Here’s the second installment to last week’s recap of The Capital Spectator’s short list of titles from 2012 that deserve a second look. Each of the following reviews and summaries appeared earlier in the year on these pages, and here they are once more… an encore presentation.
● The Great Recession: Market Failure or Policy Failure?
By Robert Hetzel
Review via John Taylor’s Economics One blog
The debate about the causes of the financial crisis and the great recession will continue for many years, and the facts and analysis that Robert Hetzel put forth in his new book The Great Recession: Market Failure or Policy Failure? should now be part of that debate. As I said in my comments for Cambridge University Press, “Hetzel applies his experience as a central banker and his expertise as a monetary economist to make a compelling case for rules rather than discretion, showing that ‘monetary disorder’ rather than a fundamental ‘market disorder’ is the cause of poor macroeconomic performance. At the same time, he acknowledges and discusses disagreements among those who argue for rules rather than discretion.”
● The 7 Most Important Equations for Your Retirement: The Fascinating People and Ideas Behind Planning Your Retirement Income
By Moshe Milevsky
Summary via publisher, Wiley
Physics, Chemistry, Astronomy, Biology; every field has its intellectual giants who made breakthrough discoveries that changed the course of history. What about the topic of retirement planning? Is it a science? Or is retirement income planning just a collection of rules-of-thumb, financial products and sales pitches? In The 7 Most Important Equations for Your Retirement…And the Stories Behind Them Moshe Milevsky argues that twenty first century retirement income planning is indeed a science and has its foundations in the work of great sages who made conceptual and controversial breakthroughs over the last eight centuries. In the book Milevsky highlights the work of seven scholars—summarized by seven equations—who shaped all modern retirement calculations. He tells the stories of Leonardo Fibonnaci the Italian businessman; Benjamin Gompertz the gentleman actuary; Edmund Halley the astronomer; Irving Fisher the stock jock; Paul Samuelson the economic guru; Solomon Heubner the insurance and marketing visionary, and Andrey Kolmogorov the Russian mathematical genius—all giants in their respective fields who collectively laid the foundations for modern retirement income planning.
● The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal
By Ludwig B. Chincarini
Summary via publisher, Wiley
Financial markets are not immune to the human tendency to group together. Investors follow popular trends or latch onto profitable new strategies with herd-like single-mindedness. In The Crisis of Crowding, finance veteran and professor Ludwig Chincarini explores how this dramatic overcrowding has yielded terrifying results and contributed to recent financial crises. “Modern risk-measurement models generally ignore the presence of copycats and the resulting crowded spaces. As a result, a shock to the system can lead to sudden, sometimes large asset price moves, which can cause panic and failure among the institutions involved in that investment space,” explains Chincarini. “In the past 20 years, globalization, technology, and increased leverage have made the effects of overcrowding more apparent and dramatic. In fact, market crashes are happening more regularly than in the past.”
● Automate This: How Algorithms Came to Rule Our World
By Christopher Steiner
Review via USA Today
Christopher Steiner’s new book, Automate This: How Algorithms Came to Rule Our World, is a fascinating exploration of how the mathematics behind automated trading revolutionized business worldwide. But it is also a cautionary tale of how automated trading can get completely out of hand. As an example, he points to the “flash crash” of May 6, 2010. “At 2:42 PM on the East Coast, the markets began to shudder before dropping into a free fall. By 2:47 PM — a mere 300 seconds later — the Dow was down 998.5 points, easily the largest single-day drop in history. Nearly $1 trillion of wealth fell into the electronic ether.” He continues, “Some share prices crashed to one penny — as in $0.01 — rendering billion-dollar companies worthless, only to bounce back to $30 or $40 in a few seconds. Other stocks swung wildly up. At one point, Apple traded at $100,000 a share (up from about $250). The market had been gripped with violent turbulence and nobody knew why.”
● The Signal and the Noise: Why So Many Predictions Fail–But Some Don’t
By Nate SIlver
Review by Burton Malkiel via The Wall Street Journal
It is almost a parlor game, especially as elections approach—not only the little matter of who will win but also: by how much? For Nate Silver, however, prediction is more than a game. It is a science, or something like a science anyway. Mr. Silver is a well-known forecaster and the founder of the New York Times political blog FiveThirtyEight.com, which accurately predicted the outcome of the last presidential election. Before he was a Times blogger, he was known as a careful analyst of (often widely unreliable) public-opinion polls and, not least, as the man who hit upon an innovative system for forecasting the performance of Major League Baseball players. In “The Signal and the Noise,” he takes the reader on a whirlwind tour of the success and failure of predictions in a wide variety of fields and offers advice about how we might all improve our forecasting skill.