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The Pain of Paying: The Psychology of Money

And..another great video from Dan Ariely, James B. Duke Professor of Psychology & Behavioral Economics.

During this session, you will learn:
– why paying with cash for a nice dinner feels worse than paying with a credit card
– how AOL underestimated internet usage with a change in pricing structure
– how to get maximum enjoyment from your vacation

If you like this, don’t forget to sign up for Ariely’s course: A Beginner’s Guide to Irrational Behavior at Coursera starting March 25. I did.

Here are the key take aways:

Ariely IAriely IIAriely IIIAriely IVAriely V

Charlie Munger on the Psychology of Human Misjudgements

This is an audio recording of the often referred to speech by Charlie Munger on the psychology of human misjudgement given to an audience at Harvard University circa Jun 1995.

Mr. Munger speaks about the framework for decision making and the
factors contributing to misjudgements. c. Jun 1, 1995

Enjoy this nestor of succesful investing thanks to Buffett Munger Wisdom. Go here to find the full transcript.

Also see the very readable Poor Charlie’s Almanack



GMO’s Jeremy Grantham Chief Investment Officer about asset managers at a Dutch pension fund: They’re worried about their career risk and not about the capital of the retirees …

Jeremy Grantham*: “… you can sit down with a great, sexy Dutch pension fund dripping with Ph.Ds, and you have lunch and you talk about risk 12 times, and each of the 12 times they did not mean the risk of the beneficiary, the pensioner losing money. They meant the risk of deviating from their precious benchmark and putting them into some career risk with their bosses. And nobody thinks of risk as the actual real risk to the beneficiary. It’s actually almost unethical….”

Jeremy Grantham*: “….Keynes described (80 yrs ago!) a row of bankers marching of the cliff together. He said as long as they make sure they’re all together, their careers are reasonably safe. That’s a pretty good description of ’08. If you wanted to lose your job, you had to do something spectacularly incompetent. Otherwise, you’re in decent shape”

Huang and Mahieu (2010) find that up to  ’06 on average, Dutch pension funds do not generate excess return relative to a predetermined benchmark. #

Are Dutch pensions safe in the hands of career minded asset managers?

* Morningstar Investment Conference 2012
# Large funds perform better than smaller funds.

James Montier (GMO) on the Flaws of Finance

James Montier ( GMO ) on the Flaws of Finance and VaR in specific (CFA presentation May 2012) 

Some takeaways:

  • VaR is radioactive material because you’re not looking at the risk that matters most. Tail risk!
  • CAPM is CRAP (Completely Redundant Asset Pricing)…
  • Economists envy science and mathematics…
  • Optimization (e.g. leverage) is mathematically beautiful, but in business downright dangerous…mother nature works with extensive redundancies…(two lungs kidneys etc.)

At GMO’s website (free registration required) you can find a paper based on the speech Montier delivered at the 65th Annual CFA Institute Conference in Chicago on May 6, 2012: