Capital for Living a More Practical Life
One of the most common problems in economics and finance is the fallacy of composition. The fallacy of composition occurs when you fail to understand the entirety of an argument. As an example, a common fallacy of composition in finance includes the cash on the sidelines myth. The cash on the sidelines myth is the… Read More
There’s a bubble in catastrophizing. This is the tendency to always assume the worst. Which is weird because the worst rarely plays out. In fact, even in worst case scenarios the financial markets have tended to stabilize fairly fast. Larry Swedroe had a good piece today on the trend in catastrophizing everything noting 3 particularly… Read More
It’s become fashionable in recent years to shun all types of forecasting about the future. This narrative usually involves the cherry picking of bad forecasts to prove the point. For instance, we often hear about how economists have never predicted recessions or how Wall Street strategists never predict bear markets. Something like this might be… Read More
Humans have an easier time understanding the world by thinking about things in relative terms. These comparisons help us better compartmentalize our thoughts and benchmark our performance. Relative thinking creates order in a seemingly orderless world. But it can be both productive and highly unproductive since, in addition to thinking in relative terms, we also tend to overestimate… Read More
There was a good piece in the WSJ today discussing potential “flaws” in Exchange Traded Funds (ETFs). ETFs are a relatively new product that have amassed huge quantities of assets in the last few decades but are still dwarfed by the mutual fund space (roughly 2.1 trillion in assets vs 12.6 trillion in mutual funds).… Read More
Covariation bias is the tendency for people to overestimate the relationship between fearful stimuli and negative outcomes. The classic example in scientific studies is people’s reactions to spiders. Death from spider bites are extremely rare and there hasn’t been a recorded spider death in Australia (where spiders are most common) since 1979 (see here and here).… Read More
If you’ve been paying attention to the financial media in the last few weeks you’ve probably seen the drama surrounding a company named Valeant. In case you’ve been buried in your bunker waiting for China to blow up the global economy, here’s the short version – Valeant is a pharmaceutical company that has basically acquired… Read More
Tonight’s Mets vs Dodgers game is going to be an interesting one. The playoff series is tied 1-1, but game 2 was decided in a controversial manner. Chase Utley was on first base with 1 out in the seventh inning and a man on first. The batter hit a ball up the middle where the… Read More
A boom/bust theory of the economy and the financial markets doesn’t reflect the dominant environment. Instead, I propose that we think of the economy and the financial markets in terms of a boom/bust/bore cycle.