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May's Most Popular Posts

Anyone hoping for some cheerful news from the most eagerly-awaited IPO of the decade quickly discovered that it made even grimmer reading than the eurozone debt crisis.  Still, a post that explored the regret felt by Facebook’s new owners topped the list of the most popular posts in May (a eurozone-related article sneaked in at no. 3). The second of most-read discussed the impact of a financial transactions tax on the so-called Shareholder Spring.

1)      Avoiding Regret with Facebook

2)      Investing is not a Spectator Sport

3)      EU Philosophers' Meeting

DAX-Sentiment: DAX buyers peer at the euro, not the eurozone

Perception of a resilient DAX prevails.

30 May 2012. FRANKFURT (Börse Frankfurt). It is tempting to say that not much is happening in the DAX, given that this is the second consecutive week where the index has traded in the low 6,300s at survey time. However, if one compares this to the performance of, say, the Spanish IBEX35 benchmark, which lost seven percent in the last fortnight, the German equivalent’s zero looks glowing. The resilience of the DAX in the face of the latest bad news from Spain is something that investors have certainly recognised...

Read more on Boerse Frankfurt's website

A Heart on Each Sleeve

My son came down with a frightful case of bronchitis recently. He wasn’t able to go to the kindergarten and I was obliged to stay at home to nurse him back to health. Skipping three days off work left me with a bad conscience. Even though I had a good reason for my absence, I didn’t feel good at all. However, had I done things differently, i.e., gone to work and had someone else look after him, it probably wouldn’t have felt any better.  With the knowledge that his infant immune system was besieged by a high fever and a wrenching cough, I might have spent an unproductive day worrying about his well-being.

The smaller the child, the greater the guilt – in respect to the child as well as to the employer.  This ‘double life’ is slowly getting on my nerves because it is not possible to live up to all the claims that are made. I appreciate being a working mother even though I know that it comes with some disadvantages compared to the alternatives. At the same time being a full-time mother would mean that my son and I would have to do without some advantages. These conflicts weigh on my well-being and I occasionally find them uncomfortable – dissonant.

This cognitive dissonance is not so great that I have felt bound to eliminate one of the cognitions that are causing my annoyance: in this case, as I cannot undo my son, this means fiving up my work and reversing the decision to send him to day-care. Like most people in my situation, my first response is to seek information that supports my existing beliefs or, at least, justifies my initial decision. I have already come across academic studies that demonstrate that full-time kindergarten attendance does the child no harm at all and actually brings benefits. The same applies to the working mother; she has to think not only about the offspring that she must tirelessly care for, but also about herself. What happens to her contact with the world of work, her professional relationships, and her pension?

Not so long ago, at the playground, I overheard a conversation between two mothers. They chatted principally about raising children and running a home.

“Attending a kindergarten before the age of three brings no advantages for the child,” insisted one, “because they do not really play with one another.” The second confirmed the theory of the first and supported it with evidence drawn from a recent newspaper article, wherein a well-known child psychologist actually cautioned against day-care for children below the age of two. It is far too stressful for the infant. I had to smile. I had read precisely this article and had concluded that it was absolute nonsense. I guess this too is part of the dissonance-reduction strategy: information that doesn’t fit has to be downplayed, discredited and, if none of those work, it has to be ignored altogether.

How to Influence Recruiters

As I write one final graduate program application, I imagine the pool of admissions officers at the university sieving through piles of paper. How does this group possibly determine who should have the opportunity to attend a program from hundreds of applicants, all of whom hold much the same qualifications? What sticks out from the stack that screams ‘accept me!’? A factor such as the GPA, cherished and nurtured for years, accumulates to a miniscule portion of the overall application. This is the case with many factors, e.g., test scores, study abroad semesters, internships/work experience, etc. Even when the content of two options is identical, people can nonetheless be enticed to choose one over the other, for instance, by the presence of a frame. If it is possible to influence consumer preferences between a yoghurt with 10 percent fat versus one that is 90 percent fat-free, isn’t it possible to do so with recruiters too?

In a recent study by TheLadders, recruiters were observed taking only six seconds to review a resume when assessing whether to bring a candidate in for an interview. By using eye-tracking software, the study showed where on the resume the recruiters were looking. As expected, the person’s name, current company and title, previous company and title with dates associated as well as education consumed all of these few seconds a candidate has to distinguish oneself. The recruiter does nothing more than mentally check the relevant boxes (or not) and then moves to the next candidate. So, this appears to be a useful starting point in my attempt to strategically influence the competition between applicants who are likely to be more homogeneous than those for a typical job.

By knowing where on the resume recruiters will look, a proper initial step will be to order the information to make the key data as accessible as possible. They want to check those boxes, principally education, as quickly as possible and will not appreciate having to search for key data way down the page or on subsequent pages. At this point, it is simply about trying to avoid annoying the assessor. Formatting the information is the first way to influence the recuiter. Here I try to improve the visual attractiveness by deviating from the standard format. This is a delicate task because the new formatting should not compromise the earlier ordering, while giving the impression that the application was specifically thought out. To gain attention, I will try physically isolating on the page certain data items that require no context to be understood – dates, for instance – so as to raise the profile of the rest. Finally, there is the hook; this is a very individual piece of information that hopefully will keep the reader’s attention for more than the usual six seconds. This has to be a very short but salient piece of information (dramatic, colorful, detailed, etc.,) that encourages the assessor to dwell a little longer. The key is that it has to be seen before all those boxes are checked. It doesn’t even need to be specifically about me: ‘worked for a company that went bankrupt…’ It simply needs to grab attention and not let go.

Strategic framing in competition would therefore mean that, while staying within the parameters of what recruiters look for on the resume and where they look for it, I differentiate my own salient ‘story’, and all within those few precious seconds.

(Another) Costly Hedging Strategy

‘An embarrassment for Frankfurt,’ was how one described it; ‘disgraceful,’ said another, ‘a complete over-reaction on the part of the police. These were some of the quotes that circulated after last weekend’s Blockupy Frankfurt protest – and not just from left-leaning commentators. The attempt by Occupy supports to bring Germany’s finance capital to a halt over four days using peaceful, creative and colourful means, undeniably left the city’s authorities with egg on the faces. The forces of law and order bore the brunt of the embarrassment because they literally fortified the city centre even though it seemed that hardly any demonstrators bothered to show up. It was almost as if 20,000 protesters simply vanished into thin air and the 5,000 police officers were deployed needlessly to defend the city?

The three of the four planned demonstration days had been declared by the German High Court as illegal even before it started. One could discuss eternally about the appropriateness of that manoeuvre. One could also debate whether the law-keepers were genuinely made to look ridiculous by the peacefulness of the demonstrators. In hindsight, it is always easy to identify what was done right and what was done wrong, and there are always those who seem to find themselves on the winning side of the argument after the event. The question one should ask is whether the protest would have been so peaceful had there been 2000 or 3000 fewer police on the streets during those days, especially on those side streets where uniformed officers had positioned themselves just in case. One could also turn the entire argument on its head and remark that the objective of the demonstrators was to disrupt, to cause gridlock. They were able to achieve it, thanks in part to the heavy police presence.

The case of Blockupy Frankfurt reminded me of a situation that frequently occurs in the financial markets where agents try to insure themselves against the worst case. At the moment, for instance, the menace is the possible exit of Greece from the eurozone. The urgent need among investors to regain control of a unpredictable situation, a behaviour that tends to be highly infectious, usually leads them all to reach for the same tools. As the feared outcome is repeatedly discussed and apparently ‘confirmed’ through multiple exposures to these discussions, asset prices tend to reflect the event as if it had already happened. When the event finally occurs, because the market positioning has already taken place, there is no further price adjustment to be made; very often a price move in the opposite direction unfolds. This was, for example, the case in January of this year when S&P downgraded several eurozone states including one triple-A country, France. Many thought the CAC40 would tumble in reaction to such news. Instead, it rallied over 14 percent in the subsequent months. The abundance of insurance policies had eliminated the need for panic. The same applies to the preparations for Blockupy Frankfurt: the police presence had prevented any excesses and therefore left the impression that the whole hysteria was overdone.

By the way, in neither case is there any guarantee that the opposite strategy – namely, no police deployment or no financial hedge – would be successful. The question, ‘what if?’, especially if it posed by everybody else too, will invariably mean that the insured are on the wrong side whatever they decide to do.

DAX-Sentiment: The stock market is (still) not the economy

Investors are no longer sure how the Greek drama will affect stocks.

Avoiding Regret with Facebook

I watched a TV interview with a retail investor last Friday. She had subscribed to the Facebook IPO and was standing among the crowd in Times Square in front of the NASDAQ board waiting (quite a while, as it turned out) for the stock to start trading. The journalist asked why she was so convinced about her new investment and she explained that she and all her family and friends were Facebook users and was impressed by its stellar growth. She also expressed her regret at not buying Google when it IPO’d a few years back. She had thought about subscribing but wasn’t sure, back then, about a business model based on search. This time, she planned to “get in at the ground floor.”

Presumably, she had changed her mind about the viability of the Google business model in the meantime. At least, she was ready to buy another internet firm with a less-proven track record than the search giant. So my first thought was: why didn’t she simply buy Google stock on that day instead of Facebook? The answer is probably the desire to avoid regret.

Google shares cost more than $600 after having been first offered at $85 in a 2004 IPO. Our lady investor considered and rejected the idea of subscribing. She undoubtedly regretted the decision as the price marched higher to $700 in the subsequent three years (she probably stopped watching it long before then). Buying it now, even at current prices, would just be a painful reminder of those foregone profits. The attraction of the new Facebook stock is that nobody can regret NOT having bought it before. This is the case for all IPOs, which probably explains why they tend to be richly-priced, and tend to perform disappointingly over the long-term.

Subscribing to the Facebook IPO is obviously no guarantee that one will avoid regret – the stock is already 18 percent down from its issue price. Google stock is also lower too, but Messrs. Brin and Page have only cost their ‘friends’ three percent since Friday's open.

Vying for a Tax-Free Passport

The latest prominent personality to renounce his US citizenship is the Facebook co-founder Eduardo Saverin. Apparently, Saverin gave up the US passport to avoid a hefty capital gains tax bill that he would have incurred post-IPO.  However, Saverin is not a typical high net-worth individual who is renouncing his passport. The US Internal Revenue Service data showed that around 1,780 US expatriates gave up their nationality at US embassies last year, up from 235 in 2008.  The surge in the number comes as FATCA, a law that seeks to prevent tax evasion by Americans with offshore accounts comes into force at the beginning of 2013.  Thus, with scrutiny higher now, these individuals look at the idea of paying high taxes as a greater loss-making transaction than loss of US passport (despite all its privileges).

Tax advisors, who obviously prefer to have clients with complex tax affairs, are now faced with a challenge to retain these wealthy expatriates as US taxpayers. However, this trend fits the post-Lehmans behaviour of high-net worths. An Economist study, for example, revealed that this group trusts their investment experts less since the crisis broke out.  At the same time, their desire to control their affairs has increased and they prefer to have more hands-on approach on their wealth. Due to the lengthy nature of the political debate on tax changes, and the uncertainty about future outcomes, the wealthy feel that they are not able exercise control over their affairs.  As tax strategies consequently become more complicated, the act of giving up the passport is seen as relatively simple gesture to regain lost control.

In order to retain their clients in the US tax loop, tax advisors should look at the behavioural forces that are driving them away and try to convince them, firstly, that paying US taxes is not just a pure loss-making transaction and, secondly, that they do not necessarily gain control by opting out. For example, the clients assume that relative advantage of tax laws in the adoptive country will persist indefinitely into the future.  This assumption is loaded with present bias as it almost assumes there will never be a good reason to return to the US for tax or other reasons.  Yet, already, one can observe increasing official scrutiny of tax havens like Switzerland as much of the world undergoes austerity. Thus, the very irrevocability of the decision to give up the passport is what the tax lawyers can use to persuade these individuals to stay tied to the US. After all they are more likely to feel regret, should the laws of the new home country change to their disadvantage.

Another behavioural trait which can be tapped is the current aversion among the wealthy to complexity. This is obviously a more daunting challenge for tax advisors as complexity is synonymous with high fees.  At the moment, however, a complex tax plan is more likely to look like a potential minefield to a client who is seeking more control. A simpler, more straightforward tax strategy is more likely to make the client feel in control, even though it means more tax being paid and fewer fees being earned. There’s more: what could be more conducive to a sense of control than a little blue insurance policy that guarantees a problem-free return to the US – just in case.

€10,000 for Cancer Diagnosis

I took an unsettling call from lady at American Express the other day. Apparently because I had been a card member for such a long time, she wondered whether I would like to have a second card for my wife. It was only after I bluntly refused that she came to what I now suspect to have been the real reason for the call. She expressed how uncomfortable it was for her to broach this subject, but American Express had tasked her to propose insurance security specifically for life events that are neglected by other insurers because they are unable or unwilling to discuss sensitive issues. Her voice adopted a solemn, gravelly timbre: “No, Mr Goldberg,” she choked, “this is not a comfortable subject, but one that must be discussed.” I braced myself.

“What do you imagine is the most frequently occurring type of cancer among men?” I immediately thought of the recent news about Warren Buffet’s illness and the availability heuristic delivered me the answer straight away: prostate cancer.

“Correct!” bounced back down the phone line. “I do not want to frighten you, and it pains me to talk about it, but many men do suffer from it.”

“So you mean to say that you insure against…?”

“We cannot prevent it or make it go away,” she added quickly, “but we will give you €10,000 cash if you are diagnosed.” She then went on to describe how the anxiety of a diagnosis could be mitigated, perhaps by a relaxing holiday; something to take my mind off it. And that was not all: the insurance would also pay €100 for each day spent in hospital and another €20,000 for case where I have to say goodbye to my two oldest friends. They had also bundled in an accident insurance, which I didn’t need anyway.

“And all that,” she chimed seductively, “not for €100, not €50, but for just €18.90 per month. All you need to do is agree and you will benefit from immediate coverage. The premium will appear on your next monthly statement.”

I was overwhelmed. Of course, I saw through her cheap sales trick – the setting of an unrealistically high €100 reference point – but I still wanted to figure out whether the offer made any kind of sense. It didn’t. The sales lady also went on to assure me of the financial muscle of their American partner, ACE; to explain that I would receive all the details later by post; to remind me that my premiums would remain stable over time;  and to explain how easily I could cancel the valuable coverage if later decided it was not for me. Here too, years of reading behavioural economics kept me out of the mire. I know that those TV shopping channels rely on the fact that most customers, once they have bought the steam cleaner, the miracle paint brush, or the workout DVD, never return it during the money-back period even if they never use it (endowment effect). I knew that whether out of laziness, forgetfulness, a fear of then being ‘uninsured’, or out of a desire to avoid any future regret, once I was insured I would probably never cancel the policy.

When I started to wriggle, she tried repeatedly to pin me down, but I wasn’t having any of it and simply hung up. I remember Warren Buffett saying that he had more chance of being killed by a jealous husband than by his prostate cancer. I didn’t mention this to her though; she might have had an insurance for that too.

Legal Landslide

My friend has just switched jobs. She is a lawyer and decided to accept the offer of a former colleague to join him at his new firm. Things like that happen all the time in the law business. In this case, though, she was not the only one to have been lured away – many members of staff received an offer of a job at the new firm and all of them, like her, wanted to accept. Wary of the huge shock that at mass exodus would have on the firm’s boss and on the remaining staff, my friend wondered whether there was any way to mitigate the ‘damage’ so that good relationships wouldn’t be spoiled nor ill-feelings left behind.

“You should all quit at the same time,” was my immediate response. Sure, it would be a massive blow for the boss but, from a psychological point of view, aggregating all the bad news into one dreadful event would be better than enduring a string of staff members showing up at his office with resignation letters over weeks.  It sounds almost counter-intuitive, but when faced with a block resignation the boss would perceive the loss of each individual proportionally less the more of them there are.  However, if they quit separately with a gap of several days in between, he would perceive the departure of each with the same intensity. From a purely hedonic perspective, it is more favourable to aggregate losses and to segregate gains. “Pull off the plaster all in one go,” I counselled.

It turned out the lawyers were not inclined to indulge a well-intentioned behavioural economist; they quit one after the other with an interval of a couple of days between each. The poor boss must have felt that the ground was opening up beneath him.