David Einhorn Q&A

Guy Spier - The Education of a Value Investor


Noam Chomsky - How The World Works



Perspective on the world from Noam Chomsky “How the world works?”


Towards the end of the question-and-answer period someone asked you about the power of the system and how to change it. You said it’s a very weak system. It looks powerful but could easily be changed.” Where do you see the weaknesses?


I see them at every level. We’ve discussed them earlier, but here’s a summary:


·        People don’t like the system as mentioned earlier, 95% of Americans think corporations should lower their profits to benefit their workers and the communities they do business in, 70% think businesses have too much power and more than 80% think working people don’t have enough to say in what goes on, that economic system is inherently unfair, and that government basically isn’t functioning, because it’s working for the rich.


·        Corporations – the major power system in the West – are chartered by states, and legal mechanisms exists to take away their charters and place them under worker or community control. That would require a democratically organized public, and it hasn’t been done for a century. But the rights of corporations were mostly given to them by courts and lawyers, not by legislation, and that power system could erode very quickly.


Of course, the system once in place, cannot simply be dismantled by legal tinkering. Alternatives have to be constructed within the existing economy, and within the minds of working people and communities. The questions that arise go to the core of socioeconomic organization, the nature of decision making and control, and the fundamentals of human rights. They are far from trivial.


·         Since government is to some extent under public control – at least potentially – it can also be modified.


·        About two-thirds of all financial transactions in the globalized economy take place in areas dominated by the US, Japan and Germany. These are all areas where - in principle, at least – mechanics already exist that allow the public to control what happens.


People need organizations and movements to gravitate to.

If people become aware of constructive alternatives with even the beginning of mechanisms to realize those alternatives, positive change could have a lot of support. The current tendencies, many which are pretty harmful, don’t seem to be all that substantial, and there’s nothing inevitable about them. That doesn’t mean constructive change will happen, but the opportunity for it is definitely there.




Speaking the truth to the power makes no sense. There’s no point in speaking the truth to Henry Kissinger- he knows it already. Instead speak the truth to the powerless – or better, with the powerless. Then they’ll act to dismantle illegitimate power.


A Canadian journal called Outlook ran an article on the talk you gave in Vancouver. It concluded with quotes from people leaving the hall: Well, he certainly left me depressed. And: I’m more upset than I was before I came. And on and on. Is there a way to change that?

I’ve heard that a lot, and I understand why. I fell that it’s none of my business to tell people what they ought to do- that’s for them to figure out. I don’t even know what I ought to do.


So I just try to describe as best I can what I think is happening. When you look at that, it’s not very pretty, and if you extrapolate it into the future, it’s very ugly.

But the point is – and it’s my fault if I don’t make this clear – it’s not inevitable. The future can be changed. But we can’t change things unless we begin to understand them.

We’ve had plenty of successes; they’re cumulative, and they lead us to new peaks to climb. We've also had plenty of failures. Nobody ever said it was going to be easy.




The 3G Way: Dream People Culture

Great book ultimately about how Jorge Paulo Lemann, Marcel Telles and Beto Sicupira achieved their success in growing companies. I only list the key commandments, their management style was influenced by Goldman Sachs, GE and Walmart. 


Garantia's  (first investment bank founded by Jorge Paulo Lemann)  original 18 commandments

  1. A big and challenging dream makes everyone row in the same direction.
  2. A company's biggest asset is good people working as a team, growing in proportion to their talent, and being recognized for that. Employee compensation has to be aligned with shareholders'interests.
  3. Profits are what attracts investors, people, and opportunities, and keep the wheels spinning.
  4. Focus is the essence. It's impossible to be excellent in everything, so concentrate on the few things that really matter.
  5. Everything has to have an owner with authority and accountability. Debate is good, but in the end, someone has to decide.
  6. Common sense is as good as fancy concepts. Simple is better than complicated. 
  7. Transparency and information flow ease decision-making and minimize conflicts.
  8. Hiring people who are better than yourself, training them, challenging them, and retaining them is the main attribution of a manager.
  9. Leading through example is vital, in both heroic gestures and the simple actions of the company's day-to-day
  10. Luck is always a function of sweat. Work hard, but with joy.
  11. Things happen in the business' operations and in the market. You have to pound the pavement.
  12. Being paranoid about costs and expenses- the only variables under our control - helps ensure long term survival. 
  13. Constant discontent, a sense of urgency, and zero complacency help ensure a sustainable competitive advantage.
  14. Innovations that add value are useful, but copying practices that already work is usually easier.
  15. Corporate and personal discretion are helpful. Showing off is only allowed when done with concrete objectives.
  16. Constant training and improvement have to be ongoing efforts and should permeate our routine.
  17. Name, reputation, and brands are precious assets that take decades to build and days to destroys
  18. Trickery and cheating can rot a company from the inside. Ethics pay off on the long run.

AB InBev's 10 Principles (the trio went on to build the largest and most profitable Beer Company in the world)

  1. Our shared Dream energize everyone to work in the same direction to Best Beer Company Bringing People Together for a Better World
  2. Our greatest strength is our people. Great people grow at the place of their talent and are rewarded accordingly. 
  3. We recruit, develop, and retain people who can be better than ourselves. We will be judged by the quality of our teams.
  4. We are never completely satisfied with our results, which are the fuel of our company. Focus and zero complacency guarantee lasting competitive advantage.
  5. The consumer is the Boss. We serve our consumer by offering brand experience that play a meaningful role in their lives, and always in a responsible way.
  6. We are a company of owners. Owners take results personally.
  7. We believe common sense and simplicity are usually better guidelines than unnecessary sophistication and complexity.
  8. We manage our costs tightly to free up resources that will support sustainable and profitable top line growth.
  9. Leadership by personal example is at the core of our culture. We do what we say.
  10. We never take shortcuts. Integrity, hard work, quality, and responsibility are key to building our company.

I personally like the concept to divide costs into strategic costs which support long term development vs. non strategic costs. Companies should focus on having lower non strategic costs than the competition and higher strategic costs making them stronger over time.


 A core aspect is setting goals which require a ca. 20% stretch in performance from everybody, highly rewarding the strong performers and firing the 10% worst performers. Focus on constant improvement and aligning individual goals with team goals, aligning team goals with corporate goals.


Every page of the book is worth reading as it is kept to the essentials. 



The Third Industrial Revolution and a Zero Marginal Cost Society (Jeremy Rifkin) | DLD16


An Investing Principles Checklist - From Charles t. Munger

“No wise pilot, no matter how great his talent and experience, fails to use his checklist.“






  •  Risk – All investment evaluations should begin by measuring risk, especially reputational

o   Incorporate and appropriate margin of safety

o   Avoid dealing with people of questionable character

o   Insist upon proper compensations for risk assumed

o   Always beware of inflation and interest rate exposure

o   Avoid big mistakes; shun permanent capital loss


  •   Independences – “Only in fairy tales are emperors told they are naked”

o   Objectivity and rationally require independence of thought

o   Remember that just because other people agree or disagree with you doesn’t make you right or wrong – the only thing that matters is the correctness of you analysis and judgement

o   Mimicking the herd invites regression to the mean (merely average performance)


  •   Preparation – “The only way to win is to work, work, work, work , and hope to have a few insights”

o   Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day

o   More important than the will to win is the will to prepare

o   Develop fluency in mental models from the major academic disciplines

o   If you want to get smart, the question you have to keep is asking is “why, why, why?”


  • Intellectual humility – Acknowledging what you don’t know is the dawning of wisdom

o   Stay within a well-defined circle of competence

o   Identify and reconcile disconfirming evidence

o   Resist the craving for false precision, false certainty, etc.

o   Above all, never fool yourself, and remember that you are the easier person to fool


  •   Analytical rigor – Use of the scientific method an checklists minimize errors and omissions

o   Determine value apart from price; progress apart from activity; wealth apart from size

o   It is better to remember the obvious than to grasp the esoteric

o   Be a business analyst, not a market, macroeconomics or security analyst

o   Consider totality of risk and effect; look always at potential second order and higher level effects

o   Think forward and backwards – Invert, always invert


  • Proper allocation of capital is an investor’s number one job

o   Remember that highest and best use is always measured by the next best use (opportunity costs)

o   Good ideas are rare –when the odds are greatly in your favour, bet (allocate) heavily

o   Don’t fall in love with an investment – be situation-dependent and opportunity driven


  •  Patience – Resist the natural human bias to act

o   “Compound interest is the eighth wonder of the world “ (Einstein); never interrupt it unnecessarily

o   Avoid unnecessary transactional taxes and frictional costs; never take action for its own sake

o   Be alert for the arrival of luck

o   Enjoy the process along with proceeds, because the process is where you life


  •   Decisiveness- When proper circumstances present themselves, act with decisiveness and conviction

o   Be fearful when others are greedy, and greedy when others are fearful

o   Opportunity does not come often, so seize it when it does

o   Opportunity meeting the prepared mind: that’s the game


  • Change – Life with change and accept unremovable complexity

o   Recognize and adapt to the true nature of the world around you; don’t expect it to adapt to you

o   Continually challenge and willingly amend your “best-loved-ideas”

o   Recognize reality even when you don’t like it – especially when you don’t like


  • Focus – Keep things simple and remember what you set out to do

o   Remember that reputation and integrity are your most valuable assets – and can be lost in a heartbeat

o   Guard against the effects of hubris and boredom

o   Don’t overlook the obvious by downing in minutiae

o   Be careful to exclude unneeded information or slop: “A small leak can sink a great ship”

o   Face your big troubles don’t sweep them under the rig


In the end it comes down to Charlie’s most basic guiding principles, his fundamental philosophy of life: Preparation. Discipline. Patience. Decisiveness. Each attribute is in turn lost without the other, but together they form the dynamic critical mass for a cascading positive effects for which Munger is famous (the “lollapalooza”).




Charles T. Munger's Psychological Checklist For Investing and life in General

Summary of Charles T. Munger’s psychology checklist taken from “Poor Charlie’s Almanack”. We should develop mental checklists for investing or at least go through them before important decisions. This one is highly relevant to life in general.


1)    Reward and Punishment  - Get the incentives right (Management consulting report this problem needs more management consulting). First action should always be to write down the incentives of everybody involved. If the equation does not workout change it. Incentives are despite being taught in each business school, often underestimated in real life.


2)    Like Loving Tendency - like and love being liked, positive feedback bias towards the loved ones. Ignore faults of and comply with wishes of, the object of affection, to favour people, products and actions merely associated with the object of affection, to distorts other facts to facilitated love.


3)    Dislike Hating Tendency - Often used in politics to “channel” the hatreds and disliking of individuals and groups into nonlethal patterns including elections. Politics is the art of marshalling hatreds. Often relevant on family level (property law).


4)    Doubt-Avoidance Tendency - The brain of man is programmed with a tendency to quickly remove doubt by reaching a decision. Which is often supported by puzzlement and stress (used as well in religion).


5)    Inconsistent Avoiding Tendency - Easy to prevent habits than to avoid them. It’s difficult for us to change something which we already programmed into our brain. “An ounce of prevention is worth a pound of cure”. Developing good habits and avoid the bad ones from the beginning.


6)    Curiosity Tendency- Curiosity can be strong motivation and lead to better performance, education needs to embrace this.


7)    Kantian Fairness Tendency – Human have a natural understanding for fairness, sort of “golden rule” everybody is aware of according to Kant.


8)    Envy/Jealousy Tendency – Natural tendency in humans, to compare. “It’s not greed that drives the world but envy.”


9)    Reciprocation Tendency - Small courtesy, car sales man cup of coffee for $500 extra dollars, ask for a small favor to gain relationship advantage.


10)Influence –from-Mere-Association Tendency- Associate highest price with highest quality. Even trivial associations work, Coke ads of happy life, military bands play impressive music etc. Some of the most important miscalculations come from what is accidentally associated with one’s past success, or one’s liking and loving, or one’s disliking and hating, which includes a natural hatred for bad news.


11)Simple, Pain-Avoiding Psychological Denial - If something is painful to admit, an easy way is just too simply deny it. E.g. drug addicted often trick themselves. Stay away from any conduct at all like do drift into chemical dependency.


12)Excessive Self-Regard Tendency - We all commonly observe the excessive self-regard of man. He mostly misappraisals himself on the high side, like ninety percent of Swedish drives that judge themselves to be above average. Also once you own something you value it more also called “endowment effect”. Example is also the overinfluence by face-to-face impression for a job candidate who is a marvelous “presenter” often causes great danger under modern executive-search practice.


13)Overoptimism Tendency - “What a man wishes, that also will he believe”. Excess of optimism is standard approach for us even when we are already doing well. One antidote to foolish optimism is trained, habitual use of simple probability math of Fermat and Pascal. The mental rules of thumb that evolution gives us to deal with risk are not adequate.


14)Deprival-Superreaction Tendency - Man values overvalues not losing to gaining. Or if man almost get something he greatly wants and has it jerked away from him in the last moment, he will react much as if he had long owned the reward and had it jerked away. Man also often compare to what is near instead of what really matters. For instance a man with $10m in his brokerage account will often be extremely irritated by the accidental loss of $100 out of the $300 in his wallet. Am man ordinarily reacts with irrational intensity to even a small loss, or threated loss, of property, love friendship, dominated territory, opportunity, status, or any valued thing. As a natural result, bureaucratic infighting over the threatened loss of dominated territory often causes immense damage to an institution as a whole. This factor, among others accounts for much of the wisdom of Jack Welch’s long fight against bureaucratic ills at General Electric.


15)Social-Proof Tendency - Compliance behaviour and management errors result out of social proof tendencies, most easily triggered under puzzlement or stress, and particularly when both exist. Because both bad and good behaviour are made contagious by Social-Proof Tendency, it is highly important that human societies 1) stop any bad behaviour before it spreads and 2) Forster and display all good behaviour. If only one lesson is to be chosen this would be learn how to ignore the examples from others when they are wrong, because few things are more worth having.


16)Contrast Misreaction Tendency - The eyes contrast in what is seen registered. Moreover, as perception goes, so goes cognition. Few psychological tendencies do more damage. Small scale damages involve buying an overpriced $1000 leather dashboard merely because the price is so low compared to his concurrent purchase of a $65000 car. Large-scale damages often ruin lives, as when a wonderful woman having terrible parents marries a man who would be judged satisfactory only in comparison to her parents. Salesman deliberately shows the customer three awful houses at ridiculously high prices. Then he shows him a merely bad house at a price only moderately too high. And, boom the broker makes an easy sale. Other example, to make an ordinary price seem low, the vendor will advertise an ordinary price as reduction. Even when people know this sort of manipulation, it will often work to trigger buying. It also demonstrated that being aware of psychological ploys is not a perfect defense.


17)Stress Influence Tendency - More social confirmatory decision under stress. People might turn complete personality after break down (Palov experiments), every person can be broken. A break down can change a personality completely.


18)Availability- Misweighting Tendency - Theories and stories that can be easy remembered have a higher weight for us, and therefore are more likely to be seen as true. Good example for this in finance is the CAPM.


19)Use-It-Or-Lose-It-Tendency - Over time educations narrows down to the field in which knowledge is applied. One needs systematic checklist of skills and constant training of important theoretical frameworks to keep a general toolbox for solving problems, and don’t become the man with the hammer who treats every problem with the same solution.


20)Drug-Misinfluence Tendency - Avoid problem from the beginning, can result in “Simple, Pain-Avoiding Psychological Denial.”


21)Senescene-Misinfluence Tendency - Continues learning and practice will slow down aging of mental abilities.


22)Authority-Misinfluence Tendency -  Higher authority can result in blind following of orders, reason for many catastrophes. Warren Buffet is always quite like a mouse around his pilots.


23)Twaddle Tendency – Tendency to focus on unimportant stuff.


24)Reason-Respecting Tendency - Why is the most important question for any task. Reason can lead to strong motivation but is often also misused to manipulate people. “Why?” is a sort of Rosetta stone opening up the major potentially of mental life.


25)Lollapalooza Tendency - Bringing pressure to bear form various psychological tendencies at the same time. Extreme consequences from confluences of psychological tendencies acting in favor of a particular outcome. One of the key reasons for the success of the Milgram experiment often not considered in psychological textbooks.




William Janeway on Innovation


Dynamic ESG investing and asset management

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Democratization and the European Union

A question I have been discussing recently is where are we heading with the EU?


Even if you are pro EU and agree with the general vision we need more debate on how the EU should look like and work in detail. We are moving into a world of more bureaucracy with anonymous decision makers without “skin in the game”.  I believe, if you ask the majority of European citizens how the exact decision making in the EU works and how much their national political governments (for which they vote) are influenced by EU level (for which most of them do not bother to vote) they will have a wrong picture of it. Is this a democratic system? An interesting way forward could be a more federal system with a creditable government at EU level. This would go in line with strengthening the EU parliament and increasing the government’s responsibility for actions. Furthermore, a good lesson from the US is that you can let states go bankrupt in a federal system and you have to do so.



Here an organisation that promotes European federalism: http://www.federalists.eu/uef/our-vision/



Finally, does it even make sense to promote the potentially best solution which is by itself a prisoner’s dilemma to implement?



Momentum investing and 3d printing

Never ask anyone for their opinion, forecast or recommendation. Just ask them what they have- or don't have in their portfolio. Nassim Taleb (2013)


There you go..3d printing is a great story at the moment. In line with Schiller’s recent Noble stories drive markets. Or as Soros said there is no better investment than an emerging bubble (in the case you can limit your downside somehow and I personally prefer value but sometimes I have to do momentum). A good way to profit from emerging technologies without hours of research and extremely high risks (still high risks) are specific ETFs or indices.

Here a 3d printing index certificate offered by UBS: http://keyinvest-de.ubs.com/Produktdetails/DE000UBS13D0


I bought it roughly 2 months ago and made over 30% return so far. Therefore, it should be obvious why this article exists. Still success in the long run depends on limited downside mechanisms for such a strategy (just look at our Tesla exit below). 



Mandelbrot “The (mis)behaviour of markets” and insights from multifractal models

In the following a few highlights from Mandelbrot’s book:

 “To me the greatest charm of the multifractal models is the economy. One simple set of rules can produce a great variety of behaviour, depending on the circumstances. By contrast, most financial academics are going through a love affair with another way of modelling market volatility. Its main inventor, Robert F. Engle shared a Nobel in 2003 for its development. It starts from the same facts I have been advancing in this book: Volatility clusters, due to dependence. To model that, it as already been mentioned that a set of statistical tools were developed; it is called GARCH, short for a model the cluster its starts with conventional Brownian model price variation.  When the volatility jumps, it plugs in new parameters to make the bell curve grow; when the volatility falls; it plugs in new parameters to shrink the curve. You might say the bell curve vibrates, to fit the circumstances. GARCH is, certainly, a handy abacus now used by many option traders and financial directors to model risk.  But it begs the question of what makes the bell curve vibrate. And as you try to work with the model, it becomes increasingly complicated. To say much with little: Such is the goal of good science. But most financial models say little with much. They input endless data, require many parameters, take long calculations. When the fail they are “fixed”. They are amended, qualified, particularized and complicated. Bit by bid, from a bad seed a big but sickly tree is build, with glue nails, screws, and scaffolding. That people lose money on these models should come as no great surprise.

The multifractal model, by contrast, begins with the unchanging, mathematicians would call them. Its economical and flexible and mimics the real thing […]  My hope is that, someday, the small seed of multifractal analysis can grow into a fruitful new way of managing the world’s money and economy.” Despite the message of power laws one of Mandelbrot main points is the importance of time.

Hey explains the general dependence of three underlying functions with a metaphor: “ The family starts with the parent. The father takes clock time and transforms it into trading time. The mother takes clock time and changes it into a price. Merged together, the baby takes the father’s trading-time and coverts it into a price by the rules the mother provides. Last step: Use the new baby generator to make a full fractal price chart.”


If one read carefully he is still critical towards the practical applications and a main argument is to invest more into fundamental research on markets. Fractal theory needs more researchers working on it.


Key findings:

-Volatility comes in cluster and can be mild, normal and wild. Standard models only account for the normal periods (stationary issue).

-Fractal models can be scaled and do not depend on finite higher moments.

-Contrary most money can be made in wild periods, timing matters prices cluster.

-Risk mgmt and portfolio models could use multifractal model for monte carlo simulations. (Or one could do it Taleb’s way and build “antifragile” portfolios benefiting from randomness.)


To conclude: “Since my youth I have been shamelessly disrespectful of received wisdom […] My understanding of economics comes not from abstract theory but from observation.”


Mandelbrot concludes his book with the following:

“One night of February 1, 1953, a very bad storm lashed the Dutch coast. It broke the famous see dikes, the country’s ancient and proud bulwark against disaster. More than 1,800 died. Dutch hydrologists found the flooding had pushed the benchmark water-level indicators, in Amsterdam to 3.85 over the average seemingly impossible. The dikes has had been thought to be safe enough from such a calamity; the conventional odds of so high a flood were thought to have been less than one in ten thousand. And yet, further research showed, an even greater inundation of four meters had been recorded only a few centuries earlier, in 1570. Naturally the pragmatic Dutch did not waste time arguing about the math. The cleaned up the damage and rebuild the dikes higher and stronger.


Such pragmatism is needed in financial theory. It is the Hippocratic Oath to “do no harm”. In finance, I believe the conventional models and their recent “fixes” violate that oath. They are not merely wrong; they are dangerously wrong. They are like a shipbuilder who assumes that gales are rare and hurricanes myth; so he builds his vessel for speed, capacity and comfort- giving little thought to stability and strength. To launch such ship across the ocean in typhoon season is to do serious harm. Like the weather markets are turbulent. We must learn to recognize that, and better cope."






Why behavioural studies matter for new “smart” energy demand startups!

Its obvious that huge economic potential is hidden in energy efficiency and smart demand business models. Various private equity companies are at the forefront of this development and build an investment case on the potential role, which technical solutions will play. I would like to emphasize a “low hanging fruit” for future business models. Nudging has become a quite popular word in behavioural studies and for policy makers but despite the general theory a lot of it is about psycholgical details. Different ways of implementation can make a difference between success and failure. I believe that the following paper from Michelle Baddeley (Cambridge/UCL) is highly relevant for any regulator, consulting company and startup in the energy demand sector. Here the link: Energy, the Environment and Behaviour Change: A survey of insights from behavioural economics


Just a few highlights to illustrate the difference between idealistic opinions and reality:

-“The highest correlation with actual conservation behaviour was a person’s belief about whether or not their neighbours were doing it.”

-“Given bounded attention to social norms, social norms will only result in behaviour when norms are at the top of the mind.”

- Normative influence matter.

-Families and habits play a key role in society.

-Huge potential lies in the way “toxic” emissions have to be published.

-“Thaler and Sunstein suggest that a Greenhouse Gas Inventory requiring most significant emitters to disclose their emissions could have similar beneficial effects as the Toxic Release Inventory, particularly given the current salience of climate change problems in the public consciousness. Firms will also be affected by the actions of regulators, and this may generate strategic conflicts. When firms social motivations will interact with strategic considerations it introduces additional complexities, for example Shogren et al. (2010) assert that a regulators subsidy can interact negatively with social motives of a firm concerned about reputation. Selfish firms will make an optimal effort and socially oriented firms will be subsidised less than is optimal.” (Just think about the recent increase in EEG costs…)


Results: A range of policy tools is required, next to “pricing” energy and emissions. Frequent simple feedback and control is important (smart meter roll out, 80% by 2020 in the EU can play a key role here). Nudging can be used to overcome biases and can be combined with monetary incentives (as outlined by Stern et al 2009), but it is important that policies aim for long term behavioural change.



My own view is that despite the important insights above, the right way is "top down". We have to change the “vision and goal” of the system as first step. This would mean to internalize the environment and social costs into our measurement of economic success. The Chinese government has already announced that the environment will be its key priority over the next 5 years and it will obviously have strong reflexive influence on the shape of the world. It is time to redefine “economic success”.



A conversation with Bill Janeway: Doing Capitalism in the Innovation Economy

This 60min interview gives you the core ideas of his book. Worth watching. 

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"The The Power of Habit" a must read by Charles Duhigg



Really good book on the power of habit in organisations and also in ourselves including interesting case studies especially Paul O’Neills Alcoa turnaround.

My favourite pages are pp. 272-274:



 “He wanted to become a painter, and then enrolled in medicine school, then left to join an expedition up the Amazon River. Then he quit that, as well. He chastised himself in in his diary for not being good at anything. What’s more he wasn’t certain if he could get better. In medical school, he had visited a hospital for the insane and had seen a man hurling himself against a wall. The patient, a doctor explained, suffered from hallucinations. James didn’t say that he often felt like he shared more in common with the patients than his fellow physicians.

“Today I about touched the bottom, and perceive plainly that I must face the choice with open eyes”, James wrote in his diary in 1870, when he was a twenty-eight years old. “Shall I frankly throw the morals business overboard, as one unsuited to my innate aptitudes?”

Is suicide, in other words a better choice? Two month later, James made a decision. Before doing anything rash, he would conduct a yearlong experiment.  He would spend 12 month believing that he had control over himself and his destiny, that he could become better, that he had the free will to change. There was no proof that it was true. But he would free himself to believe, all evidence to the contrary, that change was possible. “I think yesterday was a crisis in my life” he wrote in his diary. Regarding his ability to change, “ I will assume for the present until next year/ that it is no illusion. My first act of free will shall be to believe in free will.” Over the next year, he practiced every day. In his diary, he wrote as if his control over himself and his choices was never in question. He got married. He started  teaching in Harvard. He began spending time with Oliver Wendell Holmes Jr., who would go on to become a Supreme court justice, and  Charles Sanders Peirce, a pioneer in the study of semiotics, in a discussion group the called the Metaphysical Club. Two years after writing his diary entry, James sent a letter to the philosopher Charles Renouvier, who had expounded at length of free will. “I must not lose this opportunity of telling you of the admiration and gratitude which have been excited in me by the reading of your Essais” James wrote. “Thanks to you I  possess for the first time and intelligible and reasonable conception of freedom.. ..I can say that through that philosophy I am beginning to experience a rebirth of moral life; and I can assure you , sir, that this is no small thing.”

Later he would famously write that the will to believe is the most important ingredient in creating a belief in change. And that one of the most important methods for creating that belief  was habits. Habits, he noted, are what allow us to “do a thing with difficulty the first time, but soon do it more and more easily, and finally with sufficient practise, do it semi-mechanically, or with hardly any consciousness at all.” Once we choose who we want to be, people grow “ to the way in which they have been exercised, just as a sheet of paper or a coat , once creased or folded,  tends to forever afterwards into the same identical folds.”

If you believe you can change- if you can make it a habit- the change becomes  real. This is the real power of habits: the insights that your habits are what you choose them to be. Once the choice occurs- and becomes automatic- it’s not only real, it starts to seem inevitable, the thing, as James wrote, that bears “us irresistibly towards our destiny, whatever the latter  may be. The way we habitually think of our surroundings and ourselves create the worlds that each of us inhabit…the unthinking choices and invisible decisions that surround us every day- and which,  just by looking at them, become visible again.“ 




Here a conversation between Nassim Taleb and Daniel Kahneman. 


How do we -- as individuals and as communities -- make decisions when faced with uncertainty, inexperience, lack of knowledge or chaos? 

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The (honest) truth about dishonesty

Daniel Ariely shows in a cool way how small things and a little bit of cheating on a micro level can result in big losses on a macro level such as a financial crisis.

The interesting part is that there are solutions to solve this issue and it might be more important than we think. A key finding is  that the distance between our action and responsibility creates unsocial/unethical decisions (Ethics defined as obedience to the unenforceable).

Nassim Taleb  argued in Antifragile in the same way. Decisions makers need more skin in the game! When it comes to finance here is the solution: 

Never ask anyone for their opinion, forecast or recommendation. Just ask them what they have- or don't have in their portfolio. (Taleb 2013) 



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Thinking fast and slow: the future of economic theory

Schleifer (Harvard) wrote an interesting short review of Kahneman's  book thinking fast and slow. He concludes with his view on the future of behavioural economics.


"Kahneman’s book, and his lifetime work with Tversky, had and will continue to have enormous impact on psychology, applied economics, and policy making. Theoretical work on Kahneman and Tversky’s ideas has generally modeled particular heuristics and choices under risk separately, without seeking common elements. A potentially large benefit of Kahneman’s book is to suggest a broader theme, namely that highly selective perception and memory shape what comes to mind before we make decisions and choices. Nearly all the phenomena the book talks about share this common thread. In this way, Kahneman points toward critical ingredients of a more general theory of intuitive thinking, still an elusive, but perhaps achievable, goal."


Here the link: review thinking fast and slow



Why the hell greeninvestment? Update!

by Fabian Leonhardt

The answer to this question is simple. The production factor nature is more or less free. Regulaters and economic theory did not take care of the fact that this will lead to an exploitation of nature by markets in the long run. Markets will not be able to solve this problem at least not without high costs for future generations. 

The dilema can only be solved according to econmists by privatizing nature. This is a very theoretical argument, which would probably not work in the real world and might result in further negative effects for future generations.

What we need is a global institution or a worldwide legal framework insuring that nature has its price (good book by Prof. Radermacher Welt mit Zukunft on this). In the long run we will see an exponetial increase in the costs of nature as a production factor for society and next generations. This will give companies focusing on sustainability to date a strategic advantage and might provide good investment opportunities. Furthermore additional fundamental investments into reserach and subsidies from governments are very important and urgent.


On the other hand before we will see the clean tec market becoming the next kondratieff cycle a bubble in this field over the next 10 years is highly likely as well. Hopefully we will see a bubble, because financial speculation  is necessary here to develop the new green paradigma. (George Soros Theory of Reflexivity)


Interesting additional opinion/facts by Janaway:


“Yet the next new economy can already be defined in broad strokes. Like the digital one we are currently still learning how to exploit and enjoy, that low carbon economy can be built only on a base of substantial state investment and agreed rules of engagement across both public and private sectors. To advance the frontier of needed innovation, much science remains to be done.  A host of technologies – batteries and solar cells and fuel cells, among them – require extended investment to improve both absolute performance and the ratio of performance to costs. And the protocols for bringing alternative renewable energy sources online into the intelligent grid that is yet to be designed, let alone deployed, well need to be standardized, as where the networking and internetworking protocols of the digital economy. However, no significant private-sector investment in the new infrastructure, let alone the speculative funding necessary to finance deployment at scale, can be expected while return on that investment remain exposed to the volatile markets of conventional energy sources. Only collective state action- the prospect for which is not at all visible – can protect the new alternative energy technologies and accelerate the step-function to increases in thermal efficiency necessary to compete with conventional sources without state subsidy. In parallel, advances in materials and in information technologies to reduce the carbon content of consumers goods and services are similarly required and at risk.

By the way by 2010 China’s investment in Clean-energy technologies was estimated to have reached $54.4bn more than 50% above the US level in an economy less than half the size.”

…Along this dimension, the successive East Asian “miracle” economies, from Japan to China by way of the “Tigers”, generated growth initially through protection and subsidy and then once a sufficient degree of competitive maturity has been established backed off and opened up.” More particularly, by endowing multiple players in the Three-Player Game (State, Financial Markets, other sectors) with access to scientific and technological sources of innovation, the state can sponsor the open-ended process of trial and error that alone has the potential to explore new economic space.”

… Recognition that technology spill overs are key to generation of economic growth goes far back as Keynes’s mentor, Alfred Marshall, and resides at the core of New Growth Theory.


Janeway, W. H., (2012). Doing Capitalism in the Innovation Economy. Cambridge: Cambridge University Press. pp 277-278


Doing Capitalism in the Innovation Economy

Really good book by Whilliam H. Janeway.

I will write a follow up soon.

Here is a link to an interview with Janeway.




"Janeway applies keen insights from his experience as a venture capitalist and creates a vision of the interaction between governments, financiers, and firms that shows what institutions society must develop to foster innovation. I believe that Doing Capitalism will help all of us, whether academics, private sector leaders, or government officials, to see beyond shallow political dogma and move to a deeper understanding of challenges of technological advance."

George Soros, Chairman of Soros Fund Management





Lessons from the Dalia Lama

In his book the art of happiness at work a key idea is that happiness comes from the inside and critical self-reflection is always a question of perspective. Or as a good friend of mine recently ended our discussion about happiness “if you want to be happy, be happy that’s it”.  So before working hard just for the money think about increasing your happiness and life satisfaction by doing a few weeks development work with miserable people (decreasing your reference group). That will make you more happy and thankful for your own circumstances and the effect might last longer than the keeping up with the Jones.  Altruistic things will have stronger contribution to life satisfaction than short-term happiness. According to Viktor Frankl happiness is a double-edged sword and the other side is responsibility: It is not just about happiness but also about responsibility not just for yourself but also for others.

There are many things we can learn from the Dalai Lama. One of the facts I still remember from his book is a meeting with all kind of powerful people in Washington.

Before the Dalai Lama enters the room everybody was walking around and talking to each other with the question in mind like: what can he do for me? What is my rank relative to him? Powerful people felt very important and young guys around were looking up to them full of ambition. More or less like every lobbying or meeting of powerful people. Then the Dalai Lama arrived. Like always he treaded everybody equal and was interested in  the people and their problems. By the end of the evening the whole room was gathered around the Dalai Lama and eagerly in discussion about the world problems and how to tackle them.

In conclusion to all the powerful people if you want become happy start from the inside and start to take real responsibility for others!

For all the others:

“If you think you are too small to make a difference, try sleeping with a mosquito.”

― Dalai Lama XIV




Mistaking beauty for truth and the conservatism bias

Or as Robert Schiller puts it, a student ask me about writing a PHD thesis using efficient market theory and equilibrium models. He replied asking him, why are you doing that don’t you just participate in my course on behavioral finance. The student answer, I simply want to get a job afterwards.


Traditional Finance versus Behavioral Finance (by Fabian Leonhardt)

 Some behavioural models use the same assumptions about the behaviour of traders but come to different conclusion as to why the momentum effect exists. As mentioned above, no superior model exists. Momentum and further exploitation lead to a higher volatility in financial markets and away from the basic function of the financial market. Momentum can support the development of bubbles, which can be very costly for society. The regulators must be aware of this fact and should focus on dynamic regulation of competition and a market in which arbitrage is easier. Furthermore, regulators must intervene if a bubble occurs, even when it is not easy to realize a bubble and when the market itself is not realizing it. Nevertheless, the authorities will get feedback from the market and correct their mistakes. Leverage has to be controlled more strictly. It is clear that leverage plays a critical role in asset pricing.The most important function of a capital market is still the efficient allocation of capital and providing capital for the “real” economy. Furthermore, one has to start to accept behavioural finance not just as a red herring for explaining a few anomalies, but as a foundation for our utility theory, which is the base for our whole economic theory. That’s why Thaler chose the ironic title The End of Behavioural Finance for his paper, because is there any other finance than behavioural? On the other hand one may argue:

“If behavioural finance is ever to approach the stature of classical asset pricing, it will have to move beyond being a large collection of empirical facts and competing one- off models, and ultimately reach a similar sort of consensus. While this goal seems well within sight in the part of the field that explores limits to arbitrage, it is much further away in the part that seeks to understand the origins of market mispricing. Many horses are still running in this latter race, and it is still not clear whether a decisive winner will emerge in a foreseeable future.” (Hong, Stein (2006), p. 25)

George Soros argues that behavioural finance only explains one half of the financial world, namely why mispricing occurs. The other half is that

mispricing itself can change reality to some extent. Thus, investing itself can change the fundamental values. If this statement were true, reality would be shaped by the interests of financial markets as well as the other way around.That is what George Soros calls reflexivity. The momentum effect as a persistent market anomaly plays the role of an advocate diabolist and might help further researches to bet on the right horse and to develop a theory that improves the efficient allocation of capital in the interest of the whole economy. Finally, we must learn to be aware of our own fallibility. The progress of knowledge is framed not just by what we know, but also by gaining a better understanding of what we cannot know.