"Hedonomics" - The Un-Dismal Science

I thought this was amusing.

Madsen Pirie at The Adam Smith Institute has a link to a tongue-in-cheek article on "hedonomics" - the "dismal science with its own happy ending". I think there are mostly two types of people (10, if you speak binary) - hedonomicists, and their opposite number (although I haven't decided what best to call them - maybe skeptonomicists, or gloomonomicists?) Here's an excerpt:

This is the newly identified branch of economics which exists to show that every story has a happy ending. As so often happens, practice has been running far ahead of theory. Chancellors work on it, deal-makers live by it, tycoons try their luck with it. In the stock market, hedonomics finds its natural home.

Click here for the whole thing.

Two observations:

• I wonder how much of which camp a person is in is is determined by their basic nature, and how much by their incentives to be optimistic or pessimistic.
• IMHO, many journalists tend to be practitioners of gloomonomics.

Housing Bubbles and Insider Sales (from WSJ)

Talk is always cheap. That's why I like prediction markets like Tradesport.com and the Iowa Electornic Markets. the prices of these contracts give you an idea of the predictions by people who are willing to put their money where their mouth is. So, you could say that the purchase of a prediction-market contract is a costly signal.

Insider trades are also often viewed as a signal. If we believe that corporate insiders have better information than outsiders about their companies' prospects, their trading behavoir cold have predictive power.

Tuesday's Wall Street Journal (online subscription required) has an article titled Insider Sales Hit Record at Builders that indicates insiders at home-building firms are engaging in insider selling, and that it could signal the end of the housing boom. It says:

Merrill Lynch quantitative analyst Richard Bernstein said he has seen record net insider selling during the past 10 months at eight of the 12 home-building companies he has tracked.

"This record level of selling comes despite the general perception that the stocks are undervalued, and despite that Wall Street analysts have few 'sell' recommendations on the stocks," Mr. Bernstein said in a note to clients.

He sees parallels between the housing sector and the technology industry before the bursting of the tech bubble. He said that within a year of the tech bubble's peak, about 14 of the 20 tech companies he tracked at the time reported record net insider sales and 16 of 20 within 18 months of the peak.

He could be right, but there are a few reasons to be skeptical. First off, "net insider selling" is typically defined as "sales-purchases". Most academic studies of insider trading indicate that insider selling is a lot less informative than insider buying. Insiders purchase their company's stock because they believe it's undervalued. OTOH, they sell for a variaty of reasons - the company is overvalued, they want to diversify (and they're recently gotten a lot of stock because of stock or option grants), or they simply need liquidity (maybe their teenage son just wrapped the family Porshe around a telephone pole). So, aggragating sales and purchases (like the net selling measure does) might not be a very informative measure.

In addition, the analyst quoted in the story has a pretty small sample to work with - 12 firms. Still, it's food for thought.

This Week's Carnival Of The Capitalists

The week's COTC is up and running at Casey Software. There seem to be more posts than usual, but these are my picks:

For a refresher on supply and demand, see Paradise Lost? - Price Controls in Hawaii from Rofasix, where he discusses (you guessed it - price controls).

In further "gasblogging", David Tufte at VoluntaryXchange gives us Gas Station Profits.

And finally, Searchlight Crusade's talks about Levels of Mortgage Documentaton. It's worth reading if you're thinking of buying a house.

Again, there are lots of iteresting things there. These just caught my eye.

This Week's Carnival of Personal Finance

This week's Carnival of Personal Finance is up at AllThingsFinancial. It's an interesting bunch of articles this time. As usual, I'll give my picks of the week:

Financial Fruition discusses Important Financial Documents. I know JLP's discussed this before, but it's worth revisiting. Darn - I just have to get more organized!

The Real Returns has an interesting piece on Focus Funds.

Searchlight Crusade has a good one titled Getting Rich Quick in Real Estate (it could have easily been titled "No, you're not getting rich quick in real estate").

FrugalforLife has some good information, titled Tips for Buying Your First Home. If you're in this boat, learn as much as you can - mistakes can easily cost you thousands of dollars.

Of course, browse around - your tastes are probably different from mine.

Michael Yon And The Deuce Four

I'm a bit late to the party, but I just came across this blog by Michael Yon. He's an embedded freelance reporter with the 1-24th (the "Deuce Four") in Iraq. I don't think it would be too far out of line to say that he could end up being the Ernie Pyle of our time.

For two of the best dispatches he's written, check out Gates of Fire and Jungle Law. The second one is a bit of a nail-biter - it recounts the countdown as one of the unit's vehicles approaches the site of an IED (Improvised Explosive Device).

It's particularly interesting because Yon is an ex Green Beret, so he understands both combat and the martial culture from the inside. Critics might say that he looks at the unit with uncritical eyes, but as someone says, "that's a feature, not a bug".

If you want to hear about soldiers lifes in IRAQ, you could do a lot worse.

Mortgage Securitization and The Housing Boom

Wednesday's Wall Street Journal has a very interesting article titled "Housing-Bubble Talk Doesn't Scare Off Foreigners". It shows how the phenomena of securitization has changed the mortgage market. For the uninitiated, "securitization" is the process whereby mortgage loans are pooled and then used to back securities that are sold in the open market. It benefits all the players in the mortgage market- lenders, borrowers, and fixed-income investors.

These benefits occur because securitization allows lenders to reallocate risk to other parties (fixed income investors) that have a comparative advantage on bearing (or alternately a greater preference for) it. Since the lenders no longer have to keep the loans in their portfolio, they are willing to lend to borrowers with less pristine credit. As an example of this trend:

...Strong investor interest has also made loans available to borrowers with poor credit and many other people who might otherwise have trouble getting a mortgage. Subprime loans included in mortgage securities totaled $401.5 billion last year, nearly double the total for 2003, according to Standard & Poor's. Meanwhile, loans with less than full documentation of the borrower's income and assets accounted for 70% of mortgage securities rated by Standard & Poor's in this year's first half, double the level recorded in 2000.

As a result, interest rates are lower all along the risk spectrum. Finally, investors willing to bear the risk (in this case foreign investors) have more investment options.

Click here for the whole article (note: online subscription required).

How to Succeed in Graduate School (via The Austrian Economists)

Here's some excellent advice from The Austrian Economists for new PhD students: get started on topics for articles ASAP. While they're stressing the particular need for students to have pubs when coming out of "non-mainstream" programs, it also holds for those at lower-tier programs across the boards. Here are the best lines:

PhD in hand + refereed publication(s) + strong teaching evaluations = tenure track job.

The other factor in the equation is the "lunch tax" that the individual represents. The more difficult the person is to take as a personality, the stronger publications they will have to have in order to signal that they are worth it.

Click here for the whole thing.