On the 8 Spot

Tim Harford: Borrow Money to fund Stock Market Investments

November 11th 2008 by chuck in Uncategorized 2

Book cover via Amazon

Tim Harford, author of ‘The Logic of Life‘ and ‘The Undercover Economist‘, advocates borrowing money to start investing in the stock market.

Here are the chief investment lessons of the financial crisis for today’s young people: they should be buying more shares and running up debts to do so. I’m not saying that the market is undervalued… I am merely suggesting a way of reducing risks.

Arguing that holding stocks in the long term is not guaranteed to be particularly safe, he goes on to describe the effect of “generational risk”:

…stocks can be very volatile. We also know that some generations have been luckier than others when it comes to the performance of the stock market. The baby boomer who started regular purchases of US stocks in 1970 and sold up in 2000 would have felt pretty sick after the awful bear market of 1974, but in retrospect his timing would have been perfect, filling his boots with bargain late 1970s and early 1980s shares, and selling out right at the top. His daughter, entering the stock market in 1995 and aiming to retire in 2025, would have spent the past 13 years buying shares at prices that now seem to range from high to extortionate. We could call this “generational risk”.

Now, think about the current prevailing wisdom on investing in shares, which reflects the fact that shares tend to produce high but risky returns. It is to start by putting most of one’s savings into the stock market, and as retirement approaches, increasingly shifting one’s portfolio to bonds and other less volatile investments. That seems to make sense. In fact, it is nonsense…

…The logical way to fight generational risk is to borrow money to make large, regular investments in shares while young, then use a proportion of later savings to pay back the loan rather than to pile into the stock market in middle age. That sounds risky, but it is in fact exactly what people do in the housing market. Knowing that they will need a place to live all their lives, they tend to buy a small house and gradually trade up to a bigger one, only paying off their mortgages late in life.

Most of us need a retirement fund as well as a place to live; there is nothing intrinsically risky about regular borrowing to get that fund off to an early start.

Not only does the concept make sense, it has paid off in the past. The Yale academics who proposed it, Ian Ayres and Barry Nalebuff, have looked at historical stock market data covering 94 cohorts who retired between 1913 and 2004. For every single cohort, the early leverage strategy beat the conventional wisdom; it also almost always beat the gambler’s strategy of investing every penny in stocks until the moment of retirement. Only the blessed cohorts who retired in 1998 and 1999 did better. Such gambles rarely pay off, so if you’re 20 years old and want to spread your risks, mortgage your retirement today.

It makes sense in a way that I’d rather invest a large position (funded by debt) in stocks while young and ‘throw the key away for 20 years ‘ (like Warren Buffett’s long-term value investing. This is better than starting with a small position then personally trading up to have a large position in 20 years. Think of the time and energy this will entail! I don’t want my mind usually thinking of the stock market, with all of its ups and downs.

On another thought: Does anyone know how this is possible in the Philippine banking industry? If I can fund stock market purchases via credit card, I MIGHT consider getting a credit card (which I have no plan of getting ever).

getting paid to study (incentives for exams)

October 19th 2008 by chuck in Education 0

Book cover via Amazon

A father writes Tim Harford (author of the book Undercover Economist) to inquire on how to divvy up a stash of cash as incentives for his son to pass his exams. Harford answers:

Start by promising more than you can deliver. If you offer €10,000 for a perfect score, you will only need to apologise after your scheme has succeeded. That may seem to undermine your credibility, but the real risk lies the other way: your son may expect to get the money from his doting dad anyway. Discourage this view or your plan will be in vain.

You must also pitch the stakes just right. Research in behavioural economics suggests that trivial rewards are worse than no rewards, but also that performance suffers when too much is at stake.

Finally, focus on the early exams, because success breeds success. Promise your son €200 for every excellent result in these: that should engage his interest without throwing him into a panic. If things go well, the money will run out before the high-pressure exams. But by then he will have mastered his subjects anyway.

Link

Now, the question here is can we develop an insurance scheme that will fund the incentives (drawing from the insurance policy)? In the payment term, parents would be pressed to help their child (via tutoring). In the long run, (in the ideal case) the child will have enough study habits and have high enough grades to qualify for college scholarships.

On the other hand, the child may be put off by the hard work involved with studying which will increase the lure of those ‘get-rich-quick’ schemes when he gets older.

Study to be paid

October 18th 2008 by chuck in Chuck, Education 0

Philantrophist Eli Broad has an educational program called Spark to improve school children’s test scores:

Seventh-graders can earn up to $50 a test — for 10 assessment tests throughout the year. There’s a similar program for fourth-graders. The money goes into a bank account that only the student can access. The better you do, the more money you earn, up to $500 a year for seventh-graders. The idea is to make school tangible for disadvantaged kids — short-term rewards that are in their long-term best interest…

[Eight-grader Soledad Moya] said she wasn’t a “studying kind of” person before the awards. Now she and her friends like to look in the dictionary and memorize words and their definitions, and they ask their teachers for more practice tests. Even though she’s not eligible for the awards now that she’s in eighth grade, she’s still studying harder before tests, she said. “Once you get started with something, you keep doing it.”

The changes she saw in students like Moya caused Lisa Cullen — a literacy and social studies teacher at the school — to go from skeptic to supporter: “I saw how it takes away the uphill battle you have trying to get students to study for tests.” She saw a definite increase in students’ excitement, enthusiasm and effort.

Link

Wow! That is exactly of why I studied to ace that Science in fourth grade, to buy myself a horde of comics.

Even though they may say that it’s basically bribing kids to study (isn’t that what scholarhsips are about?), you have to concede that the short-term gains are quite tangible and attractive enough to be taken upon on. In plain economics, it’s the power of incentives!

What experts underestimate here is the power of building a long-term habit in the school children participating with the program. Not only are study habits going to be built, but the confidence and self-esteem of the students will also be given a boost.

Google vs Alzheimer’s

October 14th 2008 by chuck in Research 1

Functional magnetic resonance imaging provides...

Image via Wikipedia

Internet searches MIGHT have a positive effect on brain functions of middle-aged adults. Here’s a snippet (emphasis mine):

UCLA scientists have found that for computer-savvy middle-aged and older adults, searching the Internet triggers key centers in the brain that control decision-making and complex reasoning. The findings demonstrate that Web search activity may help stimulate and possibly improve brain function. The study, the first of its kind to assess the impact of Internet searching on brain performance, is currently in press at the American Journal of Geriatric Psychiatry and will appear in an upcoming issue.

…

“Internet searching engages complicated brain activity, which may help exercise and improve brain function,” said principal investigator Dr. Gary Small, a professor at the Semel Institute for Neuroscience and Human Behavior at UCLA who holds UCLA’s Parlow-Solomon Chair on Aging.

For the study, the UCLA team worked with 24 neurologically normal research volunteers between the ages of 55 and 76. Half of the study participants had experience searching the Internet, while the other half had no experience. Age, educational level and gender were similar between the two groups.

Study participants performed Web searches and book-reading tasks while undergoing functional magnetic resonance imaging (fMRI) scans, which… tracks the intensity of cell responses in the brain by measuring the level of cerebral blood flow during cognitive tasks.

All study participants showed significant brain activity during the book-reading task, demonstrating use of the regions controlling language, reading, memory and visual abilities…

Internet searches revealed a major difference between the two groups. While all participants demonstrated the same brain activity that was seen during the book-reading task, the Web-savvy group also registered activity in the… areas of the brain which control decision-making and complex reasoning.

…researchers found that during Web searching, volunteers with prior experience registered a twofold increase in brain activation when compared with those with little Internet experience. The tiniest measurable unit of brain activity registered by the fMRI is called a voxel. Scientists discovered that during Internet searching, those with prior experience sparked 21,782 voxels, compared with only 8,646 voxels for those with less experience.

…the Internet’s wealth of choices requires that people make decisions about what to click on in order to pursue more information, an activity that engages important cognitive circuits in the brain.

“A simple, everyday task like searching the Web appears to enhance brain circuitry in older adults, demonstrating that our brains are sensitive and can continue to learn as we grow older,” Small said.

Small added that the minimal brain activation found in the less experienced Internet group may be due to participants not quite grasping the strategies needed to successfully engage in an Internet search, which is common while learning a new activity.”With more time on the Internet, they may demonstrate the same brain activation patterns as the more experienced group,” he said.

Link

There are a few caveats though, the study didn’t differentiate between the levels of prior internet searching knowledge (maybe one was a power googler while another might’ve only searched for porn before). One more caveat, the participants in the study may have been through ’self-selecting bias’.

Does anyone know if Google funded this study? It Seems that a good way to increase the web search market share is to reel in those baby boomers into searching as a preventive measure against Alzheimer’s disease.

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