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  • Boston Fed: The Relationship Between the Housing Crash and Confidence in Real Estate and the Economy

    In a new paper for the Center for Behavioral Economics Federal Reserve Bank of Boston , economists Anat Bracha and Julian C. Jamison , explore how the housing crisis and the Great Recession have affected Americans' attitudes toward home ownership. They sifted through recent Michigan Survey of Consumers data, and found that direct experience matters quite a bit: Our main results are as follows. People who lived (in 2008) in ZIP codes that were hardest hit by the crash in housing prices, as compared to those in areas that were least severely affected, are significantly more likely to be confident about owning a home if they are older (above 58 in our sample) but are significantly less likely to be confident about owning a home if they are younger. These results control for demographics, current absolute house price levels, and other factors, but importantly they are concentrated in the approximately one‐third of our sample who report that either they or someone close to them actually lost a large amount of money in real estate during the crisis. We argue that the latter result implies that mere information is not enough, and instead something like hands‐on experience is required to change confidence in home ownership. This is because presumably almost everyone was exposed to multiple media headlines about what had happened in their neighborhood and around the country, and yet they do not show a similar divergence in confidence. In terms of the striking age differential, one possibility is that relatively younger respondents were indeed more malleable, and hence they internalized the sharp drop as a regime change. In the new perceived regime, housing is an insecure investment and thus (relatively) to be eschewed. Available evidence from economics and psychology further suggests that such a change is likely to be persistent. On the other hand, older respondents – whose models of the world are harder to alter – see the drop in house prices as a temporary dip in a stable long‐term upward trend, making it a particularly good time to purchase. Of course it is also possible that older consumers buy homes more for consumption and less for investment, although the wording of the question was explicitly designed to hone in on general beliefs and away from individual circumstances. In their research, Bracha and Jamison also found that despite all the losses in real estate over the last four years, few Americans see renting as a desirable option: Read Shifting Confidence in Home Ownership: The Great Recession here . (Hat tip Binyamin Applebaum, NYT )

  • McKinsey Survey: Executives Want to Invest More, But Decision Biases Lead to Risk Aversion

    Companies have the cash, and there are low-cost options out there, and yet corporate investment is down. In the latest McKinsey Quarterly , Tim Koller , Dan Lovallo , and Zane Williams try to make sense of this "puzzle." In sharing some data from a recent McKinsey survey, the authors argue that executive know that they should be investing more now. Take a look: So what is the holdup? The authors point to the usual suspect--the lagging, uncertain economy. But they also put weight on "decision biases." Generally, the most common biases that affect decisions could be traced to the past experiences of those who make or support a proposal. The confirmation bias, for example, was the most common one—decision makers focus their analyses of opportunities on reasons to support a proposal, not to reject it. Depending on the proposal, this bias can result in decisions to underinvest or not to invest at all just as easily as in decisions to overinvest. Another common bias was a tendency to use inappropriate analogies based on experiences that aren’t applicable to the decision at hand. A third was the “champion” bias—managers defer more than is warranted to the person making or supporting an investment proposal than to merits of the proposal itself. The presence of behavioral bias seems to have a substantial effect on the performance of corporate investments. Respondents who had reported observing the fewest biases were also much more likely to report that their companies’ major investments since the global financial crisis began had performed better than expected. By contrast, those who reported observing the most biases were more likely to report that their companies’ investments had performed worse than expected. Those biases then lead to more conservative thinking, and loss aversion. Read A bias against investment? here .

  • Significant Growth in China's Outward Investment in Europe

    Over the last decade, China has expanded its investments in other economies. The bulk of that investment has been in Asian and African economies. In comparison, China has put very little into Europe. But as The Economist points out in this multimedia slideshow, China's investment in Europe is "gathering pace": For more of The Economist's coverage of Chinese businesses expanding into the West, click here .

  • McKinsey Quarterly: Global Growth and the Need for Capital

    Signs are good for growth in the global marketplace, largely because of the prospects for emerging markets like India and China. In the latest McKinsey Quarterly , Richard Dobbs , Susan Lund , and Andreas Schreinerare warn that there is some reason to be concerned about all that growth. Their primary concern: the availability of capital to fuel all the growth. Growth depends on investment, which depends on capital. Take a look at the McKinsey Global Institute's projections for global demand on investment over the next 20 years: Dobbs, Lund, and Schreinerare note that when economies become more robust, the savings rate declines. And therein lies the problem for investment capital: The capital needed to finance this investment comes from the world's savings. Over the three decades or so ending in 2002, the global saving rate (saving as a share of GDP) fell, driven mainly by a sharp decline in household saving in mature countries. The global rate has increased since then, from 20.5 percent of GDP in 2002 to 24 percent in 2008, as household saving rebounded in mature economies and many of the developing countries with the highest rates-particularly China-have come to account for a growing share of world GDP. Our analysis suggests, however, that the global saving rate is not likely to rise in the decades ahead, as a result of several structural shifts in the world economy. First, China's saving rate will probably decline as it rebalances its economy so that domestic consumption plays a greater role. In 2008, China surpassed the United States as the world's largest saver, with the national saving rate reaching over 50 percent of GDP. But if China follows the historical experience of other countries, its saving rate will decline over time as the country grows richer, as happened in Japan, South Korea, Taiwan, and other economies (Exhibit 2). It is unclear when this process will begin, but already the country's leaders have started to adopt policies that will increase consumption and reduce saving. 4 If China succeeds at increasing consumption, it would reduce the 2030 global saving rate by around two percentage points compared with 2007 levels-or about $2 trillion less than China would have accumulated by 2030 at current rates. Read How the growth of emerging markets will strain global finance here .

  • The Challenges of Being a Private Entrepreneur in China's 'Thriving' Economy

    As those of us in the West are exposed to more stories of successful state-owned businesses in China, Gady Epstein --Beijing bureau chief for Forbes -- reminds us that the spoils of "authoritarian state-let capitalism" have not reached everybody in the world's largest country. There are plenty of losers, Epstein notes, among China's private entrepreneurs. And it appears that the best way to operate as a private investor is to try to fly under the radar, and that means not being too ambitious: Indeed, the best way to stay alive as a private entrepreneur in an industry the state dominates — and there are many of those — is to stay small. “Our principle is that we don’t make trouble for the SOEs, and they don’t consider us competition,” Wang Junjin, chairman of JuneYao Airlines, told me. “Don’t do the things they don’t like. Don’t make them think you’re going to squeeze them out of the market. You cannot step on others to climb up.” Not exactly the capitalist credo you might pick up in business school. In any case, it is difficult to expand without financing, and Chinese state capitalism is terrible at lending to private businesses. This was glaringly true during the financial crisis: While state banks made headlines globally for their gigantic lending spree to mostly state-owned enterprises, thousands of private companies faced bankruptcy, desperate for underground loans at high interest rates ( see “Chinese Credit” for more on where such companies turn for cash). Bank of China Chairman Xiao Gang explained the warped but very rational incentive system that drives bank lending in his commentary last week, “Don’t blame it on the government,” writing: While expanding their loan portfolios, Chinese banks are smart enough to take the risk-averse approach and to focus on lending to large State-owned enterprises (SOEs). These SOEs often enjoy monopoly in their sectors and favorable conditions in an industry and enjoy quasi-government credit ratings. In other words, banks figure the large SOEs won’t go bankrupt and default on their loans. It is not so much that they are too big to fail. They are too government to fail. That was one reason why the president of a third struggling private airline, Okay Airways, told me, “The SOEs laugh at us, ‘Yeah, we’re the government’s companies, of course the government will help us’.” Read The Winners And Losers In Chinese Capitalism here .

  • FT: Investment Lessons in Baseball

    Kevin Youkilis had three RBI yesterday as the Boston Red Sox beat the New York Mets, and he is off to a strong start as one of the top players in Major League Baseball. But this is not a Boston-centric post to brag about the Sox moving into first place. Rather, Youkilis is the centerpiece of this John Authers Financial Times video explaining what baseball can teach investors about strategy. The key lesson: Framing. Authers says, "If you frame an issue wrong...you may well miss something that is hidden in plain sight." Click here to watch the video.

  • The Impact of the Recession, by Age Group

    The Pew Research Center has some interesting data on how the recession is hitting different age groups in the US. And it looks like Americans aged 50-64 are taking a big hit. In contrast, older Americans--65 years and up-- "are living through what for them has been a kinder, gentler recession" They are less likely than younger and middle-aged adults to say that in the past year they have cut back on spending; suffered losses in their retirement accounts; or experienced trouble paying for housing or medical care. They're more likely to report being very satisfied with their personal finances. And they're less likely to say the recession has been a source of stress in their family. Americans between 30 and 64 have watched their investments erode at a much greater rate than older and younger age groups (see graph at right), with Boomers--or members of the "Threshold Generation" having suffering the biggest losses in retirement accounts: They are the most likely to say they won't have enough to live on in retirement. And nearly half (46%) of 50 to 64 year olds who are not yet retired say that in the past year they've considered delaying their eventual retirement, a higher share than says the same within any other age group. Two-thirds of the Threshold Generation say they have lost money in the past year in investment accounts, compared with slightly more than half of 30- to 49-year-olds and 43% of those 65 or older. Only about three-in-ten adults under the age of 30 experienced losses, in large part because proportionately fewer young people have invested in stocks, mutual funds or 401(k) programs. Members of the Threshold Generation also are more likely to have suffered the biggest losses. Nearly one-in-seven (14%) say their investment or retirement holdings declined more than 40% in just the past year, compared with 5% of older adults, 7% of those under 30 and 9% of adults ages 30 and 49. Read the full report here .