Monthly Archives: December 2008

Excel’s faulty statistics: a bibliography

McCullough, B.D. (2002). Proceedings of the 2001 Joint Statistical Meeting [CD-ROM]: Does Microsoft fix errors in Excel? Alexandria, VA: American Statistical Association.

McCullough, B.D. (1999). Assessing the reliability of statistical software: Part II. The American Statistician, 53(2), 149-159.

McCullough, B.D. (1998). Assessing the reliability of statistical software: Part I. The American Statistician, 52(4), 358-366.

McCullough, B.D. & Wilson, B. (2005). On the accuracy of statistical procedures in Microsoft Excel 2003. Computational Statistics and Data Analysis, 49(4), 1244-1252.

McCullough, B.D. & Wilson, B. (2002). On the accuracy of statistical procedures in Microsoft Excel 2000 and Excel XP. Computational Statistics and Data Analysis, 40(4),
713-721.

McCullough, B.D. & Wilson, B. (1999). On the accuracy of statistical procedures in Microsoft Excel 97. Computational Statistics and Data Analysis, 31(1), 27-37.

Also, see Errors, Faults and Fixes for Excel Statistical Functions and Routines.

Behavioral finance marches on

Quant. Shop Offers Heady Long/Short Hedge Fund

December 17, 2008 | Source: FINalternatives

Santa Monica, Calif-based MarketPsy has launched a quantitative hedge fund that incorporates psychology into its trading strategy. So far, the firm’s Long-Short Fund has outperformed its discretionary counterparts, returning 6.03% since inception in September.

MarketPsy’s fund, which focuses on U.S. mid- to large-cap names, profits from what it calls psychology-driven movements in equities prices.

“Our investment strategy is based on the fact that innate psychological biases distort investors’ perceptions of stock value,” said Richard Peterson, managing director. “We find misvalued stocks by examining investors’ and executives’ language in SEC filings, executive conference calls and stock message boards. We have performed extensive software development, trade back testing, and portfolio simulation. Our long-short strategy is based on our discoveries of the psychological factors that predict stock price movement.”

In September, Peterson said the fund’s performance lagged because investors were not emotionally overreacting to the crises surrounding Fannie Mae, Freddie Mac and AIG, the bankruptcy of Lehman Brothers, and the credit freeze. The fund lost 6.7% that month.

However, the firm says investors began to overreact to news reports and media the following month, resulting in a 9% gain. In November, the firm’s short positions in solar stocks performed well after the U.S. presidential election, consistent with the classic “buy on the rumor and sell on the news” price pattern, said Peterson.

“We also performed well in November due to strategic long positions in financial stocks during the bailout of Citigroup.”

The fund charges a 1% management fee and a 10% performance fee with a $100,000 minimum investment requirement. It has a one-year lockup period.

On the causes of World War I

Many times, I’ve tried to put together a brief narrative of the causes of World War I, and I invariably find (after the fact) that I’ve left something out. So here’s the latest (and, one would hope, final) attempt…

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There were at least three causes that in confluence led to World War I. Let’s take them one at a time and put them together a little later.

1. Germany unable to feed itself

In his book The Economic Consequences of the Peace (1919), J.M. Keynes cited contemporary estimates suggesting that immediately before the war, Germany had a population of 67 million, while producing enough food to feed about 40 million. Austria was in a qualitatively similar position. This state of affairs was largely caused by the legacy of feudal land ownership, whereby the aristocracy controlled vast amounts of land and extracted substantial rents from them.

2. The gold standard

Under the gold standard, a nation can expand its money supply only as far as its gold stock allows. To expand its gold stock, a nation must have a trade surplus. So expanding the money supply under the gold standard is only possible if a nation has a trade surplus.

Expanding money supply is the quickest way of ending recessions and thus keeping the population gainfully employed and reasonably happy. But under the gold standard, it is only possible if a nation has a trade surplus, so governments, instead of abandoning the gold standard (which was considered the holy cow of economic policy back then), started working on ensuring that their nations always have a trade surplus.

3. The continuing rule of the military aristocracy

All major European countries (with possible exception of Britain) were de-facto ruled by the military aristocracy, educated, if at all, in humanities and the art of war, not in economics (which, having begun in earnest with Marshall’s Principles published in 1890, was barely out of diapers in 1913). Three things were the direct result of this, (1) the ruling class, unable to comprehend the evils of the gold standard, upheld it, (2) the ruling class, being a military elite, actively sought military solutions to economic problems, and (3) the ruling class extracted substantial rents from its vast land holdings, making domestic agriculture prohibitively expensive compared to that of U.S., Canada, Australia, or Argentina.

Put all three together, and what do you get?

To keep the growing urban population employed, you need to expand money supply, which, under the gold standard, is only possible if your country has a trade surplus. To ensure that you have a trade surplus, you begin pressuring other countries into opening their markets for your exports while keeping imports off your domestic market using tariffs or non-tariff barriers. The pressure tactics gradually escalate from diplomacy to the threat or war, until Europe is completely polarized, with all major countries joining one of the two blocs that eventually went to war with each other. Germany, which desperately needs to export manufactures in order to pay for food, is especially aggressive in its attempts to secure export markets for its manufactures. So Europe becomes a powder keg that sits there waiting for a random spark to ignite its explosion. That spark was the assassination of Franz Ferdinand, the heir to the Austrian throne, by a group of Serbian conspirators. Had it not happened, another “cause” (having as little to do with the real causes as the assassination of Franz Ferdinand did) would have been found in a pretty short order…

Nathan Myhrvold in Shanghai

Nathan Myhrvold, the former chief technology officer of Microsoft, now running Intellectual Ventures (which describes itself as “the invention company”), guest-blogs on Freakonomics. Here’s an excerpt:

The infrastructure is all new, from the airport to the expressway leading into the city (or you can take an ultra-high-speed maglev train and be there in 12 minutes). The downtown section of Shanghai is called Pudong, and it is full of gleaming new skyscrapers. The other side of the river has the Bund, the center of Shanghai’s 19th-century economic boom. It too is replete with interesting architecture, albeit smaller and older. Amusingly, none of this architecture is Chinese. The closest thing I found to ancient Chinese culture was a fast food-chain called Kung Fu. Maybe that is the point of the place; Shanghai has long prospered by embracing and adopting the foreign.

Pudong is clearly a work in progress — cranes hover over building sites everywhere. Most places that have tall buildings do so because they first had shorter buildings. The only reason to build high is that you’ve already exhausted the possibilities for building low. The economic value of density forces buildings up, because out is not an option.

The only places in the world that violate this rule are “instant” downtown areas that connive to jump the queue and go straight to the super-tall stage, for some artificial reason, rather than follow land-density economics. The Century City section of Los Angeles is one example, but the real classic example for this sort of instant development is the Las Vegas Strip. Vegas builds high, not because of economic pressure for building density, but for its own sake.

Shanghai has no casinos, but Pudong is the office-tower equivalent of the Strip. Giant skyscrapers erupt from the river bank in myriad forms, one more architecturally extravagant than the next. Like Vegas, they sport outsized gimmicks: the Aurora building transforms into a giant video billboard at night, the Pearl Orient tower is a science-fiction fantasy, and the Shanghai World Financial Center (SWFC) — the second-tallest building in the world — has a 105th-floor observation lounge with a glass floor looking down onto a giant hole in the building. It is spectacular.

I was curious what all of this splendor and view cost, so looked up the rent: the SWFC is charging $76 per square foot per year. By comparison, my company pays $25 for a second- or third-tier building in Bellevue, Wash. The good buildings in Bellevue are $40; downtown Seattle commands $45 to $50 (although I understand there may be some space coming available in the Washington Mutual building rather soon). At the other extreme, the warehouse space we rent in Kent, an outlying industrial suburb of Seattle, is a whopping $3.60, which is fortunate for me because rocket engines and dinosaurs take up space.

Our Singapore office costs us $73: about the same as SWFC, but for a much less impressive building. Our Tokyo office is the worst at $96, and it is definitely second-tier. I don’t have an office in midtown Manhattan, but my broker tells me that those average about $88 per square foot per year. So the coolest, newest office space in Shanghai at the SWFC is about the same price as mid-range Singapore, and a bit cheaper than midtown.

We have no plans to open a office in Shanghai. Plus we’re cheap, so we’d never pick that building (our office in Palo Alto is upstairs from a nail salon). However, I find it interesting that despite our frugal approach, we already pay 26 percent higher than SWFC in at least one place. Of course, all this proves is a rediscovery of the old real estate maxim: location, location, location.

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