GREATER FOOLS

The dangers of financial illiteracy in America: newyorker.com

Halfway through his Presidency, George W. Bush called on the country to build “an ownership society.” He trumpeted the soaring rate of U.S. homeownership, and extolled the virtues of giving individuals more control over their own financial lives. It was a comforting vision, but, as we now know, behind it was a bleak reality—bad subprime loans, mountains of credit-card debt, and shrinking pensions—reflecting a simple fact: when it comes to financial matters, many Americans have been left without a clue.

The depth of our financial ignorance is startling. In recent years, Annamaria Lusardi, an economist at Dartmouth and the head of the Financial Literacy Center, has conducted extensive studies of what Americans know about finance. It’s depressing work. Almost half of those surveyed couldn’t answer two questions about inflation and interest rates correctly, and slightly more sophisticated topics baffle a majority of people. Many people don’t know the terms of their mortgage or the interest rate they’re paying. And, at a time when we’re borrowing more than ever, most Americans can’t explain what compound interest is.

Financial illiteracy isn’t new, but the consequences have become more severe, because people now have to take so much responsibility for their financial lives. Pensions have been replaced with 401(k)s; many workers have to buy their own health insurance; and so on. The financial marketplace, meanwhile, has become a dizzying emporium of choice and easy credit. The decisions are more numerous and complex than ever before. As Lusardi puts it, “It’s like we’ve opened a faucet, and told people they can draw as much water as they want, and it’s up to them to decide when they’ve had enough. But we haven’t given people the tools to decide how much is too much.”

Unsurprisingly, the less people know, the more they run into trouble. Gary Rivlin’s blistering new examination of the subprime economy, “Broke, U.S.A.,” is full of stories of financially ignorant people bamboozled into making bad decisions—refinancing out of low-interest mortgages, say, or buying overpriced credit insurance—by a consumer finance industry adept at creating confusing products. Such stories are backed up by the numbers. A study by economists at the Atlanta Fed found that thirty per cent of people in the lowest quartile of financial literacy thought they had a fixed-rate mortgage when in fact they had an adjustable-rate one. A study of subprime borrowers in the Northeast found that, of the people who scored in the bottom quartile on a very basic test of calculation skills, a full twenty per cent had been foreclosed on, compared with just five per cent of those in the top quartile.

What can be done? One solution is regulation: the financial-reform bill now before Congress will create a consumer financial-protection agency that should help curb the finance industry’s most predatory excesses. Another solution is to tinker with “choice architecture”—doing things like enrolling people in 401(k)s automatically—in order to “nudge” them toward better decisions. Both of these strategies are necessary, but they’re not enough on their own, because financially illiterate consumers are always going to be easy victims. We also urgently need proper financial education.

This seems obvious, but it’s surprisingly controversial. Some suggest that financial illiteracy is an example of what economists call “rational ignorance”—inattention that is justified because the costs of paying attention outweigh the benefits. But few decisions affect us more directly than the ones we make about our money. Critics also argue that financial education may make people overconfident, and therefore more likely to make bad decisions. In fact, the reverse is true: the less people know, the more overconfident in their abilities they tend to be. In a German study, eighty per cent of those surveyed described themselves as confident in their answers on a questionnaire, yet only forty-two per cent got even half the questions right. This is known as the Dunning-Kruger effect: people who don’t know much tend not to recognize their ignorance, and so fail to seek better information. No wonder, then, that the least knowledgeable people in the Atlanta Fed study were also the least likely to do research before getting a mortgage. By contrast, well-informed people are more likely to ask others for help. If financial education taught people only how little they actually know, it would accomplish quite a lot.

The government’s new consumer-protection agency has the authority to “review and streamline” financial literacy programs, but that’s not enough. We really need something more like a financial equivalent of drivers’ ed. There’s evidence that just improving basic calculation skills and inculcating a few key concepts could make a significant difference. One study of the few states that have mandated financial education in schools found that it had a surprisingly large impact on savings rates. And the Center for American Progress has found that, across the country, education and counselling by nonprofit organizations, like the Massachusetts Affordable Housing Alliance, have helped low-income families buy and hold onto homes, even during the housing bubble. The point isn’t to turn the average American into Warren Buffett but to help people avoid disasters and day-to-day choices that eat away at their bank accounts. The difference between knowing a little about your finances and knowing nothing can amount to hundreds of thousands of dollars over a lifetime. And, as the past ten years have shown us, the cost to society can be far greater than that. ♦

职场最不应说的七句话

http://blog.sina.com.cn/s/blog_3f5e666e0100gozm.html?tj=1

纽约有句常话：人人是雇员。即便自我开业者，你也是客户的雇员。而保持良好的雇主雇员关系最重要的就是，不要让雇主认为你不喜欢这份工作，或你没能力做好这份工作，还有就是，你不认为你会从工作中受益。

这听上去老生常谈，但有些不该说的话却天天响在耳边，几乎任何一间办公室都能听到。没人认为有什么了不起，可日积月累就可能让你倒霉，使你无意中丧失继续发展的空间。其中以下七句为最常见：

“这不是我的工作”。你知道，其实每个老板心中的潜台词都是，我让你做什么做什么。人都这德行，有点权力就不得了。不过与其跟他顶，不如想想为何他把不属于你职责范围的工作交给你？如果你认为做不好，可以婉约地建议，让谁谁谁做可能结果更好。不过你要知道，一般老板能把职责外的工作交给你，大多出于好意，所以不要一上来就生气。

“这不是我的问题”。如果你这么说，别人会认为你不在乎这份工作，你老板也会这么看。问题发生时，如果你不想发表建设性意见，不如什么都不说，最好是能主动帮助解决问题。严格说，问题发生人人有份，因为团队彼此都相关。

“这不是我的错”。知道此地无银三百两这句话吗？这么说很容易让别人怀疑你。你一定弄明白，谁的错是问题焦点吗？问题焦点是如何解决问题，而不是彼此指责，解决问题比相互指责更经济实惠。

“我不能同时做两件事”。你在抱怨工作太多吗？放心，你老板不会为此同情你。相反他会认为，要么你不喜欢这个工作，要么做不来。如果你真觉得工作太多，与其抱怨不如开几句玩笑算了，否则吃力不讨好。

“我做这个工作是大材小用”。也许你是对的，但问题是，早干嘛来着，有本事当初你别接受啊，再后悔这也是你的工作。而且这么说很容易得罪周围人，怎么着，就你棒，我们都不如你？何况你老板会因为你抱怨提升你吗？

“这工作太容易，是人就能做”。也许你想说你特聪明，可别人很容易理解为你在暗示这项工作太愚蠢。老板最忌讳别人说他的工作愚蠢，不值一提，这对他和他所领导的企业是羞辱性的。记住，再愚蠢的工作也是靠人做的。

“这事做不了，谁也做不了”。这样说你从事的工作，首先就在暗示别人你没能力或没效益。与其如此不如想想问题是什么，目标是什么？怎样做才可能达到目的？这才是老板恰恰希望得到的，没一个老板希望工作做不了。

最后的劝告是，当疑问产生时，一定记住：沉默是金。

Counter-Cyclical Spending (during recessions)

http://www.ritholtz.com/blog/2010/03/counter-cyclical-spending/

One of the things I hate about a secular bull market — especially towards its rampaging tail end — is how everyone and everything gets silly. Money and champagne flows, conspicuous consumption is on full display. I recall people — literally — dancing on bars during the late 90s in NYC.

To be sure, Fed Chair Alan Greenspan was not going to be the spoilsport and take away the punchbowl. Every one was having a good old time.

Except the people who knew. Those worrywarts who looked at price, at valuations, who are familiar with market history and understood mean reversion. These folks were aware of what was going to come next.

I hated the Manhattan party atmosphere in 1999; it was obvious how (but not precisely when) it was going to end: Badly. The prices paid for baubles, the reckless, conspicuous consumption, and ostentatious displays of wealth — paying more than full retail — it was all a symptom of way too much money sloshing around.

Mal-investments were everywhere, and prices became stupid — for cars, for apartments, and of course, for equities.

That is, to say the least, no longer the case (equities excepted).

Prices have plummeted, consumers are de-leveraging, and cash is king, For those of you consumers who are value sensitive — and still have jobs — this current environment is far more attractive a period of time to acquire goods and services than the mayhem at bull market tops. Everything is priced to sell.

I started thinking about this issue in mid 2008 when a wealthy client had said the following to me: “Barry, I appreciate you steering us away from trouble during this mess, but your commentary is so relentlessly negative, its a bummer to read. What can you tell me that is not utterly depressing?”

Now, this gentlemen measures his wealth in GDP of small countries, and while we have many similar interests — cars, watches, boats, travel, music, etc. — his “collections” are insane, museum quality work. (I have an old SL, he has a airplane hanger full of fully restored 196os Ferraris; I have a few nice antique watches, he has million dollar time pieces). So my advice – I mentioned this on Tech Ticker — was as follows: “Make a wish list of what you have wanted to own, but were unwilling to pay top dollar for. Could be real estate, art work, collectible autos, jewels, sports franchises. Bid 50% of the peak market price. Then sit back to see what happens.”

He thanked me for that, and acquired a number of items at a hefty discount to market value.

Which leads me to this question for us mortals: Are any of you readers going on a “spending spree” of sorts? What are you purchasing? What assets have dropped enough in price that they have tempted you to step up to the plate and buy?

Since the crisis began, I have advised clients to consider buying:

-Homes, Vacation Properties
-Renovations, Construction, Extensions
-Vacations, Travel
-Collectible Automobiles
-Investments, Stocks, funds
-Boats, Planes, recreational vehicles
-Art & Sculptures?
-Audio, Video, Electronics, Computers.
-Watches, Jewelry (especially those of Precious Metals)

Fortunately, I avoided temptation and did not make many dumb purchases at the top. That made me more comfortable buying distressed assets after the prices collapsed. And, putting my money where my mouth is, I have made many purchases this down cycle (no Gulfstream, but much of the rest of the list).

So my question is simply this: What are you buying?

~~~

For those of you who want to be anonymous, send me an email at thebigpicture at optonline dot net, and I will assemble a list of the most interesting purchases for a future post . . .

A special report on managing information

http://www.economist.com/specialreports/displaystory.cfm?story_id=15557507

Handling the cornucopia
The best way to deal with all that information is to use machines. But they need watching
Feb 25th 2010 From The Economist print edition

IN 2002 America’s Defence Advanced Research Projects Agency, best known for developing the internet four decades ago, embarked on a futuristic initiative called Augmented Cognition, or “AugCog”. Commander Dylan Schmorrow, a cognitive scientist with the navy, devised a crown of sensors to monitor activity in the brain such as blood flow and oxygen levels. The idea was that modern warfare requires soldiers to think like never before. They have to do things that require large amounts of information, such as manage drones or oversee a patrol from a remote location. The system can help soldiers make sense of the flood of information streaming in. So if the sensors detect that the wearer’s spatial memory is becoming saturated, new information will be sent in a different form, say via an audio alert instead of text. In a trial in 2005 the device achieved a 100% improvement in recall and a 500% increase in working memory.

Is this everybody’s future? Probably not. But as the torrent of information increases, it is not surprising that people feel overwhelmed. “There is an immense risk of cognitive overload,” explains Carl Pabo, a molecular biologist who studies cognition. The mind can handle seven pieces of information in its short-term memory and can generally deal with only four concepts or relationships at once. If there is more information to process, or it is especially complex, people become confused.

Moreover, knowledge has become so specialised that it is impossible for any individual to grasp the whole picture. A true understanding of climate change, for instance, requires a knowledge of meteorology, chemistry, economics and law, among many other things. And whereas doctors a century ago were expected to keep up with the entire field of medicine, now they would need to be familiar with about 10,000 diseases, 3,000 drugs and more than 1,000 lab tests. A study in 2004 suggested that in epidemiology alone it would take 21 hours of work a day just to stay current. And as more people around the world become more educated, the flow of knowledge will increase even further. The number of peer-reviewed scientific papers in China alone has increased 14-fold since 1990 (see chart 3).

“What information consumes is rather obvious: it consumes the attention of its recipients,” wrote Herbert Simon, an economist, in 1971. “Hence a wealth of information creates a poverty of attention.” But just as it is machines that are generating most of the data deluge, so they can also be put to work to deal with it. That highlights the role of “information intermediaries”. People rarely deal with raw data but consume them in processed form, once they have been aggregated or winnowed by computers. Indeed, many of the technologies described in this report, from business analytics to recursive machine-learning to visualisation software, exist to make data more digestible for humans.

Some applications have already become so widespread that they are taken for granted. For example, banks use credit scores, based on data about past financial transactions, to judge an applicant’s ability to repay a loan. That makes the process less subjective than the say-so of a bank manager. Likewise, landing a plane requires a lot of mental effort, so the process has been largely automated, and both pilots and passengers feel safer. And in health care the trend is towards “evidence-based medicine”, where not only doctors but computers too get involved in diagnosis and treatment.

The dangers of complacency
In the age of big data, algorithms will be doing more of the thinking for people. But that carries risks. The technology is far less reliable than people realise. For every success with big data there are many failures. The inability of banks to understand their risks in the lead-up to the financial crisis is one example. The deficient system used to identify potential terrorists is another.

On Christmas Day last year a Nigerian man, Umar Farouk Abdulmutallab, tried to ignite a hidden bomb as his plane was landing in Detroit. It turned out his father had informed American officials that he posed a threat. His name was entered into a big database of around 550,000 people who potentially posed a security risk. But the database is notoriously flawed. It contains many duplicates, and names are regularly lost during back-ups. The officials had followed all the right procedures, but the system still did not prevent the suspect from boarding the plane.

One big worry is what happens if the technology stops working altogether. This is not a far-fetched idea. In January 2000 the torrent of data pouring into America’s National Security Agency (NSA) brought the system to a crashing halt. The agency was “brain-dead” for three-and-a-half days, General Michael Hayden, then its director, said publicly in 2002. “We were dark. Our ability to process information was gone.”

If an intelligence agency can be hit in this way, the chances are that most other users are at even greater risk. Part of the solution will be to pour more resources into improving the performance of existing technologies, not just pursue more innovations. The computer industry went through a similar period of reassessment in 2001-02 when Microsoft and others announced that they were concentrating on making their products much more secure rather than adding new features.

Another concern is energy consumption. Processing huge amounts of data takes a lot of power. “In two to three years we will saturate the electric cables running into the building,” says Alex Szalay at Johns Hopkins University. “The next challenge is how to do the same things as today, but with ten to 100 times less power.”

It is a worry that affects many organisations. The NSA in 2006 came close to exceeding its power supply, which would have blown out its electrical infrastructure. Both Google and Microsoft have had to put some of their huge data centres next to hydroelectric plants to ensure access to enough energy at a reasonable price.

Some people are even questioning whether the scramble for ever more information is a good idea. Nick Bostrom, a philosopher at Oxford University, identifies “information hazards” which result from disseminating information that is likely to cause harm, such as publishing the blueprint for a nuclear bomb or broadcasting news of a race riot that could provoke further violence. “It is said that a little knowledge is a dangerous thing,” he writes. “It is an open question whether more knowledge is safer.” Yet similar concerns have been raised through the ages, and mostly proved overblown.

Knowledge is power
The pursuit of information has been a human preoccupation since knowledge was first recorded. In the 3rd century BC Ptolemy stole every available scroll from passing travellers and ships to stock his great library in Alexandria. After September 11th 2001 the American Defence Department launched a program called “Total Information Awareness” to compile as many data as possible about just about everything—e-mails, phone calls, web searches, shopping transactions, bank records, medical files, travel history and much more. Since 1996 Brewster Kahle, an internet entrepreneur, has been recording all the content on the web as a not-for-profit venture called the “Internet Archive”. It has since expanded to software, films, audio recordings and scanning books.

There has always been more information than people can mentally process. The chasm between the amount of information and man’s ability to deal with it may be widening, but that need not be a cause for alarm. “Our sensory and attentional systems are tuned via evolution and experience to be selective,” says Dennis Proffitt, a cognitive psychologist at the University of Virginia. People find patterns to compress information and make it manageable. Even Commander Schmorrow does not think that man will be replaced by robots. “The flexibility of the human to consider as-yet-unforeseen consequences during critical decision-making, go with the gut when problem-solving under uncertainty and other such abstract reasoning behaviours built up over years of experience will not be readily replaced by a computer algorithm,” he says.

The cornucopia of data now available is a resource, similar to other resources in the world and even to technology itself. On their own, resources and technologies are neither good nor bad; it depends on how they are used. In the age of big data, computers will be monitoring more things, making more decisions and even automatically improving their own processes—and man will be left with the same challenges he has always faced. As T.S. Eliot asked: “Where is the wisdom we have lost in knowledge? Where is the knowledge we have lost in information?”