The Human Element in Investment Decisions

zshapira_articleExcerpt - Making strategic investment decisions is not a task that should be taken haphazardly. Managers and MBA students spend time studying appropriate decision criteria such as net present value (NPV) to aid in making profit-maximizing decisions. However, in discussing investment decisions with practicing managers over the years, we sensed that managers often systematically deviated from profit maximization. In particular, we noticed that managers often equate changes in scaled profit measures (e.g., changes in return on investment [ROI]) with changes in total profits (i.e., marginal profits). This causes them to deviate systematically from profit maximization with respect to strategic investment decisions (e.g., research and development [R&D] investments, capital investments, acquisitions) by avoiding investments that increase total profits yet are less profitable than their average current investment. In other words, current levels of average profit create an anchor by which investments are assessed. This decision-making behavior, subtle but critical, was recently demonstrated by NYU Stern Management Professor Zur Shapira.

Professor Shapira, along with Carlson School of Management Professor J. Myles Shaver, devised studies that teased out this counter-productive pattern and described it in “Confounding Changes in Averages With Marginal Effects: How Anchoring Can Destroy Economic Value In Strategic Investment Assessments.”

Read the full paper here.

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Professor Edward Altman’s Z-Score Measure is Featured

The following is an excerpt from USA Today:

ealtmanEver hear of the Altman Z-Score? If not, it’s time to start – just ask investors in Caesars Entertainment (CZR).

Caesars’ shares Thursday are down nearly 8% to $11.72 on news one of the casino operator’s units plans to file for Chapter 11 restructuring. It wasn’t a surprise to investors paying attention.

An easy-to-use financial measure, invented decades ago by New York University Stern School of business professor Edward Altman, was designed to be an early warning signal of companies in major trouble. Professional investors swear by the Altman Z-Score and the number has proved prescient, yet again. Oddly and regrettably, many individual investors don’t know about it – even though it was designed to make financial warnings available to all.

Read the full article here.

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MSRM Alumni Highlight: Dante Disparte Class of 2014, Founder and CEO of Risk Cooperative

DanteRisk Cooperative is a specialized strategy, risk and capital management firm founded around the question of what people would do in a world without risk? With this guiding principle, Risk Cooperative addresses the most pressing strategic questions of market expansion and innovation, strives to remove risk from management decisions and works to level the playing field for small to medium-sized enterprises (SMEs) in the capital markets. Headquartered in Washington, D.C., alongside the American Security Project, Risk Cooperative stands on three often separate disciplines of strategy, risk and investment, bringing them together as a part of our methodology to unlock value from risk.

Founded in 2014 by a team of risk, strategy and capital management executives, Risk Cooperative operates across a wide range of industries helping them gain access to global markets and innovate. Risk Cooperative is a licensed brokerage across the full spectrum of risk and insurance solutions.


Prior to forming Risk Cooperative, Mr. Disparte served as the managing director of Clements Worldwide, a leading insurance brokerage with customers in more than 170 countries. Mr. Disparte is a specialist in strategy and risk reduction through the design and delivery of comprehensive risk solutions of worldwide scope. He is credited with designing the world’s first card-based life insurance program for the United Nations, a plan that has placed more than a half billion USD of risk with the markets in more than 150 countries. This innovation was heralded as one of the top product innovations of 2011 by the MENA Insurance Review. Mr. Disparte serves as the chairman of the board of the Harvard Business School Club of Washington, D.C., and on Harvard Business School’s global alumni board. He is a founding member of the Business Council for American Security and an advisory member with the American Security Project.

Dante has also written recent pieces published in Foreign Policy Digest, The Hill blog and the American Security Project.

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The Best Defense to Litigation Is a Good Bank Culture by Professors Ingo Walter and Roy Smith

The following is an excerpt from an op-ed in American Banker written by Professors Ingo Walter and Roy Smith:

Smith-and-Walter_articleOf all the financial markets that should be resistant to manipulation, foreign exchange surely tops the list. With $5.3 trillion traded daily by thousands of buyers and sellers across the world, this should be one hyper-efficient market.

And yet six major banks recently agreed to a $4.3 billion settlement with U.S., U.K. and Swiss authorities over charges that the banks had failed to prevent traders from attempting to manipulate the market. In all three countries, it is possible that criminal charges against individuals may follow.

The settlement is the latest in a long line of massive legal actions that hold banks responsible for the activities of their employees. Prosecutorial efforts to hold shareholders liable for myriad problems that bank employees have caused seem to have no end in sight. The goal of these actions is to prompt boards and their managers to reform banking cultures. If banks want to avoid more floods of litigation in the future, they’ll have to act fast.

Read the full article here.

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Professor Nouriel Roubini Shares his Predictions for the Economy in 2015

The following is an excerpt from Yahoo Finance:

In February of 2013, Nouriel Roubini, New York University professor and chairman of Roubini Global Economics, told Yahoo Finance that the U.S. was about to enter an asset bubble that would be “bigger than the one we had in 2003-06.” This was a huge departure for Roubini whose typically negative economic outlook earned him the affectionate nickname, Dr. Doom. Roubini’s general outlook was correct.  Since February of 2013, the S&P 500 (^GSPC) has increased by nearly 39%.

But bubbles burst. So will we continue to see double digit returns in 2015? We’re currently in the mid-late stretch of this boom, “so next year we’ll see economic growth and easy money. This frothiness that we’ve seen in financial markets is likely to continue from equities to credit to housing,” says Roubini. He predicts an eventual crash, but not for at least a few years. He believes that valuations in some markets are already stretched and will continue to stretch until seeing a shakeout around two years down the line, in 2016.

Roubini is particularly worried about the increase in issuance of junk bonds. Low interest rates and an increased thirst for high-risk speculation have led to the junk bond market to being bigger than it ever has been. He also sees equities as a potential list, the P/E ratio is slightly above average but he thinks that tech and social media sector valuations are very stretched. “Throughout the world, we have low growth, low inflation and easy money. And where is liquidity going? Not in real credit or to the real economy, it’s leading to asset deflation,” he says.

Read more.

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NYU Stern Volatility Institute Launches at NYU Shanghai

vlabNYU Shanghai is celebrating the launch of the Volatility Institute at NYU Shanghai. The Volatility Institute at NYU Shanghai, located at the NYU Shanghai Pudong Academic Building in the heart of Liujiazui, Shanghai’s financial center, aims to create opportunities for research focused on both the Chinese financial markets and markets around the world.  It also seeks to facilitate collaboration and community-building among market participants and academic researchers within China and abroad, and to help improve global financial markets by providing timely financial information and analysis to academics, practitioners, regulators and policy makers through innovative technology platforms and services.

The Volatility Institute at NYU Shanghai  will operate in close partnership with and as an extension of the  Volatility Institute at New York University Stern School of Business, under the direction of Nobel Laureate and volatility expert Robert Engle, and with generous support from the Pudong Institute of Finance and NYU Shanghai. The Volatility Institute, created by Professor Robert Engle at New York University Stern School of Business in March 2009, has the over-arching mission to develop and disseminate cutting-edge research on risks in global financial markets and in financial econometrics that will ultimately contribute in a meaningful way to international financial policy.

One of the research tools of the Volatility Institute is the Volatility Lab (V-Lab), which provides real-time measurement, modeling and forecasting of financial volatility, correlations and risk for a wide spectrum of assets. V-Lab blends together both classic models, including Engle’s award-winning ARCH model, as well as some of the latest advances proposed in the financial econometrics literature. Its aim is to provide real-time evidence on market dynamics for researchers, regulators, and practitioners. The V-Lab currently runs 28900 analyses on 6053 datasets, producing a total of 63766 series each day.

Read the full press release here.

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Benchmarking the European Central Bank’s Asset Quality Review and Stress Test: A Tale of Two Leverage Ratios

The following is an excerpt from a recent paper written by NYU Stern Professor Viral Acharya and Sascha Steffen:

Viral Acharya, NYU SternIn November 2014, the ECB published its asset quality review (AQR) and comprehensive assessment (ECB 2014), as well as capital shortfall estimates based on its stress test. These results differed widely from our earlier assessment (Acharya and Steffen 2014). Indeed, the two shortfall estimates are negatively correlated.

Calculations that we have recently completed suggest that the divergence between our numbers and those of the ECB can be explained by the continued reliance on static risk-weights in the regulatory assessment. In fact, using the projected losses in the adverse scenario employed by the ECB and applying a different (non risk-weights based, i.e. simple) leverage ratio gives results much closer to ours.
Shortfall measures

We compare two measures of capital shortfall, the “regulatory shortfall measure” as used by the ECB, and SRISK as calculated by NYU Stern School of Business Volatility Lab. Both concepts are conceptually similar as they estimate losses in a stress scenario and determine the capital shortfall between a prudential capital requirement and the remaining equity after losses.

Read full article as published by VoxEU

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MS in Risk Management Alumni Event Featured on the NYU Stern Homepage!

Engle Event 1Nobel Laureate and NYU Stern Professor Robert Engle spoke to MS in Risk Management students and alumni on his research and future global collaborations with the NYU Stern Volatility Institute.

On November 7, MS in Risk Management Academic Director Ingo Walter and Nobel Laureate and NYU Stern Professor Robert Engle discussed Professor Engle’s research with the NYU Stern Volatility Laboratory (V-Lab) and the global outlook of his measures.

Professor Engle spoke about recent market volatility, the results of European banking stress tests and volatility in the Chinese economy.  He noted that the Volatility Institute is in the process of opening a second location in China. “The idea is to create a global research community,” he said, through technology platforms such as the V-Lab.

Professor Engle also stated that having an “impact on application to firms and regulators is a measure of success.”

See the post here.

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MSRM Alum, Andrew Koh, to Speak at the 2014 RiskMinds Asia Conference

N12220351 KohRiskMinds Asia is part of the Global RiskMinds Event Series, one of the largest and most senior annual gatherings globally. The fourth RiskMinds Asia event was held in Hong Kong in 2013, and brought together over 65 of the most senior risk practitioners, academics and economists which gave delegates a comprehensive view of the latest trends in risk management.

In addition to determining the future for risk management at a very high level, RiskMinds Asia also offers in-depth coverage of all the below risk management topics and more:

  • Market Risk & Stress Testing
  • Credit Risk Modelling & Management
  • Liquidity Risk Management
  • Economic & Regulatory Capital Allocation
  • Operational Risk Management
  • Strategic, Regulatory & Enterprise-Wide Risk Management

The 2014 conference takes place November 17-20, 2014 in Singapore. For more information, please visit the RiskMinds Asia website here.

Andrew Koh is an alum of the MS in Risk Management Program, Class of 2010 and the MS in Global Finance Program, Class of 2008. Andrew is a thought leader, risk and governance expert. He has presented to boards, senior management and industry experts from central banks, government agencies, financial institutions and corporations in major conferences. Andrew has almost 25 years working in banking, finance, cards and payment sectors’ risk and governance related roles.

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NYU Stern Professor Edward Altman’s Research on Chapter 11 Bankruptcy is Cited

The following is an excerpt from the Wall Street Journal:

ealtmanThrough data collected from 1984 to 2013, New York University Professor Edward Altman found two factors are most indicative of a debtor filing again: its profitability upon its first emergence and its leverage. The data reveals that for recidivist debtors, their financial profiles upon exiting their first bankruptcy tended to resemble that of other firms as they entered bankruptcy—namely too much debt and too much leverage. This data supports what restructuring professionals have experienced anecdotally. Sometimes a plan is premised on the best available recapitalization structure, which is not necessarily the right structure.

Read the entire article here and additional coverage in the Wall Street Journal.

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