Blog My Brain

Today I read the book Manias, Panics and Crashes.  And I think the following outline of a financial bubble is very insightful to understand the past and the future.

Rise of the Bubble

    1. An outside shock to the macroeconomic system. A displacement is an outside event or shock that changes horizons, expectations, anticipated profit opportunities, behavior—‘some sudden advice many times unexpected’

    2. The economic outlook and the anticipated profit opportunities would improve in at least one important sector of the economy.

    3. Businesses and individuals would borrow to take advantage of the increase in anticipated profits in related investments.

    4. The rate of economic growth would accelerate and in turn there might be a feedback to even greater optimism.

    5. Economic growth leads to expansion of credit, which fuels the bubble and introduces instability.
    6. Increase in effective demand presses against capacity, raising prices and profit.  Positive feedback develops as the increase in investments leads to increases in the rate of growth of national income that induces additional investment.

    7. Euphoria develops. Investors buy goods and securities to profit from the capital gains associated with the anticipated increases in the prices of these goods and securities.

    8. The authorities recognize that something exceptional ishappening in the economy and while they are mindful of earlier manias, ‘this time it’s different,’ and they have extensive explanations for the difference.

    9.  More and more firms and households that previously had been aloof from these speculative ventures begin to participate in the scramble for high rates of return. Making money never seemed easier.

Burst of the Bubble

    10. As the buyers become less eager and the sellers become more eager an uneasy period of ‘financial distress’ follows.

    11. Price drops sharply and highly leveraged investors go bankrupt.

    12. Some bear rallies will happen as some investors believe the drop is temporary, and other believe the price has dropped too far.

    13. As the decline in prices continues,more and more investors realize that prices are unlikely to increase and that they should sell before prices decline further; in some cases this realization occurs gradually and in others suddenly.

    14. The rush is on—prices decline and bankruptcies increase.

    15. The decline in investor optimism might lead to panic, which feeds on itself until prices have declined so far and have become so low that investors are tempted to buy the less liquid assets, or until trade in the assets is stopped by setting limits on price declines, shutting down exchanges or otherwise closing trading, or a lender of last resort succeeds in convincing investors that money will be made available in the amounts needed to meet the demand for cash and that hence security prices will no longer decline because of a shortage of liquidity.

admin :: Dec.30.2008 :: The World, Psychology, Finance/Investment :: No Comments »

I’ve come across an awesome game called Field Runners in the IPhone.  It is very fun, and here is my strategy for the Grasslands Map and the highest level I get to is 115 on ‘Hard’:

The same strategy on ‘Easy’:

Here are the reasons for the above layout:

1. All heavy weapons are concentrated in the horizontal path.  This is the only way to defend from the fast running airplanes.

2. For units other than airplanes, they must go through a long path to get to the exit, and in the path they will be constantly hit by the Teslas.

3. For extremely strong units (ie. the red Robot), they can be easily re-routed by switching positions of the guns.

Here is my Crossroads Map Strategy for ‘Hard’, it gets to level 135:

The idea is to keep all firepower in the center, which is the most efficient allocation of resource to counter air units.  For ground units, the routing forces everyone to go through the same route, which is easily reversible by removing the gun unit on the most left column and blocking the exit in the lower right corner.

Recently the new update bring us two new weapons, the flame tower and the mortar tower.   Since the mortar tower has massive splash damage, it allows me to beat the helicopters that troubled my strategy.  So with mortar tower, I am able to get to level 161 on ‘Hard’:

admin :: Dec.27.2008 :: Fun, Brain Teasers, Strategy :: 44 Comments »

1.  Quick rate cuts provides liquidity to the economy, and would result in consumer price inflation or asset price inflation.  The expansionary move fuels the self-reinforcing uptrend that defines a boom.

2.  High Fed Fund Rates will stall growth, but will bring inflation down.

3.  During a self-reinforcing boom, wall street analysts will feel great pressure from their clients (investors, fund managers) to act against their own bearish believes.

4.  The driver of a bull market is usually caused by a cultural shift of money flow.

admin :: Dec.09.2008 :: Finance/Investment :: No Comments »

I read a paper regarding investor psychology today.  And here are some notes:

Some psychological biases that affect investors:

1. Overconfidence.  Investors are overconfident about their predictions or judgments.

2. Optimism.  Investors underestimate the likelihood of bad outcomes over which they have no control.  Investors underestimate the role of chance in human affairs and misperceive games of chance as games of skill.

3.  Hindsight.  Events people did not anticipate appear almost inevitable after they occur.  Hindsight promotes overconfidence, by creating the illusion that the world is more predictable than it is.

4.  Over-Reaction to Chance Events.  Investors often perceive trends where none exist.

5.   Non-Linear Weighting of Probabilities.  Investors overweight low probabilities and underweight high probabilities, which is why lottery and insurance work.

6.   People value changes, not states.  Investors would prefer gains over losses even if they lead to the same outcome.   Loss aversion is prevalent in the pricing of risky assets.

7.   Purchase price is a reference point.  An increase of loss is much more significant than a reduction of gain of the same amount.

8.   Narrow Frame.  Investors keep mental accounts and adopt different risk attitudes towards each.

9.   Irrational Risk Policy.  Investors usually have too little tolerance for risk with small gambles and too much risk taking with large ones.

admin :: Dec.02.2008 :: Psychology, Finance/Investment :: No Comments »

Just something worthy remembering.  A typical boom-bust cycle has eight stages:

It starts with a prevailing bias and a prevailing trend, kicking off a reflexive process.

1. The trend is not yet recognized

2. The trend is recognized and reinforced by the prevailing bias.  The process approaches far-from-equilibrium territory.

3.  A period of testing intervene when prices suffer a setback.

4.  If the bias and trend survive the testing, both emerge stronger and the far-from-equilibrium condition is firmly established.

5.  Moment of truth, when reality can no longer sustain the exaggerated expectations.

6.  Twilight period, when people continue to play the game although they no longer believe in it.

7.  A cross point, when the trend turns down and the bias is reversed.

8.  Catastrophic downward acceleration, commonly known as a crash.

admin :: Dec.01.2008 :: Finance/Investment :: No Comments »