Drops from the Fire Hose – October 31, 2012

In or Out? The Case for — and Against — the Stock Market — Knowledge @ Wharton

Most middle class households probably held too much of their investments in stock anyway, notes Wharton business economics and public policy professor Kent Smetters, which is why he is “not too upset” with the apparent trend away from equities. “Stocks should not be the main workhorse vehicle for basic retirement needs,” Smetters says. “Bonds should be used for basic retirement and stock for goals where falling short is more acceptable to the household.”

Smetters recommends that portfolios include bonds, TIPS and some stocks, but adds a caveat: “People should not use the expected return on stocks when estimating how much saving they need,” he says. “They should use a bond yield to adjust for risk. That forces them to save but also better manages risk.”

The Feedback Effect: How the Financial Markets Affect Decisions in the ‘Real Economy’ — Knowledge @ Wharton

A considerable volume of research explores the theory of feedback, Goldstein said, and some examples are clear. “This kind of feedback loop serves to amplify shocks, and everyone saw that in the financial crisis,” he said.

But there’s much research still to be done, he added. Few financial models fully account for the effects of feedback. And although the theory of feedback effects seems solid, it is difficult to measure real-world results because so many factors cloud the data. A stock’s price can dip, for example, simply because a mutual fund has sold a large block of shares to meet investor redemptions, a price change that has nothing to do with information flowing through the market. If information were flowing at the same time, it would be very hard to know how much each factor had influenced the share price.

Future research should also look at how information from stock prices can be used more effectively by regulators, lenders, customers and others concerned with a firm’s health, Goldstein said. The study of feedback, he concluded, is only beginning. “I would say it’s been neglected for awhile, and it’s growing now.”

When Success is Born Out of Serendipity — Harvard Business Review

Our mind abhors these serendipitous explanations, and searches for convenient patterns instead. Ask for the keys to career success and you’ll get logical explanations, recommendations, pathways and approaches. Then ask someone how he or she became successful and suddenly it becomes a story of serendipitous encounters, unexpected changes in plans, and random consequences. It does not make sense to ignore this basic fact about success any longer.

We like to think that success comes from predicting trends, analyzing data, gaming out strategies — from using some sort of logical approach. But if it was that simple we should have solved the mystery of success long time ago — and we haven’t. Instead serendipity is what sets us apart — since that is the only way we can discover an approach that is not obvious or logical.

So be open to serendipity, in your organization and in your life. You can take steps to increase the chances of it, too. For instance, bring together people from outside your organization, or between siloed departments or between different countries or cultures. These interactions will help you find unexpected insights and opportunities — those that others might not have logically figured out. Take statistical advantage of these random moments by placing as many purposeful bets you can afford while not becoming distracted. Angry Birds was the game-maker Rovio’s 52nd game. You have probably not heard of their 51 earlier ones. If you tried 52 times at anything you would probably have a decent chance at finding something that helped you stand apart, too!

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