johnjohn
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Is there a list of Scott Alexander's short stories somewhere?
I made a couple of bets on https://www.predictious.com/ using bitcoin. It was pretty straightforward and easy to use.
You imply that one should invest where economic growth is expected to be highest.
Note that it does not follow that shares in high growth companies (or countries) will lead to high returns. This is because the expected future growth may well be built into the current price.
That is, if everyone thinks something will be likely worth a lot in the future, the current price will be bid up to reflect this.
It is the uncertainty of the outcome that may arguably cause higher expected returns. If people have a distaste for uncertainty, then the price might be bid down leading to higher expected returns.
This is the idea that one must assume risk (uncertainty) to obtain excess expected returns. It is by no means ubiquitous: assuming risk may reduce expected returns. For example, people assume risk to gain exposure to negative expected returns in a casino (roulette, blackjack, &c). No doubt there are plenty of examples in financial markets where risk does not automatically yield excess expected returns.
Putting six months worth of expenses in a money-market account seems like a needless 'mental accounting' bias. You can easily and quickly liquidate a portion of your " 70% in a stock index fund and 30% in a bond fund" if you need the cash in an emergency.
The 70% stocks 30% bonds seems somewhat arbitrary. I remember reading a paper once that advocated allocating 130% equities through the use of leverage. Of course, there is always the chance that the stockmarket underperforms over the long run. But, that's the risk that you are ostensibly being compensated for.
that requires no upkeep, no worry, and good returns.
It is plausibly the "worry" (or discomfort) that is required for good expected returns. For instance, CAPM, implies you are being paid to hold undiversifiable risk. You get paid for it because of people's distaste for it.
Your expected returns for a corporate bond, for example, might be because of the worry that it defaults (the extent to which this is undiversifiable, as there is a tendency for bond defaults to co-occur in bad times.), and an illiquidity premium --- in bad times when you'd like to be able to liquidate your position, you're likely to find no one who wants to buy... (read 351 more words →)
According to the academic literature, the opposite is true:
"Do Financial Markets Reward Buying or Selling Insurance and Lottery Tickets?" Antti Ilmanen Financial Analysts Journal, September/October 2012, Vol. 68, No. 5: 26–36.
"The empirical evidence is unambiguous: Selling insurance and selling lottery tickets have delivered positive long-run rewards in a wide range of investment contexts. Conversely, buying financial catastrophe insurance and holding speculative lottery-like investments have delivered poor longrun rewards. Thus, bearing small risks is often well rewarded, bearing large risks not."
People seem to overestimate events that are salient yet have small probability of occurring. The empirical evidence bears this out.
Investors tend to overestimate the odds of tail events, so selling insurance and lottery tickets is long-run profitable.
Antti Ilmanen's "Expected Returns" is probably one of the best attempts to answer these questions. This book is however quite pricy.
From the intro: "Finance theories have changed dramatically over the past 30 years away from the restrictive theories of the single-factor CAPM, efficient markets, and constant expected returns. Current academic views are more diverse, less tidy, and more realistic. Expected returns are now commonly seen as driven by multiple factors. Some determinants are rational (risk and liquidity premia), others irrational (psychological biases such as extrapolation and overconfidence)."
It is worth mentioning that he has another book "Expected Returns on Major Asset Classes" that is a shorter version covering the central chapters of the pricy book. The kindle version is inexpensive.
Surely if a certain future payoff is expected a priori to be good (because of expected favorable business climate or whatever), then the price paid will adjust accordingly. This means that expected return (a function of price paid and payoff) will be comparable to other investments with similar payoffs, rather than being good.
If, say, business climate were unfavorable, and payoff is expected to be low, price paid for the investment should adjust for this so that expected return need not be low.
If there is large degree of uncertainty associated with a payoff, then expected return may be high to reflect the low price one might get due to people's distaste for... (read more)
It will be nice if posts that are links (e.g. "[Link] John Ioannidis: Why Most Clinical Research Is Not Useful (2016)") can have the link in the body too rather than only in the title.
With feed readers such as feedly, one cannot directly click the link if it is in the title.