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Sunday, August 19, 2007

Coffe Cans And Cognitive Bias

Over at Calculated Risk Tanta posted a link to this paper discussing cognitive bias in assessing risks. It's quite interesting. So far all I have concluded is that I am truly weird and that Stanford undergraduates really aren't that smart. Every time it gives an example of how people think, I find that I don't think the way the majority does. True, I'm accurate, and they're not. Maybe this explains why what was so obvious to me was not to others.

But the thing is, I have met numerous people who are not in the finance business in any way shape or form who did understand what was coming. Over the past year, for example, I have met several business owners who were literally taking proceeds that they would normally deposit and depositing them instead in the classic coffee can buried in the back yard. Their fear was that the instability would result in bank closures and shutdowns, and so the lost interest on the money meant less to them than the security of knowing that they could cover a few months of operational costs in turmoil.

Maybe the reality is that finance types and Stanford undergraduates are weird, and that the rest of us are normal. (Note, I would suggest not the coffee can route but the spreading your money around route.)

Here's a little risk management gem;

If the odds are 1,000,000 to 1 and the event happens, then the odd weren't 1,000,000 to 1.

How about a nice little treasury bill that pays interest. Plus you don't need to worry where you buried the can or find the dog dug it up and ate the $$
FDIC insurance is just as good. T-Bills are not quite day-to-day accessible.

Anyway, my money isn't in a coffee can. I mentioned this as evidence that the "unforeseeable" event was anticipated by a number of people.
PS: I'd be concerned about the wife running off with the coffee can!!!
I wonder if these business owners weren't really keeping some cash to themselves on a regular basis long before this began? Any business run on cash is unlikely to deposit all of it's earnings for tax reasons.

So maybe they are putting a different spin on what they had been doing throughout the bubble? People tend to want to make themselves look smarter than they really are, you are relying on a type of self reported data there :)
No - these were actually honest people keeping straight books. They knew what I do. I am a straight arrow. They were reporting their earnings on the books and taxes, but not depositing all the cash in the bank. My guess is that actual crooked businesses might be less afraid, because of course they do in effect have more margin.

One of them wanted me to come work for him.... The fear has been in the air for at least a year now.

At the smaller banks it started in 2005, but it surprises me that the fear of a bank crash was going on at this level.
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