Mean Markets and Lizard Brains

by Terry Burnham

  26 Sanfey, A.G., J. K. Rilling, et al., “The Neural Basis of Economic Decision-Making in the Ultimatum Game,” Science 300 (2003): 1755-1758.

  27 Burnham, T. C., “Pride, Status and Hormones: Rejectors in an Ultimatum Game Have High Levels of Testosterone,” manuscript, 2004.

  28 Kahneman, D., and A. Tversky, “Choices, Values, and Frames,” American Psychologist 39, no. 4 (1984): 341-50.

  29 Leeson, N., with E. Whitley, Rogue Trader: How I Brought Down Barings Bank and Shook the Financial World (Boston: Little Brown, 2000).

  30 Skinner, B.F., “‘Superstition’ in the Pigeon,” Journal of Experimental Psychology 38 (1947): 168-172.

  31 Tversky, A., and D. Kahneman, “Judgment Under Uncertainty: Heuristics and Biases,” Science 185 (1974): 1124-1131.

  32 Laibson, D., “Golden Eggs and Hyperbolic Discounting,” The Quarterly Journal of Economics 112, no. 2 (1997): 443-477.

  Chapter 3 Crazy World 1 Smith, V. L., “An Experimental Study of Competitive Market Behavior,” The Journal of Political Economy 70 (1962): 111-137.

  2 Bachelier, L., Théorie de la Spéculation (Paris: Gauthier-Villars, 1900).

  3 Bernstein, P., Capital Ideas: The Improbable Origins of Modern Wall Street (New York: Free Press, 1992).

  4 Malkiel, B., A Random Walk Down Wall Street (New York: Norton, 1973).

  5 Siegel, J.J., Stocks for the Long Run, 2nd ed. (New York: McGraw-Hill, 1998).

  6 MacKay, C., Memoirs of Extraordinary Popular Delusions (London: R. Bentley, 1841).

  7 Shiller, R., Irrational Exuberance (Princeton, NJ: Princeton University Press, 2000).

  8 Shiller, R., “Investor Behavior in the 1987 Stock Market Crash: Survey Evidence,” Cowles Foundation Discussion Papers (#853), 1987.

  9 Siegel, J., “The Stock Market Crash of 1987: A Macro-Finance Perspective,” Rodney L. White Center for Financial Research Working Papers (#24-88), 1988.

  10 Smith, V.L., G.L. Suchanek, et al., “Bubbles, Crashes and Endogenous Expectations in Experimental Spot Asset Markets,” Econometrica 56 (1988): 1119-1151.

  11 Investment Company Institute, www.ici.org, 2004 Fact Book, 88.

  12 “The Death of Equities: Why the Age of Equities May Be Over,” BusinessWeek (August 13, 1979).

  13 Investment Company Institute, www.ici.org, 2004 Fact Book, 88.

  14 Prechter, R., Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression (Hoboken, NJ: John Wiley & Sons, 2002), Figure 7.1.

  15 Odean, T., “Do Investors Trade Too Much?” American Economic Review 89 (1999): 1279-1298.

  16 De Bondt, W., and R. Thaler, “Does the Stock Market Overreact?” Journal of Finance 40 (1985): 793-808.

  17 Thaler, R., ed., Advances in Behavioral Finance (New York: Russell Sage Foundation, 1993).

  18 Berkshire Hathaway annual report 2003, 2.

  19 Fuller & Thaler Asset Management, www.fullerthaler.com.

  20 Popper, K., The Logic of Scientific Discovery (London: Hutchinson, 1959).

  21 Tobias, A., Money Angles (New York: Linden Press, 1984).

  22 Asch, S., “Studies of Independence and Conformity: 1. A Minority of One against a Unanimous Majority,” Psychological Monographs 70 (1956): 1-70.

  23 Profet, M., “The Evolution of Pregnancy Sickness as Protection to the Embryo against Pleistocene Teratogens,” Evolutionary Theory 8 (1988): 177-190.

  24 Lo, A., and D. Repin, “The Psychophysiology of Real-Time Financial Risk Processing,” Journal of Cognitive Neuroscience 14 (2002): 323-339.

  Chapter 4 U.S. Economic Snapshot 1Keynes, J.M., “Economic Possibilities of Our Grandchildren,” Essays in Persuasion (London: Macmillan, 1972).

  2 Federal Reserve, www.federalreserve.gov.

  3 Bureau of Economic Analysis, www.bea.gov, Table 2.1.

  4 Bureau of Labor Statistics, www.bls.gov, Foreign Labor Statistics.

  5 Schwarzenegger Press Conference, August 20, 2003.

  6 Office of Management and Budget, Congressional Budget Office, see Figure 7.4 of this book.

  7 Bureau of Labor Statistics, www.bls.gov.

  8 Office of Management and Budget, Congressional Budget Office, see Figure 7.3 of this book.

  9 Darwin, C., On the Origin of Species by Means of Natural Selection, or the Preservation of Favoured Races in the Struggle for Life (London: John Murray, 1859), Chapter 3.

  10 Diener, E., “Cross-Cultural Correlates of Life Satisfaction and Self-Esteem,” Journal of Personality and Social Psychology 68, no. 4 (1995): 653-664. Diener, E., E. Sandvik, et al., “The Relationship between Income and Subjective Well-being: Relative or Absolute?” Social Indicators Research 28, no. 3 (1993): 195-224.

  Chapter 5 Inflation 1 Friedman, M., and A.J. Schwartz, A Monetary History of the United States: 1867-1960 (Cambridge: National Bureau of Economic Research, 1963), 695.

  2 Roth, A.E., and X. Xing, “Turnaround Time and Bottlenecks in Market Clearing: Decentralized Matching in the Market for Clinical Psychologists,” Journal of Political Economy 105 (1997): 284-329.

  3 Friedman, M., and A.J. Schwartz, A Monetary History of The United States: 1867-1960 (National Bureau of Economic Research, 1963), 696.

  4 Quiggin, A., A Survey of Primitive Money; The Beginning of Currency (London: Methuen, 1907), 250.

  5 Einzig, P., Primitive Money in Its Ethnological, Historical, and Economic Aspects, 2nd ed. (New York: Pergamon Press, 1966), 310.

  6 Angell, N., The Story of Money (Garden City, NY: Garden City Publishing Company, 1929), 88-89.

  7 Mankiw, N.G., Macroeconomics, 5th ed. (New York: Worth Publishers, 2003), 79.

  8 Connolly, B., and R. Anderson, First Contact: New Guinea’s Highlanders Encounter the Outside World (New York: Viking Penguin, 1987).

  9 Ringer, F., The German Inflation of 1923 (London: Oxford University Press, 1969).

  10 Bopp, K., “Hjalmar Schacht: Central Banker,” The University of Missouri Studies xiv, no. 1 (1939): 13.

  11 Bresciani-Turroni, C., The Economics of Inflation; A Study of Currency Depreciation in Post-War Germany (New York: A.M. Kelley, 1968).

  12 Tyran, J., and E. Fehr, “Limited Rationality and Strategic Interaction—The Impact of the Strategic Environment on Nominal Inertia,” University of St. Gallen Department of Economics working paper series, 2002.

  13 Bernanke, B.S., and K. Carey, “Nominal Wage Stickiness and Aggregate Supply in the Great Depression,” Quarterly Journal of Economics 111 (1996): 853-883. Bordo, M.D., C. J. Erceg, et al., “Money, Sticky Wages and the Great Depression,” American Economic Review 90 (2000): 1447-1463.

  14 Fischer, S., “Why Are Central Banks Pursuing Long-Run Price Stability?” in Achieving Price Stability (a symposium sponsored by the Federal Reserve Bank of Kansas City, 1996), 7-34.

  15 Summers, L., “Commentary: Why Are Central Banks Pursuing Long-Run Price Stability?” in Achieving Price Stability (a symposium sponsored by the Federal Reserve Bank of Kansas City, 1996), 35-43.

  16 Wincott Memorial Lecture, London, September 16, 1970.

  17 Federal Reserve, www.federalreserve.gov; see Figures 6.3 and 6.4 of this book.

  Chapter 6 Deficits and Dollars 1Grabbe, O., “The Rise and Fall of Bretton Woods,” Chapter 1 in International Financial Markets, 3rd ed. (Englewood Cliffs, NJ: Prentice-Hall, 1996).

  2 International inflation rates from the International Monetary Fund, country information, www.imf.org.

  3 Bresciani-Turroni, C., The Economics of Inflation; A Study of Currency Depreciation in Post-War Germany (New York: A.M. Kelley, 1968).

  4 Powell, J., A History of the Canadian Dollar (Ottawa: Bank of Canada, 1999).

  5 The value of the Canadian dollar over time: Federal Reserve, www.federalreserve.gov; see foreign exchange rates, historical data.

  6 Statistics Canada, national income and expenditure accounts. Catalogue no. 13-001-PPB, Fourth Quarter 2000.

  7 Statistics Canada, www.statcan.ca.

  8 The value of the Mexican peso over time: Federal Rese
rve, www.federalreserve.gov, see foreign exchange rates, historical data.

  9 Federal Reserve, dollar indexes, historical data, www.federalreserve.gov.

  10 International Monetary Fund, www.imf.org.

  11 “The End of the Affair?” The Economist (February 18, 2004).

  12 Mr. Norfield and Ms. Foley are quoted in the same article: Litterick, D., “Euro Below 85 Cents after Duisenberg U-Turn over Intervention,” telegraph.co.uk, October 17, 2000.

  13 “Big Mac Index,” The Economist (May 27, 2004).

  Chapter 7 Bonds 1Mehra, R., and E.C. Prescott, “The Equity Premium: A Puzzle,” Journal of Monetary Economics 15 (1985): 145-162.

  2 Siegel, J.J., Stocks for the Long Run, 2nd ed. (New York: McGraw-Hill, 1998), and related Table 8.1 in this book.

  3 Tobin, J., “How to Think about the Deficit,” New York Review of Books 33, no. 14 (September, 25, 1986).

  4 Presidential debate, Boston, MA, October 3, 2000.

  5 Federal Reserve Chairman Alan Greenspan’s prepared remarks at the Conference on Bank Structure and Competition, sponsored by the Federal Reserve Bank of Chicago, Chicago, Illinois, May 6, 2004.

  6 Burnham, T. C., “Limits on Liability Actually Are What Invite the LBOs,” Wall Street Journal, February 1, 1989.

  7 Orphanides, A., “Monetary Policy in Deflation: The Liquidity Trap in History and Practice,” Federal Reserve Publication, 2003.

  8 Investment Company Institute, www.ici.org, 2004 Fact Book, 122.

  Chapter 8 Stocks 1All data in this section from Siegel, J.J., Stocks for the Long Run, 2nd ed. (New York: McGraw-Hill, 1998).

  2 Dow Jones, www.djindexes.com.

  3 Dimson, E., P. Marsh, et al., Triumph of the Optimists: 101 Years of Global Investment Returns (Princeton, NJ: Princeton University Press, 2002), 34-38.

  4 Arnott, R., and P. Bernstein, “What Risk Premium Is ‘Normal’?” Financial Analysts Journal 58 (2002): 64-85.

  5 Hawking, S., A Brief History of Time, 10th anniversary edition (New York: Bantam, 1988), 129.

  6 Ibid., 128.

  7 Ibid., 129.

  8 Chomsky, N., “Confronting the Empire,” Z Magazine 16, no. 3 (January 27, 2003).

  9 Taleb, N.N., Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life (New York: Texere, 2001). Taleb, N.N., The Black Swan (New York: Random House, 2005).

  10 Galbraith, J. K., The Great Crash 1929 (New York: Houghton Mifflin, 1979).

  11 Wall Street Journal.

  12 Microsoft conference call, July 22, 2004.

  13 Wall Street Journal.

  14 Wall Street Journal; see Table 3.1 of this book.

  15 Dow Jones, www.djindexes.com.

  16 “Bearish Merrill Strategist under Fire,” Cnnfn, November 22, 2003.

  17 Leading Wall St. Firms’ Asset Allocation Recommendations (for 2004), Dow Jones Newswires, December 31, 2003.

  18 Federal Reserve; see Figures 6.3 and 6.4 of this book.

  19 Siegel, J.J., Stocks for the Long Run, 3rd ed. (New York: McGraw-Hill, 2002), 361.

  Chapter 9 Real Estate 1 The Japan Real Estate Institute, Urban Land Price Index (Nationwide), www.reinet.or.jp.

  2 Ricardo, D., On the Principles of Political Economy and Taxation (London: John Murray, 1817).

  3 Mankiw, N.G., Principles of Economics, 2nd ed. (Fort Worth, TX: Harcourt College Publishers, 2001).

  4 Fallows, J., “The Passionless Presidency: The Trouble with Jimmy Carter’s Administration,” The Atlantic Monthly (May 1979).

  5 Office of Federal Housing Enterprise Oversight and Federal Reserve; see also Figure 7.1 of this book.

  6 Mankiw, N.G., and D.N. Weil, “The Baby Boom, the Baby Bust, and the Housing Market,” Regional Science and Urban Economics 19 (1989): 235-258.

  7 S&P 500 (July 2004) 1101, Earnings estimate for S&P $61.50 for 2004 (Goldman, Sachs & Co.).

  8 Dow Jones, www.djindexes.com.

  9 Krainer, J., “House Price Bubbles,” Federal Reserve Bank of San Francisco Economic Letter (#2003-06), 2003.

  10 MacKay, C., Memoirs of Extraordinary Popular Delusions (London: R. Bentley, 1841).

  11 Marx, G., Groucho and Me (Classics of Modern American Humor Series) (New York: AMS Press, 1991).

  12 Securities and Exchange Commission, www.sec.gov.

  13 Federal Reserve, Consumer Credit, www.federalreserve.gov.

  14 Mortgage Bankers Association, www.mbaa.org.

  15 Jacobs, B., Capital Ideas and Market Realities: Option Replication, Investor Behavior, and Stock Market Crashes (Oxford: Blackwell, 1999).

  16 Dow Jones, www.djindexes.com.

  17 Mortgage Bankers Association, www.mbaa.org.

  18 “Killing Hope—The Imminent Execution of Sean Sellers,” Amnesty International, December 1, AMR 51/108/1998, 1998.

  19 Federal Reserve Chairman Alan Greenspan’s prepared remarks at the Credit Union National Association 2004 Governmental Affairs Conference, Washington, DC, February 23, 2004.

  Chapter 10 Timeless Advice 1Bowlby, J., Attachment and Loss. Vol. I: Attachment (New York: Basic Books, 1969). Bowlby, J., Attachment and Loss. Vol. II: Separation, Anxiety, and Anger (New York: Basic Books, 1973). Wilson, E. O., Sociobiology: The New Synthesis (Cambridge, MA: Belknap Press of Harvard University Press, 1975). Wilson, E. O., On Human Nature (Cambridge, MA: Harvard University Press, 1978). Tooby, J., and L. Cosmides, “Evolutionary Psychology and the Generation of Culture: I. Theoretical Considerations,” Ethology & Sociobiology 10 (1989): 29-49. Barkow, J.H., L. Cosmides, et al., The Adapted Mind: Evolutionary Psychology and the Generation of Culture (New York: Oxford University Press, 1992). Irons, W., “Adaptively Relevant Environments versus the Environment of Evolutionary Adaptedness,” Evolutionary Anthropology 6, no. 6 (1998): 194-204.

  2 Irons, W., “Adaptively Relevant Environments versus the Environment of Evolutionary Adaptedness,” Evolutionary Anthropology 6, no. 6 (1998): 194-204.

  3 Tooby, J., and L. Cosmides, “The Past Explains the Present: Emotional Adaptations and the Structure of Ancestral Environments,” Ethology & Sociobiology 11 (1990): 375-424.

  4 Gigerenzer, G., “The Bounded Rationality of Probabilistic Mental Modules,” Rationality. K.I. Manktelow and D.E. Over, eds. (London and New York: Routledge, 1993), 284-313.

  5 Gigerenzer, G., “Ecological Intelligence: An Adaptation for Frequencies,” The Evolution of Mind, D. Cummins and C. Allen, eds. (Oxford: Oxford University Press, 1998), 107-125.

  6 Personal communication.

  7 Kahneman, D., and A. Tversky, “Variants of Uncertainty,” Judgment under Uncertainty: Heuristics and biases, D. Kahneman, P. Slovic, and A. Tversky, eds. (Cambridge: Cambridge University Press, 1982), 512.

  8 Shostak, M., Nisa, the Life and Words of a !Kung Woman (Cambridge, MA: Harvard University Press, 1981). Hill, K., and M. Hurtado, Ache Life History: The Ecology and Demography of a Foraging People (New York: Aline De Gruyter, 1996). Chagnon, N., Yanomamo, 4th ed. (New York: Harcourt Brace Jovanovich, 1992).

  9 Lee, R., The Dobe Ju/’hoansi (New York: Harcourt Brace, 1993), 42.

  10 Barkow, J.H., L. Cosmides, et al., The Adapted Mind: Evolutionary Psychology and the Generation of Culture (New York: Oxford University Press, 1992).

  11 Silverman, I., and M. Eals, “Sex Differences in Spatial Abilities: Evolutionary Theory and Data,” The Adapted Mind: Evolutionary Psychology and the Generation of Culture. J.H. Barkow, L. Cosmides, and J. Tooby, eds. (New York: Oxford University Press, 1992), 573.

  12 Barber, B.M., and T. Odean, “Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment,” Quarterly Journal of Economics 116, no. 1 (2001): 261-292.

  13 Lefèvre, E., Reminiscences of a Stock Operator (New York: G.H. Doran, 1923).

  14 Morton, F., The Rothschilds: Portrait of a Dynasty (reprint edition) (New York: Kodansha International, 1998), 48-50.

  15 Tversky, A., and D. Kahneman, “Judgment under Uncertainty: Heuristics and Biases,” Science 185 (1974): 1124-1131.

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nbsp; 16 Thaler, R., A. Tversky, et al., “The Effect of Myopia and Loss Aversion on Risk Taking: An Experimental Test,” Quarterly Journal of Economics 112, no. 2 (1997): 647-661.

  17 Thaler, R., “Mental Accounting and Consumer Choice,” Marketing Science 4, no. 3 (1985): 199-214.