Money Mania
By Bob Swarup
PAGES: 310
PRICE: Rs 499
Bloomsbury IndiaThe global financial crisis that erupted in 2007 is perhaps remarkable for generating the largest number of books by authors with the wisdom of hindsight. Bob Swarup in Money Mania takes a different approach as he narrates financial crises down the ages. He traces similar patterns in each occurrence, with human behaviour playing a key role.The commonality is the position of fallacy wherein we wrongly interpret upswings as high and sustainable development, oblivious that there are seeds of crisis already sown. Even when we have our own models to guide our future investments, we prefer to go with the majority, which in turn becomes self-fulfilling when a crisis strikes and affects all.Such crises have been there since Roman times. There has always been an urge to spend in a big way and build empires through borrowing. They crumble when there are wars, which was the case when Sparta attacked ancient Greece. More recently, Japan was obsessed with growth. It took the nation to large-scale speculation in land, which eventually led to a crisis in the 1980s. The Great Depression showed us how an unsustainable model based on higher spending and borrowing after World War I ended up in a stock market crash.Almost all growth stories have strong traces of financial speculation. Swarup clinically analyses this persistent seduction of our senses by new opportunities, leading to a collective belief that this state of bliss will hold forever. In the run up to the latest financial crisis, too, we assumed so. It is the case with real estate, too, where it is assumed that prices will always go up, riding on speculation.Let us look at what conclusions Swarup draws from the past financial crises. Man is not rational, which is opposite of what all theories in economics assume. We are motivated by self-interest and influenced by our cognitive biases. Furthermore, our actions do not add up laterally but cascade exponentially making interpretation of human behaviour complex. Therefore, the whole is not the sum of all parts. Also, economies are not isolated entities in a static equilibrium. They are dynamic and interwoven with political and social dimensions. Above all, efficient markets do not exist as information is contextual and asymmetries exist making free markets an idealistic limiting case.He gives several examples to support his theory of speculative activity fostered by groupthink. One of the more interesting ones is on how the market for tulips developed in the Netherlands gave shape to the futures market, which eventually led to excess speculation and crash.A thought expressed here which should tickle our brains is that we do always find reasons for a crisis and say that it could have been avoided if certain things were done. There is hence a tendency to pontificate especially by the regulator, which is a false belief.The book is a historical work and an interesting read. But it is difficult to read as the narrative is not chronological; chapters do not flow from one to another. The reader has to connect them and in a way it adds charm to the book.(The author is Chief Economist at CARE Ratings)
By Bob Swarup
PAGES: 310
PRICE: Rs 499
Bloomsbury IndiaThe global financial crisis that erupted in 2007 is perhaps remarkable for generating the largest number of books by authors with the wisdom of hindsight. Bob Swarup in Money Mania takes a different approach as he narrates financial crises down the ages. He traces similar patterns in each occurrence, with human behaviour playing a key role.The commonality is the position of fallacy wherein we wrongly interpret upswings as high and sustainable development, oblivious that there are seeds of crisis already sown. Even when we have our own models to guide our future investments, we prefer to go with the majority, which in turn becomes self-fulfilling when a crisis strikes and affects all.Such crises have been there since Roman times. There has always been an urge to spend in a big way and build empires through borrowing. They crumble when there are wars, which was the case when Sparta attacked ancient Greece. More recently, Japan was obsessed with growth. It took the nation to large-scale speculation in land, which eventually led to a crisis in the 1980s. The Great Depression showed us how an unsustainable model based on higher spending and borrowing after World War I ended up in a stock market crash.Almost all growth stories have strong traces of financial speculation. Swarup clinically analyses this persistent seduction of our senses by new opportunities, leading to a collective belief that this state of bliss will hold forever. In the run up to the latest financial crisis, too, we assumed so. It is the case with real estate, too, where it is assumed that prices will always go up, riding on speculation.Let us look at what conclusions Swarup draws from the past financial crises. Man is not rational, which is opposite of what all theories in economics assume. We are motivated by self-interest and influenced by our cognitive biases. Furthermore, our actions do not add up laterally but cascade exponentially making interpretation of human behaviour complex. Therefore, the whole is not the sum of all parts. Also, economies are not isolated entities in a static equilibrium. They are dynamic and interwoven with political and social dimensions. Above all, efficient markets do not exist as information is contextual and asymmetries exist making free markets an idealistic limiting case.He gives several examples to support his theory of speculative activity fostered by groupthink. One of the more interesting ones is on how the market for tulips developed in the Netherlands gave shape to the futures market, which eventually led to excess speculation and crash.A thought expressed here which should tickle our brains is that we do always find reasons for a crisis and say that it could have been avoided if certain things were done. There is hence a tendency to pontificate especially by the regulator, which is a false belief.The book is a historical work and an interesting read. But it is difficult to read as the narrative is not chronological; chapters do not flow from one to another. The reader has to connect them and in a way it adds charm to the book.(The author is Chief Economist at CARE Ratings)
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