Category Archives: The Real World

Interview With Meir Statman (extra credit opportunity)

Meir Statman has very important things to say about decision-making under risk and uncertainty; I introduced Professor Statman to you in my previous blog posting entitled “Your Tolerance for Investment Risk Is Probably Not What You Think.”  Here is an extra credit opportunity for Finance 4335 based upon a 1 hour, 25 minute podcast (recorded in July 2017) hosted by Barry Ritholtz’s Masters of Business podcast (link provided below) entitled “Interview with Meir Statman.”

You may earn extra credit by listening to and reporting on Mr. Ritholtz’s interview with Meir Statman about behavioral finance.   In order to receive extra credit for this assignment, you must submit (via email sent to risk@garven.com) a 1-2 page executive summary of what you learned from this podcast; it is due by no later than 5 p.m. on Monday, September 18.  This extra credit assignment will replace your lowest quiz grade in Finance 4335 (assuming the extra credit grade is higher).

Bloomberg View columnist Barry Ritholtz interviews Meir Statman, the Glenn Klimek Professor of Finance at Santa Clara University. His research focuses on behavioral finance. He attempts to understand how investors and managers make financial decisions and how these decisions are reflected in financial markets. His most recent book is “Finance for Normal People: How Investors and Markets Behave,” published by Oxford University Press. This commentary aired on Bloomberg Radio.

Your Tolerance for Investment Risk Is Probably Not What You Think

This WSJ article is authored by Professor Meir Statman,  the Glenn Klimek Professor of Finance at Santa Clara University.  Professor Statman’s research focuses on behavioral finance, which is a very important topic in decision theory that I hope to cover during tomorrow’s meeting of Finance 4335.
The questions financial advisers ask clients to get at the answer actually measure something completely different—often leading to misguided investment strategies.

How government policy exacerbates hurricanes like Harvey

Here’s the (very timely) cover story of the latest issue of The Economist. Quoting from the article, “Underpricing (of flood insurance) encourages the building of new houses and discourages existing owners from renovating or moving out. According to the Federal Emergency Management Agency, houses that repeatedly flood account for 1% of NFIP’s properties but 25-30% of its claims. Five states, Texas among them, have more than 10,000 such households and, nationwide, their number has been going up by around 5,000 each year. Insurance is meant to provide a signal about risk; in this case, it stifles it.”

As if global warming were not enough of a threat, poor planning and unwise subsidies make floods worse.

On the Economics of Price Gouging

This is an oldie (from 2007) but goody – on the economics of price gouging in the wake of a hurricane. The principles discussed are timeless and well worth pondering!

Mike Munger of Duke University recounts the harrowing (and fascinating) experience of being in the path of a hurricane and the economic forces that were set in motion as a result. One of the most important is the import of urgent supplies when thousands of people are without electricity. Should prices be allowed to rise freely or should the government restrict prices? Listen in as Munger and EconTalk host Russ Roberts discuss the human side of economics after a catastrophe.

Harvey’s Test: Businesses Struggle With Flawed Insurance as Floods Multiply

This WSJ article provides a fairly comprehensive look at the financial implications for #Harvey for small business. What’s particularly disconcerting is that NFIP is already for all intents and purposes technically insolvent (current debt to the US Treasury stands at around $25 billion) and Congress is supposed to reauthorize funding for the program’s next five years by September 30. On the lighter side of things, it’s fun to see a couple of academic colleagues’ names in print in this article; specifically, Erwann Michel-Kerjan of the Organization for Economic Cooperation and Development Board on Financial Management of Catastrophes and Ben Collier, who is a faculty member at Temple University’s Fox School of Business.

Hurricane will strain a National Flood Insurance Program out of step with needs of small businesses in era of extreme weather.

Catastrophe Bonds Fall as Hurricane Harvey Bears Down on Texas

Good article from Bloomberg on how catastrophe (AKA “cat”) bonds are a unique asset class for investors and how such bonds disrupt traditional reinsurance markets.  For a broader perspective of these topics, also see the August 2016 WSJ article entitled “The Insurance Industry Has Been Turned Upside Down by Catastrophe Bonds” and my blog posting entitled “Cat Bonds“.

Cat bonds represent a form of securitization in which risk is transferred to investors rather than insurers or reinsurers. Typically, an insurer or reinsurer will issue a cat bond to investors such as life insurers, hedge funds and pension funds. The bonds are structured similarly to traditional bonds, with an important exception: if a pre-specified event such as a hurricane occurs prior to the maturity of the bonds, then investors risk losing accrued interest and/or the principal value of the bonds. This is why these bonds are falling in price – investors expect that the payment triggers tied to storms like #Harvey will reduce the payments received by holders of these bonds.

Bonds tied to weather risks tumbled the most in seven months as Hurricane Harvey advances on Texas’s Gulf Coast.

Place Your Bets: When Will the U.S. Hit the Debt Ceiling?

This is an excellent article on how asset prices impound political risks, and the role of so-called “prediction markets” in assessing political event probabilities (in this case, the likelihood of the U.S. defaulting on its debt).

Prediction markets add a crowdsourced opinion to the chaos of Washington.

Insurance featured as one of “50 Things That Made the Modern Economy”

During the past year, Financial Times writer Tim Harford has presented an economic history documentary radio and podcast series called 50 Things That Made the Modern Economy.  While I recommend listening to the entire series of podcasts, I would like to call your attention to Mr. Harford’s episode on the topic of insurance, which I link below.   This 9-minute long podcast lays out the history of the development of the various institutions which exist today for the sharing and trading of risk, including markets for financial derivatives as well as for insurance. Here’s the description of this podcast:

“Legally and culturally, there’s a clear distinction between gambling and insurance. Economically, the difference is not so easy to see. Both the gambler and the insurer agree that money will change hands depending on what transpires in some unknowable future. Today the biggest insurance market of all – financial derivatives – blurs the line between insuring and gambling more than ever. Tim Harford tells the story of insurance; an idea as old as gambling but one which is fundamental to the way the modern economy works.”

Insurance is as old as gambling, but it’s fundamental to the way the modern economy works
bbc.co.uk

SAP CEO Interview on the importance of taking time to read The Wall Street Journal

As SAP CEO Bill McDermott explains in the video below, taking time to read the Wall Street Journal (WSJ) is all about intellectual curiosity. Furthermore, I will frequently post links to WSJ articles throughout the course of the semester which help to bridge the gap between Finance 4335 specifically (as well as your business studies generally) and the “real” world. WSJ subscription instructions are available at http://risk.garven.com/2017/05/04/how-to-obtain-a-fall-2017-wall-street-journal-subscription/.