Marty Weitzman’s Noah’s Ark Problem
> Marty Weitzman passed away suddenly yesterday. He was on many people’s shortlist for the Nobel. His work is marked by high-theory applied to practical problems. The theory is always worked out in great generality and is difficult even for most economists. Weitzman wanted to be understood by more than a handful of theorists, however, and so he also went to great lengths to look for special cases or revealing metaphors. Thus, the typical Weitzman paper has a dense middle section of math but an introduction and conclusion of sparkling prose that can be understood and appreciated by anyone for its insights.
> The Noah’s Ark Problem illustrates the model and is my favorite Weitzman paper.
Don’t Put Your Valuables in the Bank
> On the other hand if you have valuable stuff you can leave it with the bank, and the bank will keep it in a box for you, but that is sort of an accident. It is not a core banking function, not really a banking function at all except for historical reasons. And sometimes they’ll drill open the box and throw your stuff out!
Original story: https://www.nytimes.com/2019/07/19/business/safe-deposit-box-theft.html
> It turns out that, statistically, heart surgeons are better at heart surgery than barbers are. What about dermatologists, are they better at sourcing and identifying private-equity and venture-capital investments than private-equity professionals are?
Who Can Pay Venezuela’s Debts?
> Also racing sponsorships, credit ratings, ice-water celebrations and Trump on crypto.
This was a good one.
How Discount Brokerages Make Money
> This is outside of my usual software-oriented beat, but sometimes people are wrong on the Internet. Most recently, people have been wrong about payment for order flow, an esoteric topic in the investing industry which seems vaguely unsavory to Hacker News commenters, Michael Lewis , etc.
> Explaining why payment for order flow isn’t a big deal requires a more in-depth discussion of discount brokerages. All stats below are as of 2018; citations for the annual reports are at the bottom.
KPMG Audit Professionals Manipulated the Scoring of Training Exams
In today’s edition of edit a URL and go to jail...
> KPMG sent participants in training programs a hyperlink that directed them to the applicable exams. Embedded in the hyperlink was an instruction to the server that specified the score necessary to pass the exam. Thus, the characters “MasteryScore=70” meant participants were required to answer at least 70 percent of the answers accurately to pass the exam. By changing the number in the hyperlink, audit professionals could change the score required to pass.
> 58. For a period of time up to November 2015, certain audit professionals, including one partner, altered the URLs for their exams to lower the scores required to pass. Twenty-eight of these auditors did so on four or more occasions. Certain audit professionals lowered the required score to the point of passing exams while answering less than 25 percent of the questions correctly.
Also: 25%??? Come on guys, that’s worse than random chance!
Don’t Buy the Wrong Electricity
> Second: It’s a thing that happens often enough that ICE Futures has a procedure to report trades like this as errors and adjust their prices. A normal part of electricity futures markets is people buying the wrong contract because they didn’t read the name all the way through, and then going to the exchange and saying “whoops wrong contract,” and the exchange fixing the trade.
> Instead he’s accused of doing it basically as a form of … protest art, I guess? It happened to him, he was mad, so he did it to other people “to prove the point that” … that … that you’d be mad too if it happened to you? He was driven by that most universal of human motivations, the desire to annoy other people with the thing that was annoying him. Really it’s the most relatable kind of market manipulation.
But what about the opportunity cost?
Ethercombing: Finding Secrets in Popular Places
> In this paper we examine how, even when faced with this statistical improbability, ISE discovered 732 private keys as well as their corresponding public keys that committed 49,060 transactions to the Ethereum blockchain. Additionally, we identified 13,319 Ethereum that was transferred to either invalid destination addresses, or wallets derived from weak keys that at the height of the Ethereum market had a combined total value of $18,899,969. In the process, we discovered that funds from these weak-key addresses are being pilfered and sent to a destination address belonging to an individual or group that is running active campaigns to compromise/gather private keys and obtain these funds. On January 13, 2018, this “blockchainbandit” held a balance of 37,926 ETH valued at $54,343,407.
> In an experiment, we picked a private key of 1, for no reason other than that it is the lower bound of a possible private key for secp256k1 and it also lies within the 1 to 232-1 range of a 32-bit truncated key. We use the private key 0x0000000000000000000000000000000000000000000000000000000000000001 to derive the public Ethereum address 0x7e5f4552091a69125d5dfcb7b8c2659029395bdf.
The Triple Lizard Is a Love Story and a Cautionary Tale
> A lot of banking businesses are mysterious, but the exotic-derivatives business is actually very straightforward and normal. It is a sort of manufacturing business. You think about a product that customers might want, a need that they have that can be filled by a product you can build. Once you have an idea for a product, you design it and figure out how to manufacture it efficiently.
> Unlike in a regular manufacturing business, you are not exactly manufacturing the product, delivering it to the customer and walking away. In fact manufacturing a derivative normally requires continual trading — “dynamic hedging” — throughout its life. You are manufacturing it prospectively; you sign up the trade, give the customer her money, and then spend the life of the trade trying to make it worth what your model said it was worth.
> Triple lizard! Wouldn’t you buy a triple lizard just for the joy of saying it? “Give me three triple lizards please!” Who even cares what they are, they’re triple lizards.
Who Can Say What California Means?
> Imagine, as I do every day, being the Tesla Inc. “Designated Securities Counsel” whose job is to review Elon Musk’s draft tweets before he sends them out. (Bloomberg News calls this unnamed but undoubtedly accomplished lawyer “Musk’s Mystery Twitter Sitter.”)
Wherein Matt Levine then proceeds to imagine the discussion that must have taken place.
> I think these tweets are fine. If you don’t, you have to explain to me, specifically, how they violate the settlement.
> I am not giving you a formal legal opinion that it is illegal for you to tweet “California.” I am just telling you that it’s dumb.
> Apparently the compromise was that Musk tweeted the tweets, but first he changed his Twitter name to “Elon Tusk,” with an elephant emoji, to make them … less official? Less contemptuous? More annoying?
Warren Buffett’s Stocks Went Down
> Also a poison pill, BlackRock private equity, Windstream and a decacorn.
> Last year Sinovac Biotech Ltd., a U.S.-listed Chinese biopharmaceutical company incorporated in Antigua and Barbuda (why not), held an annual general meeting of shareholders to re-elect its board of directors. Some shareholders showed up at the meeting (in Beijing) and took the board by surprise by demanding to vote for different directors. This is generally viewed as somewhere between “extremely impolite” and “totally illegal,” because: Who goes to shareholder meetings? In most of the world, most of the time, the answer is almost nobody; all of the business of the meetings is conducted by proxies. If you want to nominate directors, you send in a notice months in advance, and navigate a bunch of tricky procedural formalities, and if all goes well you get to send a proxy card to all the shareholders asking them to vote for your directors, and if more shareholders send back proxies for your slate than for the management slate then your directors get elected. You don’t just show up at the meeting, nominate your directors and ask for a show of hands. The company’s managers will quite properly tell you that you are out of order, and you will respond “the whole system is out of order,” and there will be a lot of shouting and confusion.
And then it gets really weird.
> We have talked a lot recently about the question of who controls a corporation, and I have consistently pushed back on the naive view that shareholders “own” the corporation and get to choose its managers and directors and control how it operates. Here some shareholders wanted to vote out the old directors and vote in some new ones, and their new directors got more votes than the old ones did, and not only did this not have the effect of replacing the old directors with the new ones, but the old directors have decided to punish the shareholders who voted against them by taking away some of their shares. Whatever is happening here, it is hard to see it as the shareholders owning the corporation.
GE Powered the American Century—Then It Burned Out
> How the company that was once America’s biggest, the maker of power turbines, the seller of insurance, the broadcaster of ‘Seinfeld,’ became a shadow of its former self
The day Volkswagen briefly conquered the world
> In midst of the great financial crisis, something odd happened. Volkswagen, the German carmaker, became the biggest company in the world. For one, brief day. Looking back a decade, as many have recently, you’d be forgiven for thinking the worst asset to own was a US investment bank or mortgage originator. But it was nothing compared to being short the Wolfsburg-based business. Exactly 10 years (and 48 hours) later, here’s how it happened.
Eric Schmidt on the Life-Changing Magic of Systematizing, Scaling, and Saying “Thanks”
> Tyler questioned Schmidt about underused management strategies, what Google learned after interviewing one job candidate sixteen times, his opinion on early vs. late Picasso, the best reform in corporate governance, why we might see a bifurcation of the Internet, what technology will explode in the the next 10 years, the most underrated media source, and more.
> Well, turns out there were a few extra credit cards in the company floating around, and random things were showing up. This is how I ran things. But it’s important not to go to the person who bought the telephone booth and say, “You’re fired.” The important thing to do is take their credit card away.
> As a general rule, I try to blame the Internet for everything because everyone else does, and I think some of this is true and some of it’s false. That was a joke by the way. And you can’t joke anymore in the age of Twitter.
> And I’m glad to be introduced to the bizarre world of pre-union Scottish currency, which, in addition to the loonslate, includes the bawbee, the unicorn, the hardhead, the bodle, and the plack.
The risky move a title-starved team should try: Trade a young, star QB
> Unless your quarterback is married to a supermodel with a net worth stretching into nine figures, though, the bargain doesn’t last forever. The best-case scenario is that you get four seasons of excellent play at a below-market rate before locking up your franchise passer and hoping to find arbitrage opportunities elsewhere.
How to best value an asset that will increase in absolute terms but decline in relative terms?
> This is one of those comics that I mostly mean to just be funny, but will be interpreted as a direct political statement.
Earning the Right to Get Swindled
> What kind of company do you think will want to raise $1,000 at a time from poor-but-credentialed investors, but won’t want to go public? Is the answer “the very good and fast-growing kind”? Really?
> I have written before about my own fantasy for consumer securities regulation, which would solve all of these problems but which would probably face some political hurdles in getting enacted.
> Anyone can also invest in any other dumb investment; you just have to go to the local office of the SEC and get a Certificate of Dumb Investment.
Sensation Seeking and Hedge Funds
> We show that motivated by sensation seeking, hedge fund managers who own powerful sports cars take on more investment risk but do not deliver higher returns, resulting in lower Sharpe ratios, information ratios, and alphas. Moreover, sensation‐seeking managers trade more frequently, actively, and unconventionally, and prefer lottery‐like stocks. We show further that some investors are themselves susceptible to sensation seeking and that sensation‐seeking investors fuel the demand for sensation‐seeking managers. While investors perceive sensation seekers to be less competent, they do not fully appreciate the superior investment skills of sensation‐avoiding fund managers.
> The empirical results are striking. We ﬁnd that hedge fund managers who purchase performance cars take on more investment risk than do fund managers who eschew performance cars. Speciﬁcally, sports car drivers exhibit annualized return standard deviations that are 1.80 percentage points, or 16.61%, higher than those of nonsports car drivers. Similarly,funds managed by drivers of high horsepower and high torque automobiles deliver more volatile returns. Conversely, we ﬁnd that managers who acquire practical but unexciting cars take on less investment risk relative to managers who shun these cars. Minivan owners,for example, generate annualized return standard deviations that are 1.28 percentage points,or 11.74%, lower than do other owners. Moreover, managers who purchase cars with high passenger volumes and excellent safety ratings also produce more stable returns.
The Cowboys' salary-cap mismanagement is wasting Dak Prescott
> In reality, though, they aren’t spending because they find themselves in a difficult cap situation, even with the benefit of Prescott’s minuscule salary. For years now, they’ve operated with a unique strategy designed to pay their top stars market-value contracts while simultaneously keeping their cap hits relatively team-friendly. It might sound like a great plan, and it is when everyone stays healthy and effective. The downside is that when those players become ineffective or are otherwise unable to play, teams end up paying the price. While most teams can move on from veteran deals without incurring significant costs, the Cowboys have been stuck paying uncomfortable amounts of dead money.
Mostly a football story, but maybe some technical debt parallels. Borrow from tomorrow.