I Am In The $$$MONEY$$$

[Michael Scally MD]

[Michael Scally MD]

The Wall Street Gene
What makes a top trader? Researchers point to dopamine
Jonah Lehrer on Genetics, Dopamine and Wall Street | Head Case - WSJ.com

It's been a tough few years for Wall Street. Traders got big bonuses for taking foolish risks, while taxpayers got stuck with the bill. But without the financial industry's machinations, Facebook couldn't go public, your neighbor couldn't get a mortgage and we'd all be stuck buying cars with cash.

This raises the obvious question: How can we ensure that Wall Street doesn't get carried away as it did before the 2008 meltdown? That traders aren't seduced by foolish risks in the near future?

One approach has been increased governmental regulation, such as the Dodd-Frank Act of 2010, which attempts to reign in the excesses of the financial industry with new rules and restrictions. Only time will tell if this strategy works.

A different approach to reducing the irrationality of Wall Street can be found in new research led by Steve Sapra and Paul Zak, neuroeconomists at Claremont Graduate University. Dr. Zak got the idea for the paper after spending time with leading analysts and traders at a conference. "These guys are a pretty weird bunch," he says. "They're very rational and very competitive."

Dr. Zak wanted to see if he could find the genetic signature of this personality type. Did certain genes correlate with investment success? What's the difference between the prudent decisions of somebody like Warren Buffett—he's famously unwilling to invest in bubbles—and the reckless bets that cause so many other traders to lose vast sums of money?

There was reason to think that such a link might exist. Previous research had shown, for instance, that 29% of the variation in whether or not people invest in stocks depends on their DNA. Studies of professional traders had demonstrated that approximately 25% of individual variation in portfolio risk is due to genetics. Other scientists had found correlations between testosterone levels and risk-taking—more hormone equals more risk—and shown that, at least among London traders, men with higher hormone levels in the morning generate larger profits.

Drs. Sapra and Zak began by analyzing the genes of 60 professional traders working in five major Wall Street firms. (They collected the DNA samples in 2008—only three of the firms are still in business.) The scientists focused on a short list of genes that are known to affect the activity of dopamine, a neurotransmitter in the brain.

In recent years, it's become clear that dopamine helps to regulate decisions involving risk and reward, allowing us to experience both the thrill of getting what we want and the pain of losing it all.

Consider the decision to invest in an initial public offering. As Dr. Zak notes, these investment offerings are pretty exciting, leading "to lots of dopamine activity," he says. "There's the thrill of novelty and the potential for a big future reward." The problem, however, is that 63% of newly public companies fail within 10 years.

The challenge for investors, then, is to balance the allure of the new stock against the risk that the company might go bankrupt. Such calculations are often extremely difficult, even for experienced traders.

So what did the scientists find? It turned out that successful traders—Drs. Zak and Sapra measured success in terms of longevity on Wall Street—tended to hit a sweet spot of dopamine activity; their genes kept them from experiencing either very high or very low levels of the molecule. These prosperous professionals were much more likely to have so-called Goldilocks genes, placing them solidly in the middle of the dopamine distribution.

"The best traders are willing to take risks," Dr. Zak says. "They definitely want to make lots of money. But they're also able to take a long-term perspective and check their impulses. Being able to balance these competing interests seems to require a balanced dopamine system."

Dr. Zak notes that it's far too soon to use his genetic assay as a hiring tool—the results still need to be replicated. Still, it's possible to imagine a future in which the financial sector requires less oversight because firms have found a way to hire more prudent employees.

Given the massive amounts of money at stake, spending a few hundred dollars on a DNA kit might strike Wall Street as a particularly wise investment.


Sapra S, Beavin LE, Zak PJ. A Combination of Dopamine Genes Predicts Success by Professional Wall Street Traders. PLoS ONE 2012;7(1):e30844. PLoS ONE: A Combination of Dopamine Genes Predicts Success by Professional Wall Street Traders

What determines success on Wall Street? This study examined if genes affecting dopamine levels of professional traders were associated with their career tenure. Sixty professional Wall Street traders were genotyped and compared to a control group who did not trade stocks. We found that distinct alleles of the dopamine receptor 4 promoter (DRD4P) and catecholamine-O-methyltransferase (COMT) that affect synaptic dopamine were predominant in traders. These alleles are associated with moderate, rather than very high or very low, levels of synaptic dopamine. The activity of these alleles correlated positively with years spent trading stocks on Wall Street. Differences in personality and trading behavior were also correlated with allelic variants. This evidence suggests there may be a genetic basis for the traits that make one a successful trader.

[Michael Scally MD]

Hidden Financial Risk: Understanding Off Balance Sheet Accounting
J. Edward Ketz, PhD
http://213.55.77.157/bitstream/12345...41/2/28615.pdf

An insider's guide to understanding and eliminating accounting fraud

How do these high-profile accounting scandals occur and what could have been done to prevent them. Hidden Financial Risk fills that void by examining methods for off balance sheet accounting, with a particular emphasis on special purpose entities (SPE), the accounting ruse of choice at Enron and other beleaguered companies. J. Edward Ketz identifies the incentives for managers to deceive investors and creditors about financial risk and also shows investors how to protect their investments in a world filled with accounting and auditing frauds.

J. Edward Ketz, PhD (State College, PA) is MBA Faculty Director and Associate Professor of Accounting at Penn State's Smeal College of Business. He has been cited in the press nearly 300 times since Enron's bankruptcy, including The New York Times, The Wall Street Journal, and The Washington Post.. He has a regular column in Accounting Today.

[Michael Scally MD]

When Your DNA Dings Your ROI
Are We Genetically Programmed to Be Bad Investors? - Total Return - WSJ


Cronqvist, Henrik and Siegel, Stephan, Why Do Individuals Exhibit Investment Biases? (February 22, 2012). Available at SSRN: Why Do Individuals Exhibit Investment Biases? by Henrik Cronqvist, Stephan Siegel :: SSRN

We find that a long list of investment biases, e.g., the reluctance to realize losses, performance chasing, and the home bias, are "human," in the sense that we are born with them. Genetic factors explain up to 50% of the variation in these biases across individuals. We find no evidence that education is a significant moderator of genetic investment behavior. Genetic effects on investment behavior are correlated with genetic effects on behaviors in other domains (e.g., those with a genetic preference for familiar stocks also exhibit a preference for familiarity in other domains), suggesting that investment biases is only one facet of much broader genetic behaviors. Our evidence provides a biological basis for non-standard preferences that have been used in asset pricing models, and has implications for the design of public policy in the domain of investments.

[Michael Scally MD]

Pham, Michel Tuan, Lee, Leonard and Stephen, Andrew T., Feeling the Future: The Emotional Oracle Effect (October 18, 2011). Journal of Consumer Research, Forthcoming. Available at SSRN: Feeling the Future: The Emotional Oracle Effect by Michel Pham, Leonard Lee, Andrew Stephen :: SSRN

Eight studies reveal an intriguing phenomenon: Individuals who have higher trust in their feelings can predict the outcomes of future events better than individuals with lower trust in their feelings. This emotional oracle effect was found in a variety of domains, including (a) the 2008 U.S. Democratic presidential nomination, (b) movie box-office success, (c) the winner of American Idol, (d) the stock market, (e) college football, and even (f) the weather. It is mostly high trust in feelings that improves prediction accuracy rather than low trust in feelings that impairs it. This effect occurs only among individuals who possess sufficient background knowledge about the prediction domain, and it dissipates when the prediction criterion becomes inherently unpredictable. The authors hypothesize that this effect arises because trusting one’s feelings encourages access to a “privileged window” into the vast amount of predictive information people learn, often unconsciously, about their environments. How the present research relates to Bem (2011) is also discussed.

[Michael Scally MD]

What High-I.Q. Investors Do Differently
http://www.nytimes.com/2012/02/26/bu...omic-view.html

February 25, 2012
By ROBERT J. SHILLER
Robert J. Shiller is professor of economics and finance at Yale.

YOU don’t have to be a genius to pick good investments. But does having a high I.Q. score help?

The answer, according to a paper published in the December issue of The Journal of Finance, is a qualified yes.

The study is certainly provocative. Even after taking into account factors like income and education, the authors concluded that people with relatively high I.Q.’s typically diversify their investment portfolios more than those with lower scores and invest more heavily in the stock market. They also tend to favor small-capitalization stocks, which have historically beaten the broader market, as well as companies with high book values relative to their share prices.

The results are that people with high I.Q.’s build portfolios with better risk-return profiles than their lower-scoring peers.

Certainly, caution is needed here. I.Q. tests are controversial as to what they measure, and factors like income, quality of education, and family background may not be completely controlled for. But the study’s results are worth pondering for their possible implications.

The paper, by Mark Grinblatt of the University of California, Los Angeles, Matti Keloharju of Aalto University in Helsinki and Juhani Linnainmaa of the University of Chicago took advantage of some unusual data. The crucial numbers came from, of all places, Finland.

Why there? Two reasons. First, Finland requires all able young men to perform military service. As a result, the authors were able to obtain I.Q. test scores of all of men conscripted in Finland from 1982 to 2001.

Second, Finland had a wealth tax, and its citizens had to report their investment portfolios to the government. This means the authors could compare the men’s I.Q. scores and their investing habits, as well as link those factors to other individual data. Similar data sets aren’t available in other countries, however, so we may not want to generalize too much.

Still, the results are interesting. The authors didn’t claim that people with high scores had some kind of monopoly on stock-picking genius. What they did contend was that these people tended to follow basic rules of successful investing.

In some ways, it’s a puzzle why I.Q. scores would matter in this regard. After all, the view that people should diversify their investments, to avoid putting all their eggs in one basket, is widely accepted. It’s not hard to diversify a portfolio or to have someone do it for you.

And another time-proven rule of investing — that people should put a substantial amount of their money in the stock market — might have its detractors, no matter what their I.Q. scores. That is especially possible given the volatility in the financial markets in recent years.

Yet only about half of all American adults have money in the stock market, directly or indirectly. So maybe something else is going on. If people can’t figure out the financial markets on their own, they can entrust their money to professionals or heed professional advice. The real problem may not be that many people lack investing savvy or smarts. Perhaps what they lack is trust, or confidence in whom to trust.

Three economists, Luigi Guiso of the Einaudi Institute for Economics and Finance, Paola Sapienza of Northwestern and Luigi Zingales of the University of Chicago, argued in a paper published in 2008 that many households avoid investing directly in stocks out of vague fears that they might be deliberately misled or cheated. Using results from a survey of households, this time in the Netherlands, the economists showed that those who indicated a high level of trust were 50 percent more likely to invest in the stock market. They were also more likely to have diversified their stock holdings. The paper, titled “Trusting the Stock Market,” was published in The Journal of Finance.

Knowing whom to trust, and relying on those who are trustworthy, is itself an aspect of intelligence. Mr. Guiso and his co-authors cited research that suggested that investment decisions relied significantly on a part of the brain called the Brodmann area 10. This region of the frontal cortex is believed to be associated with our ability to make inferences about others’ preferences and beliefs based on their actions. Such social intelligence seems to reward some people more than others with an ability to put standard investment advice into practice.

Successful investing requires that we judge other people, and it relies on an ability to develop a good model of others’ minds. It requires that we put into perspective recent angry rhetoric against Wall Street and understand that, while some criticisms are surely justified, others are just as surely exaggerated.

Anyone, regardless of background or education, may worry about being misled. The professionals tell us that the stock market is the best place to invest, but such assurances don’t help us when the market swoons. Many pros assured us that housing prices would never decline, either.

But if we can somehow foster more trust in investment professionals, a full spectrum of people — whatever their I.Q.’s — might adopt a more successful approach toward investing.

THE Consumer Financial Protection Bureau, created by the Dodd-Frank Act of 2010 and now under the command of Richard Cordray, ought to be an important vehicle to help bring about such trust, by responding to complaints and making rules that will help restore confidence. The Office of Financial Education, one of its divisions, would seem to have a big role in this effort.

But there is only so much this agency can do. It has a budget amounting to less than $2 for every American adult in 2012, and much of that will go toward activities it is taking over from the Office of Thrift Supervision and other agencies.

The government, as well as those in financial and educational spheres, must think about how we can restore and strengthen ordinary people’s trust in the financial markets. It doesn’t take a high I.Q. to see that it’s in everyone’s interest to get basic financial decisions right.


Grinblatt, Mark, Keloharju, Matti and Linnainmaa, Juhani T., IQ and Stock Market Participation (October 9, 2010). AEA 2010 Atlanta Meetings Paper; CRSP Working Paper; Western Finance Association 2010 Meetings Paper; Journal of Finance, Forthcoming; Chicago Booth Research Paper No. 09-27. Available at SSRN: IQ and Stock Market Participation by Mark Grinblatt, Matti Keloharju, Juhani Linnainmaa :: SSRN

Stock market participation is monotonically related to IQ, controlling for wealth, income, age, and other demographic and occupational information. The high correlation between IQ, measured early in adult life, and participation, exists even among the affluent. Supplemental data from siblings, studied with an instrumental variables approach and regressions that control for family effects, demonstrate that IQ’s influence on participation extends to females and does not arise from omitted familial and non-familial variables. High-IQ investors are more likely to hold mutual funds and larger numbers of stocks, experience lower risk, and earn higher Sharpe ratios. We discuss implications for policy and finance research.

[Michael Scally MD]

WSJ - Free 24 Hours
Business News, Finance News, World, Political & Sports News from The Wall Street Journal - Wsj.com

[Michael Scally MD]

IMO, today is a good day for some bargains.

[Michael Scally MD]

Government Poised To Provide A Huge Boost To Healthtech Startups
Government Poised To Provide A Huge Boost To Healthtech Startups | TechCrunch

Currently, the federal government is poised to level the playing field for healthtech startups. An unprecedented wave of innovative healthtech startups has been developing over the last few years. You can see them at conferences such as Health 2.0, TechCrunch Disrupt, TEDMED and demo day events that Blueprint Health, Healthbox, Rock Health and StartUp Health host. Nonetheless, the health sector may be the single most challenging arena for startups.

[Michael Scally MD]

Bob Farrell was a legend at Merrill Lynch & Co. for several decades. Farrell had a front-row seat to the go-go markets of the late 1960s, mid-1980s and late 1990s, the brutal bear market of 1973-74, and October 1987′s crash.

He retired as chief stock market analyst at the end of 1992, but continued to occasionally publish. Rumor has it for a humongous donation to Farrell’s favorite charity, you can get on his very exclusive email list.

Marketwatch gathered some of Farrell’s more famous observations, and republished them as "10 Market Rules to Remember."

1. Markets tend to return to the mean over time

When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people’s heads. It’s easy to get caught up in the heat of the moment and lose perspective.

2. Excesses in one direction will lead to an opposite excess in the other direction

Think of the market baseline as attached to a rubber string. Any action to far in one direction not only brings you back to the baseline, but leads to an overshoot in the opposite direction.

3. There are no new eras — excesses are never permanent

Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots. Look at how far the emerging markets and BRIC nations ran over the past 6 years, only to get cut in half.

As the fever builds, a chorus of "this time it’s different" will be heard, even if those exact words are never used. And of course, it — Human Nature — never is different.

4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways

Regardless of how hot a sector is, don’t expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction — eventually. comes.

5. The public buys the most at the top and the least at the bottom

That’s why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing.

Watch Investors Intelligence (measuring the mood of more than 100 investment newsletter writers) and the American Association of Individual Investors survey.

6. Fear and greed are stronger than long-term resolve

Investors can be their own worst enemy, particularly when emotions take hold. Gains "make us exuberant; they enhance well-being and promote optimism," says Santa Clara University finance professor Meir Statman. His studies of investor behavior show that "Losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks."

7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names

Hence, why breadth and volume are so important. Think of it as strength in numbers. Broad momentum is hard to stop, Farrell observes. Watch for when momentum channels into a small number of stocks ("Nifty 50" stocks).

8. Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend

I would suggest that as of August 2008, we are on our third reflexive rebound — the Januuary rate cuts, the Bear Stearns low in March, and now the Fannie/Freddie rescue lows of July.

Even with these sporadic rallies end, we have yet to see the long drawn out fundamental portion of the Bear Market.

9. When all the experts and forecasts agree — something else is going to happen

As Stovall, the S&P investment strategist, puts it: "If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?"
Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.

10. Bull markets are more fun than bear markets

Especially if you are long only or mandated to be full invested. Those with more flexible charters might squeek out a smile or two here and there.


Bob Farrell’s 10 Rules for Investing | The Big Picture