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If you've ever read a book on Behavioral Economics and wondered why PHd candidates spend so much time formulating theories on the obvious, this book is for you. This book is applied Behavioral Economics as it relates to the crisis of 2007 and it is a mostly brilliant work at that.
If you are a capitalist, you might want to stop at the end of Chapter 12 as the authors take off their lab coats and get up on their social apologist soap box in an inexplicable departure from an otherwise coherent book.
One nagging point that the authors might not agree with is what I percieved to be an interchangeable use of "Economies" and "Markets". That strikes me as particularly egregious in a book on behavioral econ.
Absolutely don't agree w conclusion that Animal Spirits can or should be regulated away. Still, well worth a read.
19 of 19 people found this review helpful
Firstly, I completely agree with the basic premise of this book; current economic theory does not account for the non-economic urges (animal spirits) that greatly effect financial decisions. Unfortunately that is about as far as my agreement extends. I think most economists agree animal spirts are important BUT they are very difficult to quantify, thus the lack of a coherent theory involving animal spirits. This does not seem to bother the authors, who instead of quantifying their theory, tell stories about animal spirits. These stories sound reasonable, but anyone can make up stories that sound reasonable. Such stories are not evidence at all, let alone compelling evidence. Most of the stories, when analyzed carefully, are very weak at best.
The authors propose to show how “corruption” stimulated several recessions. Not only was the argument quite weak, the editors seem to have added a single line after the rest was written indicating that it was clear there were several other more important causal factors.
The authors propose the fact union labor contracts generally don’t include cost of living adjustments in their contracts, or workers strongly fight wage reductions demonstrate that people don’t understand inflation (the money illusion). I suspect union contract negotiators are quite aware of inflation, as are workers fighting wage reductions, and instead they don’t want COLAs or wage reductions because accepting such deals are not good long term negotiating tactics. Certainly many people don’t always consider inflation properly, but I think the authors significantly over-emphasize this weakness.
The authors propose the root cause of the 2007 financial crisis was the MAC’s loosening credit to high risk minorities. This loosening caused private mortgage providers to loosen their credit. Of course this makes no sense if the mortgage provider was planning to keep the mortgage. My favorite book on the 2007 crisis (The Big Short) gives a very different, more compelling, and a bit more complex explanation. Very briefly, financial analysts found they could package very diverse sets of mortgages and demonstrate these diversified products would have performed well in almost any historical period. They used this data to convince the largest, most sophisticated, insurance company on the planet to insure the product, then they included the insurance with the product. Rating agencies reasonably rated these products highly. The story was mathematics and computers allowed regional risk to be diversified then insured making these products highly profitable, yet low risk. One problem, once the banks found they could sell these mortgages as fast as they could write them, they started writing mortgages with higher and higher risk. This rendered all the statistics completely useless, but the story had been proven, so the process continued, until the mortgages began to fail across all regions, all at once, at very high rates. It quickly became clear these products were incredibly risky.
The combination of over simplification, weak supporting evidence, and a complete lack of specific practical proposed actions makes this book utterly impotent.
The idea that the government should somehow regulate these vague, non-quantitative, animal-spirits is simply frightening.
10 of 10 people found this review helpful
Great insight into individual behaviours. By personal experience know how much some of the animal spirits such as fairness plays a role in ones behaviour. Also concepts presented in way easy to comprehend.
2 of 2 people found this review helpful