Five Good Questions with Terry Odean

5 Good QuestionsTerrance Odean is the Rudd Family Foundation Professor of Finance at the Haas School of Business at the University of California, Berkeley. He is a member of the Journal of Investment Consulting editorial advisory board, of the Russell Sage Behavioral Economics Roundtable, and of the WU Gutmann Center Academic Advisory Board at the Vienna University of Economics and Business. He has been an editor and an associate editor of the Review of Financial Studies, an associate editor of the Journal of Finance, a co-editor of a special issue of Management Science, an associate editor at the Journal of Behavioral Finance, a director of UC Berkeley’s Experimental Social Science Laboratory, a visiting professor at the University of Stavanger, Norway, and the Willis H. Booth Professor of Finance and Banking and Chair of the Finance Group at the Haas School of Business. As an undergraduate at Berkeley, Odean studied Judgment and Decision Making with the 2002 Nobel Laureate in Economics, Daniel Kahneman. This led to his current research focus on how psychologically motivated decisions affect investor welfare and securities prices.

Today I ask (in bold) and Terry answers what I hope are Five Good Questions as part of my longstanding series by that name (see links below). Continue reading

Worth Watching

An ESPN cameraman (or woman) caught some Phillies fans taunting Dan Uggla of the Braves Monday Night but then being rudely interrupted by Uggla’s hitting a game-winning grand slam in the ninth inning. Deadspin took it a bit further by creating the video below using music (Take This Lying Down by The Lucksmiths) and extreme slow motion. It’s fantastic. Enjoy.

That’s right, the women are smarter

Regular readers will recall that I began my Wall Street career on the ginormous fixed income trading floor of what was then Merrill Lynch in downtown Manhattan. Of the hundreds of people who called the seventh floor of the World Financial Center home during the workday then, astonishingly few were women and even fewer were traders – those who committed hundreds of millions of dollars of Merrill’s capital every single day. Even so, and despite rampant and often aggressive sexism, the women were always amongst the very best of the breed – smart, shrewd, savvy and discerning.

Part of that was to be expected. In such a male dominated, testosterone fueled world, only the very best women would be allowed access to that boy’s club in the first place. And only the very best of them would be allowed to stay. Still, the women traders I knew seemed more calculating and less prone to foolish errors than many of their male counterparts. They were also quicker to recognize and fix the errors they did make. And the research data backs up my anecdotal experience.

Which, in a roundabout way, brings me to my point. Last week I participated in an excellent conference entitled Diversifying Income and Innovations in Asset Allocation put on by S&P Dow Jones Indices in Beverly Hills. I spoke about retirement income strategies. Among the other presenters was Deborah Frame of Cougar Global Investments in Toronto. Her presentation focused on asset allocation and it was very enlightening.

During the cocktail hour, she and I were discussing the research literature that looks at the differences in men and women when it comes to investing. She took exception to my having characterized one of those differences, consistent with the literature, as women being more “risk averse” than men. She made the point that women are more “risk aware” – more cognizant of the risks they face and smarter about dealing with them (in general, of course). In her view, that’s why, for example, women so routinely asked for directions (in the days when phones didn’t come with GPS) when they weren’t sure where they were, and men so routinely refused to do so.

And, by golly, she was right. Since women generally are better investors, they should be portrayed positively (more “risk aware”) rather than negatively (more “risk averse”). Moreover, since men (again, in general) are more risk seeking and more likely to make foolish investment decisions, they should not be the standard to which women are compared. It should be the other way around. It was sexist of me to look at things otherwise.

Thanks, Deborah. Lesson learned (I hope).

April 10: Diversifying Income and Innovations in Asset Allocation

EventS&P is presenting a program entitled Diversifying Income and Innovations in Asset Allocation this coming Thursday, April 10, beginning at 1pm PT at the Montage Beverly Hills Hotel. I will be speaking along with some excellent and knowledgeable luminaries (Hi Meb!). It’s free of charge and even includes a cocktail reception afterwards. CE credit is available. Registration and program information is available here. I hope to see many of you there.

Diversifying Income and Innovations in Asset Allocation

How Not to Do It

Climate Change3

On Monday, the United Nations’ Intergovernmental Panel on Climate Change issued an important report on climate change. From the report: “Impacts from recent climate-related extremes, such as heat waves, droughts, floods, cyclones, and wildfires, reveal significant vulnerability and exposure of some ecosystems and many human systems to current climate variability.” Moreover, for “countries at all levels of development, these impacts are consistent with a significant lack of preparedness for current climate variability in some sectors.” In other words, climate change is a big problem and we’re ignoring it. That’s important stuff, if not exactly news.

John Tamny of Forbes (already notorious for an appearance on The Daily Show — video herevehemently disagrees. His article explaining why provides a veritable treasure trove of examples of how not to do investment analysis, or analysis of any sort for that matter. Continue reading

Who Knew?!

Irish TimesIn much the same way that Jerry Lewis was said to be a big deal in France, I received a ringing endorsement from The Irish Times yesterday, for which I am most grateful. Given that my ancestry is Irish (County Down), I am especially touched. I am also in excellent company, as the other investment blogs recommended are of the highest order. The best vacation my wife and I ever took was to the Emerald Isle too. This is a lovely honor. Thank you.

Word to the wise: finding investment insight online

Realistic Retirement Planning

BreenSteve Breen is our local editorial cartoonist here in San Diego. He has won the Pulitzer Prize twice (1998 and 2009) and, best of all, he’s terrific. His cartoon yesterday (above) is particularly pertinent for my readers. I wrote about its subject here.

A more realistic approach to retirement planning will not be all that different substantively – in general, people should save more and start saving sooner.  But a better approach will meet the people who need good advice “where they live” without judgment or condescension, while remaining forthright about the challenges that await.

Not everyone with a less than perfect retirement plan gets into that situation on account of foolish decisions.  My wife and I made some difficult choices.  We remain convinced that, for us and for our family, they were the right choices. We are now ready to give retirement planning a much higher priority.  It would have been better for our retirement plan had we done more and done it sooner, but thankfully we are in a position where we can still be cautiously optimistic about our retirement prospects.

Realistic Retirement Planning

Beware High-Speed Trading’s Hidden Cost

Interview2I was interviewed this morning about how to discuss the high-frequency trading controversy (on account of a new book by Michael Lewis and related publicity) with clients. The resulting article from ThinkAdvisor is available here. I hope you will read it. A quick snippit follows.

ThinkAdvisor: So in a sense, ordinary investors are barely harmed by this latest Wall Street scandal?

Seawright: That’s the insidious part of it. It’s not something that you readily see. You hit enter on your order and you get filled in part or filled at two different prices and the assumption always was, “Well, that’s where the market was.’

And the reality is that is where the market was, but the market was there because somebody stepped in between really, really fast.

For retail shops like ours it’s not a [significant] issue because our orders aren’t big enough that’s somebody’s going to step in front of them. If somebody’s buying 100 shares of something, there’s not enough money to be made stepping in front.

But when a client owns a mutual fund, and the mutual fund is trading shares, and somebody steps in front of that, it matters significantly to the portfolio as a whole, and by extension it matters to some extent to investors: 2 cents a share is a rounding error, and I get that.

On the other hand, the high-frequency trading firms are spending hundreds of millions of dollars to get another couple milliseconds of an advantage. Clearly it’s a real advantage to them, and that money’s coming from somewhere. That money is coming out of our clients, mutual fund clients and everybody else that’s involved in the market, and that ought to concern all of us.

Beware High-Speed Trading’s Hidden Cost