price anchoring

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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

Balthazar isn’t taking any chances about that: it’s got a picture at upper right, another way to draw the eye. From there the gaze usually moves down to the center of the right page. Menu consultants use these prime menu spaces for high-profit items and price anchors. In this case, the anchor is the Le Balthazar seafood plate, for $110. Psychophysics says that the contrast effect is strongest in the immediate vicinity of a stimulus. It’s anyone’s guess whether this applies to prices on menus, but consultants seem to believe it does. They recommend putting high-profit items immediately adjacent to the high-priced anchor. The real agenda of the $110 price is probably to induce customers to spring for the $65 Le Grand plate just to the left of it or the more modest seafood orders below it. A box around a menu item draws attention and, usually, orders.

Some volunteers were asked to name their price for the sound and also to rank it on a list of minor annoyances. The peeves included “discovering you purchased a spoiled carton of milk,” “forgetting to return a video and having to pay a fine,” “having your ice cream fall on the floor,” and seven other items. Overall, the annoying sound came in #2 on the list, behind “missing your bus by a few seconds.” The telling thing is this. The 10- and 50-cent price anchors had no effect on the ranking of the annoying noise. Everyone approximately agreed on how bad the noise was, relative to life’s other little annoyances. Another group of volunteers consented to put a finger in a vise. The experimenter tightened the vise until the subject said he was beginning to experience pain (the “pain threshold”). Then the vise was tightened a millimeter more. The subject was instructed to remember that level of pain.

It paid over $1,700 per square foot for its Rem Koolhaas–designed store in SoHo and is forking over equally stratospheric rents. It would not devote floor space to goods that hardly ever sell unless there was a reason for it. Trade-off contrast is part of the cost of doing business, like advertising or window displays or “starchitect” designs. It’s not unusual to find items similar to the high-priced anchor selling for a tenth as much. Anyone who can’t swing that can always try the $300 sunglasses. Or the $110 mobile phone charm. The British Prada website hints at where the money is (online, at any rate). It offers 10 makes of women’s shoes, 23 handbags, and 54 “gifts”—trinkets like keychains, bracelet charms, and golf tee holders. At £60 for a bracelet charm, the profit margin must be staggering.


pages: 383 words: 108,266

Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions by Dan Ariely

air freight, Al Roth, Bernie Madoff, Burning Man, butterfly effect, Cass Sunstein, collateralized debt obligation, computer vision, corporate governance, credit crunch, Daniel Kahneman / Amos Tversky, David Brooks, delayed gratification, endowment effect, financial innovation, fudge factor, Gordon Gekko, greed is good, housing crisis, IKEA effect, invisible hand, lake wobegon effect, late fees, loss aversion, market bubble, Murray Gell-Mann, payday loans, placebo effect, price anchoring, Richard Thaler, second-price auction, Silicon Valley, Skype, The Wealth of Nations by Adam Smith, Upton Sinclair

From then on, we are willing to accept a range of prices—but as with the pull of a bungee cord, we always refer back to the original anchor. Thus the first anchor influences not only the immediate buying decision but many others that follow. We might see a 57-inch LCD high-definition television on sale for $3,000, for instance. The price tag is not the anchor. But if we decide to buy it (or seriously contemplate buying it) at that price, then the decision becomes our anchor henceforth in terms of LCD television sets. That’s our peg in the ground, and from then on—whether we shop for another set or merely have a conversation at a backyard cookout—all other high-definition televisions are judged relative to that price. Anchoring influences all kinds of purchases. Uri Simonsohn (a professor at the University of Pennsylvania) and George Loewenstein, for example, found that people who move to a new city generally remain anchored to the prices they paid for housing in their former city.

In other words, the sensitivity we show to price changes might in fact be largely a result of our memory for the prices we have paid in the past and our desire for coherence with our past decisions—not at all a reflection of our true preferences or our level of demand. The same basic principle would also apply if the government one day decided to impose a tax that doubled the price of gasoline. Under conventional economic theory, this should cut demand. But would it? Certainly, people would initially compare the new prices with their anchor, would be flabbergasted by the new prices, and so might pull back on their gasoline consumption and maybe even get a hybrid car. But over the long run, and once consumers readjusted to the new price and the new anchors ( just as we adjust to the price of Nike sneakers, bottled water, and everything else), our gasoline consumption, at the new price, might in fact get close to the pretax level. Moreover, much as in the example of Starbucks, this process of readjustment could be accelerated if the price change were to also be accompanied by other changes, such as a new grade of gas, or a new type of fuel (such as corn-based ethanol fuel).

And more importantly, does that price (which in academic lingo we call an anchor) have a long-term effect on our willingness to pay for the product from then on? It seems that what’s good for the goose is good for humans as well. And this includes anchoring. From the beginning, for instance, Assael “anchored” his pearls to the finest gems in the world—and the prices followed forever after. Similarly, once we buy a new product at a particular price, we become anchored to that price. But how exactly does this work? Why do we accept anchors? Consider this: if I asked you for the last two digits of your social security number (mine are 79), then asked you whether you would pay this number in dollars (for me this would be $79) for a particular bottle of Côtes du Rhône 1998, would the mere suggestion of that number influence how much you would be willing to spend on wine?


pages: 302 words: 87,776

Dollars and Sense: How We Misthink Money and How to Spend Smarter by Dr. Dan Ariely, Jeff Kreisler

accounting loophole / creative accounting, Airbnb, Albert Einstein, bitcoin, Burning Man, collateralized debt obligation, Daniel Kahneman / Amos Tversky, delayed gratification, endowment effect, experimental economics, hedonic treadmill, IKEA effect, invisible hand, loss aversion, mental accounting, mobile money, placebo effect, price anchoring, Richard Thaler, sharing economy, Silicon Valley, Snapchat, Stanford marshmallow experiment, Steve Jobs, TaskRabbit, the payments system, Uber for X, ultimatum game, Walter Mischel, winner-take-all economy

ARBITRARY COHERENCE As you probably noticed, anchoring can come from both the first price we see, like an MSRP (manufacturer’s suggested retail price), and from the prices we’ve paid in the past, like for a can of soda. The MSRP is an example of an external anchor—that is, the auto manufacturer planting the notion that the car we lust after costs $35,000. The soda price is an internal anchor, coming from our own previous experience buying Coke, Diet Coke, or New Double Diet New Caffeine Free Cherry Coke Zero . . . with Lime. The effects of these two types of anchors on our decisions are basically the same.5 In fact, not much matters about where the anchor comes from. If we consider buying something at that price, the anchoring effect has been set. The number can even be completely random and arbitrary. Our favorite anchoring experiments were carried out by Drazen Prelec, George Loewenstein, and Dan. In one of these experiments they asked a group of MIT undergraduate students how much they would pay for certain products, which included things like a computer mouse, a cordless keyboard, some specialty chocolates, and highly rated wines.

Once we pay $4 for a latte or $50 for an oil change, we’re more likely to do so in the future, because we have made this decision before, we remember it, and we’re partial to our own decisions—even if it means paying more than we need to. Even if there’s a place offering free coffee while we wait for our $25 oil change. This is how anchoring starts with a single decision, but then grows through self-herding to become a bigger problem, creating a perpetual cycle of self-delusion, fallacy, and incorrect valuation. We purchase a widget at a certain price because of a suggested price—an anchor. Then that purchase price becomes evidence that this was a good decision. From that point on it becomes the starting point for our future purchases of similar widgets. Another value-manipulating cue that is a close relative of anchoring and self-herding is CONFIRMATION BIAS. Confirmation bias pops its head up when we interpret new information in a way that confirms our own preconceptions and expectations.

This is the same amount of time it would take to watch eighteen movies, which would cost around $70 to rent from iTunes and much more than that to see in theaters. This is also equivalent to fifty-four half-hour television episodes, which would cost $53.46 to stream at 99 cents each. When we look at it this way, $13.50 for twenty-seven hours of fun doesn’t seem like a bad deal. The problem is that we don’t do this exercise—or anything like it. Rather, we compare this app to other apps on price alone—a price that’s been anchored to zero. As a consequence, we end up spending our money in ways that don’t maximize our pleasure and may not make financial sense. IGNORANCE IS BLISS The less we know about something, the more we depend on anchors. Consider once again our real estate example, where real estate agents and “regular people” in Tucson were shown anchor prices and then asked to assess the value of the home.


pages: 898 words: 266,274

The Irrational Bundle by Dan Ariely

accounting loophole / creative accounting, air freight, Albert Einstein, Alvin Roth, assortative mating, banking crisis, Bernie Madoff, Black Swan, Broken windows theory, Burning Man, business process, cashless society, Cass Sunstein, clean water, cognitive dissonance, computer vision, corporate governance, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, delayed gratification, Donald Trump, end world poverty, endowment effect, Exxon Valdez, first-price auction, Frederick Winslow Taylor, fudge factor, George Akerlof, Gordon Gekko, greed is good, happiness index / gross national happiness, hedonic treadmill, IKEA effect, Jean Tirole, job satisfaction, Kenneth Arrow, knowledge economy, knowledge worker, lake wobegon effect, late fees, loss aversion, Murray Gell-Mann, new economy, Peter Singer: altruism, placebo effect, price anchoring, Richard Feynman, Richard Thaler, Saturday Night Live, Schrödinger's Cat, second-price auction, Shai Danziger, shareholder value, Silicon Valley, Skype, software as a service, Steve Jobs, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, ultimatum game, Upton Sinclair, Walter Mischel, young professional

From then on, we are willing to accept a range of prices—but as with the pull of a bungee cord, we always refer back to the original anchor. Thus the first anchor influences not only the immediate buying decision but many others that follow. We might see a 57-inch LCD high-definition television on sale for $3,000, for instance. The price tag is not the anchor. But if we decide to buy it (or seriously contemplate buying it) at that price, then the decision becomes our anchor henceforth in terms of LCD television sets. That’s our peg in the ground, and from then on—whether we shop for another set or merely have a conversation at a backyard cookout—all other high-definition televisions are judged relative to that price. Anchoring influences all kinds of purchases. Uri Simonsohn (a professor at the University of Pennsylvania) and George Loewenstein, for example, found that people who move to a new city generally remain anchored to the prices they paid for housing in their former city.

In other words, the sensitivity we show to price changes might in fact be largely a result of our memory for the prices we have paid in the past and our desire for coherence with our past decisions—not at all a reflection of our true preferences or our level of demand. The same basic principle would also apply if the government one day decided to impose a tax that doubled the price of gasoline. Under conventional economic theory, this should cut demand. But would it? Certainly, people would initially compare the new prices with their anchor, would be flabbergasted by the new prices, and so might pull back on their gasoline consumption and maybe even get a hybrid car. But over the long run, and once consumers readjusted to the new price and the new anchors (just as we adjust to the price of Nike sneakers, bottled water, and everything else), our gasoline consumption, at the new price, might in fact get close to the pretax level. Moreover, much as in the example of Starbucks, this process of readjustment could be accelerated if the price change were to also be accompanied by other changes, such as a new grade of gas, or a new type of fuel (such as corn-based ethanol fuel).

And more importantly, does that price (which in academic lingo we call an anchor) have a long-term effect on our willingness to pay for the product from then on? It seems that what’s good for the goose is good for humans as well. And this includes anchoring. From the beginning, for instance, Assael “anchored” his pearls to the finest gems in the world—and the prices followed forever after. Similarly, once we buy a new product at a particular price, we become anchored to that price. But how exactly does this work? Why do we accept anchors? Consider this: if I asked you for the last two digits of your social security number (mine are 79), then asked you whether you would pay this number in dollars (for me this would be $79) for a particular bottle of Côtes du Rhône 1998, would the mere suggestion of that number influence how much you would be willing to spend on wine?


pages: 267 words: 72,552

Reinventing Capitalism in the Age of Big Data by Viktor Mayer-Schönberger, Thomas Ramge

accounting loophole / creative accounting, Air France Flight 447, Airbnb, Alvin Roth, Atul Gawande, augmented reality, banking crisis, basic income, Bayesian statistics, bitcoin, blockchain, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, Cass Sunstein, centralized clearinghouse, Checklist Manifesto, cloud computing, cognitive bias, conceptual framework, creative destruction, Daniel Kahneman / Amos Tversky, disruptive innovation, Donald Trump, double entry bookkeeping, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Ford paid five dollars a day, Frederick Winslow Taylor, fundamental attribution error, George Akerlof, gig economy, Google Glasses, information asymmetry, interchangeable parts, invention of the telegraph, inventory management, invisible hand, James Watt: steam engine, Jeff Bezos, job automation, job satisfaction, joint-stock company, Joseph Schumpeter, Kickstarter, knowledge worker, labor-force participation, land reform, lone genius, low cost airline, low cost carrier, Marc Andreessen, market bubble, market design, market fundamentalism, means of production, meta analysis, meta-analysis, Moneyball by Michael Lewis explains big data, multi-sided market, natural language processing, Network effects, Norbert Wiener, offshore financial centre, Parag Khanna, payday loans, peer-to-peer lending, Peter Thiel, Ponzi scheme, prediction markets, price anchoring, price mechanism, purchasing power parity, random walk, recommendation engine, Richard Thaler, ride hailing / ride sharing, Sam Altman, Second Machine Age, self-driving car, Silicon Valley, Silicon Valley startup, six sigma, smart grid, smart meter, Snapchat, statistical model, Steve Jobs, technoutopianism, The Future of Employment, The Market for Lemons, The Nature of the Firm, transaction costs, universal basic income, William Langewiesche, Y Combinator

Prices ending in nines: Even if policy makers prohibit prices ending in nine, recent research has shown that the market adjusts quickly to the restriction and shifts from prices ending in ninety-nine to prices ending in ninety, with the same deceiving effect on consumers; see Avichai Snir, Daniel Levy, and Haipeng Chen, “End of 9-Endings, Price Recall, and Price Perceptions,” Economics Letters, forthcoming (posted April 2, 2017), https://ssrn.com/abstract=2944919. “under $1,000, which is code for $999”: Matthew Amster-Burton, “Price Anchoring, or Why a $499 iPad Seems Inexpensive,” Mint-Life, April 6, 2010, https://blog.mint.com/how-to/price-anchoring. sellers often use price to deliberately obscure information: Authors’ conversation with Florian Bauer, December 19, 2016. CHAPTER 4: DATA-RICH MARKETS “Nothing anyone does will seem that crazy”: Olivia Solon, “Oh the Humanity! Poker Computer Trounces Humans in Big Step for AI,” Guardian, January 30, 2017, https://www.theguardian.com/technology/2017/jan/30/libratus-poker-artificial-intelligence-professional-human-players-competition.


pages: 254 words: 79,052

Evil by Design: Interaction Design to Lead Us Into Temptation by Chris Nodder

4chan, affirmative action, Amazon Mechanical Turk, cognitive dissonance, crowdsourcing, Daniel Kahneman / Amos Tversky, Donald Trump, en.wikipedia.org, endowment effect, game design, haute couture, jimmy wales, Jony Ive, Kickstarter, late fees, loss aversion, Mark Zuckerberg, meta analysis, meta-analysis, Milgram experiment, Netflix Prize, Nick Leeson, Occupy movement, pets.com, price anchoring, recommendation engine, Rory Sutherland, Silicon Valley, Stanford prison experiment, stealth mode startup, Steve Jobs, telemarketer, Tim Cook: Apple, trickle-down economics, upwardly mobile

We formed an opinion on the price of gasoline (an anchor) when we last filled up. Now we compare the new prices that we see against this anchor. We are looking for coherence between the new price and the last price we paid. With a product that varies in price over time and over location, it’s hardly surprising to see price hikes but still we rely on our internal anchor until the evidence of several gas stations tells us that it’s time to perform a reset. How much you last paid for gas creates an anchor for how much you expect to pay next time. Still, when we perform this reset we don’t have a “gold standard” of gas prices that we are calibrating against. It’s unlikely that we even refer to government statistics describing current national average prices. The new anchor price that we create is instead somewhat arbitrary—it’s based just on our recent experiences.

In 2010, Best Buy started raising the price of one computer every week, and then advertised that computer in their paper flyers with the price highlighted. They never used the word “Sale,” just the term “New Price.” Thus, they managed to set a new anchor point for many customers that was actually higher than the previous product price. How to own the anchor For a high-end anchor: Show a range of comparable products, with the most expensive setting a high-end anchor price sufficiently large to make the rest of your products look cheap by comparison. Make frequent comparison to the high-end anchor when describing other products’ prices. For a low-end anchor: Show a range of comparable products, with the cheapest setting the lowest price that you are comfortable with. Ensure that the low-end anchor price does not deviate substantially from customers’ expectations, or that comparison with other vendors is difficult.


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

This experiment was particularly interesting because it was designed so that the subject clearly knew that the number produced by the wheel was purely random and, moreover, because the number produced by the wheel should have had no emotional significance for the subject.2 In making judgments about the level of stock prices, the most likely anchor is the most recently remembered price. The tendency of investors to use this anchor enforces the similarity of stock prices from one day to the next. Other possible anchors are remembered past prices, and the tendency of past prices to serve as anchors may be part of the reason for the observed tendency for trends in individual stock prices to be reversed. Another anchor may be the nearest milestone of a prominent index such as the Dow, the nearest round-number level, and investors’ use of this anchor may help explain unusual market behavior surrounding such levels.

Investors are striving to do the right thing, but they have limited abilities and certain natural modes of behavior that decide their actions when an unambiguous prescription for action is lacking.1 Two kinds of psychological anchors will be considered here: quantitative anchors, which themselves give indications for the appropriate levels of the market that some people use as indications of whether the market is over- or underpriced and whether it is a good time to buy, and moral anchors, which operate by determining the strength of the reason that compels people to buy stocks, a reason that they must weigh against their other uses for the wealth they already have (or could have) invested in the market. With quantitative anchors, people are weighing numbers against prices when they decide whether stocks (or other assets) are priced right. With moral anchors, people compare the intuitive or emotional strength of the argument for investing in the market against their wealth and their perceived need for money to spend now. Quantitative Anchors for the Market Designers of questionnaires have learned that the answers people give can be heavily influenced by suggestions that are given on the P S YCH O L O G ICAL AN CH OR S FOR THE MAR KET 137 questionnaires themselves.

Past price 138 PSYC HOLOGIC AL FAC TOR S changes may also provide an anchor, if attention is suitably drawn to them. Recall from Chapter 4 that the drop in the market in the October 19, 1987, crash was nearly the same in percentage terms as that in the October 28–29, 1929, crash that was so much discussed at the time of the 1987 crash. For individual stocks, price changes may tend to be anchored to the price changes of other stocks, and price-earnings ratios may be anchored to other firms’ price-earnings levels. This kind of anchoring may help to explain why individual stock prices move together as much as they do, and thus ultimately why stock price indexes are as volatile as they are—why the averaging across stocks that is inherent in the construction of the index doesn’t more solidly dampen its volatility.3 It may also explain why stocks of companies that are in different industries but are headquartered in the same country tend to have more similar price movements than stocks of companies that are in the same industry but are headquartered in different countries, contrary to one’s expectation that the industry would define the fundamentals of the company better than the location of its headquarters.4 And it may explain why real estate investment trusts traded on stock exchanges tend to behave more like stocks than like the appraised value of their underlying commercial real estate.5 Indeed all of these anomalies noted in financial markets have a simple explanation in terms of quantitative anchoring to convenient numbers.


pages: 306 words: 85,836

When to Rob a Bank: ...And 131 More Warped Suggestions and Well-Intended Rants by Steven D. Levitt, Stephen J. Dubner

Affordable Care Act / Obamacare, Airbus A320, airport security, augmented reality, barriers to entry, Bernie Madoff, Black Swan, Broken windows theory, Captain Sullenberger Hudson, creative destruction, Daniel Kahneman / Amos Tversky, deliberate practice, feminist movement, food miles, George Akerlof, global pandemic, information asymmetry, invisible hand, loss aversion, mental accounting, Netflix Prize, obamacare, oil shale / tar sands, Pareto efficiency, peak oil, pre–internet, price anchoring, price discrimination, principal–agent problem, profit maximization, Richard Thaler, Sam Peltzman, security theater, Ted Kaczynski, the built environment, The Chicago School, the High Line, Thorstein Veblen, transaction costs, US Airways Flight 1549

., 138–40 Pataki, George, 119 Paulos, John Allen, 286 Paulson, Henry, 236 Peltzman, Sam, 166 penny, 61–65 penny floor, 65 Pepsico, 59–60 perfect substitutes, 60 petroleum extraction, 109–16 Pettitte, Andy, 149–50 Pham, David “the Dragon,” 193 pilots, 83–86 pirates, 314–19 Pittsburgh Steelers, 212–19 Plack, Les, 47 Planned Parenthood, 65–67 Pledge-a-Picket, 66 poker: cheating, 154–58 how not to cheat, 153–55 Internet, 127–30, 157 one card away from final table, 192–95 record that can never be broken, 192 shootout tournament, 193 World Series of Poker, 187–88, 192–95 Polamalu, Troy, 216 Poland Spring bottled water, 3–4 Pollan, Michael, 169 postage, exemption from, 141–43 practice, ten thousand hours, 199, 201–2 praise, 351 Pre-Implantation Genetic Diagnosis (PGD), 280–82 prices: anchoring, 309 of autographed baseballs, 80–81 bounty on bin Laden, 57–59 of cars, 54–57 of chicken wings, 75–77 and corporate sponsorships, 81 discrimination in, 173 of food, 116 of gas, 86–90 for hate mail, 49–51 housing, 67–69 of kiwifruits, 77–80 peak oil, 109–16 of a penny, 61–65 of prescription drugs, 52–54 rising, 110, 111 of shrimp, 344 of songs, 69–71 and substitutes, 113 supply and demand, 78–80, 110, 112, 115, 128, 341–44 of voices in animated films, 306 priming, 228–29 principal-agent problem, 209 Prius Effect, 185 procrastination, 121 profits, going green for, 172–74 pro-life movement, 65 prostitution: Berlin brothel, 173 escort service, 261–67 legalization of, 255–56, 265–67 race: in the marketplace, 315–22 TV viewing habits, 322–24 rain forest, saving, 174–75 randomization, 322 rational addictions, 92–94 Reeve, Christopher, 102 Reilly, Barry, 225–26 Rickman, Neil, 225–26 RICO (federal racketeering statutes), 232 Rios, Brandon, 72 risk-aversion, 125–27 risk-taking, 121 Rochambeau (Rock, Paper, Scissors), 188–89 Rodriguez, Alex, 149 Roethlisberger, Ben, 103 Roe v.


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

The lower the quantity on the wheel, the smaller their estimate – the arbitrary value had planted a figure in their mind, ‘anchoring’ their judgement.6 You have probably fallen for anchoring yourself many times while shopping in the sales. Suppose you are looking for a new TV. You had expected to pay around £100, but then you find a real bargain: a £200 item reduced to £150. Seeing the original price anchors your perception of what is an acceptable price to pay, meaning that you will go above your initial budget. If, on the other hand, you had not seen the original price, you would have probably considered it too expensive, and moved on. You may also have been prey to the availability heuristic, which causes us to over-estimate certain risks based on how easily the dangers come to mind, thanks to their vividness.


pages: 275 words: 82,640

pages: 295 words: 66,824

A Mathematician Plays the Stock Market by John Allen Paulos

Benoit Mandelbrot, Black-Scholes formula, Brownian motion, business climate, business cycle, butter production in bangladesh, butterfly effect, capital asset pricing model, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, diversified portfolio, dogs of the Dow, Donald Trump, double entry bookkeeping, Elliott wave, endowment effect, Erdős number, Eugene Fama: efficient market hypothesis, four colour theorem, George Gilder, global village, greed is good, index fund, intangible asset, invisible hand, Isaac Newton, John Nash: game theory, Long Term Capital Management, loss aversion, Louis Bachelier, mandelbrot fractal, margin call, mental accounting, Myron Scholes, Nash equilibrium, Network effects, passive investing, Paul Erdős, Paul Samuelson, Ponzi scheme, price anchoring, Ralph Nelson Elliott, random walk, Richard Thaler, Robert Shiller, Robert Shiller, short selling, six sigma, Stephen Hawking, stocks for the long run, survivorship bias, transaction costs, ultimatum game, Vanguard fund, Yogi Berra

technical analysis trading strategies unemployment whim World Class Options Market Maker (WCOMM) present value compound interest and discounting process for stock purchases based on price movements complexity changes over time extreme movements herd-like and volatile nature of insider trading and network effect on normal curve and power law and subterranean information processing and price, P/E ratio price targets anchoring effect and hype and unrealistic prices, of stocks manipulating for own benefit (management/CEO) oscillation created by investor reactions to each other reflecting publicly available information prisoner’s dilemma private information becoming common knowledge dynamic with common knowledge market predictions and probability coin flipping game and dice and gambling games games of chance outguessing the average guess St.


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

The prior losers (future winners) were not more risky than the prior winners (future losers).54 This contradicts a central proposition of EMH that higher returns can only be earned by assuming higher risks. Additionally, it bolsters the notion that a very simplistic form of TA is useful. • Nonreversing momentum: When a stock’s momentum is measured by its proximity to its 52-week high, rather than its prior rate of return, profits are greater and momentum does not reverse.55 The author of this study speculates that investors become mentally anchored to prior 52-week price highs. Anchoring is known to prevent people from making appropriate adjustments to new information. The author of this study, Michael Cooper, conjectured that this prevents stocks near their 52-week highs from responding to new fundamental developments as rapidly as they should. Retarded news response engenders systemic price trends (momentum) that correct the mispricing. • Momentum confirmed by trading volume: Further support for the validity of TA comes from studies showing that, when trading volume is used conjointly with price momentum, even higher returns can be earned.

For example, if the wheel landed on the number 10, the median estimate was 25 percent, but when the wheel stopped on 65 the median estimate was 45 percent. The anchoring heuristic is thought to be related to investor underreaction. Underreactions to bullish news cause asset prices to remain too cheap, whereas underreactions to bearish news leave prices too dear. Over time, the market’s temporary state of inefficiency is resolved as prices drift (trend) to the rational level. Thus, anchoring can help explain the occurrence of price trends. Anchoring may explain the profitability of a momentum strategy alluded to earlier.67 It is based on a simple technical indicator, a stock’s proximity to its 52-week high. Because this information is available in newspapers and on various web sites, investors may fixate (anchor) on it. In other words, investors may fixate or anchor on the 52-week high price if a stock is currently trading near that level.


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

This generic nature of carry and value indicators is a clear advantage, given our inherently limited understanding of the ultimate drivers of expected asset returns. If expected returns vary over time, how can we know the current level of expected returns? In most cases we cannot. Sadly, the market’s expected returns are unobservable. The best we can do is estimate them, by hook or crook. The simplest and more popular approaches involve relating current market prices to some value anchors. If current market prices are low compared with such anchors (which can be as simple as historical average price, yield or spread, or something more complex), expected returns are deemed to be above average. Such value indicators do not reveal whether high current expected returns reflect irrational underpricing or rationally high risk premia. Moreover, these value indicators can be poor short-term predictors.

Sources: Bloomberg, Robert Shiller’s website, Moody’s, Ibbotson Associates (Morningstar), Federal Reserve Board, Blue Chip Economic Indicators. Table 21.1. Three building blocks of expected returns for diverse investments Value and carry indicators are reviewed above for stocks and bonds. Value and carry indicators for real estate, commodities, and currencies are discussed in Sections 11.2, 11.3, and 13.3. Value is typically based on deviation of current market price from some valuation anchor (such as purchasing power parity for currencies or rental income for real estate). In the absence of better value anchors, investors may use average real market price over the past few years to capture any mean reversion tendency. Natural value indicators exist for some systematic strategies (e.g., the dispersion of valuation ratios between value and growth stocks, or the implied-vs.


pages: 654 words: 191,864

Thinking, Fast and Slow by Daniel Kahneman

Albert Einstein, Atul Gawande, availability heuristic, Bayesian statistics, Black Swan, Cass Sunstein, Checklist Manifesto, choice architecture, cognitive bias, complexity theory, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, delayed gratification, demand response, endowment effect, experimental economics, experimental subject, Exxon Valdez, feminist movement, framing effect, hedonic treadmill, hindsight bias, index card, information asymmetry, job satisfaction, John von Neumann, Kenneth Arrow, libertarian paternalism, loss aversion, medical residency, mental accounting, meta analysis, meta-analysis, nudge unit, pattern recognition, Paul Samuelson, pre–internet, price anchoring, quantitative trading / quantitative finance, random walk, Richard Thaler, risk tolerance, Robert Metcalfe, Ronald Reagan, Shai Danziger, Supply of New York City Cabdrivers, The Chicago School, The Wisdom of Crowds, Thomas Bayes, transaction costs, union organizing, Walter Mischel, Yom Kippur War

An example could be: 84% chance to win: A dozen red roses in a glass vase. Value $59. 21% chance to win: A dozen red roses in a glass vase. Value $59. It is easy to assess the expected monetary value of these gambles, but adding a specific monetary value did not alter the results: evaluations remained insensitive to probability even in that condition. People who thought of the gift as a chance to get roses did not use price information as an anchor in evaluating the gamble. As scientists sometimes say, this is a surprising finding that is trying to tell us something. What story is it trying to tell us? The story, I believe, is that a rich and vivid representation of the outcome, whether or not it is emotional, reduces the role of probability in the evaluation of an uncertain prospect. This hypothesis suggests a prediction, in which I have reasonably high confidence: adding irrelevant but vivid details to a monetary outcome also disrupts calculation.

Jacowitz and Daniel Kahneman, “Measures of Anchoring in Estimation Tasks,” Person {pantion ality and Social Psychology Bulletin 21 (1995): 1161–66. substantially lower: Gregory B. Northcraft and Margaret A. Neale, “Experts, Amateurs, and Real Estate: An Anchoring-and-Adjustment Perspective on Property Pricing Decisions,” Organizational Behavior and Human Decision Processes 39 (1987): 84–97. The high anchor was 12% above the listed price, the low anchor was 12% below that price. rolled a pair of dice: Birte Englich, Thomas Mussweiler, and Fritz Strack, “Playing Dice with Criminal Sentences: The Influence of Irrelevant Anchors on Experts’ Judicial Decision Making,” Personality and Social Psychology Bulletin 32 (2006): 188–200. NO LIMIT PER PERSON: Brian Wansink, Robert J. Kent, and Stephen J. Hoch, “An Anchoring and Adjustment Model of Purchase Quantity Decisions,” Journal of Marketing Research 35 (1998): 71–81.

positive test strategy possibility effect: gambles and; threats and post-traumatic stress poverty precautionary principle predictability, insensitivity to predictions and forecasts; baseline; clinical vs. statistical; disciplining; of experts, see expert intuition; extreme, value of; formulas for, see formulas; increasing accuracy in; low-validity environments and; nonregressive; objections to moderating; optimistic bias in; outside view in; overconfidence in; planning fallacy and; short-term trends and; valid, illusion of; see also probability preference reversals; unjust premonition, use of word premortem pretentiousness language pricing policies priming; anchoring as t="-5%"> Princeton University probability; base rates in, see base rates; decision weights and, see decision weights; definitions of; and disciplining intuition; less-is-more pattern and; Linda problem and; overestimation of; plausibility and; and predicting by representativeness; prior, insensitivity to; professional stereotypes and; of rare events, see rare events; representativeness and, see representativeness; similarity and; subjective; as sum-like variable; see also predictions and forecasts probability neglect Proceedings of the National Academy of Sciences professional stereotypes professorial candidates prospect theory; in Albert and Ben problem; blind spots of; cumulative; decision weights and probabilities in; fourfold pattern in; frames and; graph of losses and gains in; loss aversion in; reference points in “Prospect Theory: An Analysis of Decision Under Risk” (Kahneman and Tversky) prototypes psychiatric patients psychological immune system psychology, teaching psychopathic charm psychophysics psychotherapists pundits; see also expert intuition punishments: altruistic; rewards and; self-administered pupil dilation questionnaire and gift experiments questions; substitution of, see substitution Rabin, Matthew radiologists rafters, skilled rail projects randomness and chance; misconceptions of Random Walk Down Wall Street, A (Malkiel) rare events; overestimation of; regret and rational-agent model rationality Rationality and the Reflective Mind (Stanovich) ">rats Reagan, Ronald reciprocal priming recognition recognition-primed decision (RPD) model Redelmeier, Don reference class forecasting regression to the mean; causal interpretations and; correlation and; difficulty in grasping; two-systems view of “Regression towards Mediocrity in Hereditary Stature” (Galton) regret religion remembering self Remote Association Test (RAT) reorganizations in companies repetition representativeness; base rates and; see also base rates; in Linda problem; predicting by; professional stereotypes and; sins of; in Tom W problem research: artifacts in; hypothesis testing in; optimism in resemblance; in predictions resilience responsibility retrievability of instances reversals; unjust rewards; self-administered Rice, Condoleezza risk assessment; aggregation and; broad framing in; decision weights in, see decision weights; denominator neglect and; by experts; and format of risk expression; fourfold pattern in; for health risks; hindsight bias and; laws and regulations governing; loss aversion in; narrow framing in; optimistic bias and; policies for; possibility effect and; precautionary principle and; probability neglect and; public policies and; small risks and; of technologies; terrorism and; see also gambles risk aversion risk seeking “Robust Beauty of Improper Linear Models in Decision Making, The” (Dawes) Rosett, Richard Rosenzweig, Philip Royal Dutch Shell Royal Institution Rozin, Paul < Philip Rumsfeld, Donald Russell Sage Foundation Russia Saddam Hussein sadness safety; health risks and; health violation penalties and; precautionary principle and samples, sampling: accidents of; and bias of confidence over doubt; law of large numbers; law of small numbers; size of; small, exaggerated faith in Samuelson, Paul San Francisco Exploratorium Savage, Jimmie Save More Tomorrow Schelling, Thomas Schkade, David school size Schwarz, Norbert Schweitzer, Maurice Science Scientific American scientific controversies scientific research: artifacts in; hypothesis testing in; optimism in Scottish Parliament self-control self-criticism Seligman, Martin selves; experiencing; remembering sets Shafir, Eldar similarity judgments Simmel, Mary-Ann Simon, Herbert Simons, Daniel Simpson, O.


Super Thinking: The Big Book of Mental Models by Gabriel Weinberg, Lauren McCann

affirmative action, Affordable Care Act / Obamacare, Airbnb, Albert Einstein, anti-pattern, Anton Chekhov, autonomous vehicles, bank run, barriers to entry, Bayesian statistics, Bernie Madoff, Bernie Sanders, Black Swan, Broken windows theory, business process, butterfly effect, Cal Newport, Clayton Christensen, cognitive dissonance, commoditize, correlation does not imply causation, crowdsourcing, Daniel Kahneman / Amos Tversky, David Attenborough, delayed gratification, deliberate practice, discounted cash flows, disruptive innovation, Donald Trump, Douglas Hofstadter, Edward Lorenz: Chaos theory, Edward Snowden, effective altruism, Elon Musk, en.wikipedia.org, experimental subject, fear of failure, feminist movement, Filter Bubble, framing effect, friendly fire, fundamental attribution error, Gödel, Escher, Bach, hindsight bias, housing crisis, Ignaz Semmelweis: hand washing, illegal immigration, income inequality, information asymmetry, Isaac Newton, Jeff Bezos, John Nash: game theory, lateral thinking, loss aversion, Louis Pasteur, Lyft, mail merge, Mark Zuckerberg, meta analysis, meta-analysis, Metcalfe’s law, Milgram experiment, minimum viable product, moral hazard, mutually assured destruction, Nash equilibrium, Network effects, nuclear winter, offshore financial centre, p-value, Parkinson's law, Paul Graham, peak oil, Peter Thiel, phenotype, Pierre-Simon Laplace, placebo effect, Potemkin village, prediction markets, premature optimization, price anchoring, principal–agent problem, publication bias, recommendation engine, remote working, replication crisis, Richard Feynman, Richard Feynman: Challenger O-ring, Richard Thaler, ride hailing / ride sharing, Robert Metcalfe, Ronald Coase, Ronald Reagan, school choice, Schrödinger's Cat, selection bias, Shai Danziger, side project, Silicon Valley, Silicon Valley startup, speech recognition, statistical model, Steve Jobs, Steve Wozniak, Steven Pinker, survivorship bias, The Present Situation in Quantum Mechanics, the scientific method, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, transaction costs, uber lyft, ultimatum game, uranium enrichment, urban planning, Vilfredo Pareto, wikimedia commons

Shoppers at retailers Michaels or Kohl’s know that these stores often advertise sales, where you can save 40 percent or more on selected items or departments. However, are those reduced prices a real bargain? Usually not. They’re reduced from the so-called manufacturer’s suggested retail price (MSRP), which is usually very high. Being aware of the MSRP anchors you so that you feel you are getting a good deal at 40 percent off. Often, that reduction just brings the price to a reasonable level. Anchoring isn’t just for numbers. Donald Trump uses this mental model, anchoring others to his extreme positions, so that what seem like compromises are actually agreements in his favor. He wrote about this in his 1987 book Trump: The Art of the Deal: My style of deal-making is quite simple and straightforward. I aim very high, and then I just keep pushing and pushing to get what I’m after.

You don’t want to make a fundamental attribution error by assuming that your colleague is incapable of doing something when they really just need the proper guidance. All the mental models in this section—from the third story to learned helplessness—can help you increase your empathy. When applying them, you are effectively trying to understand people’s actual circumstances and motivations better, trying as best you can to walk a mile in their shoes. PROGRESS, ONE FUNERAL AT A TIME Just as you can be anchored to a price, you can also be anchored to an entire way of thinking about something. In other words, it can be very difficult to convince you of a new idea when a contradictory idea is already entrenched in your thinking. Like many kids in the U.S., our sons are learning “Singapore math,” an approach to arithmetic that includes introducing pictorial steps in order to develop a deeper understanding of basic concepts. Even to mathematically inclined parents, this alternative way of doing arithmetic can feel foreign after so many years of thinking about it another way.


pages: 398 words: 111,333

The Einstein of Money: The Life and Timeless Financial Wisdom of Benjamin Graham by Joe Carlen

Albert Einstein, asset allocation, Bernie Madoff, Bretton Woods, business cycle, business intelligence, discounted cash flows, Eugene Fama: efficient market hypothesis, full employment, index card, index fund, intangible asset, invisible hand, Isaac Newton, laissez-faire capitalism, margin call, means of production, Norman Mailer, oil shock, post-industrial society, price anchoring, price stability, reserve currency, Robert Shiller, Robert Shiller, the scientific method, Vanguard fund, young professional

In his very first published work on investing, the September 1917 Magazine of Wall Street article titled “Curiosities of the Bond List,” Graham wrote that “as accurate as markets are, they cannot claim infallibility.”9 Writing at the end of World War I, Graham's observation about the market's general (but occasionally imperfect) accuracy was correct. Then, during the war boom and the ensuing “Roaring Twenties,” this dynamic was altered dramatically and permanently. Whereas, prior to the war, the collective behavior of these investing businesspeople usually kept security (particularly common stock) prices well-anchored to a value reflective of the issuing companies’ business fundamentals, the collective behavior of the postwar “speculative public”10 left many security prices dangerously untethered to their underlying (or intrinsic) values, as they remain to this day. So, like a balloon released into the air, security prices have since veered up, down, and sideways for a multitude of reasons, the vast majority of which are not material to the issuing company's long-term business fundamentals.


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The Paradox of Choice: Why More Is Less by Barry Schwartz

accounting loophole / creative accounting, attribution theory, Atul Gawande, availability heuristic, Cass Sunstein, Daniel Kahneman / Amos Tversky, endowment effect, framing effect, hedonic treadmill, income per capita, job satisfaction, loss aversion, medical residency, mental accounting, Own Your Own Home, Pareto efficiency, positional goods, price anchoring, psychological pricing, RAND corporation, Richard Thaler, science of happiness, The Wealth of Nations by Adam Smith

Sometime later, the catalog began to offer a larger capacity, deluxe version for $429. They didn’t sell too many of these expensive bread makers, but sales of the less expensive one almost doubled! With the expensive bread maker serving as an anchor, the $279 machine had become a bargain. Anchoring is why department stores seem to have some of their merchandise on sale most of the time, to give the impression that customers are getting a bargain. The original ticket price becomes an anchor against which the sale price is compared. A more finely tuned example of the importance of the context of comparison comes from a study of supermarket shoppers done in the 1970s, shortly after unit-pricing started appearing on the shelves just beneath the various items. When unit price information appeared on shelf tags, shoppers saved an average of 1 percent on their grocery bills. They did so mostly by purchasing the larger-sized packages of whatever brand they bought.


pages: 97 words: 28,524

Minimalism: Live a Meaningful Life by Joshua Fields Millburn, Ryan Nicodemus

agricultural Revolution, price anchoring, Skype, young professional


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

It’s a heck of a lot harder for a central bank to destroy the value of gold. If you review the graphs presented in chapter 13, ‘A brief flash of reality,’ you’ll see why I like it so much. In times of grotesque debt accumulation and asset destruction, gold is the one investment buddy you can really trust. I have plenty of gold in my current portfolio and I can’t see that changing while conditions remain as uncertain as they are. Having said that, the price of gold isn’t anchored by interest rates or dividend payments, or any of the other things which normally anchor the price of a security or physical commodity. That makes the gold price more than normally susceptible to swings of sentiment. So if you like gold, then buy carefully. Buy on the dips. Don’t get suckered into buying when the gold is on one of its periodic upsurges. And don’t, of course, be stupid enough to plunge all your assets into gold.


pages: 294 words: 82,438

Simple Rules: How to Thrive in a Complex World by Donald Sull, Kathleen M. Eisenhardt

Affordable Care Act / Obamacare, Airbnb, asset allocation, Atul Gawande, barriers to entry, Basel III, Berlin Wall, carbon footprint, Checklist Manifesto, complexity theory, Craig Reynolds: boids flock, Credit Default Swap, Daniel Kahneman / Amos Tversky, diversification, drone strike, en.wikipedia.org, European colonialism, Exxon Valdez, facts on the ground, Fall of the Berlin Wall, haute cuisine, invention of the printing press, Isaac Newton, Kickstarter, late fees, Lean Startup, Louis Pasteur, Lyft, Moneyball by Michael Lewis explains big data, Nate Silver, Network effects, obamacare, Paul Graham, performance metric, price anchoring, RAND corporation, risk/return, Saturday Night Live, sharing economy, Silicon Valley, Startup school, statistical model, Steve Jobs, TaskRabbit, The Signal and the Noise by Nate Silver, transportation-network company, two-sided market, Wall-E, web application, Y Combinator, Zipcar

The field of strategy is based on a precise point of view of what a company’s ultimate objective should be—to create economic value over time and capture it as profits. Economic value is defined as the difference between what a customer is willing to pay for a product and the cost of all the inputs required to produce it. Willingness to pay works better than alternative measures, such as revenues or price, because it anchors the analysis in the customer’s point of view and forces managers to consider what customers value and what alternatives they have. If a company succeeds in generating economic value (and protecting it from competitors), it will generate profits and cash flow into the future—the ultimate goal of a company’s strategy. Other measures of success, such as market share, revenue growth, and customer satisfaction, serve as useful markers along the road to profitable growth.


pages: 355 words: 81,788

Monolith to Microservices: Evolutionary Patterns to Transform Your Monolith by Sam Newman

Airbnb, business process, continuous integration, database schema, DevOps, fault tolerance, ghettoisation, inventory management, Jeff Bezos, Kubernetes, loose coupling, microservices, MVC pattern, price anchoring, pull request, single page application, software as a service, source of truth, telepresence

core competency, teams structured around, Shifting Structures correlation IDs (CIDs), Choreographed sagas, Tracing costsavoiding the sunk cost fallacy, Avoiding the Sunk Cost Fallacy cost-effective scaling for load, Scale Cost-Effectively for Load of change, Cost of Change-Easier Places to Experimenteasier places to experiment, Easier Places to Experiment reversible and irreversible decisions, Reversible and Irreversible Decisions couplingabout, Coupling and cohesion, balancing, On Coupling and Cohesion deployment, Deployment coupling domain, Domain coupling implementation, Implementation coupling temporal, Temporal coupling credentials, separate, for database access, The Database as a Public Contract credit derivative pricing, comparing using parallel run, Example: Comparing Credit Derivative Pricing culture (organizational)anchoring new approaches in the culture, Anchoring New Approaches in the Culture and adaptability to change or process improvements, Being Open to New Approaches customer-installed software, Customer-Installed and Managed Software D dark launching, parallel run pattern and, Dark Launching and Canary Releasing data consistency, As a Fallback Mechanismeventual consistency, Data Synchronization, Synchronizing the data in ACID transactions, ACID Transactions in move foreign key relationship to code pattern, Data Consistencycheck before deletion, Check before deletion deciding how to handle deletion, So how should we handle deletion?


pages: 511 words: 132,682

Competition Overdose: How Free Market Mythology Transformed Us From Citizen Kings to Market Servants by Maurice E. Stucke, Ariel Ezrachi

affirmative action, Airbnb, Albert Einstein, Andrei Shleifer, Bernie Sanders, Boeing 737 MAX, Cass Sunstein, choice architecture, cloud computing, commoditize, corporate governance, Corrections Corporation of America, Credit Default Swap, crony capitalism, delayed gratification, Donald Trump, en.wikipedia.org, George Akerlof, gig economy, Goldman Sachs: Vampire Squid, Google Chrome, greed is good, hedonic treadmill, income inequality, income per capita, information asymmetry, invisible hand, job satisfaction, labor-force participation, late fees, loss aversion, low skilled workers, Lyft, mandatory minimum, Mark Zuckerberg, market fundamentalism, mass incarceration, Menlo Park, meta analysis, meta-analysis, Milgram experiment, mortgage debt, Network effects, out of africa, payday loans, Ponzi scheme, precariat, price anchoring, price discrimination, profit maximization, profit motive, race to the bottom, Richard Thaler, ride hailing / ride sharing, Robert Bork, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, Shoshana Zuboff, Silicon Valley, Snapchat, Social Responsibility of Business Is to Increase Its Profits, Stanford prison experiment, Stephen Hawking, The Chicago School, The Market for Lemons, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Thomas Davenport, Thorstein Veblen, Tim Cook: Apple, too big to fail, transaction costs, Uber and Lyft, uber lyft, ultimatum game, Vanguard fund, winner-take-all economy

Participants who heard the higher sentencing anchor gave considerably higher sentences (mean of 33.38 months) than those given the low anchor (25.43 months).30 As the authors of this study concluded, from this and other similar experiments they conducted, “God may not play dice with the universe—as Albert Einstein reassured us. But judges may unintentionally play dice with criminal sentences.” And these “anchoring effects” may result in rolls of the dice in many other areas of judgment, too, including prices set by hotel reservation sites and real estate agents.31 We may reject the idea that an arbitrary number could have an impact on our own decisions. But drip pricing is a way of anchoring us to a low headline price (say $26 for the Circus Circus hotel room). Once we’ve got that price of $26 in our head, we fail to adjust our “perception of the ‘value of the offer’ sufficiently as more costs are revealed.”32 Drip pricing also taps into a second weakness. Although as we shop for a hotel room we haven’t actually purchased that reservation for $26, some part of us feels like we have and we now feel attached to it.

See also CoreCivic Costco and other club stores, 102–3 cream skimming, 169–70, 175, 183–87 credit card industry, 68, 69, 70–71, 75–77 credit default swaps, 128 criminal sentencing, 80–81, 176–77 crony capitalism, 160, 163, 230, 285 Cruz, Ted, 266 cultural conditioning college as route to social mobility, 29–30 competition delivers quality at a low price, 47–48, 49 competition is always good, x, 284 embarrassment for gullibility, 70 and escalation paradigm, 35–36 lifelong superior achievement goal, 32–33 to love competition, 125 to not compete, 122 self-interest, 71, 235–36 and status competition, 28 See also human nature culture, x–xi Dalai Lama, 253 Dale, Stacy, 36–37 D’Angelo, Jonathan, 112–13 Dartmouth College, 25 Darwin, Charles, 39 data for Amazon’s personal recommendations, 105–6, 107 analytical power of, 218–19 children’s data gleaned for advertisers, 193–95 college scorecard data, 300–304, 318n86 on consumers’ behavior, 87–91, 204–5, 207–9 Gamemakers attract bidders/advertisers, 207–9 Gamemakers’ harvesting techniques, 194, 203–7 in Las Vegas, 87–91 dating services, online overview, 108–9 competition levels, 109–12, 111 InterActiveCorp, 109–11, 111, 115–16 and marriage, 114–15 profiting from choice overload, 113–14, 115–16 slow dating, 117 deadbeat customers, 70–71 Dear Genevieve effect, 12–15, 16, 19–20, 38–39 death bonds, 245 decision aids for choice overload, 101–2 de-escalating the arms race colleges and universities, 25–27, 40, 133–34 collegiate sports, 134–38, 140–41 students and parents, 27–34, 40 Deloitte, 277 deregulation of banks, 126–30 derivatives market, 261–63 diaper apps, 197 digital ad market, 210 diminishing returns, 96–97 dissent, noncompliance, and change, 284–87 divergence of individual and collective interests, 12–20, 39–40, 242–43, 263 DOJ (US Department of Justice), 128, 172–73, 174, 232 do not track features on mobile phones, 212–13 Dostoyevsky, Fyodor, 71 drip pricing overview, 147 and anchor value, 80–81 and brain fatigue, 81–82 Caesars opposition to, 84–87 casino lobbyists combat FTC’s plan, 150–52 vs. consumer’s ability to compare prices, 155–57 consumers’ loss aversion, 81 countries with laws against, 148 FTC attempt to legalize, 148–50 in hotels, 78–80, 82–84, 147, 148–54 lobbyists use competition ideology, 150–52 and sunk cost fallacy, 81 Duhigg, Charles, 227 Duke University, 16–17, 24 dynamic ads, 204–5 Easterbrook, Frank H., 234–35 Economist, 197 Eliot, T.


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Networks, Crowds, and Markets: Reasoning About a Highly Connected World by David Easley, Jon Kleinberg

Albert Einstein, AltaVista, clean water, conceptual framework, Daniel Kahneman / Amos Tversky, Douglas Hofstadter, Erdős number, experimental subject, first-price auction, fudge factor, George Akerlof, Gerard Salton, Gerard Salton, Gödel, Escher, Bach, incomplete markets, information asymmetry, information retrieval, John Nash: game theory, Kenneth Arrow, longitudinal study, market clearing, market microstructure, moral hazard, Nash equilibrium, Network effects, Pareto efficiency, Paul Erdős, planetary scale, prediction markets, price anchoring, price mechanism, prisoner's dilemma, random walk, recommendation engine, Richard Thaler, Ronald Coase, sealed-bid auction, search engine result page, second-price auction, second-price sealed-bid, Simon Singh, slashdot, social web, Steve Jobs, stochastic process, Ted Nelson, The Market for Lemons, The Wisdom of Crowds, trade route, transaction costs, ultimatum game, Vannevar Bush, Vickrey auction, Vilfredo Pareto, Yogi Berra, zero-sum game

Roughly speaking, if there weren’t alternating paths anchoring all the prices to items of price 0, then we could find a set of items that were “floating” free of any relation to the zero-priced items. In this case, we could push the prices of these free-floating items down slightly, while still preserving the market-clearing property. This would yield a set of market-clearing prices of smaller total sum, contradicting our assumption that we already have the minimum market-clearing prices. This contradiction will show that the minimum market-clearing prices are all anchored via alternating paths to zero-priced items. 476 CHAPTER 15. SPONSORED SEARCH MARKETS Sellers Buyers Valuations a w 7, 5, 4, 2 b x 0, 0, 0, 0 c y 5, 6, 2, 2 d z 4, 4, 2, 1 Figure 15.12: If we start with the example in Figure 15.11 and zero out buyer x, the structure of the optimal matching changes significantly. The Second Fact: Zeroing Out a Buyer. Our second main fact will relate the minimum market-clearing prices to a matching that achieves the value V S , the first term on the right-B−j hand side of Equation (15.1).

And this in turn establishes that the reduced prices are still market-clearing after the price-reduction, contradicting our assumption that they were the minimum market-clearing prices. This concludes the proof, and if we look back at how it worked, we can see that it bears out our intuition for how the non-matching edges serve to anchor all the items via alternating paths to the items of price 0. Specifically, if this anchoring did not happen, then there would be a set X that was floating free of any connections to zero-priced items, and in this case the prices of all items in X could be pushed further downward. This can’t happen if the market-clearing prices are already as low as possible. A Proof of Fact 2. To prove Fact 2, we start with a matching market with minimum market-clearing prices p, and we consider the preferred-seller graph for these prices.


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Inside the House of Money: Top Hedge Fund Traders on Profiting in a Global Market by Steven Drobny

Albert Einstein, asset allocation, Berlin Wall, Bonfire of the Vanities, Bretton Woods, business cycle, buy and hold, buy low sell high, capital controls, central bank independence, commoditize, commodity trading advisor, corporate governance, correlation coefficient, Credit Default Swap, diversification, diversified portfolio, family office, fixed income, glass ceiling, high batting average, implied volatility, index fund, inflation targeting, interest rate derivative, inventory management, John Meriwether, Long Term Capital Management, margin call, market bubble, Maui Hawaii, Mexican peso crisis / tequila crisis, moral hazard, Myron Scholes, new economy, Nick Leeson, oil shale / tar sands, oil shock, out of africa, paper trading, Paul Samuelson, Peter Thiel, price anchoring, purchasing power parity, reserve currency, risk tolerance, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, short selling, Silicon Valley, The Wisdom of Crowds, too big to fail, transaction costs, value at risk, yield curve, zero-coupon bond, zero-sum game

It has brought inflation expectations right down to the target and that has had a lot of beneficial effects. In the old days, when oil prices went up, there was always a risk that you needed to tighten policy to ensure that inflation didn’t get out of hand. Now we’ve had two significant oil shocks since the Bank of England has been independent, and in neither case did they have to tighten policy, because wages and prices were well anchored by subdued inflation expectations.That’s a good outcome. There are other benefits from the reduction of inflation volatility, such as businesses being more willing to invest, and you don’t get unfair redistribution because of unexpected inflation. Likewise, the Treasury is no longer worrying that much about macromanagement and macrostability, so it can concentrate on other policies designed to help the long-term growth rate of the UK economy.


pages: 505 words: 142,118

A Man for All Markets by Edward O. Thorp

3Com Palm IPO, Albert Einstein, asset allocation, beat the dealer, Bernie Madoff, Black Swan, Black-Scholes formula, Brownian motion, buy and hold, buy low sell high, carried interest, Chuck Templeton: OpenTable:, Claude Shannon: information theory, cognitive dissonance, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Edward Thorp, Erdős number, Eugene Fama: efficient market hypothesis, financial innovation, George Santayana, German hyperinflation, Henri Poincaré, high net worth, High speed trading, index arbitrage, index fund, interest rate swap, invisible hand, Jarndyce and Jarndyce, Jeff Bezos, John Meriwether, John Nash: game theory, Kenneth Arrow, Livingstone, I presume, Long Term Capital Management, Louis Bachelier, margin call, Mason jar, merger arbitrage, Murray Gell-Mann, Myron Scholes, NetJets, Norbert Wiener, passive investing, Paul Erdős, Paul Samuelson, Pluto: dwarf planet, Ponzi scheme, price anchoring, publish or perish, quantitative trading / quantitative finance, race to the bottom, random walk, Renaissance Technologies, RFID, Richard Feynman, risk-adjusted returns, Robert Shiller, Robert Shiller, rolodex, Sharpe ratio, short selling, Silicon Valley, Stanford marshmallow experiment, statistical arbitrage, stem cell, stocks for the long run, survivorship bias, The Myth of the Rational Market, The Predators' Ball, the rule of 72, The Wisdom of Crowds, too big to fail, Upton Sinclair, value at risk, Vanguard fund, Vilfredo Pareto, Works Progress Administration


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

You thought that a price of 40 for a stock that had been 80 made the stock cheap, yet you never considered the possibility that 40 was still too high. This demonstrates another one of Kahneman and Tversky’s behavioral findings: anchoring, or the tendency of people facing complex decisions to use an “anchor” or a suggested number to form their judgment.22 Figuring out the “correct” stock price is such a complex task that it is natural to use the recently remembered stock price as an anchor and then judge the current price a bargain. Dave: If I follow your advice and sell my losers whenever prospects are dim, I’m going to register a lot more losses on my trades. IC: Good! Most investors do exactly the opposite and realize poor returns. Research has shown that investors sell stocks for a gain 50 percent more frequently than they sell stocks for a loss.23 This means that stocks that are above their purchase price are 50 percent more likely to be sold than stocks that show a loss.


pages: 517 words: 139,477

Stocks for the Long Run 5/E: the Definitive Guide to Financial Market Returns & Long-Term Investment Strategies by Jeremy Siegel

Asian financial crisis, asset allocation, backtesting, banking crisis, Black-Scholes formula, break the buck, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, capital asset pricing model, carried interest, central bank independence, cognitive dissonance, compound rate of return, computer age, computerized trading, corporate governance, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, Deng Xiaoping, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Financial Instability Hypothesis, fixed income, Flash crash, forward guidance, fundamental attribution error, housing crisis, Hyman Minsky, implied volatility, income inequality, index arbitrage, index fund, indoor plumbing, inflation targeting, invention of the printing press, Isaac Newton, joint-stock company, London Interbank Offered Rate, Long Term Capital Management, loss aversion, market bubble, mental accounting, money market fund, mortgage debt, Myron Scholes, new economy, Northern Rock, oil shock, passive investing, Paul Samuelson, Peter Thiel, Ponzi scheme, prediction markets, price anchoring, price stability, purchasing power parity, quantitative easing, random walk, Richard Thaler, risk tolerance, risk/return, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, stocks for the long run, survivorship bias, technology bubble, The Great Moderation, the payments system, The Wisdom of Crowds, transaction costs, tulip mania, Tyler Cowen: Great Stagnation, Vanguard fund

You thought that a price of 40 for a stock that had been 80 made the stock cheap; what you never considered is the possibility that 40 was still too high. This demonstrates another one of Kahneman and Tversky’s behavioral findings: anchoring, or the tendency of people facing complex decisions to use an “anchor” or a suggested number to form their judgment.24 Figuring out the “correct” stock price is such a complex task that it is natural to use the recently remembered stock price as an anchor and then judge the current price a bargain. Dave: If I follow your advice and sell my losers whenever prospects are dim, I’m going to register a lot more losses on my trades. IC: Good! Most investors do exactly the opposite, to their detriment. Research has shown that investors sell stocks for a gain 50 percent more frequently than they sell stocks for a loss.25 This means that stocks that are above their purchase price are 50 percent more likely to be sold than stocks that show a loss.


pages: 270 words: 64,235

pages: 290 words: 76,216

What's Wrong with Economics? by Robert Skidelsky

"Robert Solow", additive manufacturing, agricultural Revolution, Black Swan, Bretton Woods, business cycle, Cass Sunstein, central bank independence, cognitive bias, conceptual framework, Corn Laws, corporate social responsibility, correlation does not imply causation, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, disruptive innovation, Donald Trump, full employment, George Akerlof, George Santayana, global supply chain, global village, Gunnar Myrdal, happiness index / gross national happiness, hindsight bias, Hyman Minsky, income inequality, index fund, inflation targeting, information asymmetry, Internet Archive, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, knowledge economy, labour market flexibility, loss aversion, Mark Zuckerberg, market clearing, market friction, market fundamentalism, Martin Wolf, means of production, moral hazard, paradox of thrift, Pareto efficiency, Paul Samuelson, Philip Mirowski, precariat, price anchoring, principal–agent problem, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, shareholder value, Silicon Valley, Simon Kuznets, survivorship bias, technoutopianism, The Chicago School, The Market for Lemons, The Nature of the Firm, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, Thorstein Veblen, transaction costs, transfer pricing, Vilfredo Pareto, Washington Consensus, Wolfgang Streeck, zero-sum game

So it’s a classic unjust bargain, with the worker having to accept whatever wage the capitalist offers him, on pain of starvation.6 The problem facing all cost of production theories was that the prices which goods fetched in rapidly expanding and increasingly deregulated markets had little relation to the hours of labour spent in producing them. The long-run, or normal or ‘natural’ price obstinately failed to emerge from the ever-spreading web of exchange relations. The price system lacked a moral anchor. A theory of value which couldn’t explain actual price behaviour was rather obviously deficient, and from the 1870s the cost of production theory was swept away by a supply and demand theory, in which market prices were jointly determined by scarcity and consumer demand. Adam Smith had explained the high price of diamonds by the expense of getting them from the mines to the market.


pages: 387 words: 110,820


pages: 276 words: 82,603

Birth of the Euro by Otmar Issing

"Robert Solow", accounting loophole / creative accounting, Bretton Woods, business climate, business cycle, capital controls, central bank independence, currency peg, financial innovation, floating exchange rates, full employment, inflation targeting, information asymmetry, labour market flexibility, labour mobility, market fundamentalism, money market fund, moral hazard, oil shock, open economy, price anchoring, price stability, purchasing power parity, reserve currency, Y2K, yield curve

Tinbergen, On the Theory of Economic Policy, 2nd edition (Amsterdam, 1952). 66 • The ECB and the foundations of monetary policy instead. On account of the loss of credibility, the interest rate level across periods is higher than with a constant monetary policy aimed solely at maintaining price stability. In the end, therefore, an inflationary monetary policy does not add up, and on balance society is worse off. Thus the long-run maintenance of price stability and correspondingly well-anchored inflation expectations are not only the best, but also the only way in which monetary policy can contribute to growth and employment over time. If the central bank deviates from this course, not only will it fail to make a positive contribution to achieving the ‘other objectives’, but – quite the reverse – it will also fail to fulfil its actual mandate.19 The above reflects current knowledge at the time the consultations and negotiations on the Statute of a European Central Bank got under way.


pages: 310 words: 82,592

Never Split the Difference: Negotiating as if Your Life Depended on It by Chris Voss, Tahl Raz

banking crisis, Black Swan, clean water, cognitive bias, Daniel Kahneman / Amos Tversky, Donald Trump, framing effect, friendly fire, iterative process, loss aversion, market fundamentalism, price anchoring, telemarketer, ultimatum game, uranium enrichment

It gives the number credibility and weight. 6.On your final number, throw in a nonmonetary item (that they probably don’t want) to show you’re at your limit. The genius of this system is that it incorporates the psychological tactics we’ve discussed—reciprocity, extreme anchors, loss aversion, and so on—without you needing to think about them. If you’ll bear with me for a moment, I’ll go over the steps so you see what I mean. First, the original offer of 65 percent of your target price will set an extreme anchor, a big slap in the face that might bring your counterpart right to their price limit. The shock of an extreme anchor will induce a fight-or-flight reaction in all but the most experienced negotiators, limiting their cognitive abilities and pushing them into rash action. Now look at the progressive offer increases to 85, 95, and 100 percent of the target price. You’re going to drop these in sparingly: after the counterpart has made another offer on their end, and after you’ve thrown out a few calibrated questions to see if you can bait them into bidding against themselves.


pages: 471 words: 124,585

The Ascent of Money: A Financial History of the World by Niall Ferguson

Admiral Zheng, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, business cycle, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collateralized debt obligation, colonial exploitation, commoditize, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, deglobalization, diversification, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Glaeser, Edward Lloyd's coffeehouse, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, German hyperinflation, Hernando de Soto, high net worth, hindsight bias, Home mortgage interest deduction, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, iterative process, John Meriwether, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour mobility, Landlord’s Game, liberal capitalism, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, Naomi Klein, negative equity, Nelson Mandela, Nick Leeson, Northern Rock, Parag Khanna, pension reform, price anchoring, price stability, principal–agent problem, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, quantitative hedge fund, RAND corporation, random walk, rent control, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, stocks for the long run, structural adjustment programs, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Malthus, Thorstein Veblen, too big to fail, transaction costs, undersea cable, value at risk, Washington Consensus, Yom Kippur War

It was not until 1993, after the Savings and Loans crisis (see Chapter 5), that the number of national banks fell below 3,600 for the first time in nearly a century. In 1924 John Maynard Keynes famously dismissed the gold standard as a ‘barbarous relic’. But the liberation of bank-created money from a precious metal anchor happened slowly. The gold standard had its advantages, no doubt. Exchange rate stability made for predictable pricing in trade and reduced transaction costs, while the long-run stability of prices acted as an anchor for inflation expectations. Being on gold may also have reduced the costs of borrowing by committing governments to pursue prudent fiscal and monetary policies. The difficulty of pegging currencies to a single commodity based standard, or indeed to one another, is that policymakers are then forced to choose between free capital movements and an independent national monetary policy. They cannot have both.


pages: 336 words: 101,894

Rogue Trader by Nick Leeson

corporate governance, margin call, Nick Leeson, price anchoring, the market place

We were a new team, and I was just picking up on the crazy hand signals traders use, like bookies at the racecourse indicating betting prices. We were watching the September futures contracts on the Nikkei 225 index, which is calculated from the fluctuating value of an underlying ‘basket’ of shares – rather like the Dow-Jones index or the ‘Footsie’ 100. Futures contracts enable you – for the cost of a small ‘margin’ payment up front – to buy or sell this basket of shares at a given price in the future, typically anchored around four dates: the ends of March, June, September and December. Given the uncertainty of future prices, the value can move around wildly as people take different views about how the Nikkei share index itself might trade. The futures contracts and the index move in broadly similar lines, but the time gap and the leverage in the futures market means that the futures are far more volatile than the share index itself.


pages: 354 words: 105,322

The Road to Ruin: The Global Elites' Secret Plan for the Next Financial Crisis by James Rickards

"Robert Solow", Affordable Care Act / Obamacare, Albert Einstein, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Bayesian statistics, Ben Bernanke: helicopter money, Benoit Mandelbrot, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Black Swan, blockchain, Bonfire of the Vanities, Bretton Woods, British Empire, business cycle, butterfly effect, buy and hold, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, cellular automata, cognitive bias, cognitive dissonance, complexity theory, Corn Laws, corporate governance, creative destruction, Credit Default Swap, cuban missile crisis, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, disintermediation, distributed ledger, diversification, diversified portfolio, Edward Lorenz: Chaos theory, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, fiat currency, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, Fractional reserve banking, G4S, George Akerlof, global reserve currency, high net worth, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Isaac Newton, jitney, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, mutually assured destruction, Myron Scholes, Naomi Klein, nuclear winter, obamacare, offshore financial centre, Paul Samuelson, Peace of Westphalia, Pierre-Simon Laplace, plutocrats, Plutocrats, prediction markets, price anchoring, price stability, quantitative easing, RAND corporation, random walk, reserve currency, RFID, risk-adjusted returns, Ronald Reagan, Silicon Valley, sovereign wealth fund, special drawing rights, stocks for the long run, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transfer pricing, value at risk, Washington Consensus, Westphalian system


pages: 391 words: 22,799

To Serve God and Wal-Mart: The Making of Christian Free Enterprise by Bethany Moreton

affirmative action, American Legislative Exchange Council, anti-communist, Berlin Wall, big-box store, Bretton Woods, Buckminster Fuller, collective bargaining, corporate personhood, creative destruction, deindustrialization, desegregation, Donald Trump, estate planning, Fall of the Berlin Wall, Frederick Winslow Taylor, George Gilder, global village, informal economy, invisible hand, liberation theology, longitudinal study, market fundamentalism, Mont Pelerin Society, mortgage tax deduction, Naomi Klein, new economy, post-industrial society, postindustrial economy, prediction markets, price anchoring, Ralph Nader, RFID, road to serfdom, Ronald Reagan, Silicon Valley, Stewart Brand, strikebreaker, The Wealth of Nations by Adam Smith, union organizing, walkable city, Washington Consensus, white flight, Whole Earth Catalog, Works Progress Administration

Arkansas, Wal-Â�Mart’s home state, passed one of the first “right-Â�to-Â�work” laws in 1947; by 1954, the entire South had enacted such legislation.11 When it came time to select sites for military bases and war contracts, the conservative conÂ�gresÂ�sional coalition made its power felt as well. Jesse H. Jones’s lieutenant at the Reconstruction Finance Corporation—a zealous supporter of the free market from Houston—shaped the postwar sell-Â�off of federal assets to private companies at bargain-Â�basement prices.12 This infrastructure anchored the Sun Belt’s dominance of the high-Â�tech “clean development” of the Cold War—NASA in Texas and Florida; Hughes Aircraft in Orange County, California; Lockheed-Â� Martin in Cobb County, Georgia; the Air Force Academy in Colorado Springs. The Cold War defense industry and its single guaranteed client, the federal government, provided a reliable mechanism for redistributing national wealth to the South and West.13 These high-Â�tech industries in turn supported a secondary sector of serÂ�vice, entertainment, and recreation: McDonald’s and Disney from California; the retirement industry in Florida, Arkansas, and Arizona; Blockbuster Video from Dallas; the country-Â�music industry in Nashville and Branson; and, of course, Wal-Â�Mart in Bentonville, discount commissary to the Sun Belt boom economy.


pages: 386 words: 116,233

The Millionaire Fastlane: Crack the Code to Wealth and Live Rich for a Lifetime by Mj Demarco

8-hour work day, Albert Einstein, AltaVista, back-to-the-land, Bernie Madoff, bounce rate, business process, butterfly effect, buy and hold, cloud computing, commoditize, dark matter, delayed gratification, demand response, Donald Trump, fear of failure, financial independence, fixed income, housing crisis, Jeff Bezos, job-hopping, Lao Tzu, Mark Zuckerberg, passive income, passive investing, payday loans, Ponzi scheme, price anchoring, Ronald Reagan, upwardly mobile, wealth creators, white picket fence, World Values Survey, zero day

Get Unique: The USP The first step at building a brand is to have a Unique Selling Proposition or a USP. As a business without one, you're adrift in a sea of me-too businesses without a rudder, unmoored to the trade winds of the marketplace. USP-less businesses offer nothing distinct, nothing unique, no benefit, no logical reason that someone should buy from them other than hope or circumstance wrapped around a cheap price. Your USP is the anchor to your brand. What makes your company different from the rest? What sets your business apart? What will compel a customer to use you over someone else? My USP was powerful: No-risk advertising. If we send you nothing, you pay nothing. Advertisers joined by the truckload because they were tired of advertising with the Yellow Pages, which offered this risk proposition: “Pay us $5,000 upfront, then hope and pray.”


pages: 625 words: 167,097

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Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

affirmative action, Albert Einstein, algorithmic trading, Andy Kessler, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, business cycle, capital asset pricing model, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Fall of the Berlin Wall, financial independence, financial innovation, financial thriller, fixed income, full employment, global reserve currency, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, happiness index / gross national happiness, haute cuisine, high net worth, Hyman Minsky, index fund, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, job automation, Johann Wolfgang von Goethe, John Meriwether, joint-stock company, Jones Act, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Martin Wolf, mega-rich, merger arbitrage, Mikhail Gorbachev, Milgram experiment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, negative equity, NetJets, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, plutocrats, Plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Thaler, Right to Buy, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, Satyajit Das, savings glut, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, survivorship bias, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, the new new thing, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond, zero-sum game

As the supply of CDS contracts was not restricted by the amount of Greek debt, hedge funds and other rubber-necked financial accident voyeurs joined the party, looking to make profits. Dealers in CDSs made large spreads from standing in between the buyers and sellers. As with all insurance, higher risks mean higher premiums. The CDS markets became a visible benchmark of Greece’s problems. The price of insurance was not anchored to the real underlying risk or the public finances of Greece. Traders were not interested in whether Greece was likely to default or in protecting themselves from this risk. They just kept beating the Greek piñata. Traders pushed around the thinly traded insurance contracts, making money from the volatility. Price movements triggered collateral requirements, causing further problems.


pages: 892 words: 91,000

Valuation: Measuring and Managing the Value of Companies by Tim Koller, McKinsey, Company Inc., Marc Goedhart, David Wessels, Barbara Schwimmer, Franziska Manoury

activist fund / activist shareholder / activist investor, air freight, barriers to entry, Basel III, BRICs, business climate, business cycle, business process, capital asset pricing model, capital controls, Chuck Templeton: OpenTable:, cloud computing, commoditize, compound rate of return, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, discounted cash flows, distributed generation, diversified portfolio, energy security, equity premium, fixed income, index fund, intangible asset, iterative process, Long Term Capital Management, market bubble, market friction, Myron Scholes, negative equity, new economy, p-value, performance metric, Ponzi scheme, price anchoring, purchasing power parity, quantitative easing, risk/return, Robert Shiller, Robert Shiller, shareholder value, six sigma, sovereign wealth fund, speech recognition, stocks for the long run, survivorship bias, technology bubble, time value of money, too big to fail, transaction costs, transfer pricing, value at risk, yield curve, zero-coupon bond

It shows that the DCF value is far less volatile than the underlying cash flow, because no single year’s performance has a significant impact on the value of the company. In the real world, the share prices of cyclical companies are less stable than the example in exhibit 33.1. Exhibit 33.2 shows the earnings per share (EPS) and share prices, both indexed, for 15 companies with a four-year cycle. The share prices are more volatile than the DCF approach would predict—suggesting that market prices exhibit the bias of anchoring on current earnings. How can this apparent anomaly be explained? We examined equity analysts’ consensus earnings forecasts for cyclical companies to see if they would provide any clues to the volatile stock prices of these companies. What we found surprised us. Consensus earnings forecasts for cyclical companies appeared to ignore cyclicality entirely. The forecasts invariably showed an upward-sloping trend, whether the companies were at the peak or trough of the cycle.