Insights From Behavioral Finance: Parameter Uncertainty

Although behavioral finance may at first seem to be far removed from the kind of rigorous analysis required by the discipline of value investing, it is actually at the core of what value investing is all about. After all, one of the central tenets of behavioral finance is that humans are not mechanical utility maximizers, whose actions can be predicted by models that presuppose rational action. Rather, they are subject to a wide range of emotional and cognitive biases, a topic that we have explored previously.

Fuzzy models

This sentiment is quite similar to classic value investing metaphors such as “Mr. Market” and the concept of irrational exuberance. Indeed, value investing presupposes the market can be highly irrational at times, as this is what allows diligent practitioners to pick out undervalued stocks. Another key insight from behavioral finance is that of parameter uncertainty – the inherent fuzziness of financial models.

The implications of parameter uncertainty are twofold. First, it makes it very difficult to put an exact number on what the value of a business should be. Now, for most value investors, this is not a big issue. For instance, Charlie Munger (Trades, Portfolio) has often said he greatly prefers to have a range of possible values for a business, rather than a specific number.

There are many reasons why this is preferrable. For one, it is easier to do. For another, it enables an investor to establish an adequate margin of safety. And finally, it is simply the more intellectually honest thing to do. With this in mind, the exact price targets set by so many sell-side analysts begin to look suspicious. Exact numbers convey certainty and authority, which is why they appeal to so many people. But they are no better, and are often far worse, than ranges. By tying ourselves to exact targets, we narrow our margin of error and open ourselves up to a greater possibility of being wrong.

The categorization problem

The second implication of parameter uncertainty concerns the problem of categorization of investment targets. In a world where corporations are based in many different countries, how does one ascertain the risk associated with any given company? In 1990, Robert Reich, who would go on to be U.S. Labor Secretary from 1993 to1997, wrote an article in the Harvard Business Review titled, “Who Is Us?” which examined this exact question. Is a U.S.-based and listed company that conducts most of its business in the developing world more representative of the U.S. market than a foreign company that primarily employs American workers? Which is riskier?

The truth of the matter is different individuals and institutions will pick their own definitions for these things. Moreover, they will have to grapple with problems like whether Amazon (NASDAQ:AMZN) is a cloud computing company or a retailer and whether or not China should still be considered an emerging market. Of course, each will come up with their own answers. The problem is when so many different market participants have different ways of viewing the world, it is somewhat difficult to build reliable predictions of how they will react in the future.

Summary

Behavioral finance has a lot to offer value investors. While traditional thought holds that all market participants share broadly the same goals, outlooks and decision-making calculi, the truth of the matter is all of this is incredibly subjective. Parameter uncertainty is a particularly good example of this as it touches on so many different aspects of investing. As investors, there is no way to overturn uncertainty – so the best thing to do is embrace it, not ignore it.

[“source=gurufocus”]

Researchers Find New Insights Into Role of Little-Understood Placenta

placenta health illustration

More than 15 percent of women in developed countries suffer from pregnancy complications associated with the placenta, the disk-shaped organ that sustains a growing fetus. Now researchers find the placenta adapts when nutrients are scarce. The discovery identifies possible targets for intervention, the researchers say.

“Pregnancy complications are [often] linked to poor placental growth and function,” said Amanda Sferruzzi-Perri, a physiologist and developmental biologist at the University of Cambridge in the United Kingdom, who led the new research. “However, we lack information on what determines how well the placenta grows and functions to support fetal growth during a healthy pregnancy, let alone when the mother is challenged by a suboptimal environment.”

Pregnancy Problem

The placenta is a temporary organ that sprouts a baby’s umbilical cord. The organ then provides the oxygen and nutrients to the growing fetus. It also synthesizes hormones and other molecules necessary for pregnancy and pulls waste products from the baby’s blood. Beyond these fundamental functions, however, researchers know little about what makes for a healthy placenta. But if a placenta isn’t working properly, it can compromise the fetus’ development.

One in 10 infants are born small from growth restrictions in the womb. And those newborns face a higher risk for death in their first few weeks of life, followed by a lifetime of poor health. Hypoxia, an insufficient amount of oxygen getting to tissues, is the chief factor behind growth-restricted babies born at high-altitudes, but is also a common feature of pregnancy complications at sea level.

Sferruzzi-Perri and her team wanted to find out what factors contribute to a healthy placenta during a normal pregnancy, as well as what hinders the organ’s function during complications. The researchers assessed how well mitochondria, the cell’s energy factories, use oxygen and nutrients to produce energy in the placentas of pregnant mice in their third trimester. Some of the mice lived in conditions that mimic a high-altitude environment about 12,000 feet above sea level.

Mighty Mitochondria

In the final stage of labor, the placenta comes out. (Credit: ChameleonsEye/shutterstock

“We found that in the placenta, mitochondria alter their function during the course of pregnancy to best support the needs of the rapidly growing fetus,” Sferruzzi-Perri said.

The mitochondria used more oxygen in earlier stages of gestation than near term, the team reported online January 17thin the journal Proceedings of the National Academy of Sciences. The results suggest mitochondria are more active when the placenta is growing quickly. It then switches gears closer to term to shuttle oxygen and nutrients to the growing fetus.

The researchers also found that the mitochondria compensate for when mothers are not getting enough to eat or are in low-oxygen environments. “When the placenta is not able to compensate for such challenges then this can lead to complications such as fetal growth restriction,” Sferruzzi-Perri said.

“The next step would be to find ways to target mitochondria in the placenta to alter their function and improve pregnancy success in women where we know the outcome might be poor,” she added.

[“source=discovermagazine”]

Weather And Business: Insights And Ideas For Weathering The Storms

“How about this weather we’re having?” “Can you believe how cold it is?” “The weather made my commute just brutal today!” Weather dominates small talk in the United States, and there has been a lot of research done on how weather influences behavior and emotions. But, weather also has strong financial impact; it is estimated that nearly 20% of the U.S. economy is directly affected by the weather, and it impacts the profitability and revenues of many industries, including agriculture, energy, events, construction, travel and others. In a 1998 testimony to Congress, former commerce secretary William Daley stated, “Weather is not just an environmental issue, it is a major economic factor. At least $1 trillion of our economy is weather-sensitive.”

This regular column will focus on business and its relationship with weather. Our economy is dependent on weather, and increased weather volatility has forced businesses to be more proactive in including weather insights into operational planning.  As weather-forecasting technology continues to improve, businesses are finding it easier to be more proactive in making decisions related to weather.

Of the more than 10,000 practicing meteorologists in the U.S., there is strong representation in the private sector. A meteorologist may be found in a variety of positions, ranging from weather forecasting duties, to non-forecasting roles like sales, marketing and business analytics. The job outlook for meteorologists is estimated to grow by 12%, which is almost 40 percent faster than the national average.

Public safety is a very visible example of weather forecasting for business. But there are many other ways weather plays a role in business. For some companies, it’s about risk management. For retailers, meteorologists help develop strategies that address how weather impacts purchasing trends. Meteorologists can help with business planning and developing strategies for expansion geographies. The impact of weather on business is real, and as forecasting and other technology continues to evolve, the weather-based decision making within business will also evolve.

Top of mind for so many folks right now is winter and safety, particularly as yet another storm rolls into the northeast. Severe weather will impact flights, road traffic, agriculture, the delivery of energy and the general safety of the public. When thinking about the current winter conditions and the impact on traffic and road conditions, it’s expected the plows will keep the roads clear, but there’s a lot of planning needed, not only to effectively keep the roads clear, but to also effectively manage budgets. In Minnesota for example, Anoka County is responsible for keeping 1,100 lane miles of roads clear with the work of 40 full-time, and 20 on-call, maintenance workers. These crews rely on the accuracy of each weather forecast and a big benefit of leveraging those forecasts is the effective use of budgets. Anoka County weather forecasts have specific pavement forecasts, which help the team schedule crews appropriately. The county is required to give night crews a 24-hour notice, and those crews are paid a premium rate for working after hours. Having an accurate forecast helps the department avoid scheduling workers for night shifts unless it’s necessary, ultimately protecting the bottom line.

Pavement forecasts also help the department use other resources efficiently. When freezing rain is predicted, it uses this information to help determine the optimal time to salt the roads, in turn, avoiding unnecessary applications. The department also knows the best time to pretreat roads, allowing it to avoid sending out a second shift which increases safety for everyone on the road. As this story from Anoka County, Minnesota, shows, there are real economic implications to everyday weather events.

[“source=forbes”]

Maruti Suzuki’s Electric Wagon R Prototype Spotted Testing

Maruti Suzuki India is currently testing 50 prototype electric vehicles across India View Photos

Maruti Suzuki India is currently testing 50 prototype electric vehicles across India

Maruti Suzuki India is currently testing its electric cars in India, and that is in no way a secret. In fact, the company openly announced and flagged-off its electric vehicle fleet for on-road testing in India this October, and we have now come across spy photos of one of these test mules. The car, of course, is in no way camouflaged, in fact, on the contrary, it comes with ‘Electric Vehicle’ printed all around it with graphics and decals to go with the theme. Maruti’s electric vehicle that is on the test is based on the new-gen Wagon R, which was unveiled early this year, and the launch of the production model is slated for some time in 2020.

[“source-ndtv”]