Newsletter Archive
Issues older than 90 days

Available Issues

The Kids Birthday Party Hustle
Issue #518A, April 18, 2018

A Pension Question: Part II of II
Issue #518, April 16, 2018

A Physician is an Executive
Issue #517A, April 11, 2018

A Pension Question: Part I of II
Issue #517, April 09, 2018

Is the Correction Over?
Issue #516A, April 05, 2018

Used Car Dealers, Student Loans, the Chinese, and Uncle George’s Rule
Issue #516, April 02, 2018

Starter Homes
Issue #515, March 26, 2018

Redecorating: Beware!
Issue #514, March 19, 2018

NASDAQ Closes at Record High
Issue #513, March 12, 2018

A 40% Chance
Issue #512, March 05, 2018

Several Things
Issue #511, February 27, 2018

Human Capital, Education and Wealth
Issue #510, February 19, 2018

Another Stock Market Update
Issue #509A, February 18, 2018

Some Thoughts on Savings
Issue #509, February 12, 2018

A Stock Market Upfate
Issue #508S, February 10, 2018

Who Can You Trust? Part II of II
Issue #508, February 05, 2018

The Christmas Decoration Pre-worn Jeans Hustle
Issue #Interim Bulletin #507A, February 03, 2018

2018 Outlook for Financial Markets
Issue #507, January 29, 2018

Who Can You Trust? Part I of II
Issue #506, January 22, 2018

Life Insurance Settlements
Issue #505, January 15, 2018

Commodities and Buying the Breakout
Issue #504, January 08, 2018

Buffett Wins His Bet
Issue #503A, January 04, 2018

Practice Real Estate and Free Agency
Issue #503, January 01, 2018

Outlook for 2018: Part III: Stocks and Bonds
Issue #502, December 25, 2017

My Outlook for 2018: Part Ii: Precious Metals
Issue #501A, December 21, 2017

Outlook for 2018: Hard Assets: Part I of III
Issue #501, December 18, 2017

More Thoughts on Bitcoin
Issue #500A, December 14, 2017

Fees and Good Relations with Bankers
Issue #500, December 11, 2017

Salvator Mundi
Issue #499A, December 07, 2017

Should You Rent or Own a Home?
Issue #499, December 04, 2017

A Gift Subscription
Issue #Interim Bulletin #498A, December 02, 2017

Stocks vs Real Estate: Asset Allocation: Part II of II
Issue #498, November 27, 2017

When Good Enough is Fine
Issue #497A, November 22, 2017

Stocks vs Real Estate: Asset Allocation. Part I of II
Issue #497, November 20, 2017

The Saudi Arrests and the Perils of Foreign Investing
Issue #496, November 13, 2017

Gambling and Las Vegas
Issue #495, November 06, 2017

Some Tips on Auto Insurance
Issue #494, October 31, 2017

Bitcoin and the Digital (Crypto) Currencies
Issue #493, October 23, 2017

The Coming Bear Market: Part II How to Prepare
Issue #492, October 16, 2017

Some Observations on Cemeteries
Issue #Interim Bulletin #491A, October 12, 2017

The Coming Bear Market: Part I: The Myth of Buy and Hold Forever
Issue #491, October 09, 2017

The Market makes New Highs
Issue #490, October 02, 2017

The Importance of a New High
Issue #489, September 25, 2017

A Little Insurance: Wealth, War and Wisdom
Issue #488, September 18, 2017

Some Observations
Issue #487, September 11, 2017

How to be Successful in Your Career
Issue #486A, September 07, 2017

How NOT to Buy a Home
Issue #486, September 04, 2017

This Week in the Market
Issue #485, August 28, 2017

Is the “Trump Bump” Running Out of Gas?
Issue #484, August 21, 2017

Gold is on the Move
Issue #483, August 14, 2017

The Importance of Estimation
Issue #482, August 07, 2017

Buying Art and Collecting: Part II of II
Issue #481, July 31, 2017

Buying Art and Collecting in General, Part I of II
Issue #480, July 24, 2017

Physicians need to be More Forceful: Follow-up
Issue #479, July 17, 2017

Physicians need to be More Forceful
Issue #478, July 10, 2017

Your First “Real” Investment
Issue #477, July 03, 2017

Leasing a Watch: Don’t
Issue #476, June 26, 2017

The Importance of Your Children having a Job
Issue #475, June 16, 2017

The Problem with Medical Student Debt is—the Med Schools
Issue #474, June 12, 2017

Critters and Varmints in your Home and Yard
Issue #473A, June 07, 2017

Leveraged ETFs
Issue #472, May 29, 2017

Leasing a Vehicle: Don’t!
Issue #471, May 22, 2017

Issue #470, May 15, 2017

More on Buying Jewelry
Issue #469, May 08, 2017

Buying Jewelry: Gold, Diamonds and Pearls
Issue #468, April 30, 2017

Thomas Sowell: Part III of III
Issue #467, April 24, 2017

Thomas Sowell: Pat II of III
Issue #466, April 17, 2017

Live Close to Where You Work
Issue #465, April 10, 2017

Medtronic in Hospital Management
Issue #Interim Bulletin #464A, April 07, 2017

Thomas Sowell: Part I of II
Issue #464, April 03, 2017

A Political Contribution a an Investment: Part II of II
Issue #463, March 27, 2017

A Political Contribution as an Investment: Part I of II
Issue #462, March 20, 2017

Buffett Selling Vacation Home
Issue #461, March 13, 2017

Advanced Placement (AP) ourses
Issue #460, March 06, 2017

The Importance of a Credit History
Issue #459A, March 02, 2017

A Credit Card Scam
Issue #459, February 27, 2017

The Electronic Health Reord
Issue #458, February 20, 2017

Issue #457, February 13, 2017

Platinum and Palladium
Issue #456, February 06, 2017

Economic Outlook for 2017: Part II of II
Issue #455A, February 02, 2017

Economic Outlook for 2017: Part I of II
Issue #455, January 30, 2017

A Story From Vegas
Issue #454A, January 25, 2017

Land Donation Deals and the IRS
Issue #454, January 23, 2017

The Theory of Gambler’s Ruin
Issue #453, January 16, 2017

Student Loans: But Wait, There’s More!
Issue #452, January 13, 2017

A Second Home
Issue #Interim Bulletin #451A, January 04, 2017

The Consumer Confidence Index
Issue #451, January 02, 2017

Social Security
Issue #450, December 26, 2016

My Outlook for 2017: Part II of II
Issue #449, December 19, 2016

My Outlook for 2017: The Market
Issue #448, December 12, 2016

Medicine in 20 Years
Issue #447, December 05, 2016

Higher Interest Rates
Issue #446, November 28, 2016

Trump and the Markets: The Bad and Ugly
Issue #445A, November 23, 2016

Trump and the Markets: The Good
Issue #445, November 21, 2016

Negative Trends: The Suits aren’t Makin’ Steel
Issue #444, November 16, 2016

The New DOJ Fiduciary Rule
Issue #443, November 07, 2016

Barron’s Conference, Part IV of IV
Issue #442, October 31, 2016

Barron’s Conference, Part III of IV
Issue #Interim Bulletin #441A, October 26, 2016

Barron’s Conference, Part II of IV
Issue #441, October 24, 2016

Barron’s Conference, Part I of IV
Issue #440, October 20, 2016


By Robert M. Doroghazi, M.D., F.A.C.C.

Behavioral Economics: Part II: Weaknesses

Issue #413, April 11, 2016

    Economists do much of their research by conjuring up various scenarios, thinking them through, talking with colleagues, doing a survey, and giving their interpretation. As outlined in last week’s letter, I found many of the points quite insightful, with practical applications. The following just made me scratch my head.
    From Misbehaving: The Making of Behavioral Economics (Thaler, Norton).
    “You’re lying on a beach on a hot day. All you have to drink is ice water. You’ve been thinking about how much you would enjoy an ice cold bottle of your favorite beer. A companion gets up to make a phone call and offers to bring back a beer from the only nearby place where beer is sold. (Options are a fancy resort or a rundown local store). How much are you willing to pay? He will buy the beer if it’s as much as or less than you state. More, and he won’t buy it. The price is not negotiable with the seller. What price will you pay?”
    Discussion from the book: There are several things to note. Crucially, the consumption act is identical in the two situations. The respondent gets to drink his favorite beer on the beach. He never enters or sees where the beer was purchased, thus no ambiance. Also, by ruling out negotiation, the respondents have no reason to disguise their true preference. In economists’ lingo, the situation is incentive compatible.
    The median answers were $7.25 and $4.10. People are willing to pay different prices for the same beer consumed at the same spot, depending on where it was bought. Why?” One reason is expectations. Paying $7 at a fancy resort is annoying but expected, paying that at a bodega is outrageous. This is the essence of transaction utility.
    Econs (his term for the rational, logical person) do not experience transaction utility.
    RMD comment: This is some serious over-think. I’d say “Here’s 10 bucks. Buy me a beer”. In Texas Hold’em, say you have pocket Kings. At a 9-person table, the chance that any player has been dealt pocket Aces is about 1 in 24. You just shove in all your money and hope for the best.
    In some situations, sunk cost and opportunity costs can be intertwined. Thaler had 2 coupons that allowed him to upgrade to 1st class if space was available. Frequent fliers received some coupons for free, or could purchase then for $35. Thaler had already used one coupon when he ran into Edgar. He wanted to sit by Edgar, so gave him a coupon (RMD comment: a gentlemanly and practical thing to do). Edgar wanted to reimburse him, and asked how much the coupon cost (RMD: again, the gentlemanly thing to do).
    Thaler said that depended. Some were $35, some were free. Edgar asked which kind of coupon he gave him. “I am now out of coupons, and will have to buy more, so it makes no difference which kind of coupon I gave you”.  “Nonsense” was the reply. “If the coupon was free, then I’m paying you nothing, but if it cost you $35, I insist on paying you the money”. (see more below).
    RMD comment: Right about now I’d be thinking “I want my coupon back”.
    The following survey was given to people familiar with wine futures.
    “Suppose you bought a case of good Bordeaux in the futures market for $20 a bottle. The wine now sells at auction for about $75. You have decided to drink a bottle. Which of the following best captures your feelings of the cost to you of drinking the bottle?”
      a) $0. I already paid for it.                                        30%
      b) $20, what I paid for it.                                          18%
      c) $20 plus interest.                                                7%
      d) $75, what I could get for the bottle                             20%
      e) -$55. I get to drink a bottle that is worth $75 that I only
          paid $20 for so I save money by drinking the bottle           25%
    The correct answer according to economic theory is $75, since the opportunity cost of drinking the wine is selling it at the same price.
    RMD comment: The “correct” answer may be “d”, but 80% of intelligent people don’t think so. Now apply this to the stock market: you say the “correct” price of DRBOB is $40, but everybody else says its $20. The correct price is $20.
    Behavioral economics certainly seems to be an improvement over the classical model, but from my admittedly very superficial study, here is what I believe are weaknesses.
    1) Many of the scenarios have no relation to reality. One concerned how much you would pay not to play or receive if you played Russian roulette. I’d say “You go first”.
    2) The study groups seem to be all smart people: college students, grad students, professors, etc. By definition, 49.99% of the population is below average intelligence. For results to be widely applicable, there needs to be some dumb people in the studies.
    3) As in the wine example above, many studies almost seem to be set up to show people they are stupid. Give someone in a maximum security prison the test, and tell them they chose the wrong answer. You might not get out of the building.
    4) Sometimes people want to do something just because they want to do it (see below). It might not be logical, and you don’t owe anyone an explanation.
    One thing I should have mentioned in last week’s letter is that if you aren’t careful, “sale” can be a financial 4-letter word. You need a new lawn mower and one is on sale, that’s great. You see a coat you don’t need and never would have bought (and never wear), but buy it just because it’s on sale, you have wasted your money. A variant of this is buying more than you need at a warehouse store. Everybody needs to have a few batteries around the house, but I have enough to light the whole neighborhood.
    US interest rates are on the verge of breaking lower. The interest rate on the German 10-year bond is 0.096%. Since such bonds are usually in denominations of $10K, it means you are willing to receive $9.60 a year for the next10 years on $10,000 of capital.
    RMD comment: low, and negative, interest rates are a disaster. I think they mean both that 1) bonds are mispriced, and 2) there is the possibility of a central banker’s greatest fear: a deflationary collapse. Both are bad. It seems that the lower the central banks force interest rates in an attempt to goose inflation, the greater the risk for deflation. This will not end well. 
    This was the first thing we learned in Grandma Nagy’s Behavioral Econ 101: I know it in Hungarian, English, French, German and Swiss:
If somebody wants to give you something:
Take it.
If they want to hit you:
    A little while ago, Diane and I conducted our own experiment. We were coming back from Nebraska and made a stop for gas. Diane came back to the car with a $2 Power Ball ticket. I said “I’ll give you $5 for the ticket. It’s not often you can make an instantaneous 150% profit”.
    Her reply was what I expected, and what I would say. “I didn’t buy it to instantly resell it. I bought it for a jillion to one chance to be rich”. Since we split the (rare) winnings whenever we buy a ticket, we spent the rest of the way home making lists of what we would do with about $110M each. Of course we didn’t win, but we had more than $2 worth of fun.
    Graduation is coming. Want a good idea for a gift that is permanent and will always remind them of you? For high school graduation, my employer Mr. Graham gave Webster’s 7th Collegiate Dictionary. I still use it almost every day, and think of Mr. Graham every time I open it.
    There was a post on Yahoo on 4/3/16 that Sect. of State John Kerry would set a lay of flowers at the memorial dedicated to the victims of the nuclear attack on Hiroshima.
    RMD comment: Whenever I meet someone of WW II age, I asked them if they served. Five men, including a 94 year-old man I met just 2 weeks ago at church, were training for Operation Downfall, the invasion of the Japanese home islands. We were expecting more than 1,000,000 Allied casualties, and multi-millions of Japanese casualties. Each man said the exact same thing: “Truman (and his decision to drop the bomb) saved my life”.
    Great personal news: On Tuesday, April 5, younger son Mike and wife Beth had Claire Emily Doroghazi, 6 lbs., 5 oz. Mom and Baby home and doing well.

Site by Delta Systems powered by ExpressionEngine