all the trades. It updates the positions for all the traded financial assets.


pages: 460 words: 122,556

The End of Wall Street by Roger Lowenstein

Asian financial crisis, asset-backed security, bank run, banking crisis, Berlin Wall, Bernie Madoff, Black Swan, break the buck, Brownian motion, Carmen Reinhart, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fear of failure, financial deregulation, fixed income, high net worth, Hyman Minsky, interest rate derivative, invisible hand, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, Martin Wolf, money market fund, moral hazard, mortgage debt, negative equity, Northern Rock, Ponzi scheme, profit motive, race to the bottom, risk tolerance, Ronald Reagan, Rubik’s Cube, savings glut, short selling, sovereign wealth fund, statistical model, the payments system, too big to fail, tulip mania, Y2K

Option ARMs were restyled as “Pick-A-Pay” loans, a name more evocative of lottery tickets than mortgages, and they were marketed to people who were simply unable to pay the full, “non-option” rate. Perhaps Herb Sandler, who had grown up on New York’s Lower East Side, the son of a gambler whose income was devoured by loan sharks, had some empathy with subprime borrowers—or perhaps, as with Killinger, the rising tide of risk tolerance loosened his moorings. The search for growth led Golden West inland to new developments in the California desert, where cookie-cutter homes and no-doc mortgages were the standard. By 2006, they had written more than $100 billion in ARMs,24 and though the Sandlers continued to insist on a margin of collateral, home values were so inflated, and loan applications so rife with fraud, that the quality of their book was as suspect as WaMu’s.


pages: 571 words: 124,448

Building Habitats on the Moon: Engineering Approaches to Lunar Settlements by Haym Benaroya

3D printing, biofilm, Black Swan, Brownian motion, Buckminster Fuller, carbon-based life, centre right, clean water, Colonization of Mars, Computer Numeric Control, conceptual framework, data acquisition, Elon Musk, fault tolerance, gravity well, inventory management, Johannes Kepler, low earth orbit, orbital mechanics / astrodynamics, performance metric, RAND corporation, risk tolerance, Ronald Reagan, stochastic process, telepresence, telerobotics, the scientific method, urban planning, X Prize, zero-sum game

Designs must allow for ease of repair and reconditioning. Commonality of parts is a strategic goal, and therefore a design constraint. Here is one approach to a design framework . A large-scale lunar outpost, if designed for low risk to inhabitants, would be a complex and expensive undertaking, primarily because humans are very delicate. Instead, lunar settlements can be designed to higher risk tolerances with significant cost savings, but to ensure an overall high level of human safety, a number of smaller, much safer, emergency facilities can be placed throughout a settlement at easily accessible locations. These smaller facilities are designed to support the population for a significant amount of time – the time needed for rescue missions to arrive from the other settlements on the Moon, or Earth, depending on the time frame under consideration.


pages: 478 words: 126,416

Other People's Money: Masters of the Universe or Servants of the People? by John Kay

Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, buy and hold, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, corporate governance, Credit Default Swap, cross-subsidies, dematerialisation, disruptive innovation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial innovation, financial intermediation, financial thriller, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, income inequality, index fund, inflation targeting, information asymmetry, intangible asset, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, John Meriwether, light touch regulation, London Whale, Long Term Capital Management, loose coupling, low cost airline, low cost carrier, M-Pesa, market design, millennium bug, mittelstand, money market fund, moral hazard, mortgage debt, Myron Scholes, NetJets, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, Paul Samuelson, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, regulatory arbitrage, Renaissance Technologies, rent control, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, Schrödinger's Cat, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, Washington Consensus, We are the 99%, Yom Kippur War

Advertisement for Patek Philippe, luxury watch manufacturer Businesses and households use the deposit channel to facilitate their everyday transactions. They also utilise it for short-term savings when they require a high degree of confidence that their money will be available in full when needed. Long-term savers select the investment channel, where they assume a degree of risk in the hope of higher returns. Long time horizons and greater risk-tolerance fit together: the more extended the time-scale, the greater the likelihood that an investment strategy that on average yields a higher return will actually do so. As I described in Chapter 5, the functions of the investment channel involve both search and stewardship. Through the search process described there, capital is allocated through the investment channel to various long-term uses, in business, investment, property and infrastructure.


The Age of Turbulence: Adventures in a New World (Hardback) - Common by Alan Greenspan

"Robert Solow", addicted to oil, air freight, airline deregulation, Albert Einstein, asset-backed security, bank run, Berlin Wall, Bretton Woods, business cycle, business process, buy and hold, call centre, capital controls, central bank independence, collateralized debt obligation, collective bargaining, conceptual framework, Corn Laws, corporate governance, corporate raider, correlation coefficient, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cuban missile crisis, currency peg, Deng Xiaoping, Dissolution of the Soviet Union, Doha Development Round, double entry bookkeeping, equity premium, everywhere but in the productivity statistics, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, full employment, Gini coefficient, Hernando de Soto, income inequality, income per capita, invisible hand, Joseph Schumpeter, labor-force participation, laissez-faire capitalism, land reform, Long Term Capital Management, Mahatma Gandhi, manufacturing employment, market bubble, means of production, Mikhail Gorbachev, moral hazard, mortgage debt, Myron Scholes, Nelson Mandela, new economy, North Sea oil, oil shock, open economy, Pearl River Delta, pets.com, Potemkin village, price mechanism, price stability, Productivity paradox, profit maximization, purchasing power parity, random walk, reserve currency, Right to Buy, risk tolerance, Ronald Reagan, shareholder value, short selling, Silicon Valley, special economic zone, stocks for the long run, the payments system, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, total factor productivity, trade liberalization, trade route, transaction costs, transcontinental railway, urban renewal, working-age population, Y2K, zero-sum game

Take the United States and France, for example, both of whose most fundamental values are rooted in the Enlightenment. A recent poll shows that 71 percent of Americans agree that the free-market system is the best economic system available. Only 36 percent of the French agree. Another poll indicates that three-fourths of young French men and women aspire to a job in government. Few young Americans express that preference. Such numbers speak to a remarkable difference in risk tolerance. The French are far less inclined to suffer the competitive pressures of a free market and overwhelmingly seek the security of a government job, despite the widespread evidence that risk taking is essential for economic growth. I can't say the greater the risk taking, the greater the rate of growth. Obviously, reckless gambling rarely pays off in the end. The risk taking I have in mind is the rationally calculated kind of most business judgments.

Spreads of emerging-market bond yields over those of U.S. treasuries have declined from 10 percentage points in 2002 to less than IVz percentage points in June 2007. This compression of risk premiums is global. I am uncertain whether in periods of euphoria people reach for an amount of risk that is at the outer limits of human tolerance, irrespective of the institutional environment in which they live. The prevailing financial infrastructure perhaps merely leverages this risk tolerance. For decades prior to the Civil War, banks had to hold capital well in excess of 40 percent to secure their notes and deposits. By 1900, national banks' capital cover was down to 20 percent of assets, to 12 percent by 1925, and below 10 percent in recent years. But owing to financial flexibility and far greater sources of liquidity, the fundamental risk borne by the individual banks, and presumably investors generally, may not have changed much over that time period.


pages: 453 words: 111,010

Licence to be Bad by Jonathan Aldred

"Robert Solow", Affordable Care Act / Obamacare, Albert Einstein, availability heuristic, Ayatollah Khomeini, Benoit Mandelbrot, Berlin Wall, Black Swan, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Cass Sunstein, clean water, cognitive dissonance, corporate governance, correlation does not imply causation, cuban missile crisis, Daniel Kahneman / Amos Tversky, Donald Trump, Douglas Engelbart, Douglas Engelbart, Edward Snowden, Fall of the Berlin Wall, falling living standards, feminist movement, framing effect, Frederick Winslow Taylor, From Mathematics to the Technologies of Life and Death, full employment, George Akerlof, glass ceiling, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Jeff Bezos, John Nash: game theory, John von Neumann, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, meta analysis, meta-analysis, Mont Pelerin Society, mutually assured destruction, Myron Scholes, Nash equilibrium, Norbert Wiener, nudge unit, obamacare, offshore financial centre, Pareto efficiency, Paul Samuelson, plutocrats, Plutocrats, positional goods, profit maximization, profit motive, race to the bottom, RAND corporation, rent-seeking, Richard Thaler, ride hailing / ride sharing, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Skype, Social Responsibility of Business Is to Increase Its Profits, spectrum auction, The Nature of the Firm, The Wealth of Nations by Adam Smith, transaction costs, trickle-down economics, Vilfredo Pareto, wealth creators, zero-sum game

The biggest obstacle to overthrowing the old orthodoxy is our deep-seated reluctance to admit the limits of our knowledge in the face of uncertainty and our dogged faith in the quantification of uncertainty following from that reluctance. We have already noted the preference for bell-curve thinking over the hard-won yet meagre rewards of Mandelbrotian maths. More generally, the idea that we can reduce uncertainty to a single number, a probability, appeals to our desire for simplicity, security and stability. Once captured in a single number, uncertainty can seemingly be controlled. We can choose the amount of risk we will tolerate. In parallel with the desire to control our destiny comes a set of beliefs suggesting that we can do so. Many people have a deep-rooted, barely conscious belief that there are stable patterns in history which will continue into the future. This connects to the way we understand most things in terms of narratives and stories. Understanding the future as a narrative evolving from the present is not just a way of literally ‘making sense’ of uncertainty, replacing doubt with explanation.


pages: 1,157 words: 379,558

pages: 146 words: 43,446

The New New Thing: A Silicon Valley Story by Michael Lewis

Albert Einstein, Andy Kessler, business climate, creative destruction, data acquisition, family office, high net worth, invention of the steam engine, invisible hand, Jeff Bezos, Marc Andreessen, Menlo Park, pre–internet, risk tolerance, Sand Hill Road, Silicon Valley, Silicon Valley startup, the new new thing, Thorstein Veblen, wealth creators, Y2K

A simple-minded graph with an arrow pointing up and to the right illustrated the principle that the more risk you take with your money, the more you stand to gain or lose. In the past ten months Clark had "lost" $600 million simply by holding Page 164 on to his shares in Netscape. "If they only knew," he said. The Swiss banker chuckled unhappily. Clark remained straight-faced. His eyes drifted farther down the page, to a category marked "Return Objectives and Risk Tolerance." This was a summary of the typical Swiss banker's idea of the range of possible attitudes toward financial risk. It read, Conservative: I seek to... minimize investment volatility. Moderate Growth: I want to take some risk while also preserving capital. High Capital Growth: I have a minimum time horizon of five years with which to pursue my objectives. Next to each risk profile was a little square box.


pages: 347 words: 97,721

Only Humans Need Apply: Winners and Losers in the Age of Smart Machines by Thomas H. Davenport, Julia Kirby

AI winter, Andy Kessler, artificial general intelligence, asset allocation, Automated Insights, autonomous vehicles, basic income, Baxter: Rethink Robotics, business intelligence, business process, call centre, carbon-based life, Clayton Christensen, clockwork universe, commoditize, conceptual framework, dark matter, David Brooks, deliberate practice, deskilling, digital map, disruptive innovation, Douglas Engelbart, Edward Lloyd's coffeehouse, Elon Musk, Erik Brynjolfsson, estate planning, fixed income, follow your passion, Frank Levy and Richard Murnane: The New Division of Labor, Freestyle chess, game design, general-purpose programming language, global pandemic, Google Glasses, Hans Lippershey, haute cuisine, income inequality, index fund, industrial robot, information retrieval, intermodal, Internet of things, inventory management, Isaac Newton, job automation, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joi Ito, Khan Academy, knowledge worker, labor-force participation, lifelogging, longitudinal study, loss aversion, Mark Zuckerberg, Narrative Science, natural language processing, Norbert Wiener, nuclear winter, pattern recognition, performance metric, Peter Thiel, precariat, quantitative trading / quantitative finance, Ray Kurzweil, Richard Feynman, risk tolerance, Robert Shiller, Robert Shiller, Rodney Brooks, Second Machine Age, self-driving car, Silicon Valley, six sigma, Skype, social intelligence, speech recognition, spinning jenny, statistical model, Stephen Hawking, Steve Jobs, Steve Wozniak, strong AI, superintelligent machines, supply-chain management, transaction costs, Tyler Cowen: Great Stagnation, Watson beat the top human players on Jeopardy!, Works Progress Administration, Zipcar

It’s the job of a human underwriter in this case to realize that the system might recommend a policy that isn’t priced correctly. • Elicit the information the system needs It’s often not that easy to get the information an automated decision system needs to do its work. In automated financial planning, for example, it’s relatively easy to figure out the ideal stock and bond portfolio for a wealthy individual. But if you’re trying to determine a family’s retirement needs, you have to input current spending levels, risk tolerance, likely retirement dates, and so forth. The client could enter that information him or herself, but it’s often difficult to come up with such data. A human financial planner can help to motivate clients and elicit difficult information. There are many other settings in which humans can play the same type of role. • Persuade humans to take action on automated recommendations Computers can make great decisions, but those decisions often require implementation by humans.


pages: 296 words: 98,018

Winners Take All: The Elite Charade of Changing the World by Anand Giridharadas

"side hustle", activist lawyer, affirmative action, Airbnb, Bernie Sanders, bitcoin, Burning Man, Capital in the Twenty-First Century by Thomas Piketty, carried interest, cognitive dissonance, collective bargaining, corporate raider, corporate social responsibility, crowdsourcing, David Brooks, David Heinemeier Hansson, deindustrialization, disintermediation, Donald Trump, Edward Snowden, Elon Musk, friendly fire, global pandemic, high net worth, hiring and firing, housing crisis, Hyperloop, income inequality, invisible hand, Jeff Bezos, Kibera, Kickstarter, land reform, Lyft, Marc Andreessen, Mark Zuckerberg, new economy, Occupy movement, offshore financial centre, Panopticon Jeremy Bentham, Parag Khanna, Paul Graham, Peter Thiel, plutocrats, Plutocrats, profit maximization, risk tolerance, rolodex, Ronald Reagan, shareholder value, sharing economy, side project, Silicon Valley, Silicon Valley startup, Skype, Social Responsibility of Business Is to Increase Its Profits, Steven Pinker, technoutopianism, The Chicago School, The Fortune at the Bottom of the Pyramid, the High Line, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, Travis Kalanick, trickle-down economics, Uber and Lyft, uber lyft, Upton Sinclair, Vilfredo Pareto, working poor, zero-sum game

Cuddy was nervous about speaking, for the first time, to hundreds of strangers who weren’t in her field, who weren’t enthusiastic students who had signed up for her class, who didn’t know any of the basic concepts of social psychology. Although her work on images of men in individualist and collectivist societies was on her mind, it may not have exhilarated PopTech. Another paper she had published, in Psychological Science, “Brief Nonverbal Displays Affect Neuroendocrine Levels and Risk Tolerance,” would become the basis for her talk. The stage lights came up from darkness. Cuddy stood center stage with her hands on her hips, her feet planted shoulder-width apart, tucked into a pair of brown cowboy boots that only added to what would come to be called her signature “power pose.” On the giant screen behind her was an image of Wonder Woman, whose hands and feet were in the same powerful posture, engaged in the same willful taking of space.


pages: 370 words: 97,138

Beyond: Our Future in Space by Chris Impey

3D printing, Admiral Zheng, Albert Einstein, Alfred Russel Wallace, AltaVista, Berlin Wall, Buckminster Fuller, butterfly effect, California gold rush, carbon-based life, Charles Lindbergh, Colonization of Mars, cosmic abundance, crowdsourcing, cuban missile crisis, dark matter, discovery of DNA, Doomsday Clock, Edward Snowden, Elon Musk, Eratosthenes, Haight Ashbury, Hyperloop, I think there is a world market for maybe five computers, Isaac Newton, Jeff Bezos, Johannes Kepler, John von Neumann, Kickstarter, life extension, low earth orbit, Mahatma Gandhi, Marc Andreessen, Mars Rover, mutually assured destruction, Oculus Rift, operation paperclip, out of africa, Peter H. Diamandis: Planetary Resources, phenotype, private space industry, purchasing power parity, RAND corporation, Ray Kurzweil, RFID, Richard Feynman, Richard Feynman: Challenger O-ring, risk tolerance, Rubik’s Cube, Search for Extraterrestrial Intelligence, Searching for Interstellar Communications, Silicon Valley, skunkworks, Skype, Stephen Hawking, Steven Pinker, supervolcano, technological singularity, telepresence, telerobotics, the medium is the message, the scientific method, theory of mind, There's no reason for any individual to have a computer in his home - Ken Olsen, wikimedia commons, X Prize, Yogi Berra

It’s now an international activity; fewer than half of the satellites launched for commercial use are built in the United States (Figure 34).21 The economic viability of space tourism is difficult to extrapolate—its capabilities aren’t very impressive and its eventual size and long-term future are unclear. A few wealthy individuals have ponied up $20 million for a trip to the International Space Station, and it’s the belief of space visionaries that as the price comes down, the demand will increase. But there are wild cards, such as the risk tolerance of people indulging in a recreation that could lead to a grisly end. The best market study done so far is by the Futron Corporation, an aerospace consulting firm with no skin in the space-tourism game. For orbital trips, they assume that the $20 million price tag will come down to $5 million after twenty years. Revenues would be $300 million at the end of that time frame. For suborbital trips, they assume a price of $100,000, declining to $50,000 after twenty years, when revenue would be a billion dollars a year.22 Surveys of the general public are consistent among industrialized countries; the lure of space knows no borders.


pages: 410 words: 101,260

Originals: How Non-Conformists Move the World by Adam Grant

Albert Einstein, Apple's 1984 Super Bowl advert, availability heuristic, barriers to entry, business process, business process outsourcing, Cass Sunstein, clean water, cognitive dissonance, creative destruction, cuban missile crisis, Daniel Kahneman / Amos Tversky, Dean Kamen, double helix, Elon Musk, fear of failure, Firefox, George Santayana, Ignaz Semmelweis: hand washing, Jeff Bezos, job satisfaction, job-hopping, Joseph Schumpeter, Kickstarter, Lean Startup, Louis Pasteur, Mahatma Gandhi, Mark Zuckerberg, meta analysis, meta-analysis, minimum viable product, Nelson Mandela, Network effects, pattern recognition, Paul Graham, Peter Thiel, Ralph Waldo Emerson, random walk, risk tolerance, Rosa Parks, Saturday Night Live, Silicon Valley, Skype, Steve Jobs, Steve Wozniak, Steven Pinker, The Wisdom of Crowds, women in the workforce

Arena, Stephen P. Ferris, and Emre Unlu, “It Takes Two: The Incidence and Effectiveness of Co-CEOs,” The Financial Review 46 (2011): 385–412; see also Ryan Krause, Richard Priem, and Leonard Love, “Who’s in Charge Here? Co-CEOs, Power Gaps, and Firm Performance,” Strategic Management Journal (2015) “entrepreneurs are significantly more risk-averse”: Hongwei Xu and Martin Ruef, “The Myth of the Risk-Tolerant Entrepreneur,” Strategic Organization 2 (2004): 331–55. successful entrepreneurs . . . stealing valuables: Ross Levine and Yona Rubinstein, “Smart and Illicit: Who Becomes an Entrepreneur and Does It Pay?,” National Bureau of Economic Research working paper no. 19276 (August 2013); Zhen Zhang and Richard D. Arvey, “Rule Breaking in Adolescence and Entrepreneurial Status: An Empirical Investigation,” Journal of Business Venturing 24 (2009): 436–47; Martin Obschonka, Hakan Andersson, Rainer K.


pages: 372 words: 101,678

Lessons from the Titans: What Companies in the New Economy Can Learn from the Great Industrial Giants to Drive Sustainable Success by Scott Davis, Carter Copeland, Rob Wertheimer

3D printing, activist fund / activist shareholder / activist investor, additive manufacturing, Airbnb, airport security, barriers to entry, business cycle, business process, clean water, commoditize, coronavirus, corporate governance, COVID-19, Covid-19, disruptive innovation, Elon Musk, factory automation, global pandemic, hydraulic fracturing, Internet of things, iterative process, low cost airline, low cost carrier, Marc Andreessen, megacity, Network effects, new economy, Ponzi scheme, profit maximization, random walk, RFID, ride hailing / ride sharing, risk tolerance, shareholder value, Silicon Valley, six sigma, skunkworks, software is eating the world, strikebreaker, Toyota Production System, Uber for X, winner-take-all economy

Project delays often came with severe penalties for GE, even if the causes were completely outside of the company’s control. Those risks were often ignored by those who negotiated the deals. Meanwhile the accounting around GE Capital took the company one more step away from reality. Welch even spoke about the art of moving dollars around each quarter to manage the ups and downs of divisional results. Immelt simply deepened the behavior and raised the risk tolerance. To boost sales and their own bonuses, salespeople gave more discounts and took on shaky customers. They offered more financing with longer terms and smaller down payments. In China, supposedly a GE strength, executives agreed to terms that produced short-term revenues at the cost of intellectual property. Technology “sharing” with local partners became technology theft. While these troubles took place throughout the company, the power division was the worst offender, especially after 2015 as demand fell.


pages: 322 words: 107,576

Bad Science by Ben Goldacre

Asperger Syndrome, correlation does not imply causation, experimental subject, hygiene hypothesis, Ignaz Semmelweis: hand washing, John Snow's cholera map, Louis Pasteur, meta analysis, meta-analysis, Nelson Mandela, offshore financial centre, p-value, placebo effect, publication bias, Richard Feynman, risk tolerance, Ronald Reagan, selection bias, selective serotonin reuptake inhibitor (SSRI), the scientific method, urban planning

But it is also expensive: one session of Aqua Detox will cost more man the components to build your own detox device, a perfect model of the real one. You will need: One car battery charger Two large nails Kitchen salt Warm water One Barbie doll A full analytic laboratory (optional) This experiment involves electricity and water. In a world of hurricane hunters and volcanologists, we must accept that everyone sets their own level of risk tolerance. You might well give yourself a nasty electric shock if you perform this experiment at home, and it could easily blow the wiring in your house. It is not safe, but it is in some sense relevant to your understanding of MMR, homeopathy, post-modernist critiques of science and the evils of big pharma. Do not build it. When you switch your Barbie Detox machine on, you will see that the water goes brown, due to a very simple process called electrolysis: the iron electrodes rust, essentially, and the brown rust goes into the water.


pages: 319 words: 106,772

Irrational Exuberance: With a New Preface by the Author by Robert J. Shiller

Andrei Shleifer, asset allocation, banking crisis, Benoit Mandelbrot, business cycle, buy and hold, computer age, correlation does not imply causation, Daniel Kahneman / Amos Tversky, demographic transition, diversification, diversified portfolio, equity premium, Everybody Ought to Be Rich, experimental subject, hindsight bias, income per capita, index fund, Intergovernmental Panel on Climate Change (IPCC), Joseph Schumpeter, Long Term Capital Management, loss aversion, mandelbrot fractal, market bubble, market design, market fundamentalism, Mexican peso crisis / tequila crisis, Milgram experiment, money market fund, moral hazard, new economy, open economy, pattern recognition, Ponzi scheme, price anchoring, random walk, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, Small Order Execution System, spice trade, statistical model, stocks for the long run, survivorship bias, the market place, Tobin tax, transaction costs, tulip mania, urban decay, Y2K

When the most numerous generation feels they need to draw down their savings, their selling would tend to force down the prices of all these vehicles. But when one looks at long-term data on stocks, bonds, and real estate, one finds that there has in fact been very little relation between their real values.12 Possibly these differences across asset classes could still be reconciled with a Baby Boom theory, by postulating that people in different age groups have different attitudes toward risk because of age-related differences in risk tolerance, that the stock market is relatively high now because the numerous people in their forties today are naturally less risk averse than older people. But such a theory has never been carefully worked out or shown to explain relative price movements. It is also noteworthy that the personal savings rate in the United States has recently been nearly zero, not significantly positive, as the life-cycle theory might suggest.


pages: 426 words: 105,423

The 4-Hour Workweek: Escape 9-5, Live Anywhere, and Join the New Rich by Timothy Ferriss

Albert Einstein, Amazon Mechanical Turk, call centre, clean water, Donald Trump, en.wikipedia.org, Firefox, fixed income, follow your passion, game design, global village, Iridium satellite, knowledge worker, late fees, lateral thinking, Maui Hawaii, oil shock, paper trading, Parkinson's law, passive income, peer-to-peer, pre–internet, Ralph Waldo Emerson, remote working, risk tolerance, Ronald Reagan, side project, Silicon Valley, Silicon Valley startup, Skype, Steve Jobs, Vilfredo Pareto, wage slave, William of Occam

Logging time as an experiment, I concluded that I often spend at least 50 x more time to prevent a hypothetical unit of $100 from being lost vs. earned. The hysterical part is that, even after becoming aware of this bias, it’s hard to prevent the latter response. Therefore, I manipulate the environmental causes of poor responses instead of depending on error-prone self-discipline. I should not invest in public stocks where I cannot influence outcomes. Once realizing that almost no one can predict risk tolerance and response to losses, I moved all of my investments into fixed-income and cashlike instruments in July 2008 for this reason, setting aside 10% of pretax income for angel investments where I can contribute significant UI/design, PR, and corporate partnership help. (Suggested reading: Rethinking Investing—Part 1, Rethinking Investing—Part 2 on www.fourhourblog.com.) A good question to revisit whenever overwhelmed: Are you having a breakdown or a breakthrough?


pages: 519 words: 104,396

Priceless: The Myth of Fair Value (And How to Take Advantage of It) by William Poundstone

availability heuristic, Cass Sunstein, collective bargaining, Daniel Kahneman / Amos Tversky, delayed gratification, Donald Trump, East Village, en.wikipedia.org, endowment effect, equal pay for equal work, experimental economics, experimental subject, feminist movement, game design, German hyperinflation, Henri Poincaré, high net worth, index card, invisible hand, John von Neumann, Kenneth Arrow, laissez-faire capitalism, Landlord’s Game, loss aversion, market bubble, mental accounting, meta analysis, meta-analysis, Nash equilibrium, new economy, Paul Samuelson, payday loans, Philip Mirowski, Potemkin village, price anchoring, price discrimination, psychological pricing, Ralph Waldo Emerson, RAND corporation, random walk, RFID, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, rolodex, social intelligence, starchitect, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, ultimatum game, working poor

Flipping the gains to losses flips the types of behavior. When losses are likely, reckless gambles become acceptable (lower left cell). At the end of the day, racetrack bettors are willing to “throw good money after bad” in the hope they can recoup their losses. When losses are unlikely (lower right), people are willing to insure themselves against them. Financial advisors tell clients to consider their “risk tolerance” in making money decisions. The trouble is, these four domains of behavior coexist in all of us. A person who is risk-averse in one situation will turn reckless in another. All it takes is a changed reference point. Investors regard bonds as “safe” and stocks as a gamble offering a higher average return. Since both investments promise gains, many investors are risk-averse (upper right cell) and load their portfolios with bonds.


pages: 407 words: 112,767

The Tao of Fully Feeling: Harvesting Forgiveness Out of Blame by Pete Walker

Albert Einstein, Lao Tzu, life extension, Ralph Waldo Emerson, risk tolerance, Saturday Night Live

To truly feel grateful to our parents, we must first identify and achieve significant healing of our childhood injuries. Accordingly, I hope you will distinguish between those parenting practices that merit gratitude, and those that need to be repudiated. When we authentically forgive our parents, we know what we are forgiving them for, and what specifically was blameworthy about their behavior in the first place. If we do not recognize the exact nature of our parents’ transgressions, we risk tolerating similar kinds of hurtfulness in the present. Children who are not allowed to blame their parents’ bad behavior often become adults who do not protect themselves from abuse. There are many perpetrators who seem to have a sixth sense for identifying people who have lost the ability to protest and blame unfairness. If we do not register a “negative” feeling response to hurtfulness, we cannot tell that we are being abused.


pages: 421 words: 110,272

Deaths of Despair and the Future of Capitalism by Anne Case, Angus Deaton

Affordable Care Act / Obamacare, basic income, Bertrand Russell: In Praise of Idleness, business cycle, call centre, collapse of Lehman Brothers, collective bargaining, Corn Laws, corporate governance, correlation coefficient, crack epidemic, creative destruction, crony capitalism, declining real wages, deindustrialization, demographic transition, Dissolution of the Soviet Union, Donald Trump, Downton Abbey, Edward Glaeser, Elon Musk, falling living standards, Fellow of the Royal Society, germ theory of disease, income inequality, Jeff Bezos, Joseph Schumpeter, Kenneth Arrow, labor-force participation, low skilled workers, Martin Wolf, Mikhail Gorbachev, obamacare, pensions crisis, randomized controlled trial, refrigerator car, rent-seeking, risk tolerance, shareholder value, Silicon Valley, The Spirit Level, The Wealth of Nations by Adam Smith, Tim Cook: Apple, trade liberalization, universal basic income, working-age population, zero-sum game

But most servicemen who used opioids started very soon after arriving in Vietnam, and those who had seen more combat were no more likely to use. The most plausible story, and that of Lee Robins, one of the investigators, on whose description of events this account is based, is that these men used opioids because “they said it was enjoyable and made life in the service bearable.”28 They used opioids not to make combat risks tolerable—and they knew very well the risks of being high in combat—but because they were bored out of their minds. When they returned home and were no longer in the army, there were other means of enjoyment, and life made sense and was bearable without drugs. The environment matters. The drugs were also extraordinarily cheap in Vietnam. The daily triggers for use in Vietnam were absent at home, and because the men were detoxed in Vietnam rather than at home, the detox-readdiction cycle was broken by geography.29 Robins argues that the widespread perception of heroin addiction comes from the fact that so many studies have been done on special populations that are more likely to be addicted in the first place, and not on more general populations such as those who served in Vietnam.


pages: 461 words: 106,027

Zero to Sold: How to Start, Run, and Sell a Bootstrapped Business by Arvid Kahl

"side hustle", business process, centre right, Chuck Templeton: OpenTable:, continuous integration, coronavirus, COVID-19, Covid-19, crowdsourcing, domain-specific language, financial independence, Google Chrome, if you build it, they will come, information asymmetry, information retrieval, inventory management, Jeff Bezos, job automation, Kubernetes, minimum viable product, Network effects, performance metric, post-work, premature optimization, risk tolerance, Ruby on Rails, sentiment analysis, Silicon Valley, software as a service, source of truth, statistical model, subscription business, supply-chain management, trickle-down economics, web application

If you are left with a substantial amount of cash from selling the minority stake, you will always be able to draw dividends from the business, and you will have the freedom to continue to run the business as you please. I sold FeedbackPanda because, among other reasons, I felt the need to diversify my assets. Having the biggest fraction of my wealth locked up in one business seemed more and more dangerous, and it kept me from experimenting and taking certain risks. If you want to keep running your business without projecting your personal risk tolerance onto it, consider the minority share sale or start investing your dividends in unrelated assets. Keeping the business and growing it into an even bigger enterprise is something that many founders who have been through it describe as an intensely rewarding and incredibly taxing experience. The great thing about increasing the value of your business every single day is that should you ever decide to sell it, the amount of money you will walk away with is growing as well.


pages: 289 words: 113,211

A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation by Richard Bookstaber

"Robert Solow", affirmative action, Albert Einstein, asset allocation, backtesting, beat the dealer, Black Swan, Black-Scholes formula, Bonfire of the Vanities, butterfly effect, commoditize, commodity trading advisor, computer age, computerized trading, disintermediation, diversification, double entry bookkeeping, Edward Lorenz: Chaos theory, Edward Thorp, family office, financial innovation, fixed income, frictionless, frictionless market, George Akerlof, implied volatility, index arbitrage, intangible asset, Jeff Bezos, John Meriwether, London Interbank Offered Rate, Long Term Capital Management, loose coupling, margin call, market bubble, market design, merger arbitrage, Mexican peso crisis / tequila crisis, moral hazard, Myron Scholes, new economy, Nick Leeson, oil shock, Paul Samuelson, Pierre-Simon Laplace, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk tolerance, risk/return, Robert Shiller, Robert Shiller, rolodex, Saturday Night Live, selection bias, shareholder value, short selling, Silicon Valley, statistical arbitrage, The Market for Lemons, time value of money, too big to fail, transaction costs, tulip mania, uranium enrichment, William Langewiesche, yield curve, zero-coupon bond, zero-sum game

Even if we assume as a starting point that the stock market is a random walk and 168 ccc_demon_165-206_ch09.qxd 7/13/07 2:44 PM Page 169 T H E B R AV E N E W W O R L D OF HEDGE FUNDS is governed by rational behavior, and even if we assert at the outset that all trades reflect the full consideration of the most up-to-date information, merely the fact that there are winners and losers will lead to booms and busts that have little to do with the rational application of information.1 The simplest market cycle is based on two psychological characteristics of investors. First, their risk tolerance increases as their market winnings pile up. If you are making money, you will be willing to take proportionally more risk in the market.2 This is often termed the house effect, because it is akin to successful gamblers who raise their stakes because they are playing with the casino’s money. Second, the more people win, the smarter they think they are. If investors make money on a market view, they adhere more strongly to that view, even if the real reason behind their success has nothing to do with these beliefs.


pages: 423 words: 118,002

The Boom: How Fracking Ignited the American Energy Revolution and Changed the World by Russell Gold

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, activist lawyer, addicted to oil, American energy revolution, Bakken shale, Bernie Sanders, Buckminster Fuller, clean water, corporate governance, corporate raider, energy security, energy transition, hydraulic fracturing, Intergovernmental Panel on Climate Change (IPCC), margin call, market fundamentalism, Mason jar, North Sea oil, oil shale / tar sands, oil shock, peak oil, Project Plowshare, risk tolerance, Ronald Reagan, shareholder value, Silicon Valley, Upton Sinclair

Mitchell had a hunch, but the only way to know if he was right was to drill. And that meant he needed to acquire mineral leases to the north of Fort Worth. He didn’t have to wait long. During the day, Mitchell and Houston’s other independent oilmen gathered on the ground floor of the Niels Esperson Building, a peculiar prewar edifice topped with what looks like a stone gazebo. For those with the right combination of money, ambition, risk tolerance, and luck, the Esperson was the first stop on the way to a midcentury career as a wildcatter. There was a bank of pay telephones at the back of the ground floor that functioned as a makeshift office for aspiring oilmen. There was a drugstore that served coffee and sandwiches. Bar stools surrounded several zinc-topped tables. And the Esperson was one of the first buildings in swampy Houston to offer air-conditioning.


pages: 384 words: 118,572

The Confidence Game: The Psychology of the Con and Why We Fall for It Every Time by Maria Konnikova

attribution theory, Bernie Madoff, British Empire, Cass Sunstein, cognitive dissonance, coherent worldview, Daniel Kahneman / Amos Tversky, endowment effect, epigenetics, hindsight bias, lake wobegon effect, lateral thinking, libertarian paternalism, Milgram experiment, placebo effect, Ponzi scheme, post-work, publish or perish, Richard Thaler, risk tolerance, side project, Skype, Steven Pinker, the scientific method, tulip mania, Walter Mischel

On another day, in another town, Robin would have laughed; that day, in Manhattan, she fell. It makes a certain kind of sense. Often, patient, levelheaded people will go a bit crazy in the wake of a major life change—we become more impulsive, less stable, riskier versions of ourselves. And our impulsivity and appetite for risk are some of the only reliable indicators of fraud susceptibility. In one study, risk takers were over six times more likely to fall victim than those whose risk tolerance was low. Given the right circumstances, just about anyone can fit that description. When we’re feeling low, we want to get out of the slump. So, schemes or propositions that would look absurd in another light suddenly seem more attractive. When we’re angry, we want to lash out. Suddenly, something that once seemed like a gamble looks awfully appealing. A victim isn’t necessarily foolish or greedy.


pages: 364 words: 112,681

Moneyland: Why Thieves and Crooks Now Rule the World and How to Take It Back by Oliver Bullough

banking crisis, Bernie Madoff, bitcoin, blood diamonds, Bretton Woods, BRICs, British Empire, capital controls, central bank independence, corporate governance, cryptocurrency, cuban missile crisis, dark matter, diversification, Donald Trump, energy security, failed state, Flash crash, Francis Fukuyama: the end of history, full employment, high net worth, if you see hoof prints, think horses—not zebras, income inequality, joint-stock company, liberal capitalism, liberal world order, mass immigration, medical malpractice, offshore financial centre, plutocrats, Plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, rent-seeking, Richard Feynman, risk tolerance, Sloane Ranger, sovereign wealth fund, WikiLeaks

It was particularly important since many of the insiders mentioned in the book were – at precisely that time – being included on those same sanctions lists as the oligarch I mentioned at the beginning of this chapter. Nevertheless, CUP decided not to publish the book. ‘The decision has nothing to do with the quality of your research or your scholarly credibility,’ the company’s Executive Publisher John Haslam wrote to her (according to copies of the letters that she provided to the Economist). ‘It’s simply a question of our risk tolerance in light of our limited resources.’ Haslam explained that the nature of English libel law