Posts from — December 2007

• Dynamic Modeling
  Graduate Seminar in Dynamic Programming with Excellent Lecture Notes
  (tags: programming exp_econ_book)
• Syllabus § Economics 2010c (Fall 2007-2008)
  Lecture notes for a DP heavy macro course.
  (tags: macr)
• Quesnay, Tableau Economique, éditions de 1758, 1759, 1766
  (tags: EC4004 OUPBook)

Watch the video below and tell me 2 things you could do with a million dollars if you believed what she said. Email me your answers.

Watch the Video Below. Email me and tell me 3 ideas you have that relate the material we discussed in lectures this week to the content of the video.

“The first principle is that you must not fool yourself (and you are the easiest person to fool), but also that you must not attempt to fool others with your foolishness.”

Ask E.T.: Advice for effective analytical reasoning

Blogged with Flock

BBC NEWS | In pictures: Urban life in Zimbabwe, Dollars and cents

Photos of urban life in Zimbabwe today: shortages, queues, hyperinflation, and hardship.

Blogged with Flock

Blogged with Flock

People are still sleeping outside banks in the hope of getting cash before Christmas, he said.”Tomorrow is Christmas day and still people are queuing throughout the country,”

BBC NEWS | World | Africa | Zimbabwe banks open over holidays

Zimbabwe is a great case study for EC4004 Macroeconomics of what not to when running a country. Macroeconomic and political meltdown is already happening there. His people are suffering. I wonder will Mr. Mugabe have to queue for Bank Notes?

Blogged with Flock

• Dean P. Foster and H. Peyton Young - Hedge Fund Wizards - washingtonpost.com
  Good case study for the options part of the Financial Economics course.
  (tags: economics Finance EC4024)

To illustrate how easy it is to set up a hedge fund scam, consider the following example. An enterprising man named Oz sets up a new fund with the stated aim of earning 10 percent in excess of some benchmark rate of return, say 4 percent. The fund will run for five years, and investors can cash out at the end of each year if they wish. The fee is the standard “2 and 20″: 2 percent annually for funds under management, and a 20 percent incentive fee for returns that exceed the benchmark. Although he has no investment track record, Oz has a smooth manner, a doctorate in physics and many rich acquaintances. He raises $100 million and opens shop. He then studies the derivatives market and finds an event on which the market places fairly long odds, say 9:1. In other words, it costs $.10 to buy an option that pays $1 if the event occurs and $0 otherwise. The nature of the event is unimportant: it might be a large fall in the stock market, Florida getting hit by a Category 5 hurricane or Russian President Vladimir Putin dying before the end of the year. Next Oz writes some covered options on this event and sells 110 million of them in the derivatives market. This obligates him to pay the option holders $110 million if the event does occur and nothing if it does not. He collects $11 million on the options. To cover his obligations in case the “bad” event occurs, he uses the investors’ money plus the proceeds from the options to buy $110 million in one-year Treasury bills yielding 4 percent, which he deposits in escrow. This leaves $1 million in “pocket money,” which he uses to lease some computer terminals and hire a few geeks to sit in front of them, just in case his investors drop by. The probability is ninety percent that the bad event does not occur and Oz owes nothing to the option holders. With a gross return (before expenses) of $15,400,000, the investors are thrilled, and so is Oz. He collects $2 million in management fees (of which he has only spent $1 million), plus a performance bonus equal to 20 percent of the ‘excess return’, namely, 20 percent of $11,400,000. All in all, Oz nets over $3 million for doing absolutely nothing. Oz can then repeat the same gambit next year. When the fund terminates after five years, the chances are nearly 60 percent that the unlucky event will never have occurred. Oz looks like a genius and gets paid like a genius.

Econbrowser: Earning excess returns

Great Post for the EC4024 Class next year, really interesting.

Blogged with Flock

  (Yiddish) a gullible simpleton more to be pitied than despised; “don’t be such an apologetic schnook.”

Link

Blogged with Flock

• MoneyScience Home Page
  (tags: business Conference Finance news Research)
• RGE - About Us
  (tags: EC4024 Blogs Finance)
• Experimental Economics Program at the University of Massachusetts Amherst
  Experimental Economics Lab and Graduate Program
  (tags: Exp_Econ_Workshop exp_econ_book)

Here are Jstor Links to several important readings for the course. Some are available in the course pack, others are not. All can be downloaded and printed off by clicking one of the links below. I’ll add more as the course goes on.

William F. Sharpe, Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk, Journal of Finance, Vol 19, No. 3, 1964, pp. 425-442

Robert J. Shiller, From Efficient Markets Theory to Behavioral Finance, The Journal of Economic Perspectives, Vol. 17, No. 1. (Winter, 2003), pp. 83-104.

Herbert A. Simon, Rationality as Process and as Product of Thought, The American Economic Review, Vol. 68, No. 2, Papers and Proceedings of the Ninetieth Annual Meeting of the American Economic Association. (May, 1978), pp. 1-16

Andrew Lo, The Adaptive Markets Hypothesis: Market Efficiency from an Evolutionary Perspective, Journal of Portfolio Management, 30,(September Issue), 2004, pp. 15 - 29

Martin A. Leibowitz, Alpha Hunters and Beta Grazers, Financial Analysts Journal, Vol. 61, No. 5, pp. 32-39, September/October 2005

Daniel Kahneman, Maps of Bounded Rationality: Psychology for Behavioral Economics, The American Economic Review, Vol. 93, No. 5. (Dec., 2003), pp. 1449-1475.

André F. Perold The Capital Asset Pricing Model The Journal of Economic Perspectives, Vol. 18, No. 3. (Summer, 2004), pp. 3-24.

Here are some non technical books that will make the course more interesting if you read them first, before all the technical pieces are applied. All the links take you to Amazon.co.uk.

Peter Bernstein, “Against the Gods: The Remarkable Story of Risk” (Peter L. Bernstein)

Peter Bernstein, “Capital Ideas Evolving: The Improbable Origins of Modern Wall Street” (Peter L. Bernstein)

Satyait Das “Traders, Guns and Money: Knowns and Unknowns in the Dazzling World of Derivatives” (Satyajit Das)

Nassim Taleb “The Black Swan: The Impact of the Highly Improbable” (Nassim Nicholas Taleb)

Nassim Taleb “Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets” (Nassim Nicholas Taleb)

Charlse Seife “Zero: The Biography of a Dangerous Idea” (Charles Seife)

All marks are provisional subject to passing the Autumn exam board but here’s the distribution of marks in the EC4333 exam this year. Well done everyone and thanks for taking the course!

• Axes et groupes du CIREQ
  Interesting Research Institute
  (tags: interestingpeople)

• Portfolio Selection: Efficient Diversification of Investments
  Markowitz’s classic book
  (tags: books Finance EC4024)

Trying stuff is cheaper than deciding whether to try it. (Compare the cost of paying and feeding someone to do a few weeks of [Perl or PHP] hacking to the full cost of the meetings that went into a big company decision.) Don’t overplan something. Just do it half-assed to start with, then throw more people at it to fix it if it works.

A fundamental rule of the internet: Trying stuff is cheaper… (kottke.org)

• Research
  Prominent Behavioural Economist, a hero of one of the EC4024 lectures
  (tags: economics Finance Research EC4024)
• Economics 525 Syllabus
  (tags: Macro)
• Whats New in Econometrics?
  NBER course on econometric issues
  (tags: econometrics)

• The PBL Network Ireland
  Teaching forum. I’ve just joined the steering committee.
  (tags: teaching)
• Learning by Doing: Section 2
  Experiential learning theory
  (tags: teaching)

Here’s a presentation I’m giving on Friday at the 2007 UCD Teaching Colloquium, based on this paper. I’m looking forward to the event as I really want to learn more about the PBL approach.

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