Book Bits | 7.12.14

Pragmatic Capitalism: What Every Investor Needs to Know About Money and Finance
By Cullen Roche
Q&A with author via The Reformed Broker (Josh Brown)
JB: You cite “Stocks for the Long Run” as a myth we need to get over as investors – and yet there is not a single twenty year period going back to 1926, an eight decade span, in which stocks have shown a negative return. In addition, stocks have returned something on the order of 5% per year during this period even after adjusting for inflation and taxes – bonds have shown something closer to 1% when adjusted for the same factors during this time. So, why not “stocks for the long run”? What am I missing?
CR: I am a hopeless optimist at heart as I think most Americans are, but I also know that we have to look at the bigger picture here and keep things in perspective. I say, be optimistic in the long-run, but not naively optimistic. While it’s true that stocks are generally a good long-term bet it’s also true that markets are comprised of irrational participants operating in a complex dynamical system. And that means this system is actually much more fragile than many presume. And that’s why we see prolonged periods of poor equity market performance such as Japan over the last 20 years, Greece, China, etc. The US economy and markets are a powerhouse, but I don’t think it’s prudent to assume that that powerhouse is impervious to sustained periods of poor performance as we’ve seen in many other global equity markets in recent decades.

The Nature of Value: How to Invest in the Adaptive Economy
By Nick Gogerty
Summary via publisher, Columbia Unviersity Press
Using evolution as the template to understand growth, The Nature of Value takes a first-principles approach to explore the parallels between economic and ecological systems. Not only does Gogerty show how value is born out of tiny sparks of adaptive innovation, but he also explores the full scope of the economy as a complex network. He borrows from an array of disciplines—including anthropology, psychology, ecology, physics, sociology, and ethics—and, most revealing of all, examines how evolution’s processes can help investors avoid risk and improve their allocation decisions

Speculation, Trading, and Bubbles (Kenneth J. Arrow Lecture Series)
By José A. Scheinkman, et al.
Lecture by author at Princeton University via Vimeo video
Asset price bubbles are episodes in which asset prices exceed fundamentals. Three stylized facts concerning bubbles are:
1. Asset-price bubbles are accompanied by increases in trading activity.
2. Bubble implosions coincide with increases in an asset’s supply.
3. Bubbles often occur with the arrival of “new technologies”
In this lecture, I will rely on these stylized facts to argue in favor of particular models that explain asset-price bubbles. I will start by sketching a model where speculators overconfidence is a source of heterogeneous beliefs and arbitrage is limited, that is able to reproduce the observed correlation between trading activity and asset prices. I will argue that, in the presence of limited risk absorption, this same class of models can explain the coincidence between bubble deflation and increases in asset supply or shorting activity.

After the Crisis
By Alain Touraine
Summary via publisher, Polity
What effects will the current economic crisis have on the long-term development of our societies? What does the future hold in store when we emerge from the crisis? These two questions lie at the heart of this important new book by the leading French sociologist Alain Touraine. In an era dominated by the global economy and the triumph of individualism, our society has broken away from the old model of integration in place since the industrial revolution. We no longer see ourselves as players in an economic system around which every aspect of society is ordered but rather as individuals with our own rights, capable of creating our own lives in a world in which cultural values prevail.

Empirical Model Discovery and Theory Evaluation: Automatic Selection Methods in Econometrics (Arne Ryde Memorial Lectures)
By David F. Hendry and Jurgen A. Doornik
Summary via publisher, MIT Press
Economic models of empirical phenomena are developed for a variety of reasons, the most obvious of which is the numerical characterization of available evidence, in a suitably parsimonious form. Another is to test a theory, or evaluate it against the evidence; still another is to forecast future outcomes. Building such models involves a multitude of decisions, and the large number of features that need to be taken into account can overwhelm the researcher. Automatic model selection, which draws on recent advances in computation and search algorithms, can create, and then empirically investigate, a vastly wider range of possibilities than even the greatest expert. In this book, leading econometricians David Hendry and Jurgen Doornik report on their several decades of innovative research on automatic model selection.

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