Tag Archives: Chicago Booth

Updates from Chicago Booth

Foreign currency? No thanks. Investors prefer their own currencies and the US dollar
By Chana R. Schoenberger – Globalization and integrated financial markets allow companies and investors worldwide to work together more closely—but investors still strongly prefer to buy assets in their own currency or in the US dollar, research suggests. This means US companies that issue bonds only in the dollar are uniquely able to borrow from abroad.

Harvard’s Matteo Maggiori, Chicago Booth’s Brent Neiman, and Columbia’s Jesse Schreger looked at international capital flows from investors’ purchases of corporate securities, using a data set of $27 trillion in investment positions provided to them by Morningstar, an independent investment-research company. They find that investor portfolios are more strongly biased toward their own currencies than standard models, such as the kind used at the Federal Reserve or International Monetary Fund, would imply.

If a German company issues securities denominated in Canadian dollars, for example, the buyers of those securities will mainly be Canadian. This bias is so strong “that each country holds the bulk of all securities denominated in their own currency, even those issued by foreign borrowers in developed countries,” the researchers write. more>

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Updates from Chicago Booth

The danger of making policy based on assumption
By George J. Stigler – The denunciation of American complacency, however, is not my purpose, at least not my explicit purpose. I admire the humane and generous sympathies of our society—sympathies that extend to the uneducated and the uncultured and the unenterprising and even the immoral as well as to the educated and the cultured and the enterprising and the moral.

We are a people remarkably agreed on our basic goals, and they are goals which are thoroughly admirable even to one, like myself, who thinks one or two less fashionable goals deserve equal popularity.

Fortunately, our agreement on basic goals does not preclude disagreement on the way best to approach these goals. If the right economic policies were so obvious as to defy responsible criticism, this would be an intolerably dull world. In fact, I believe that each generation has an inescapable obligation to leave difficult problems for the next generation to solve—not only to spare that next generation boredom but also to give it an opportunity for greatness. The legacy of unsolved problems which my generation is bequeathing to the next generation, I may say, seems adequate and even sumptuous.

It is not wholly correct to say that we are agreed upon what we want but are not agreed upon how to achieve it. When we get to specific goals, we shall find that our agreement does not always extend to orders of importance. For example, some people are willing to preserve personal freedom of choice for consumers even if the choice is exercised very unwisely in some cases, and others will be more concerned with (say) the health of consumers which these unwise choices may impair. Nevertheless, it is roughly true that we know where to go.

We do not know how to get there. This is my fundamental thesis: we do not know how to achieve a given end. more>

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Updates from Chicago Booth

Why Bitcoin and blockchain may stumble
By Alex Verkhivker – In mid-May, the Bitcoin Gold market suffered what’s known as a 51 percent attack. A market participant with sufficient computing power was able to take control of the underlying ledger and commit fraud, Quartz reported. Other cryptocurrencies have reportedly been similarly attacked.

Could this sort of thing sink cryptocurrency markets completely?

Even those who dismiss Bitcoin as a fad often praise blockchain, the open-source digital-ledger technology underlying it, as a breakthrough in electronic record keeping. The innovation of Bitcoin’s founder, Satoshi Nakamoto, was to create a process in which people have trust in a database that lacks a centralized authority such as a government, court, or bank; rather, records are verified by anonymous “miners,” who create a verified trail, or chain, of transactions.

When bitcoins are exchanged, information about the transactions is grouped together into a block. The miners race each other to solve a computationally intense puzzle, and the winning miner adds a block to the chain, while other miners verify that the new transactions are accurate. All miners keep a copy of the chain of transactions, making the blockchain a verifiable and trusted but ultimately decentralized database.

This process was a significant computer-science innovation, but how does it work economically speaking? In thinking that through, Eric Budish crafts a worrying argument about the future of Bitcoin. more>

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Updates from Chicago Booth – Are profits passé?

Why we’re all impact investors now
By Chana R. Schoenberger – For nearly 50 years, many have been guided by the idea, laid out most famously by Milton Friedman, that the most appropriate way to create social change is to give profits to investors, and taxes to the government, and use that money to make an impact. For just as long, other investors have argued in favor of divesting from companies to make a political or social point—dumping shares of gun manufacturers or fossil fuel companies, for example.

But with the rise of index funds, divesting from individual company stocks has become more difficult, even though there are some funds that try to do this by designing a basket that tracks an index while excluding “sinful” stocks. It can even be counterproductive.

Investing with a social motivation has moved from divesting from certain companies based on values or preferences to a more regular form of seeking alpha, by investors who hope their stakes will generate returns as well as save the world.

Like financial philanthropists trying to affect specific social issues, these investors are often using markets and investing tools to shift behavior and create change. As a result, there are big shifts in thinking about the role of investors, who have had the luxury of worrying primarily about profits. Some prominent managers and investors are advocating for joining other stakeholders to push for change. more>

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Updates from Chicago Booth

Why the ‘dollars a day’ pitch works
By Alice G. Walton – Charities that encourage people to donate “just dollars a day” may have the right idea—and more businesses should consider following suit. University of Rhode Island’s Stephen A. Atlas and Chicago Booth’s Daniel Bartels find that framing a cost as a series of small daily expenses makes an offer more tempting—plus people think they’re getting more for their money, whether the outlay is for charity or a purchase.

The researchers established this preference for periodic pricing in a series of experiments that asked participants about charitable donations, car leases, and meal-delivery services.

“Our framework and results suggest that periodic pricing can help people appreciate the benefits they accrue from a purchase,” the researchers write. “So, under the right conditions, marketers can encourage purchase with periodic pricing, even for significant sums of money.” more>

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Updates from Chicago Booth

Is corporate market power really surging?
By Alex Verkhivker – In economic circles, an argument has gained traction that corporate market power is surging, resulting in skyrocketing markups, a falling labor share, and other negative consequences for consumers and workers. But some researchers are pushing back, emphasizing weaknesses in the argument and urging policy makers to be cautious before taking any actions.

Proponents of the market-power argument often rely on one of two methodologies, one that calculates and compares total revenues and costs at the economy-wide level and another that uses company-level data. University of Minnesota’s Loukas Karabarbounis and Chicago Booth’s Brent Neiman focus on the first of these two, in which the economy is considered a pie that is made of up three slices: the labor share (which goes to workers), the capital share (costs incurred to use factories, equipment, software, etc.), and economic profits. Economic profits are calculated by finding the difference between revenues and costs, including the cost of capital faced by companies to fund their assets used in production. more>

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Updates from Chicago Booth

Actively managed, but more index-like
Chicago Booth – Analyzing 2,789 actively managed mutual funds between 1979 and 2014, the researchers find that fund portfolios have become more liquid over time, largely as a result of becoming more diversified. Both components of diversification—balance and coverage—have risen sharply, especially since 2000. The level of coverage rose faster than the level of balance as mutual-fund managers poured ever more names into their portfolios.

The research captures the rise of closet indexing among active-mutual-fund managers, a phenomenon that may be caused by managers hewing toward the benchmark they are trying to outperform. While diversification has some benefits in terms of risk management and liquidity, the close resemblance of active portfolios to passive indexes might leave some investors wondering why they’re bothering to pay for active management given the ubiquitous availability of cheap, passive alternatives. more>

Updates from Chicago Booth

By Michael Maiello – Yale University’s Bryan T. Kelly, Chicago Booth’s Dacheng Xiu, and Booth PhD candidate Shihao Gu investigated 30,000 individual stocks that traded between 1957 and 2016, examining hundreds of possibly predictive signals using several techniques of machine learning, a form of artificial intelligence.

They conclude that ML had significant advantages over conventional analysis in this challenging task.

ML uses statistical techniques to give computers abilities that mimic and sometimes exceed human learning. The idea is that computers will be able to build on solutions to previous problems to eventually tackle issues they weren’t explicitly programmed to take on.

“At the broadest level, we find that machine learning offers an improved description of asset price behavior relative to traditional methods,” the researchers write, suggesting that ML could become the engine of effective portfolio management, able to predict asset-price movements better than human managers.

Of almost 100 characteristics the researchers investigated, the most successful predictors were price trends, liquidity, and volatility. more>

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Updates from Chicago Booth

Why corporate social responsibility can backfire
By Alina Dizik – As CSR has become ingrained in the workplace and even in some brands, researchers are finding drawbacks to how employees react to these initiatives.

More than 90 percent of the 250 largest global companies by revenue now publish detailed annual reports of their corporate-responsibility practices, according to KPMG’s 2017 survey of corporate-responsibility reporting.

So what are the problems?

For one thing, participating in a company’s CSR initiatives can lead to what researchers call moral self-licensing, where a positive action is offset by harmful behavior later on. In cases of moral licensing, company-sponsored social initiatives can trigger poor employee performance because doing good deeds in one area encourages the employee to behave unethically in another, according to research by List and University of Chicago postdoctoral scholar Fatemeh Momeni. more>

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Updates from Chicago Booth

By John Wasik – Finland sits at the top of the United Nations’ 2018 World Happiness Report, which ranked more than 150 countries by their happiness level. The country that gave the world the mobile game Angry Birds scored high on all six variables that the report deems pillars of happiness: income, healthy life expectancy, social support, freedom, trust, and generosity. News reports touted Finland’s stability, its free health care and higher education, and even the saunas and metal bands for which it’s famous.

Yet abundance does not equate to happiness, according to research—even on a longer time frame. In most developed countries, the average person is rich by the standards of a century ago. Millions more people have access to safe food, clean drinking water, and in most cases state-funded health care.

And in countries with a growing middle class, millions more are now finding themselves able to purchase big-screen televisions, smart phones, and cars.

But this growth in wealth hasn’t made people happier.

People gain more happiness when they satisfy their inherent rather than learned preferences—needs rather than wants. more>

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