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Falkenblog wrote a new blog post titled Robeco's Concise Financial History of Europe
If you like finance and history, you'll love Robeco's "A Concise Financial History of Europe," written by Jan Sytze Mosselaar A lot of financial firms provide books to clients, and I bet if you visit Robeco in Rotterdam they'll give you one for your plane ride home, which is more than enough time to read it (100 pages, lots of pictures).It starts with Fibonacci introducing the Arabic number system in 1202, but interestingly the Florentine bankers prevented anything but Roman numerals as of 1299, and the Medici's didn't adopt Arabic numerals until 1500.The Florentine bankers Bardi,...
146 days ago
Falkenblog wrote a new blog post titled Centralized vs. Decentralized Social Welfare Maximizers
Faith in a select group of public servants to maximize social welfare is no better founded than the belief in the supernatural gifts of kings or noblemen. Just as misguided is the idea that good things, as decided by a majority, should be mandated. It should be remembered that our current prosperity and freedom have resulted from unwanted gradual changes in mores related to property rights, which when firmly established sparked the Industrial Revolution. Nobody planned that. Property rights were not created to win wars or eliminate poverty, though they did that as well as many other good...
212 days ago
Falkenblog wrote a new blog post titled The History of Individual Property Rights
John LockeIt is important to understand that property rights are not grounded on logic, but no right is.The liberal ideas that gave rise to the Enlightenment are generally thought (eg, Steven Pinker) to be a break from a religious thinking. Yet the key liberal idea, individual rights, especially property rights, are an axiom with little justification outside Christian theology. As Feynman noted with regards to scientific laws, the process of finding new ones is not deriving them via logic, but rather, guessing, and then looking at the consequences. History has shown that individual property...
219 days ago
Falkenblog wrote a new blog post titled Why My 1994 Low-Vol Dissertation Didn't Make Impact
Pim van Vliet posted a link to my 1994 dissertation, noting it was an early documentation of the low-vol effect. One may wonder, why did this early evidence fall flat? Clearly, lots of things, but I'll try to highlight the keys.Here's my lead paragraph, which makes clear I saw the low vol effect before most everyone:This paper documents two new facts. First, over the past 30 years variance has been negatively correlated with expected return for NYSE&AMEX stocks and this relationship is not accounted for by several well-known prespecified factors (e.g., the price-to-book ratio or...
243 days ago
Falkenblog wrote a new blog post titled How to Set Up Your Own Bitcoin/Ethereum IRA
For the past couple of centuries technology empowered the state, put more things under its control. They have ultimate custody of all your financial assets, and custody is nine-tenths of the law. You simply can't hold $1M in financial assets in a form where 'The Man' can't grab it if he finds you an enemy of the state, which in many states includes righteous men.But like so many things the effect is not linear, in that now technology is putting power back in individuals. We can now take classes online, and be evaluated objectively via tests, making Universities less important. We no...
482 days ago
Falkenblog wrote a new blog post titled Maxims
My son is going to college this fall, and I wanted to give him a set of my favorite quotations. As his name is Max, I titled the book 'Maxims.' With only a little work in formatting, I was able to create a paperback and ebook on Amazon, so that I basically did this for the price of the New York Times.  I made it for him, but you can buy it on Amazon for $5, or $3 for the Kindle version (see here).Obviously, we want our kids to appreciate the things we think are really important. Whether our kids will agree with us is up to them, but we can hope. But as I'm starting to lose him to the...
538 days ago
Falkenblog wrote a new blog post titled Jordan Peterson's Business Cycle Theory
University of Toronto psychologist Jordan Peterson has gained YouTube notoriety recently for speaking out against social justice warrior lunacy. However, it should be noted that his book, Maps of Meaning, is a very profound one. I heard him give a talk in which he mentioned initially that he was interested in economics, but was put off by the undefended assumption that people want to maximize their wealth. Most people want to be wealthy, of course, but they also want to have a fulfilling life, which is much more complicated. The larger existential question is, “How do I invest my time now to...
613 days ago
Falkenblog wrote a new blog post titled Robeco's Pim van Vliet has a new Low Vol book
Pim van Vliet runs one of the oldest and most successful Low Volatility funds in the world, which has now flowered into Robeco’s Conservative Equities brand of funds. It is noteworthy that it is not referred to as “low volatility,” because when he began this strategy in 2006, low volatility was not a ‘thing.’ High Returns from Low Risk is targeted at airport readers and casual investors, and is a quick read—36k words—that makes a profound point: objectively, high volatility stocks are bad investments.  In contrast, students are taught that expected returns are an...
705 days ago
Falkenblog wrote a new blog post titled Why Are Libertarians Irrelevant?
Classical liberalism was the foundation of the American Constitution and is based on utilitarian reasoning that is still popular academically. However, the major parties use libertarian principles selectively: Democrats are pro-choice with respect to abortion, drugs, and gay marriage, while Republicans are pro-choice with respect to business, guns, and schooling. The Libertarian Party, meanwhile, caters to the few who feel very strongly about the gold standard, open borders, or marijuana.In canonical models of economy, maximizing individual preferences is the self-evident goal. Consider...
795 days ago
Falkenblog wrote a new blog post titled Finding Alpha pdf
My book The Missing Risk Premium is a steal at only $15, but my first book, Finding Alpha, is a $65, which is a bit much for anyone not expensing their books. Finding Alpha goes over why the current asset pricing model fails, with lots of evidence, explains why economists still like it, and then in chapters 10-13 shows concrete examples of how investors have actually found alpha.The risk begets return theory is 100 degrees wrong: usually generates a wrong sign, often no correlation. When it does 'work' it's like when the CAPM appeared to work in the 1970s, an omitted variables problem (ie,...
846 days ago
Falkenblog wrote a new blog post titled An Economist's Rational Road to Christianity
One bad thing about blogging, or writing a lot, is that it forces one into a foolish consistency. It is hard to really explore new ideas, because tentative steps will be clumsy. In my new position I'm not incented to blog about finance or politics, and that gave me a lot of time to read as opposed to write. Net result: I'm getting baptized this Sunday (Grace Church, 9 AM service), and everyone's invited. That is, I'm becoming a Christian, not just one who occasionally went to church as a kid, but a real one that believes in Christ, loving God with all my heart, etc.Most ex-atheists who become...
1031 days ago
Falkenblog wrote a new blog post titled Requisite Assumptions for the Persistence of the Low Volatility Anomaly
My new paper was motivated by Frazzini and Pedersen's model of the low volatility anomaly. Though I think it's profoundly wrong, I think it was done well in good faith. Wrong mainly because it still implies people think there's a positive Security Market Line, even though at best it's flat, and wrong also because high vol assets like puts lose just as much money as calls (ie, not linear in beta).  As to it being well done in spite of that, note that unlike Buffa, Vayanos and Woolley (2014), it's not so convoluted it could basically never be estimated, rather it has a concise and simple...
1465 days ago
Falkenblog wrote a new blog post titled History of Low Volatility Investing
I saw this story in Bloomberg magazine a couple weeks ago, so I decided to speak with Ric Bratton again on the history of the low volatility effect. I wanted to speak more about other people's work, especially Ed Miller and Bob Haugen, but somehow we missed that (it's one take and he leads).  In any case, here it is.  The risk premium is central to Asset Pricing Theory, one of the main things people learn in business school.  If it’s not true, this generates a very different way to assess investments. Below is an outline of what I consider to be the history of low volatility...
1469 days ago
Falkenblog wrote a new blog post titled Piketty's Terrifying Dystopia
OK, after a long absence, I'm posting this book review just because I feel like it:Thomas Piketty's bestselling door-stopper Capital in the Twenty First Century notes some facts that he thinks point to a clear problem and solution:The return on capital over the economic growth rate determines the Capital/Income ratio, where a higher return on capital implies higher level of capital relative to income (r/g --> C/I)The rate of return on capital has been pretty consistently around 4.5%, The rate of growth grew from 0.9% in the 19th century to 2.4% in the 20th, peaking around...
1602 days ago
Falkenblog wrote a new blog post titled Bye
I've got a new job with Pine River, and I really want my new colleagues to know I'm not going to blab about anything that comes up, so blogging is now really over.  Of course, if you bump into me you can always buy me drinks and try to get me spill the beans, but I should warn you, I can drink a lot of beer. Best.
1908 days ago
Falkenblog wrote a new blog post titled Historical CBO Budget Projection Highlights Bias
Recently the CBO issued its annual budget projection, and it's pretty benign for the next decade, then climbs at a pretty measured pace.Yet, note that in the last recession our debt relative to GDP doubled.  Given that economists still don't have a good model for predicting business cycles let alone avoiding recessions, we can expect more of them. I think the odds that we elect a modern-day Calvin Coolidge next term are much smaller than the odds the deficit will increase dramatically when the next recession hits.Consider that in 2007, before anyone saw any hint of the 2008 crisis, the...
1915 days ago
Falkenblog wrote a new blog post titled MSCI Quality Index
I was unaware MSCI had beaten AQR to the punch by producing a boatload of quality indices last spring.  These are applied worldwide, so they are necessarily more parsimonious than AQRs...but jeez, these are really barebones:1) Net Income/Book Equity2) Debt/Book Equity3) Earnings volatility over 5 yearsInstructively, they Winsorize the data, which everyone should do to financial ratios (ie, truncate extremums).  But, book equity in the denominator?  Earnings volatility over 5 years? Those seem like bad choices, and AQR's quality index will be superior. I have a feeling MSCI is a...
1924 days ago
Falkenblog wrote a new blog post titled de Botton on Status Anxiety
I find Alain de Botton's approach to philosophy rather refreshing, because one senses his genuine lack of certainty, and appreciation of discovering, in his works.  Indeed, he was rather insightfully quoted in a NYT review of Sophie Fontanel's book on her self-induced celibacy, which highlighted his breadth and profundity.  Anyway, here's de Botton on status anxiety. He argues that status anxiety is worse than ever because now we believe we are less constrained by our birth, more responsible for our fate. Paul Krugman agrees with this view of life. Interestingly, this leads to a...
1928 days ago
Falkenblog wrote a new blog post titled How to Maximize Lottery Revenue
As a proponent of the idea that people are oriented towards their relative success, not absolute wealth, I think this lottery idea is fiendishly clever.  Here's a description from TheWeek of a clever way to capitalize on this instinct:A salient example is the "Postcode Lottery" in the Netherlands. Weekly it awards a "Street Prize" to one postal code, the Dutch equivalent of a zip code, chosen at random. When a postal code (usually about 25 houses on a street) is drawn, everybody who played the lottery in that code wins about $12,500 or more. Those living there who neglected to buy a...
1931 days ago