The AEI-Brookings Joint Center for Regulatory Studies has just published a new book on information markets, and the whole thing is available online as a PDF — Information Markets: A New Way of Making Decisions.

Information markets are markets for contracts that yield payments based on the outcome of an uncertain future event. They are used to predict a wide range of events, from presidential elections to printer sales. These markets frequently outperform both experts and opinion polls, and many scholars believe they have the potential to revolutionize policymaking. At the same time, they present a number of challenges.

This collection of essays provides a state-of-the-art analysis of the potential impact of information markets on public policy and private decision-making. The authors assess what we really know about information markets, examine the potential of information markets to improve policy, lay out a research agenda to help improve our understanding of information markets, and explain how we might systematically improve the design of such markets.

Via Marginal Revolution

Legg Mason has just released Michael Mauboussin’s latest paper on strategy. In Common Errors in DCF Models, Mauboussin takes a look at eight common mistakes he sees analysts make when assessing the value of a company using a discounted cash flow model. It’s a great overview of best practices to use in generating the most accurate valuation possible (or the most accurate collection of possible valuations — he takes pains to point out that investing is a probabilistic undertaking, and suggests using scenario and sensitivity analysis to mitigate the risk of putting all your eggs in one valuation basket, so to speak). A great resource for anyone preparing valuations on a company!

Read more: Mauboussin on Strategy: Common Errors in DCF Models

Previously:

• Mauboussin on Strategy: Size Matters
• All posts tagged Michael Mauboussin

Much research has been done on the predictive power of analyst recommendations and insider trading separately, but this is the first paper I’ve seen which attempts to study their effects jointly. The existing consensus about the information content of insider trades is reaffirmed: sales by insiders are not generally meaningful, since insiders tend to sell regardless of their opinion of a stock’s prospects, in order to get cash on hand. Insider purchases however are a much stronger signal of the positive sentiments; insiders typically don’t buy unless they have reason to believe the price will go up. The significance of analyst recommendations runs in the opposite direction. Negative (sell) ratings from analysts are found to be meaningful, while positive (buy) ratings are less so. The research was done by Jim Hsieh, Lilian K. Ng, and Qinghai Wang. Here’s their abstract:

This study jointly evaluates the informativeness of insider trades and analyst recommendations. We show that the two activities often generate contradictory signals. Insiders in aggregate buy more shares when their firm’s stock is unfavorably recommended or downgraded by analysts than when it is favorably recommended or upgraded. This result is robust to various controls such as varying degrees of analyst coverage, firm size, book-to-market ratios, and stock price momentum. We find that analyst recommendations affect insider trading decisions, but not vice versa. Our further analysis shows that insider trading is informative when signaling positive information, and analyst recommendations are informative when conveying negative information. The overall results imply that corporate insiders and financial analysts do not substitute each other’s informational role in the financial market.

Read an earlier version of the paper here: Analyst Recommendations and Insider Trading

Regrettably, economists are not known for their good looks. What they are know for is the ability to rationally weigh competing alternatives in order to determine the best quantitative choice. So this new research from Daniel Hamermesh may come as somewhat of a surprise. Hamermesh analyzed elections of the American Economic Association to look for evidence of bias towards more attractive candidates for officer positions. He looked at data from 1966-2004, during which time all candidates had a small personal photo distributed with their bio prior to elections. Here’s what he found: among those judged to have above-average beauty (by a representative group of grad students), 54.8% won, while those with below-average beauty won only 45.2% of the time. Surprisingly, beauty did not seem to provide any advantage to female candidates, but was a significant factor for male candidates. This is likely due to the distinct gender advantage women already held in the elections — they were elected 74% of the time regardless of looks. This is an interesting addition to the existing body of research on beauty and the labor market, which I’ll review more of in due time.

Read more: Changing Looks and Changing “Discrimination”: The Beauty of Economists

Via Marginal Revolution

Five hundred and forty-eight graduating students from 11 universities were categorised as maximisers or satisficers based on their answers to questions like “When I am in the car listening to the radio, I often check other stations to see if something better is playing, even if I am relatively satisfied with what I’m listening to”.

When questioned again the following summer, the maximisers had found jobs that paid 20 per cent more on average than the satisficers’ jobs, but they were less satisfied with the outcome of their job search, and were more pessimistic, stressed, tired, anxious, worried, overwhelmed and depressed.

“We suggest that maximisers may be less satisfied than satisficers and experience greater negative affect with the jobs they obtain because their pursuit of the elusive ‘best’ induces them to consider a large number of possibilities, thereby increasing their potential for regret or anticipated regret, engendering unrealistically high expectations”, the researchers said. Indeed, the researchers found that maximisers were more likely to report fantasising about jobs they hadn’t applied for and wishing they had pursued even more jobs than they did.

Read more: Are you a grumpy maximizer or happy satisficer?

Via: Marginal Revolution