Education Reform: Old Fashioned Methods Work Best

Joanne Lipman (Why Tough Teachers Get Results, WSJ 9/28/2013) recommends going ‘old-school’ when it comes to reforming US educational system: http://online.wsj.com/article/SB10001424052702304213904579095303368899132.html

Latest Research on Asset Bubbles

A fascinating piece in the journal Neuron:

http://download.cell.com/neuron/pdf/PIIS0896627313005680.pdf

In the Mind of the Market: Theory of Mind Biases Value Computation during Financial Bubbles by Benedetto De Martino, John P. O’Doherty, Debajyoti Ray, Peter Bossaerts, and Colin Camerer

Summary

The ability to infer intentions of other agents, called theory of mind (ToM), confers strong advantages for individuals in social situations. Here, we show that ToM can also be maladaptive when people interact with complex modern institutions like financial markets. We tested participants who were investing in an experimental bubble market, a situation in which the price of an asset is much higher than its underlying fundamental value. We describe a mechanism by which social signals computed in the dorsomedial prefrontal cortex affect value computations in ventromedial prefrontal cortex, thereby increasing an individual’s propensity to ‘ride’ financial bubbles and lose money. These regions compute a financial metric that signals variations in order flow intensity, prompting inference about other traders’ intentions. Our results suggest that incorporating inferences about the intentions of others when making value judgments in a complex financial market could lead to the formation of market bubbles.

Here is the WSJ piece on the research:

http://blogs.wsj.com/moneybeat/2013/09/27/how-many-greater-fools-does-it-take-to-make-a-bubble/

The WSJ piece summarizes the research succinctly:

“…“People seem to be buying,” Prof. Camerer says, “because they think they can sell to somebody else who isn’t able to control himself as well as they can or isn’t as prescient as they are.”

In other words, as prices rise and you intensify your search for that “greater fool” you can sell to, you may get distracted from noticing that the greatest fool of all is you.”

Quants and Modern Finance

A fascinating piece from NYTIMES:

http://dealbook.nytimes.com/2013/09/26/in-this-battle-arena-warriors-are-armed-with-algorithms/

China’s Next Big Experiment – Free Trade Zone in Shanghai

The Chinese leadership attempts another experiment:

http://online.wsj.com/article/SB10001424052702304795804579100640245613408.html

http://www.cnbc.com/id/101067418

Meanwhile, BRICs guru Jim O’Neill states:

“…China is in effect creating another India every two years -- making a mockery of those who’ve argued that India’s democratic model is more likely to deliver long-term economic success. China is already more than four times bigger than its southern neighbor. India’s economy won’t rival China’s for a very long time, if ever.”

Ouch!!

There is the possibility that India's official GDP may be understating the true size of the economy. See the current issue of The Economist for an interesting piece on India's GDP value:
http://www.economist.com/news/asia/21586891-activities-out-sticks-may-add-more-gdp-was-thought-hidden-value