The Overconfidence Effect?

The presidential election of 2016 will be remembered for many reasons. For those who watched the results on election night, the greatest of these was the sheer surprise that despite the universal consensus of experts, Hillary Clinton would not win the oval office. The outcome sent overnight markets crashing, as the Dow futures market plummeted 900 points, only to rebound the following day. If there is a lesson to be learned, it is the tale of the overconfidence effect: how people make predictions, and how experts often have the most difficult time accepting outcomes that differ from what they anticipated.

Fall 2017: Unintended Consequences

In 1968, a Southern-born engineer named Don Wetzel was waiting in line at a Dallas bank when he had an idea: to create a machine that could automatically dispense cash. Instead of waiting in line and being limited to a bank’s hours, the machine would allow people to withdraw money from their accounts 24 hours a day. His idea was revolutionary.

At the time, Wetzel was an executive at Docutel, a Dallas-based company that produced automated baggage handling equipment. Previously, he had been an engineer at IBM and probably knew of existing technology where a machine could automatically count and dispense money, as it was already used in vending and money-counting machines. The problem was how to create a way for a machine to identify people and determine how much money it could, or could not, disburse for a given transaction. The answer came in the form of a plastic card with ironed on magnetic tape that the machine could read. The magnetic strip was similar to those used in cassette tapes and contained useful information, such as a person’s identity and bank account numbers. After a year of development, Docutel sold the first automated teller machine, or ATM, to New York’s Chemical Bank in 1969.

Summer 2017: The Many Faces of Unemployment

June marked the 10th anniversary of the Great Recession of 2007-2009. Yet, as Barron’s magazine lamented, one would be hard pressed to find much attention given to commemorating this anniversary, or more importantly, how much stronger the U.S. economy is today. Housing prices have rebounded, consumer confidence is higher, corporate profits have grown, and the unemployment rate has fallen from its high of 10% in October 2008 to 4.3% in May 2017. The turnaround in the U.S. economy has contributed to investors’ confidence in the stock market. From June 30, 2009 to June 30, 2017, the S&P 500 Index grew 163%. With an improving economy, there has been some concern regarding the prospect of inflation, due to increased consumer spending driving up prices on many goods and services. However, the bond market has been lowering its inflation expectations, causing long-term interest rates to fall. We believe the reason that inflation may not be a problem in the short-term has a lot to do with the unemployment rate.

Spring 2017 The Environmentally-Minded Economist

My father once told me that when he was a child, the Schuylkill River was so polluted that it would blacken one’s feet, due to the years of coal and other runoff that had turned the river into a slurry. He mentioned that the air was so dirty that his grandmother would complain about blackened sheets on the clothesline and windowsills coated with soot. He grew up during Reading, PA’s heyday, when conventional economics did not look at the impact of pollution.

The Schuylkill River was not the only casualty of early industrialization. Before the Industrial Revolution, each year over 50,000 salmon would journey up the Connecticut River to as far as Vermont and New Hampshire to spawn. It was not until the early 1800’s that the salmon disappeared, as dams were constructed to power the numerous mills built during America’s early industrial revolution. Since the dams blocked access to their spawning grounds, the salmon stopped being able to reproduce.

Winter 2017: Made in China

It is easy to understand why most Americans do not view trade with China favorably. For over thirty years, it has been a lopsided affair. Since 1986, the U.S. trade deficit with China has grown an astounding 22,056%. As the trade deficit has grown, many Americans are questioning the value of “free trade.” For investors, the outcome is critical. Will the U.S. become protectionist? Will the Chinese economy collapse as a result of decades of government manipulation? Or, will free-market influences prevail?

Winter 2016: It’s a match – who gets what and why

The King of Prussia Mall, situated in southeastern Pennsylvania, is the second largest mall in the United States. With over 400 stores, it offers something for just about everyone. Although the mall has outgrown its humble origins, opening in 1963 with open-air shopping and Gimbels as an anchor store, its evolution is a prime example of economics’ simple yet seldom-known principle of “matching.” The theory of matching attempts to explain how certain relationships are formed. At the mall, it helps explain how buyers and sellers are matched, or in the case of Gimbels, which went out of business in 1987, mismatched.

Fall 2016: Hobson’s Imperial England

Imagine a country with no laws to regulate business. No environmental laws. No labor laws. No consumer protection laws and little-to no taxes on income and property. The only “law” was that a market would regulate itself (laissez-faire capitalism.) You do not need to imagine such a world, however. Simply read about Victorian England, or the United States during the early Industrial Revolution. During these times, both nations experienced robust economic growth with little regulation and government involvement.

It is in Victorian England that one of the most loathed economists lived—his name was John A. Hobson. (If you think “loathed” is too strong of a word, think again: the title of his autobiography is Confessions of an Economic Heretic.) Hobson looked out on Victorian England and saw the disparity of wealth that existed. He saw pollution, poor working conditions (especially for child laborers) and the vast amount of wealth that was being created by the industrialists. While many economists of his time lauded England’s “free market” capitalist economy, Hobson saw a major flaw.

Summer 2016: Cheerleader in Chief?

It was a historic time eight years ago. Senator Barack Obama had just won the 2008 Presidential election over Senator John McCain, becoming the first African-American president of the United States. I was hosting my quarterly radio show on WEEU of Reading, PA and amongst the many callers, there was a general sense of optimism about the potential impact of this historic moment. As someone who grew up near the race riots in New Jersey, I could appreciate the sense of hope. Yet, such enthusiasm was not felt by everyone when it came to the future of the economy. One older gentleman was adamant that the best thing to do was to get out of stocks immediately and buy gold in preparation for the inevitable collapse of the U.S. economy due to Obama’s “liberal agenda.” Despite my dissenting response, the caller was steadfast. I can only hope that the listeners did not heed his advice. Since Obama gave his inaugural address in January 2009, the S&P 500 Index has grown around 160%, while gold has gained just 31%. Unless there is a significant drop in the stock market in the next six months, President Obama’s eight years in office may be some of the best for stocks. As the nation is faced with choosing Obama’s successor, it is once again asking, which candidate is better for the stock market and the economy.

Spring 2016: The Pension Problem

As we enter a new year, there is a sense of optimism in the stock market and U.S. economy that has not existed for several years, if not decades. While the economy chugged along, having its ups and downs, many pundits had been quick to express their views that the best of times for the United States were in the rear-view mirror. Seizing this sentiment, hedge funds and investment firms promoted investing overseas, or worse, getting completely out of stocks. While there was reason for concern, we felt that there was an argument for being cautiously optimistic about stocks, especially those with growing dividends!

Winter 2015: The Not-So Rational Consumer

Not many professors of economics would pride themselves on being irrational. Even fewer would desire to write a kitchen guide entitled Dining without Crumbs – The Art of Eating over the Kitchen Sink. But Dan Ariely, who teaches at Duke University, is hardly the traditional economist. When I was introduced to Ariely, he was in Boston speaking to 500 members of the nation’s leading organization of professional investors, the CFA Institute. His presentation asked a simple question: Is traditional economics applicable in the real world? Since most professional investors use traditional economics at some level, the audience was captivated. For those not in the investment world, the question may seem academic and with limited implications, until one realizes that Ariely’s aim is to point out that regardless of how rational we think we are in our decisions, people are actually predictably irrational.