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Cogito  Ergo Sum

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  • Cogito commented on The Science of Hitting's article 05-22 15:17
    Spotting Hidden 'Cockroaches' In Investing
    “There’s seldom just one cockroach in the kitchen. You turn on the light and all those others start scurrying around. I couldn’t find the...
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    Cogito 05-22 16:17
    •  

      @SoH: great article, thank you!

      @Batbeer2: I like your idea that their may be certain industries where it's more likely to find issues - and I also believe that fincance, esp. investment banking, is a risky place for investors. But - at least in the finance industry - I don't think that the amount of cash involved is the main reason causing the cockroaches. Imho, wrong incentives combined with too high a business complexity is the main reason financials may attract cockroaches.

      Let me explain: To understand the economic situation of a bank, you have to calculate the value of its financial contracts (a large bank may have several millions of fincial contracts), using mathematical models. The mathematical models for the types of credit derivatives that caused the crisis were highly complex (indeed, most executive boards were unable to understand them) and at the same time too simplistic to adequately represent the risks involved. 

      Incentives for traders were typically based on short time-horizons (usually the year, up-to-date). As the risks of the credit derivative contracts were not properly represented, traders made high profits with these contracts at seemingly low risk - hence, they had high incentives to buy more and more of these risky deals - and this is one of factors that caused the crisis.

      So, if you take banks as anectodic evidence, I would think that it is the complexity of the business (which attracts highly intelligent players and makes it difficult to adequately represent the economic situation) combined with wrong incentives and obscenely high bonuses (which lowered the ethical standards). Regulation has tightened, and a lot of these issues have been addressed, but the main problem - complexity - is inherent to banking, and hence getting the incentives right is very difficult.

      I am not certain whether one can generalize this to other industries. Incentives are key everywhere, but I don't think there are other industries with a similar level of complexity and opaqueness as banking.
  • Cogito commented on Grahamites's article 05-18 13:26
    On Focus Level and How You Spend Your Day
    One of my biggest takeaways from this year’s Daily Journal meeting is that Charlie Munger (Trades, Portfolio) has a very very long attention span...
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    Cogito 05-18 14:26
    • Just one hint: after working in a management position for a a couple of years, I found that my attention span had decreased considerably, simply because of the job demands - when you manage large projects, you have to be alert to interrupts all the time and pass tasks on. What really helped me to get back to being concentrated at work has been the Pomodoro time management technique. It really helped me to focus. There are even freely available smartphone apps that implement this technique...
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