The Paradox of Choice: why more is less - Barry Schwartz (Harper Perennial, 2005)

We live in an economy capable of generating countless variations of a product to meet individual tastes.  The problem arises when we find that we are not capable of managing mentally so many choices.  [153.83]

This book poses an interesting paradox: we live in a world that offers us ever more choice in even our most mundane goods, yet they ability to choose from such a variety makes us less happy with our choices.  Every decision disappoints.  This is particularly true for persons who seek to optimize based on their actions rather than to satisfy some need.

The author invokes a broad range of research in highlighting how too broad a range of choice can lead us to regret decisions because we had unrealistic expectations of the outcome or to constantly compare them with choices not made.  The impact of this paradox is greater stress in our personal lives. 

It also has implications for marketing where product line extension has become the norm (contrary to the warnings of Ries and Trout in the book Positioning of thirty years ago.)  What is a Coke today?  Is it Classic Coke, Coke Zero, Diet Coke...  Schwartz hints that we may become paralyzed by our inability to choose.  Thus, by offering more selection, we get consumers who take no decision or are ultimately dissatisfied with the product they have chosen.

This book is recommended to anyone interested in our consumer society.

Tulipmania - Anne Goldgar (University of Chicago Press, 2008)

A serious review of one of the iconic financial bubbles in European history.  The author suggests that legend has largely shaped our views on its origin, extent, and impact on Dutch society.  [330.949203]

This book re-examines the Tulip bubble of 1636-7.  Its premise is that everything we all have read in Extraordinary Popular Delusions, in Burton Malkiel, and elsewhere is based on flawed documents.  All of these derive from a single 18th century source (or from MacKay who used this same source) that drew its information from 17th century pamphlets.  The pamphlets were written with didactic or moralizing intent rather than as actual history.  They exaggerated the spread of the speculation in society and its economic impacts of the Dutch economy. 

The book asserts that the Tulipmania we all know never really happened.  There was a rise in prices, but the trade was confined to a fairly small community of traders with a high concentration within the Mennonite religious sect.  The records indicate few bankruptcies resulting from the collapse in prices.   The plague in Holland in 1636 led to inherited wealth and a new attitude toward earthly pleasure also encouraged the bubble. 

One interesting financial aspect to the actual trade is that for seven months of the year, the bulbs stay in the ground.  The trade depended heavily on forward markets and prices.  That is why the collapse led to some problems of honor among the merchants - with a forward contract the temptation to renege is high when prices fall.  There is also the problem we saw in the repo fails situation in 2008 when contracts are daisy-chained; one failure to deliver disrupts an entire series of trades. 

The book can be a bit of a long read.  Goldgar, the author, is fairly detailed on the development of tulips as objects of beauty, for the newly prosperous merchant class of Holland in the Golden Age.  She goes then into the society that engaged in the tulip trade and how small this group was and how disputes were settled.  Finally the book begins to address the tulip market.  The main point is that the pamphlets that misled later readers reflected uncertainty about the new social mobility, the rise of new classes and the impact on traditional notions such as value and honor made all the more severe by the stress of dishonored contracts. 

In the end, however, such revisionist history is satisfying.  The book's subtitle "Money, Honor, and Knowledge in the Dutch Golden Age" explains the breadth of the argument.  It makes more sense of what is usually cited as simply the madness of crowds.

This book is recommended and highly recommended for readers with an interest in art history and Dutch culture.

End the Fed - Ron Paul (Grand Central Pub., 2009)

A rant by an author who does not accept the basics of banking and uses selective history to advance an argument of pure Austrian school theory.  [332.110973]  

This short book takes only a few hours to read.  To do so, however, is to waste those few hours.  If you know something about banking, money, macroeconomics, or the Federal budget process, you will not learn anything from this book.  If you do not know these things, you will not learn them here.  The more disturbing fact is that the author was the chair of the House Subcommittee on Monetary Policy and Technology.  

The book presents no logically constructed model or argument as to why the economy would be more stable without the Fed.  He generally ignores historic periods when the U.S. did not have a central bank.  His only argument is that prices have gone up since 1913 - a post hoc, ergo propter hoc argument blind to price movements before then.  He has a fascination with the Exchange Stabilization Fund, a $20 billion Treasury fund (small by the standards of the U.S. economy - the Treasury often borrows 3 to 4 times that amount in Treasury bills each week) that he suspects is being used to manipulate global markets.  A lot of the book is a string of hypotheses and conspiracies.  He opposes the use of fractional reserve banking; a concept that dates to the Renaissance. 

The book seems to be quite popular, but I have no idea why.  To read this book is to feel trapped at a family Thanksgiving dinner at which your great uncle, who has recently discovered the internet, holds forth for hours on things he has learned online.  There are too many "it could be that ..." types of assertions.  This book is for true believers who have no need of reason or facts.

This book is not recommended at any level.

Making Sense of the Dollar - Marc Chandler (Bloomberg Press, 2009)

The Chief Foreign Exchange Strategist at Brown Brothers Harriman takes a critical look at ten myths about the balance of trade, the labor market, and globalization and the dollar. [332.4560973]

Marc Chandler takes the reader through a critical review of ten myths about exchange rates, the dollar, and international trade in a well-written 200 pages.  The book might have been suitably named, "Against the New Mercantilism."  The author completely takes apart the commonly held picture of a world in which the U.S. runs huge trade deficits that lead to an accumulation of dollars overseas that will weaken the U.S. standing in the world and that its manufacturing can be saved only by a weak dollar policy.  In every point, Chandler presents a fresh perspective to show how the common view is wrong.  

His first key point is that trade statistics do not capture how American firms compete in global trade.  Rather than producing everything in the US and shipping finished goods, US firms establish foreign subsidiaries to produce locally.  Much of what is measured in trade statistics is actually intra-firm movements of goods in production.  This means that trade data understate US competitiveness.  His second point is that dollars overseas serve more functions than simply being used to purchase goods made in the US.  This strikes at the commonly held notions of the proper exchange rate or the role of the dollar in the world economy.  Finally, he addresses the impact of institutions on the development of markets in modern societies.  This includes an insightful look at the myth that there is only one way to capitalism. 

The book is a fresh and much-needed antidote to the facile assertions about the US economy and its future in global trade.

This book is highly recommended.

And the Money Kept Rolling In (and Out) - Paul Blustein (PublicAffairs, 2005)

A history of the collapse of the Argentinian economy during its currency crisis of 2001.  The question is how could a country that seemed to live by the Washington consensus and was the darling of investment banks suddenly fall so far and so fast?   [330.98207]

Over the course of ten years, Argentina went from being the darling among emerging markets to a shattered economy.  The author suggests that much of the damage may have been self-inflicted, but that it was greatly helped along this path by policy decisions and interference by the IMF, the US Treasury, and the financial markets and banks.  These policies helped keep Argentina on an unsustainable path for too long before switching to a wrenchingly painful policy about face.

Argentina came out of the ruinous inflation of the late-1980s by adopting a rigid convertibility scheme of 1 U.S. dollar per 1 Argentine peso and committing to maintain that convertibility.  (In some ways, this action might be likened to going on a gold standard.)  The selection of the dollar for convertibility was odd because there was little tie between the two economies; that would mean that Argentina had fewer means of acquiring dollars as foreign reserves.  In the early 1990s, the economy took off with 10% annual growth and low inflation.  It cannot be said, however, that these were the necessary result of convertibility.  Worse, Argentina did little to change its fiscal policies; it ran deficits of significant size.  Because it was issuing so much debt, its weight in international indices for investment grew (a perverse aspect of indices such as EMBI) and that attracted foreign funds, sometimes justified on the grounds that the very marketability of so much debt was itself a sign of economic strength.

The crises of the mid-90s, in Mexico, Thailand, South Korea, and, worst of all, Russia, shook financial markets.  At this point, the IMF began to prepare for the end of peso convertibility, but Argentina would not budge.  The denouement comes to IMF loans trying to save the situation, the U.S. Treasury changing course to a tougher position, the flight of foreign capital, the uneven adoption of austerity that only slowed economic growth so as to make Argentina's debt burden more unsustainable, and the sudden withdrawal of IMF support.  The financial system collapsed as convertibility was only then ended. 

In sum, unwise policies were held onto for too long.  The global financial forces were too accommodating of the situation and abetted the maintenance of policies such as convertibility and fiscal looseness for longer than was wise.  When the international accommodation ceased, it came at the worst time and too swiftly.  The result was the sufferings of millions.

This book is recommended for its readability and the relevance to other bubbles.

A Short History of Financial Euphoria - John Kenneth Galbraith (Penguin Books, 1994)

A look at three hundred and fifty years of speculative bubbles and the common characteristics of the major events.  The same dynamic, the same belief in something new appears in surprisingly short cycles.  "The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version."  [332.645]

This very slim volume (113 pages) is written with Galbraith's wit and sharp insight.  During speculative periods one may note the belief that either some new asset has arisen which can be expected to rise in price for an extended time or that others may be fooled, but it will be possible for the shrewd individual to know when to get off the ride, and that doubters are to be condemned.  Common to the rise of bubbles are the shortness of financial memory (previous episodes are forgotten) and the specious association of money with financial genius.  Unfortunately, the financial innovation that arises is usually some variation on leverage which works wonderfully in rising markets and extracts a terrible price in falling ones.  Those enjoying the benefits of leverage are hailed as financial geniuses.  When the crash comes, something other than greed or stupidity is blamed.  In the past, crashes have been blamed on program trading systems, or government reports, or small changes in GDP.  Certainly, the market cannot be at fault because that would violate the central tenet of the faith in the perfect market.  The last crisis covered is the 1987 savings and loan fiasco and the market collapse.  What gives credit to Galbraith's analysis of the common factors in crashes is that the reader can see the same factors and reactions in the dot com bust and in the great collapse of 2008.   

The author then follows major speculative bubbles from the Tulip mania (a review of another, better work on this will appear here eventually) and the South Sea Bubble through the 1929 crash and the 1987 Meltdown.  Because he is trying to cover 350 years in so few pages, the descriptions are useful only as a reminder of other works one might read of these events.  That becomes the weakest part of the book.  The book's real value lies in the common threads it finds.

This book is recommended with the caution noted above.

And the Wolf Finally Came - John P Hoerr (University of Pittsburgh Press, 1988)

A history of the steel industry in the United States and the policies and decisions by management, by labor, by government, and by markets that led to its collapse in the early 1980s.  [338.4766914209]

In the 1980s, the domestic steel industry collapsed rapidly and devastatingly in the Monongahela valley near Pittsburgh.  Steel was not the first major domestic manufacturing industry to wither so severely, but it stands as the forerunner of the collapse of manaufacturing in the United States more broadly.  Then and now, the question of why and who was responsible for the failure has been a difficult and contentious political issue.  The author argues that there is sufficient blame to share by all parties. 

The government, particularly the Reagan Administration, was hostile to unions and worked hard to reduce their influence in the workplace.  The Administration adopted a laissez faire view that could accept the end of the domestic steel industry if that was what the market ruled.

The steel industry had adopted in its early years a disregard for the skills of labor.  They were taken as an undifferentiated mass with nothing to contribute except muscle to the process.  This is best exemplified by the statement of one of US Steel's presidents, "I have always had one rule.  If a workman sticks his head up, hit it."  From 1901 forward, the company strove to keep out any unions that did not already exist in plants.  Wages were kept low.  Local governments and police forces assisted the companies in maintaining labor "peace."  The USWOC labor organizing movement of the 1930s led to brutal struggles and that set the mindset for the years to follow.  Management adopted the attitude that its prerogative was to state how work was to be performed.  When combined with a Taylorite breakdown of tasks into simplest steps, this reduced the role of labor to organic machines and little more.

Labor responded by ceding the decision-making to management.  It concentrated on adherence to the contract.  Labors' job became one of grievance.  It showed little interest in improving work processes and the prevailing culture of the workmen enforced this indifference.

When steel finally came to its crisis, the industry had no tools to cope with a changing environment.  Management could not accept labor's input into decisions, but was willing to call for wage concessions.  Labor, after forty years of success at the negotiating table could not accept wage cuts.  In a period of deep recession, a strike ensued that meant the death of the mills.

The culture of one-sidedness even crippled the communities being impacted by this loss of industry; each community had always acted alone and there was no tradition of cooperation among them.  The depth and breadth of high school sports rivalries throughout the valley reflected the "apartness" of each town. 

The conditions that lead to the closing of manufacturing in each industry may be unique.  Still there is much to learn from every case about the real workings of economics.

This book is recommended.  Anyone familiar with the region should find it very readable.

The (mis) Behavior of Markets - Benoit Mandelbrot (Basic Books, 2004)

One of the pioneers of fractal analysis reviews the role of randomness and turbulence in nature with particular emphasis on financial markets.  [332.01]

This is an important and useful text.  Too often, analysts have swept everything under the rug of the Gaussian (i.e., Normal) distribution.  It represents the victory of ease over analysis.  Assuming the Normal distribution puts tables and easy computations of probability at hand.  Mandelbrot presents evidence that taking the Normal curve as given in many cases when distributions have tails that follow power laws is to err seriously.  In this regard, he presents a critique of much of modern finance that hinges on the Gaussian distribution.      

In fact, one might argue that the real nature of the Black Swan problem is one of misspecification of the underlying probability distribution.  If one reasonably assumes that one probability distribution holds, then an error in selection of that distribution can have significant consequences, especially at the extremes of the distribution.  The Normal distribution, in particular, has quite thin tails: the probability of an event six standard deviations from the mean (the 6 sigma criterion) at 3 per million events is small beyond any plausibility.  All that is guaranteed under Chebyshev's rule, however,  is that the probability of an occurrence at that extreme in no more likely than about 3%.  The difference represents an increase by 10,000 times in probability.  What is assumed rare might, indeed, be disastrously common.    

Unfortunately for this book, its author's personal problems  and history detract from the text.  He insists on reminding the reader that he was a pioneer in the field of fractal analysis.  He revisits previous positions where he was denied tenure or a chair or recognition for his achievement.  Dr. Mandelbrot's reputation is secure; he is not alone in having some of his best work overlooked.  The repetition of these old hurts adds nothing to the text.

This book is recommended with some reservations.

The Great Bull Market - Robert Sobel (W W Norton & Co., 1968)

A history of the economic and financial conditions that drove the bull market of the 1920s.  [332.642097471]

Most histories of the 1920s stock market (and there are some excellent ones) focus on the Crash as the central theme of the book.  This book is refreshing in that it treats the collapse as significant, but not the whole story.

Sobel begins with a description of the immature financial markets of the end of WWI.  Wall Street was not yet a major topic of daily discussion in America.  New York had not yet eclipsed London as the world's financial capital. 

The author looks at a number of individual events that would contribute to the economic growth of the 1920s that fed a real growth in equities and those which added to the speculative frenzy that gave the market its froth.  There were new technologies that were spurred by a new approach to consumer credit that generated, through a macroeconomic multiplier effect, more disposable income in society.  The Washington Naval Conference of 1922 led to some disarmament and a relaxing of tensions following the First World War to further spur consumer confidence.  There was also Winston Churchill's foolish decision to return the United Kingdom to the gold standard at the pre-1914 level.  To help the British prop up the pound, the New York Federal Reserve lowered money market rates that fueled the call money market and buying stocks on margin.  Finally, there was the growth of trusts and informal collusion among major firms, such as steel companies, that increased profits that justified higher stock prices.

What Sobel has done is to re-examine the economic conditions of the 1920s.  He investigates how changes in American society contributed to the forces that created the great bull market.  Although we have a tendency to see the Crash of 1929, in retrospect, as the inevitable result of those forces, Sobel argues hard against that viewpoint.  The reader will find himself reviewing tables of stock prices and other data rather than hearing the famous old stories.  The new insights are worth having.

This book is recommended.

When Genius Failed - Roger Lowenstein (Random House, 2000)

The story of the rise and painful fall of Long-Term Capital Management.  The hedge fund boasted of its ties to Nobel prize-winning economists as a new approach to efficient markets.  The denouement almost brought down several major Wall Street houses.  [332.6]

It is very human to enjoy a tale of hubris and arrogant certainty when the end of the story comes to ruin; such stories have entertained us since the Greeks gave a word for it 2,500 years ago.  The collapse of the Long-Term Capital Management hedge fund fills that same role.   

Because it is a drama of pride and its hazards, the narrative must invest a large share of its print on the individuals involved and their personalities: the traders, the academics, and the bankers.  In this regard, it is much like the work of writers such as Michael Lewis.  The risk in such writing is that the author will become so focused on the personalities that the book flirts with biography rather than with documenting for understanding the events themselves.  It is assumed that the reader will understand the nature of the trades being undertaken, although a brief explanation is given in many cases. 

In the case of LTCM, however, the basic trade was quite simple.  It was a true hedge fund when its trades involved taking two positions on one security to exploit small differences in actual price from theoretical prices.  An example might be selling the instrument short while buying the future of the same instrument when there is a difference that allows arbitrage of these two.  The key problem was that the differences could be so small that the only way to make money on the trades was through massive leverage.  Money would eventually be borrowed from several large banks and those loans would become the problem for the financial markets.  (I find it ironic that economists of the stature of Merton or Scholes could argue for the efficiency of the market - and that same efficiency would force prices to converge eventually - while not recognizing that the momentary inefficiencies might argue  that the entire theory may be imperfect.)  That became the problem.  After the collapse of the Russian ruble in 1997, prices were not converging fast enough.  Every bank which had lent LTCM money was in danger of taking large losses that could destabilize the system.  Wall Street had to find a way out, but it was a close call.

This book is highly recommended.