Andrei Shleifer

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pages: 461 words: 128,421

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

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activist fund / activist shareholder / activist investor, Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, bank run, beat the dealer, Benoit Mandelbrot, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, card file, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, discovery of the americas, diversification, diversified portfolio, Edward Glaeser, Edward Thorp, endowment effect, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, George Akerlof, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, information asymmetry, invisible hand, Isaac Newton, John Meriwether, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market design, Myron Scholes, New Journalism, Nikolai Kondratiev, Paul Lévy, Paul Samuelson, pension reform, performance metric, Ponzi scheme, prediction markets, pushing on a string, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, road to serfdom, Robert Bork, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, shareholder value, Sharpe ratio, short selling, side project, Silicon Valley, South Sea Bubble, statistical model, The Chicago School, The Myth of the Rational Market, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, Thorstein Veblen, Tobin tax, transaction costs, tulip mania, value at risk, Vanguard fund, Vilfredo Pareto, volatility smile, Yogi Berra

(Stewart and Hertzberg won a Pulitzer for the piece.) 27. James Tobin, “A Proposal for International Monetary Reform,” Eastern Economic Journal (July–Oct. 1978): 153–59; Keynes, General Theory, 160; “Glass’s 5% Tax Plan Stirs Wall Street,” New York Times, June 6, 1929, 6. CHAPTER 14: ANDREI SHLEIFER MOVES BEYOND RABBI ECONOMICS 1. Andrei Shleifer, “Do Demand Curves for Stocks Slope Down?” Journal of Finance (July 1986): 579–90. 2. This is Shleifer’s recollection. Scholes doesn’t recall the event but admits it sounds like something he would’ve said. 3. Oliver Blanchard, “In Honor of Andrei Shleifer: Winner of the John Bates Clark Medal,” Journal of Economic Perspectives (Winter 2001): 189–204. 4. Shleifer ran an advisory office in Moscow that was affiliated with Harvard and funded by the U.S. Agency for International Development. USAID later charged that Shleifer had countenanced conflicts of interest as he, his number two, and their wives and girlfriends made investments in Russian companies while advising the country’s government.

She was rebuffed by Greenspan and her fellow Clinton administration financial regulators, and late in 2000 Congress passed—and President Clinton signed—legislation barring regulation of over-the-counter derivatives. The market was working, the reasoning went. Why get in the way? THE FALL CHAPTER 14 ANDREI SHLEIFER MOVES BEYOND RABBI ECONOMICS The efficient market’s critics triumph by showing why irrational market forces can sometimes be just as pervasive as the rational ones. IN 1985, MIT GRADUATE STUDENT Andrei Shleifer assembled what he thought was compelling evidence against the efficient market hypothesis. He found that, starting in September 1976—the month after Vanguard launched the first retail index fund—new stocks being added to the S&P 500 went up relative to the rest of the market. Nothing else had changed about these businesses.

Chan and Josef Lakonishok, “Are the Reports of Beta’s Death Premature?” Journal of Portfolio Management (Summer 1993): 51–62. 7. Josef Lakonishok, Andrei Shleifer, Richard Thaler, Robert Vishny, “Window Dressing by Pension Fund Managers,” American Economic Review (May 1991): 227–31. 8. “Pensions & Investments/Watson Wyatt World 500: The world’s largest managers,” Pensions & Investments, Oct. 13, 2008. Shleifer and Vishny had by this point both left the firm. 9. John Maynard Keynes, General Theory (New York: Harcourt, Brace, 1936), 157. 10. Amir Barnea, Robert A. Haugen, and Lemma W. Senbet, Agency Problems and Financial Contracting (Englewood Cliffs, N.J.: Prentice-Hall, 1985). 11. Andrei Shleifer and Robert W. Vishny, “The Limits of Arbitrage,” Journal of Finance (March 1997): 37. 12. Jeremy J. Siegel, Stocks for the Long Run, 2nd ed.


pages: 500 words: 145,005

Misbehaving: The Making of Behavioral Economics by Richard H. Thaler

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3Com Palm IPO, Albert Einstein, Alvin Roth, Amazon Mechanical Turk, Andrei Shleifer, Apple's 1984 Super Bowl advert, Atul Gawande, Berlin Wall, Bernie Madoff, Black-Scholes formula, capital asset pricing model, Cass Sunstein, Checklist Manifesto, choice architecture, clean water, cognitive dissonance, conceptual framework, constrained optimization, Daniel Kahneman / Amos Tversky, delayed gratification, diversification, diversified portfolio, Edward Glaeser, endowment effect, equity premium, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, George Akerlof, hindsight bias, Home mortgage interest deduction, impulse control, index fund, information asymmetry, invisible hand, Jean Tirole, John Nash: game theory, John von Neumann, Kenneth Arrow, late fees, law of one price, libertarian paternalism, Long Term Capital Management, loss aversion, market clearing, Mason jar, mental accounting, meta analysis, meta-analysis, money market fund, More Guns, Less Crime, mortgage debt, Myron Scholes, Nash equilibrium, Nate Silver, New Journalism, nudge unit, Paul Samuelson, payday loans, Ponzi scheme, presumed consent, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, random walk, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Silicon Valley, South Sea Bubble, statistical model, Steve Jobs, technology bubble, The Chicago School, The Myth of the Rational Market, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, transaction costs, ultimatum game, Vilfredo Pareto, Walter Mischel, zero-sum game

He has an infamous but unpublished solo-authored paper on this theme that starts this way: “THERE ARE IDIOTS. Look around.”* Three graduate students who had met when they shared a suite during their first year as undergraduates—Brad De Long, Andrei Shleifer, and Robert Waldmann—joined Summers to produce a more rigorous, thorough, and polite version of the “idiots” paper. The model they proposed used closed-end funds as an example of the type of asset that their model might help understand, but they had not done any empirical testing. Charles and I thought we might be able to build on some of the work Charles had done for his term paper to fill in that gap, and we asked Andrei Shleifer, who had recently joined the faculty at the University of Chicago, to join us on this project. Charles, Andrei, and I then wrote a paper on closed-end funds, noting that there were four puzzles associated with these funds.

The Structure of Scientific Revolutions. Chicago: University of Chicago Press. Laibson, David. 1997. “Golden Eggs and Hyperbolic Discounting.” Quarterly Journal of Economics 112, no. 2: 443–78. Lakonishok, Josef, Andrei Shleifer, and Robert W. Vishny. 1994. “Contrarian Investment, Extrapolation, and Risk.” Journal of Finance 49, no. 5: 1541–78. Lamont, Owen A., and Richard H. Thaler. 2003. “Can the Market Add and Subtract? Mispricing in Tech Stock Carve-Outs.” Journal of Political Economy 111, no. 2: 227–68. Landsberger, Michael. 1966. “Windfall Income and Consumption: Comment.” American Economic Review 56, no. 3: 534–40. Lee, Charles, Andrei Shleifer, and Richard H. Thaler. 1991. “Investor Sentiment and the Closed-End Fund Puzzle.” Journal of Finance 46, no. 1: 75–109. Lester, Richard A. 1946. “Shortcomings of Marginal Analysis for Wage-Employment Problems.”

After writing fourteen columns in consecutive issues, I took a break. These columns were lightly edited and published in book form with the title The Winner’s Curse (the title of one of the columns). I then wrote a few more on an occasional basis, though without the quarterly deadline, their appearances becoming increasingly irregular. The last appeared in 2006. Shortly thereafter, the column was officially retired. The editor of the journal at that time, Andrei Shleifer, declared that their purpose had been served. That was a polite way of saying that my job chronicling anomalies had ended. I was fired. ________________ * One of the joys of writing the Anomalies columns was that the editors themselves handled the refereeing process, and every paper also received true “editing” to make it intelligible for non-specialists. Tim Taylor, an economist who can also write, has ably performed that task from the beginning, and he is still at it.


pages: 430 words: 109,064

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown by Simon Johnson, James Kwak

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Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, banking crisis, Bernie Madoff, Bonfire of the Vanities, bonus culture, break the buck, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, commoditize, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Edward Glaeser, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, financial intermediation, financial repression, fixed income, George Akerlof, Gordon Gekko, greed is good, Home mortgage interest deduction, Hyman Minsky, income per capita, information asymmetry, interest rate derivative, interest rate swap, Kenneth Rogoff, laissez-faire capitalism, late fees, light touch regulation, Long Term Capital Management, market bubble, market fundamentalism, Martin Wolf, money market fund, moral hazard, mortgage tax deduction, Myron Scholes, Paul Samuelson, Ponzi scheme, price stability, profit maximization, race to the bottom, regulatory arbitrage, rent-seeking, Robert Bork, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, Satyajit Das, sovereign wealth fund, The Myth of the Rational Market, too big to fail, transaction costs, value at risk, yield curve

This belief reflects a general economic principle; given perfectly rational actors with perfect information and no externalities, all transactions should be beneficial for both parties. But few economists ever believed that these assumptions actually held in the real world. And over the next few decades, dozens of leading economists such as Joseph Stiglitz, Robert Shiller, and Larry Summers set about knocking holes in the Efficient Market Hypothesis.44 Brad DeLong, Andrei Shleifer, Summers, and Robert Waldmann created a model showing that “noise trading can lead to a large divergence between market prices and fundamental values.”45 Even Fischer Black (of Black-Scholes fame) agreed. At the 1985 meeting of the American Finance Association, he argued that it was impossible to differentiate between noise and information, and hence impossible to determine who was a noise trader and who was an information trader.

Claudia Goldin and Lawrence Katz have examined data on Harvard undergraduates and found that while only 5 percent of men in classes around 1970 were in finance fifteen years after graduation, that figure tripled to 15 percent for classes around 1990.79 The share of each class entering banking and finance careers grew from under 4 percent in the 1960s to 23 percent in recent years.80 At Princeton’s School of Engineering and Applied Science, “Operations Research and Financial Engineering” became the most popular undergraduate major.81 The banks thus became major beneficiaries of the American educational system. Whether society benefited is another question. Kevin Murphy, Andrei Shleifer, and Robert Vishny have argued that society benefits more when talented people become entrepreneurs who start companies and create real innovations than when they go into rent-seeking activities that redistribute rather than increase wealth.82 If this is true, then this diversion of talent to Wall Street constituted a real tax on economic growth over the last two decades. Among the economic and intellectual elites, finance became a highly prestigious and desirable profession.

Blustein, The Chastening, supra note 17. 25. Specific ways in which chaebol faced fewer financing constraints are explored in Hyun-Han Shin and Young S. Park, “Financing Constraints and Internal Capital Markets: Evidence from Korean Chaebols,” Journal of Corporate Finance 5 (1999): 169–91. 26. The extent to which families run businesses around the world is documented by Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer, “Corporate Ownership Around the World,” Journal of Finance 54 (1999): 471–517. For Asia, see Stijn Claessens, Simeon Djankov, and Larry H. P. Lang, “The Separation of Ownership and Control in East Asian Corporations,” Journal of Financial Economics 58 (2000): 81–112. For the prevalence of political connections between powerful businesspeople and government, see Mara Faccio, “Politically Connected Firms,” American Economic Review 96 (2006): 369–86.


pages: 274 words: 93,758

Phishing for Phools: The Economics of Manipulation and Deception by George A. Akerlof, Robert J. Shiller, Stanley B Resor Professor Of Economics Robert J Shiller

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Andrei Shleifer, asset-backed security, Bernie Madoff, Capital in the Twenty-First Century by Thomas Piketty, collapse of Lehman Brothers, corporate raider, Credit Default Swap, Daniel Kahneman / Amos Tversky, dark matter, David Brooks, en.wikipedia.org, endowment effect, equity premium, financial intermediation, financial thriller, fixed income, full employment, George Akerlof, greed is good, income per capita, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, late fees, loss aversion, Menlo Park, mental accounting, Milgram experiment, money market fund, moral hazard, new economy, Pareto efficiency, Paul Samuelson, payday loans, Ponzi scheme, profit motive, publication bias, Ralph Nader, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, Silicon Valley, the new new thing, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, theory of mind, Thorstein Veblen, too big to fail, transaction costs, Unsafe at Any Speed, Upton Sinclair, Vanguard fund, Vilfredo Pareto, wage slave

This opposite side of the coin has been argued in Andrei Shleifer and Lawrence H. Summers, “Breach of Trust in Hostile Takeovers,” in Corporate Takeovers: Causes and Consequences, ed. Alan J. Auerbach (Chicago: University of Chicago Press, 1988), pp. 33–68. 30. Brian Hindo and Moira Herbst, “Personal Best Timeline, 1986: ‘Greed Is Good,’ ” BusinessWeek, http://www.bloomberg.com/ss/06/08/personalbest _timeline/source/7.htm. 31. Bruck, The Predators’ Ball, p. 320. 32. Bruck, The Predators’ Ball. 33. FDIC v. Milken, pp. 70–71. 34. Alison Leigh Cowan, “F.D.I.C. Backs Deal by Milken,” New York Times, March 10, 1992. 35. See Thomas Piketty, Capital in the Twenty-First Century (Cambridge, MA: Harvard University Press, 2014), p. 291, fig. 8.5, and p. 292, fig. 8.6. 36. Andrei Shleifer and Robert W. Vishny, “The Takeover Wave of the 1980s,” Science 249, no. 4970 (1990): 745–49.

NOTES Akerlof.indb 255 255 6/19/15 10:24 AM Shiller, “Cointegration and Tests of Present Value Models,” Journal of Politi­ cal Economy 95, no. 5 (October 1987): 1062–88. 15. J. Bradford De Long, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann, “Noise Trader Risk in Financial Markets,” Journal of Politi­ cal Economy 98, no. 4 (August 1990): 703–38. 16. In other versions of two-types-of-people-finance, uninformed traders are replaced by those who have an occasional urgent, unforeseen need for liquidity, which forces them to sell their stocks irrespective of the expected future returns. This solves the problem for those finance economists who cannot bring themselves to conceive that there may be uninformed or, worse, even irrational traders. 17. See De Long, Shleifer, Summers, and Waldmann, “Noise Trader Risk in Financial Markets.” 18. See formulas 21 and 25 in J. Bradford De Long, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann, “The Size and Incidence of the Losses from Noise Trading,” Journal of Finance 44, no. 3 (1989): 688 and 690. 19.

Republican, November 3, 2010. Accessed December 13, 2014. http://www.masslive.com/news/index.ssf/ 2010/11/ballot_question_to_revoke_sale.html. DellaVigna, Stefano, and Ulrike Malmendier. “Contract Design and Self-Control: Theory and Evidence.” Quarterly Journal of Economics 119, no. 2 (May 2004): 353–402. —. “Paying Not to Go to the Gym.” American Economic Review 96, no. 3 (June 2006): 694–719. De Long, J. Bradford, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann. “Noise Trader Risk in Financial Markets.” Journal of Political Economy 98, no. 4 (August 1990): 703–38. —. “The Size and Incidence of the Losses from Noise Trading.” Journal of Finance 44, no. 3 (1989): 681–96. Desmond, Matthew. “Eviction and the Reproduction of Urban Poverty.” American Journal of Sociology 118, no. 1 (July 2012): 88–133. BIBLIOGR APHY Akerlof.indb 187 187 6/19/15 10:24 AM Doll, Richard, and A.


pages: 598 words: 140,612

Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier by Edward L. Glaeser

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affirmative action, Andrei Shleifer, Berlin Wall, British Empire, Broken windows theory, carbon footprint, Celebration, Florida, clean water, congestion charging, declining real wages, desegregation, diversified portfolio, Edward Glaeser, endowment effect, European colonialism, financial innovation, Frank Gehry, global village, Guggenheim Bilbao, haute cuisine, Home mortgage interest deduction, James Watt: steam engine, Jane Jacobs, job-hopping, John Snow's cholera map, Mahatma Gandhi, McMansion, megacity, mortgage debt, mortgage tax deduction, New Urbanism, place-making, Ponzi scheme, Potemkin village, Ralph Waldo Emerson, rent control, RFID, Richard Florida, Rosa Parks, school vouchers, Seaside, Florida, Silicon Valley, Skype, smart cities, Steven Pinker, strikebreaker, the built environment, The Death and Life of Great American Cities, the new new thing, The Wealth of Nations by Adam Smith, trade route, transatlantic slave trade, upwardly mobile, urban planning, urban renewal, urban sprawl, William Shockley: the traitorous eight, Works Progress Administration, young professional

I have been blessed by wonderful colleagues at Harvard who have taught me much about cities, including Alan Altshuler, John Campbell, David Cutler, Benjamin Friedman, Roland Fryer, Claudia Goldin, Tony Gomez-Ibanez, Lawrence Katz, and Andrei Shleifer. I am particularly indebted to John Kain and John Meyer, two great figures in the economics of cities who are sadly gone. Many of the ideas in this book were first expressed in academic articles that were coauthored with David Cutler, Denise DiPasquale, Glenn Ellison, Jess Gaspar, Joseph Gyourko, Matthew Kahn, Hedi Kallal, William Kerr, Janet Kohlhase, Jose Scheinkman, and Andrei Shleifer. Many of those articles have also been written with students and former students, including Alberto Ades, Guy Dumais, Joshua Gottlieb, Jed Kolko, David Mare, Matthew Resseger, Bruce Sacerdote, Albert Saiz, Jesse Shapiro, and Jacob Vigdor.

Journal of Urban Economics 63, no 1 (2008): 1-24. Glaeser, Edward L., Hedi D. Kallal, José A. Scheinkman, and Andrei Shleifer. “Growth in Cities.” Journal of Political Economy 100 no. 6 (Dec. 1992): 1126-52. Glaeser, Edward L., William R. Kerr, and Giacomo A. M. Ponzetto. “Clusters of Entrepreneurship.” Journal of Urban Economics, Special Issue: Cities and Entrepreneurship, vol. 67, no. 1 (Jan. 2010): 150-68. Glaeser, Edward L., and Janet E. Kohlhase. “Cities, Regions, and the Decline of Transport Costs.” Papers in Regional Science 83, no. 1 (2003): 197-228. Glaeser, Edward L., Jed Kolko, and Albert Saiz. “Consumer City.” Journal of Economic Geography 1, no. 1 (Jan. 2001): 27-50. Glaeser, Edward L., Giacomo A. M. Ponzetto, and Andrei Shleifer. “Why Does Democracy Need Education?” Journal of Economic Growth 12, no. 2 (2007): 77-99.

Tim Welbes took me around The Woodlands in Texas and shared his insights. Emily Beam gave me a superb walking tour of inner-city Detroit. Many others were also enormously patient as I tried to get a feel of the world’s cities by walking their streets, and I apologize to those whom I have failed to thank by name. I am particularly grateful to those people who read the book and provided helpful comments: Joshua Gottlieb, Jesse Shapiro, Andrei Shleifer, Lawrence Summers, and Mitchell Weiss. Neil Levine helped me on the architectural history in the book. Stephen Greenblatt read the section on Shakespeare; his wisdom has been most helpful. The broader intellectual debts of this book are enormous. I have been profoundly influenced by my teachers, my colleagues, my coauthors, my students, and the many great urbanists whose work I have long admired.


pages: 421 words: 110,406

Platform Revolution: How Networked Markets Are Transforming the Economy--And How to Make Them Work for You by Sangeet Paul Choudary, Marshall W. van Alstyne, Geoffrey G. Parker

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3D printing, Affordable Care Act / Obamacare, Airbnb, Alvin Roth, Amazon Mechanical Turk, Amazon Web Services, Andrei Shleifer, Apple's 1984 Super Bowl advert, autonomous vehicles, barriers to entry, big data - Walmart - Pop Tarts, bitcoin, blockchain, business process, buy low sell high, chief data officer, Chuck Templeton: OpenTable, clean water, cloud computing, connected car, corporate governance, crowdsourcing, data acquisition, data is the new oil, digital map, discounted cash flows, disintermediation, Edward Glaeser, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, financial innovation, Haber-Bosch Process, High speed trading, information asymmetry, Internet of things, inventory management, invisible hand, Jean Tirole, Jeff Bezos, jimmy wales, John Markoff, Khan Academy, Kickstarter, Lean Startup, Lyft, Marc Andreessen, market design, Metcalfe’s law, multi-sided market, Network effects, new economy, payday loans, peer-to-peer lending, Peter Thiel, pets.com, pre–internet, price mechanism, recommendation engine, RFID, Richard Stallman, ride hailing / ride sharing, Robert Metcalfe, Ronald Coase, Satoshi Nakamoto, self-driving car, shareholder value, sharing economy, side project, Silicon Valley, Skype, smart contracts, smart grid, Snapchat, software is eating the world, Steve Jobs, TaskRabbit, The Chicago School, the payments system, Tim Cook: Apple, transaction costs, two-sided market, Uber and Lyft, Uber for X, winner-take-all economy, zero-sum game, Zipcar

But the existence of the phenomenon of regulatory capture is not necessarily a fatal blow to the argument in favor of regulation—or even the argument in favor of regulating platforms in particular. It’s possible to argue that, rather than eliminating regulation altogether, we need to design political, social, and economic systems that reduce the likelihood of regulatory capture—for example, through laws that restrict the “revolving door” between business and government. Economist Andrei Shleifer, a scholar in the areas of corporate governance and government regulation, points out that there are strong differences in the prevalence of regulatory capture across countries. When governments are relatively unchecked by their citizens, strong regulation often leads to high levels of corruption and expropriation by government officials. And, indeed, this is widely seen in authoritarian countries.

Economist Simeon Djankov and colleagues have classified the range of possible regulatory regimes on a spectrum from private orderings (what we call private governance), through systems that rely on court rulings administered by independent judges or regulation by state employees, to direct government ownership of assets (socialism).17 Their visual depiction of this spectrum (Figure 11.1) reflects the tradeoff between social losses because of private misdeeds and social losses because of government misbehavior. Over the last two generations, as Andrei Shleifer has noted, most economists and political theorists have shifted from viewing government intervention in a positive light to preferring privatization.18 Today, there’s a trend toward regulation that was once provided by governments now being provided by private entities acting in their own self-interest—for example, the gradual shift from nationally mandated accounting standards like the Generally Accepted Accounting Principles used in the United States toward the International Financial Reporting Standards promulgated by the International Accounting Standards Board, a private organization based in London.

“Allsopp’s Arctic Ale, The $500,000 eBay Typo,” New Life Auctions, http://www.newlifeauctions.com/allsopp.html, accessed October 13, 2015. In fact, the winning bid was $503,300, but it is unclear whether anyone actually paid this amount. 16. Hillel Aron, “How eBay, Amazon and Alibaba Fuel the World’s Top Illegal Industry—The Counterfeit Products Market,” LA Weekly, December 3, 2014, http://www.laweekly.com/news/how-ebay-amazon-and-alibaba-fuel-the-worlds-top-illegal-industry-the-counterfeit-products-market-5261019. 17. Andrei Shleifer and Robert W. Vishny, “A Survey of Corporate Governance,” Journal of Finance 52, no. 2 (1997): 737–83, esp. 737. 18. Steve Denning, “The Dumbest Idea in the World: Maximizing Shareholder Value,” Forbes, November 28, 2011, http://www .forbes.com/sites/stevedenning/2011/11/28/maximizing-shareholder-value-the-dumbest-idea-in-the-world/. 19. Alvin E. Roth, “The Art of Designing Markets,” Harvard Business Review 85, no. 10 (2007): 118. 20.


pages: 249 words: 66,383

House of Debt: How They (And You) Caused the Great Recession, and How We Can Prevent It From Happening Again by Atif Mian, Amir Sufi

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Andrei Shleifer, asset-backed security, balance sheet recession, bank run, banking crisis, Ben Bernanke: helicopter money, break the buck, Carmen Reinhart, collapse of Lehman Brothers, creative destruction, debt deflation, Edward Glaeser, en.wikipedia.org, financial innovation, full employment, high net worth, Home mortgage interest deduction, housing crisis, Joseph Schumpeter, Kenneth Rogoff, liquidity trap, Long Term Capital Management, market bubble, Martin Wolf, money market fund, moral hazard, mortgage debt, negative equity, paradox of thrift, quantitative easing, Robert Shiller, Robert Shiller, school choice, shareholder value, the payments system, the scientific method, tulip mania, young professional, zero-sum game

Figure 2.3 shows house prices over time in both types of states—the sharp relative decline in house prices in states not requiring a judicial foreclosure is clear.7 Using this difference across states, our research concludes that house prices declined by 1.9 percentage points for every 1 percent of home owners going into foreclosure between 2007 and 2009. Further, by pulling down house prices, foreclosures dampened consumption and home building. Debt-induced fire sales are not limited to the housing market. Andrei Shleifer and Robert Vishny emphasize the importance of fire sales following the leveraged-buyout wave of the late 1980s.8 In that episode, companies with extremely high leverage were forced to sell assets at steeply discounted prices, which then lowered the value of collateral for all businesses. John Geanakoplos has written extensively on the impact of fire sales.9 His work demonstrates how default means that an asset is transferred from someone for whom it’s worth a lot (the borrower) to someone for whom it’s worth much less (the lender).

As the example above illustrates, lenders are willing to lend only because they are convinced that their money is safe. They are sure that the underlying collateral protects them even when house prices inevitably decline. Debt leads to bubbles in part because it gives lenders a sense of security that they will be unaffected if the bubble bursts. But what if lenders are wrong? What if they are actually exposed to this risk? The answer is closely related to a phenomenon that Nicola Gennaioli, Andrei Shleifer, and Robert Vishny call “neglected risks.”11 They argue that certain unlikely events can materialize that are completely unexpected, because investors neglect the risks that they could happen. In the context of the housing crash, many investors may have neglected the risk of house prices falling more than 10 percent. During the financial crisis, people investing in money-market funds may have believed that no fund could ever “break the buck,” or pay back less than the nominal amount put in the account.

Atif Mian, Amir Sufi, and Francesco Trebbi, “Foreclosures, House Prices, and the Real Economy” (working paper no. 16685, NBER, May 2012). 7. Another study using a different methodology found very similar results: Elliot Anenberg and Edward Kung, “Estimates of the Size and Source of Price Declines Due to Nearby Foreclosures” (working paper 2013-09, UCLA, January 11, 2013). They find the same channel: foreclosures push down nearby house prices by forcing them to sell below the price previously posted in the market. 8. Andrei Shleifer and Robert Vishny, “Liquidation Values and Debt Capacity: A Market Equilibrium Approach,” Journal of Finance 47 (1992): 1343–66. 9. John Geanakoplos, “The Leverage Cycle,” in NBER Macroeconomic Annual 2009, vol. 24, ed. Daron Acemoglu, Kenneth Rogoff, and Michael Woodford (Chicago: University of Chicago Press, 2010), 1–65. 10. See National Fire Protection Association data, http://www.nfpa.org/research/fire-statistics/the-us-fire-problem/home-fires.


pages: 239 words: 69,496

The Wisdom of Finance: Discovering Humanity in the World of Risk and Return by Mihir Desai

activist fund / activist shareholder / activist investor, Albert Einstein, Andrei Shleifer, assortative mating, Benoit Mandelbrot, Brownian motion, capital asset pricing model, carried interest, collective bargaining, corporate governance, corporate raider, discounted cash flows, diversified portfolio, Eugene Fama: efficient market hypothesis, financial innovation, follow your passion, George Akerlof, Gordon Gekko, greed is good, housing crisis, income inequality, information asymmetry, Isaac Newton, Jony Ive, Kenneth Rogoff, Louis Bachelier, moral hazard, Myron Scholes, new economy, out of africa, Paul Samuelson, Pierre-Simon Laplace, principal–agent problem, Ralph Waldo Emerson, random walk, risk/return, Robert Shiller, Robert Shiller, Ronald Coase, Silicon Valley, Steve Jobs, The Market for Lemons, The Nature of the Firm, The Wealth of Nations by Adam Smith, Tim Cook: Apple, transaction costs, zero-sum game

The Division of Research at HBS has helped me write this book in incalculable ways. My colleagues in the Finance Unit at HBS have influenced my thinking in many ways, from seminars to teaching groups, and I am grateful to all of them. I was fortunate to be introduced to finance by a remarkable set of teachers, including Michael Edelson, Scott Mason, Dwight Crane, Andre Perold, Peter Tufano, John Campbell, Oliver Hart, and Andrei Shleifer. My academic mentors—Marty Feldstein, Michael Graetz, James R. Hines Jr., and Andrei Shleifer—have provided me with lasting models of scholarly integrity and ambition. I’ve been afforded incredible opportunities to interact with many thoughtful undergraduate, MBA, JD, doctoral, and executive education students. This book is a direct result of what they have taught me about these ideas and about teaching. The students who first received this work prompted me to turn this into a book, so I’m particularly grateful to the class of 2015 Harvard MBA students (particularly Parasvil Patel) and the executive education students of General Management Program 18.

We’ve looked so far at matters of risk and return and why investors choose to invest, but there’s also the matter of how and why investors get their money back. This might seem like a trivial matter because, obviously, they own their share in a company or a production and are therefore due their share of the profits. But The Producers captures an essential truth of finance—investors have few rights and usually have little knowledge of what actually is going on. So then the puzzle becomes, as economists Andrei Shleifer and Robert Vishny put it, why “suppliers of capital get anything back. After all, they part with their money and have little to contribute to the enterprise afterward. The professional managers and entrepreneurs who run the firms might as well abscond with the money.” In other words, why doesn’t capitalism collapse into an endless series of frauds? Why don’t all entrepreneurs do what Bialystock and Bloom tried to do, and why does anyone invest in anything, given the risks that their money might end up in the hands of opportunistic managers or outright frauds?

Harvard Business Review 90, no. 3 (March 2012): 123–29. Other sources cited in chapter 1 on moral hazard are excellent sources for corporate governance issues as well. An excellent textbook treatment of these issues is provided in Tirole, Jean. The Theory of Corporate Finance. Princeton, NJ: Princeton University Press, 2006. For an international perspective, see La Porta, Rafael, Florencio Lopez-De-Silanes, and Andrei Shleifer. “Corporate Ownership Around the World.” Journal of Finance 54, no. 2 (April 1999): 471–517. An exposition of venture capital securities is provided by Gompers, Paul A., and Joshua Lerner. The Venture Capital Cycle. Cambridge, MA: MIT Press, 1999. On the developments at Tootsie Roll, I draw on several journalistic accounts: Kesling, Ben. “Tootsie Roll CEO Melvin Gordon Dies at 95: Shares Rise as Investors Eye Candy Company as Potential Takeover Target.”


pages: 369 words: 128,349

Beyond the Random Walk: A Guide to Stock Market Anomalies and Low Risk Investing by Vijay Singal

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3Com Palm IPO, Andrei Shleifer, asset allocation, capital asset pricing model, correlation coefficient, cross-subsidies, Daniel Kahneman / Amos Tversky, diversified portfolio, endowment effect, fixed income, index arbitrage, index fund, information asymmetry, liberal capitalism, locking in a profit, Long Term Capital Management, loss aversion, margin call, market friction, market microstructure, mental accounting, merger arbitrage, Myron Scholes, new economy, prediction markets, price stability, profit motive, random walk, Richard Thaler, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, survivorship bias, transaction costs, Vanguard fund

Quarterly Journal of Economics 116(1), 261–92. Barberis, Nicholas, Andrei Shleifer, and Robert Vishny. 1998. A Model of Investor Sentiment. Journal of Financial Economics 49(3), 307–43. Barsky, Robert B., and J. Bradford De Long. 1993. Why Does the Stock Market Fluctuate. Quarterly Journal of Economics 108(2), 291–311. Brav, Alon, and J. B. Heaton. 2002. Competing Theories of Financial Anomalies. Review of Financial Studies 15, 575–606. Chen, Honghui, Greg Noronha, and Vijay Singal. 2004. The Price Responses to S&P 500 Index Additions and Deletions. Forthcoming in the Journal of Finance. Daniel, Kent, David Hirshleifer, and Avanidhar Subrahmanyam. 1998. Investor Psychology and Security Market Under- and Overreactions. Journal of Finance 53(6), 1839–85. DeLong, J. Bradford, Andrei Shleifer, Lawrence H. Summers, and Robert J.

Many academics in finance routinely use their knowledge and research to manage hedge funds or other investment portfolios. For example, Dimensional Fund Advisors, which manages more than $30 billion in assets, is associated with Eugene Fama of the University of Chicago, Ken French of Dartmouth College, and two of their former students, David Booth and Rex Sinquefield. LSV Asset Management, which manages about $8 billion, is owned by Josef Lakonishok of the University of Illinois, Andrei Shleifer of Harvard, and Robert Vishny of the University of Chicago. Long Term Capital Management, whose failure shook world financial markets in 1998 and which had to be rescued by a group of large banks prodded on by the Federal Reserve, was advised by Nobel laureates Robert Merton and Myron Scholes. 2 The January Effect and the New December Effect Small loser stocks are known to appreciate considerably in January, giving rise to the so-called January effect.

The January Effect: Still There After All These Years. Financial Analyst Journal 52(1), 27–31. Haugen, Robert A., and Josef Lakonishok. 1988. The Incredible January Effect: The Stock Market’s Unsolved Mystery (Homewood, Ill.: Dow Jones–Irwin). Keim, Donald B. 1983. Size-Related Anomalies and Stock Return Seasonality: Further Empirical Evidence. Journal of Financial Economics 12, 13–32. Lakonishok, Josef, Andrei Shleifer, Richard Thaler, and Robert Vishny. 1991. Window Dressing by Pension Fund Managers. American Economic Review 81, 227–31. Poterba, James M., and Scott J. Weisbenner. 2001. Capital Gains Tax Rules, Tax-Loss Trading, and the Turn-of-the-Year Returns. Journal of Finance 56(1), 353–68. Reinganum, Mark. 1983. The Anomalous Stock Market Behavior of Small Firms in January: Empirical Tests for Tax-Loss Selling Effects.


pages: 543 words: 147,357

Them And Us: Politics, Greed And Inequality - Why We Need A Fair Society by Will Hutton

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Andrei Shleifer, asset-backed security, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, capital controls, carbon footprint, Carmen Reinhart, Cass Sunstein, centre right, choice architecture, cloud computing, collective bargaining, conceptual framework, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, debt deflation, decarbonisation, Deng Xiaoping, discovery of DNA, discovery of the americas, discrete time, diversification, double helix, Edward Glaeser, financial deregulation, financial innovation, financial intermediation, first-past-the-post, floating exchange rates, Francis Fukuyama: the end of history, Frank Levy and Richard Murnane: The New Division of Labor, full employment, George Akerlof, Gini coefficient, global supply chain, Growth in a Time of Debt, Hyman Minsky, I think there is a world market for maybe five computers, income inequality, inflation targeting, interest rate swap, invisible hand, Isaac Newton, James Dyson, James Watt: steam engine, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, labour market flexibility, liberal capitalism, light touch regulation, Long Term Capital Management, Louis Pasteur, low-wage service sector, mandelbrot fractal, margin call, market fundamentalism, Martin Wolf, mass immigration, means of production, Mikhail Gorbachev, millennium bug, money market fund, moral hazard, moral panic, mortgage debt, Myron Scholes, Neil Kinnock, new economy, Northern Rock, offshore financial centre, open economy, Plutocrats, plutocrats, price discrimination, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, railway mania, random walk, rent-seeking, reserve currency, Richard Thaler, Right to Buy, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, Rory Sutherland, Satyajit Das, shareholder value, short selling, Silicon Valley, Skype, South Sea Bubble, Steve Jobs, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, unpaid internship, value at risk, Vilfredo Pareto, Washington Consensus, wealth creators, working poor, zero-sum game, éminence grise

Yes, we think the best and brightest should receive proportionate rewards, but not for any kind of activity. There is a distinction to be made between genuine entrepreneurship, invention and innovative leadership that create wealth, and being clever at capturing wealth that others have made and redistributing it to oneself – what economists call ‘rent’ or a return for inert property possession. Three leading theorists from Harvard and MIT – Kevin Murphy, Robert Vishny and Andrei Shleifer – argue in an important paper that countries in which talent pursues such rent-seeking activity rather than genuine entrepreneurship grow at a slower rate: ‘Pure entrepreneurial activities raise current income because resources are used more efficiently, contribute to growth because technology is improved, and take profits away from competitors.’19 Rent-seeking does the opposite. Moreover, as Schumpeter pointed out, the innovating entrepreneur who had to overcome the resistance of the conservative to change probably expended more energy and effort.

The lesson is clear. One of the reasons that so many mergers and takeovers fail afterwards is that predator companies, when they assess the profitability of a hostile takeover, regard eliminating the network of promises, processes and implicit contracts on which most firms depend as a source of a quick win. They are wrong: these elements comprise the glue that holds the company together. Larry Summers and Andrei Shleifer have argued that this type of financial engineering is a form of economic vandalism – wrecking a firm’s social capital for unsustainable short-term cost advantage.28 However, you will look in vain in mainstream economics text-books for such understanding of flesh-and-blood markets peopled by flesh-and-blood economic actors. Firms that make fairness an explicit part of their strategy tend to be more successful.

See also Serge-Christophe Kolm and Jean Mercier Ythier (eds) (2006) The Handbook on the Economics of Giving, Reciprocity and Altruism, Elsevier, North-Holland. 16 Paul Burrows and Graham Loomes (1994) ‘The Impact of Fairness on Bargaining Behavior’, Empirical Economics 19: 201–21. 17 Elizabeth Hoffman and Matthew Spitzer (1985) ‘Entitlements, Rights, and Fairness: An Experimental Examination of Subjects’ Concepts of Distributive Justice’, Journal of Legal Studies 14: 259–97. 18 Bruno S. Frey and Werner W. Pommerehne (1993) ‘On the Fairness of Pricing – an Empirical Survey among the General Population’, Journal of Economic Behavior and Organisation 20: 295–307. 19 Kevin Murphy, Andrei Shleifer and Robert Vishny (1991) ‘The Allocation of Talent: Implications for Growth’, The Quarterly Journal of Economics 106 (2): 503–30. 20 See Israel M. Kirzner, ‘The Nature of Profits: Some Economic Insights and Their Ethical Implications’, in Robin Cowan and Mario J. Rizzo (eds) (1994) Profits and Morality, University of Chicago Press. 21 The New Economics Foundation (2010) ‘A Bit Rich’, paper. 22 Unpublished documents by the Fabian Society. 23 Michael Hanman and John Freeman (1989) Organisational Ecology, Harvard University Press. 24 Ove Arup, ‘The Key Speech’, at http://www.arup.com/Publications/The_Key_Speech.aspx. 25 John Spedam Lewis’s 1957 broadcast on the BBC, John Lewis website.


pages: 162 words: 50,108

The Little Book of Hedge Funds by Anthony Scaramucci

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Andrei Shleifer, asset allocation, Bernie Madoff, business process, carried interest, corporate raider, Credit Default Swap, diversification, diversified portfolio, Donald Trump, Eugene Fama: efficient market hypothesis, fear of failure, fixed income, follow your passion, Gordon Gekko, high net worth, index fund, John Meriwether, Long Term Capital Management, mail merge, margin call, mass immigration, merger arbitrage, money market fund, Myron Scholes, NetJets, Ponzi scheme, profit motive, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk-adjusted returns, risk/return, Ronald Reagan, Saturday Night Live, Sharpe ratio, short selling, Silicon Valley, the new new thing, too big to fail, transaction costs, Vanguard fund, Y2K, Yogi Berra, zero-sum game

We also believe that hedge fund investors will continue to commit capital to mortgage strategies to seek out uncorrelated return streams, improve portfolio diversification, and achieve high risk-adjusted returns. Chapter Six Ironing Out Inefficiencies Exploiting the Efficient Market Theory If the efficient markets hypothesis was a publicly traded security, its price would be enormously volatile. —Andrei Shleifer and Lawrence H. Summers, The Noise Trader Approach to Finance In 1990, Andrei Shleifer and Larry Summers mockingly made the comment that begins this chapter, adding that the “stock in the efficient markets hypothesis—at least as it has been traditionally formulated—crashed along with the rest of the market on October 19, 1987 . . . and its recovery has been less dramatic than that of the rest of the market.”1 Pretty fun for a pair of economists from Harvard, especially for one who would serve as President Clinton’s Secretary of the Treasury and President Obama’s Director of the White House National Economic Council.

Therefore I see two paths for hedge funds: Path 1 will be to remain nimble, opportunistic and compact, maximizing returns in periods of dislocation, and preserving capital during stress. Path 2 will be to grow larger by diversification into long only and hybrid products. The long only industry has pockets of excellence, but hedge funds competing in this space have good prospects to outperform. Notes 1. Andrei Shleifer and Lawrence Summers, “The Noise Trader Approach to Finance,” Journal of Economic Perspectives 4, no. 2 (Spring 1990), www.economics.harvard.edu/faculty/shleifer/files/noise_trader_approach_finance.pdf. Chapter Seven A Balancing Act Outperforming the Market while Taking Less Risk The secret to being successful from a trading perspective is to have an indefatigable and an undying and unquenchable thirst for information and knowledge.


pages: 168 words: 46,194

Why Nudge?: The Politics of Libertarian Paternalism by Cass R. Sunstein

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Affordable Care Act / Obamacare, Andrei Shleifer, availability heuristic, Cass Sunstein, choice architecture, clean water, Daniel Kahneman / Amos Tversky, Edward Glaeser, endowment effect, energy security, framing effect, invisible hand, late fees, libertarian paternalism, loss aversion, nudge unit, randomized controlled trial, Richard Thaler

Posner, Why Is There No Milton Friedman Today, 10 ECON. J. WATCH 210, 212 (2013), available at http://econjwatch.org/articles/why-is-there-no-milton-friedman-today-RP. 11. See David Laibson, Golden Eggs and Hyperbolic Discounting, 112 Q.J. ECON. 443, 445 (1997). 12. For a discussion of some of the foundational issues, see Pedro Bordalo, Nicola Gennaioli & Andrei Shleifer, Salience Theory of Choice Under Risk, 127 Q.J. ECON. 1243 (2012); Pedro Bordalo, Nicola Gennaioli & Andrei Shleifer, Salience in Experimental Tests of the Endowment Effect, 102 AM. ECON. REV. 47 (2012). 13. See Ted O’Donoghue & Matthew Rabin, Choice and Procrastination, 116 Q.J. ECON. 121, 121–22 (2001); Richard H. Thaler & Shlomo Benartzi, Save More Tomorrow™: Using Behavioral Economics to Increase Employee Saving, 112 J. POL. ECON. S164, S168–69 (2004). 14.

January–February, 2012, available at http://hbr.org/2013/01/smarter-information-smarter-consumers/ar/pr. 18. See, e.g., http://99u.com/articles/6969/10-Online-Tools-for-Better-Attention-Focus; http://appsforhealthykids.com/; http://exercise.about.com/od/videosmusicsoftware/tp/fitnessapps.htm. 19. For valuable discussion, see IAN AYRES, CARROTS AND STICKS (2010). 20. See OREN BAR-GILL, SEDUCTION BY CONTRACT (2012). On the general point, see Andrei Shleifer, Psychologists at the Gate, 50 J. ECON. LITERATURE 1080 (2012). 21. See HEURISTICS: THE FOUNDATIONS OF ADAPTIVE BEHAVIOR (Gerd Gigerenzer et al. eds., 2011). 22. Michael Greenstone, Toward a Culture of Persistent Regulatory Experimentation and Evaluation, in NEW PERSPECTIVES ON REGULATION 111 (David Moss & John Cisternino eds., 2009). For a number of discussions of randomized controlled trials, including nudges, see ABHIJIT V.


pages: 586 words: 159,901

Wall Street: How It Works And for Whom by Doug Henwood

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accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, affirmative action, Andrei Shleifer, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, capital asset pricing model, capital controls, central bank independence, computerized trading, corporate governance, corporate raider, correlation coefficient, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, dematerialisation, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, experimental subject, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, George Gilder, hiring and firing, Hyman Minsky, implied volatility, index arbitrage, index fund, information asymmetry, interest rate swap, Internet Archive, invisible hand, Irwin Jacobs, Isaac Newton, joint-stock company, Joseph Schumpeter, kremlinology, labor-force participation, late capitalism, law of one price, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, London Interbank Offered Rate, Louis Bachelier, market bubble, Mexican peso crisis / tequila crisis, microcredit, minimum wage unemployment, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, oil shock, Paul Samuelson, payday loans, pension reform, Plutocrats, plutocrats, price mechanism, price stability, prisoner's dilemma, profit maximization, publication bias, Ralph Nader, random walk, reserve currency, Richard Thaler, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, selection bias, shareholder value, short selling, Slavoj Žižek, South Sea Bubble, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond

It wasn't until the bull market that began in the early 1980s that <7 began to take off. Other analysts have argued that while ^ is a weak explanation of real investment, changes in stock prices do a better job (Barro 1990). But it may be that the stock market is simply a leading indicator of the business cycle, responding quickly to changes in interest rates and central bank policy, rather than being the independent cause of anything. Randall Morck, Andrei Shleifer, and Robert Vishny (1990) found that over the period 1960-1987, the stock market explained very little of the change in real investment once fundamentals like sales and profit growth were controlled for — relations that held for the stock market and economy taken as a whole, and for individual firms examined in detail.^° Introducing external financing — new stock and debt issues — added a bit of explanatory power to their equations, but not much, with new debt doing a better job than equity.

In one study of 62 hostile takeover bids between 1984 and 1986, for example, an important target was lumber firms who were not cutting enough timber "given the interest rate, the growth rate of trees, and the price path for timber." The infamous Maxxam takeover of Pacific Lumber was inspired by fallow old redwoods that the latter wouldn't cut. Maxxam, powered by junk, took over Pacific Lumber and liquidated the trees. Thinking like economists, Sanjai Bhagat, Andrei Shleifer, and Robert Vishny (1990, p. 54), declared that "we have a case in which cutting the trees raises efficiency." And if trees are not sacrificed at the rate dictated by interest rates, then Wall Street is being cheated of free cash flow. Rising to a higher theoretical pitch in his early 1990s work, Jensen likened the "new LBO associations" — those with a KKR-like boutique at the center — to Japanese keiretsu, which are groups of associated firms with a large bank at their center (Jensen 1991).

The International Evidence," BIS Working Paper No. 37 (Basel: Bank for International Settlements, September). Bernstein, Peter L. (1992). Capital Ideas: The Improbable Origins of Modern Wall Street (New York: Free Press). Berthoud, Richard, and Elaine Kempson (1992). Credit and Debt: The PSI Report {London: Policy Studies Institute). Betker, Brian L. (1995). "Administrative Costs of Debt Restructurings," Ohio State University mimeo (May). Bhagat, Sanjai, Andrei Shleifer, and Robert W. Vishny (1990). "Hostile Takeovers in the 1980s: The Return to Corporate Specialization," Brookings Papers on Economic Activity: Microeconomics, pp. 1-85. Bilello, Suzanne (1992). "Free-Trade Pact Stirs Emotions," New York Newsday, August 7. Black, Fisher (1986). "Noise," Journal of Finance i\ (July), pp. 529-543. Black, Fisher, and Myron Scholes (1973). "The Pricing of Options and Corporate Liabilities," Journal of Political Economy d>\, pp. 637-654.


pages: 1,088 words: 228,743

Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen

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Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, Bernie Madoff, Black Swan, Bretton Woods, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, central bank independence, collateralized debt obligation, commoditize, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, George Akerlof, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, information asymmetry, interest rate swap, invisible hand, Kenneth Rogoff, laissez-faire capitalism, law of one price, Long Term Capital Management, loss aversion, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, Myron Scholes, negative equity, New Journalism, oil shock, p-value, passive investing, Paul Samuelson, performance metric, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, Robert Shiller, savings glut, selection bias, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, survivorship bias, systematic trading, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond, zero-sum game

Barberis, Nicholas; and Ming Huang (2008), “Stocks as lotteries: The implications of probability weighting for security prices,” American Economic Review 98 (December), 2066–2100. Barberis, Nicholas; Ming Huang; and Tano Santos (2001), “Prospect theory and asset prices,” Quarterly Journal of Economics 116, 1–53. Barberis, Nicholas; and Andrei Shleifer (2003), “Style investing,” Journal of Financial Economics 68, 161–199. Barberis, Nicholas; Andrei Shleifer; and Robert Vishny (1998), “A model of investor sentiment,” Journal of Financial Economics 49, 307–345. Barberis, Nicholas; Andrei Shleifer; and Jeffrey Wurgler (2005), “Comovement,” Journal of Financial Economics 75, 283–317. Barberis, Nicholas; and Richard H. Thaler (2003), “A survey of behavioral finance,” in Handbook of the Economics of Finance (G. Constantinides, R. Stulz, M. Harris, Eds.), Amsterdam: North Holland.

Ritchken (2008), “Correlation risk,” working paper, available at SSRN: http://ssrn.com/abstract=1027479 Kritzman, Mark P. (2000), Puzzles of Finance: Six Practical Problems and Their Remarkable Solutions, John Wiley & Sons. Kumar, Alok (2009), “Who gambles in the stock market?” Journal of Finance 64(4), 1889–1933. Lakonishok, Josef; Andrei Shleifer; and Robert W. Vishny (1994), “Contrarian investment, extrapolation, and risk,” Journal of Finance 49(5), 1541–1578. Lamont, Owen A.; and Richard H. Thaler (2003), “Can the market add and subtract? Mispricing in tech stock carve-outs,” Journal of Political Economy 111, 227–268. Lancetti, Sebastian; and David Nordquist (2008), “29 years of style investing in the US: The importance of sectors,” Global Quantitative Research Monograph, UBS Investment Research, July 9, 2008. La Porta, Rafael; Josef Lakonishok; Andrei Shleifer; and Robert Vishny (1997), “Good news for value stocks: Further evidence on market efficiency,” Journal of Finance 49, 1541–1578.

Bondarenko, Oleg (2004), “Market price of variance risk and performance of hedge funds,” University of Illinois working paper. Bondarenko, Oleg (2007), “Variance trading and market price of variance,” University of Illinois working paper. Booth, David G.; and Eugene F. Fama (1992), “Diversification returns and asset contributions,” Financial Analysts Journal (May/June), 26–32. Bordalo, Pedro; Nicola Gennaioli; and Andrei Shleifer (2010), “Salience theory of choice under risk,” Harvard University working paper. Boston Consulting Group (2010), In Search of Stable Growth: Global Asset Management 2010, annual report, available at http://www.bcg.com/documents/file53448.pdf Boudoukh, Jacob; Roni Michaely; Matthew Richardson; and Michael R. Roberts (2007), “On the importance of measuring payout yield: Implications for empirical asset pricing,” Journal of Finance 62, 877–916.


pages: 250 words: 88,762

The Logic of Life: The Rational Economics of an Irrational World by Tim Harford

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activist fund / activist shareholder / activist investor, affirmative action, Albert Einstein, Andrei Shleifer, barriers to entry, Berlin Wall, colonial rule, Daniel Kahneman / Amos Tversky, double entry bookkeeping, Edward Glaeser, en.wikipedia.org, endowment effect, European colonialism, experimental economics, experimental subject, George Akerlof, income per capita, invention of the telephone, Jane Jacobs, John von Neumann, law of one price, Martin Wolf, mutually assured destruction, New Economic Geography, new economy, Plutocrats, plutocrats, Richard Florida, Richard Thaler, Ronald Reagan, Silicon Valley, spinning jenny, Steve Jobs, The Death and Life of Great American Cities, the market place, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Malthus, women in the workforce, zero-sum game

This is said to be a common practice in Turkey, in Indostan, and, I believe, in most other governments of Asia. It seems to have been a common practice among our ancestors during the violence of the feudal government. Smith might also have mentioned the French, because France was rapidly becoming more absolutist at the time. One indication is the population of cities, which we know from chapter 7 is a sound guide to prosperity. Economists Bradford DeLong and Andrei Shleifer have used city populations to chart the effects of absolutism in political rule. In 1500, Paris was Europe’s largest city, and the great (and relatively free) Italian city-states of Naples, Milan, and Venice were the only other cities with populations over one hundred thousand. By 1800, London was almost twice as large as Paris, Amsterdam was doing well, and other cities under British rule, such as Dublin, Manchester, and Edinburgh, were rapidly growing.

Since the 1980s: Gaspar and Glaeser, “Information Technology and the Future of Cities.” “She was dissatisfied”: Jane Jacobs, The Economy of Cities, p. 51. The business guru Michael Porter: Michael Porter, “Clusters and the New Economics of Competition,” Harvard Business Review 76, no. 6 (November–December 1998): 77–90. A group of four economists: Edward L. Glaeser, Hedi D. Kallal, Jose A. Scheinkman, and Andrei Shleifer, “Growth in Cities,” Journal of Political Economy 100, no. 6(December 1992): 1126–52. Nor is this the only: Gianmarco Ottaviano and Giovanni Peri, “The Economic Value of Cultural Diversity: Evidence from US Cities,” NBER Working Paper 10904, November 2004, available at: ideas.repec.org/a/oup/jecgeo/v6y2006i1p9-44.html. When Katrina hit: Jack Shafer, “Don’t Refloat: The Case Against Rebuilding the Sunken City of New Orleans,” Slate, September 7, 2005, www.slate.com/id/2125810.

Census Bureau, www.census.gov/ipc/www/idb. Economic historian Robert Allen: Robert C. Allen, “The British Industrial Revolution in Global Perspective: How Commerce Created the Industrial Revolution and Modern Economic Growth,” unpublished paper, 2006. “In all countries”: Smith, The Wealth of Nations, book 2, chapter 30, pars. 30–32. Twelve of Europe’s fifty-six largest cities: J. Bradford DeLong and Andrei Shleifer, “Princes and Merchants: City Growth Before the Industrial Revolution,” Journal of Law and Economics 36 (October 1993): 671–702, econ161.berkeley.edu/pdf_files/Princes.pdf. Europe started to become decisively richer: Daron Acemoglu, Simon Johnson, and James Robinson, “The Rise of Europe: Atlantic Trade, Institutional Change, and Economic Growth,” American Economic Review 95, no. 3(June 2005): 546–79, econ-www.mit.edu/files/296.


pages: 370 words: 112,602

Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty by Abhijit Banerjee, Esther Duflo

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Albert Einstein, Andrei Shleifer, business process, business process outsourcing, call centre, Cass Sunstein, charter city, clean water, collapse of Lehman Brothers, congestion charging, demographic transition, diversified portfolio, experimental subject, hiring and firing, land tenure, low skilled workers, M-Pesa, microcredit, moral hazard, purchasing power parity, randomized controlled trial, Richard Thaler, school vouchers, Silicon Valley, The Fortune at the Bottom of the Pyramid, Thomas Malthus, urban planning

The point is that these vendors are sitting under what appears to be as close to a money tree as we are likely to find anywhere. Why don’t they shake it a bit more? How can we square this with the sophisticated financial planning that we encountered with Jennifer Auma? THE PSYCHOLOGY OF SAVINGS Understanding the way people think about the future can help resolve these apparent contradictions. Andrei Shleifer, probably the best exponent of the theory that many people sometimes do silly things (he coined, or at least popularized, the term “noise traders” to characterize the behavior of naïve stock traders who are ruthlessly exploited by sophisticated traders), who had just returned from Kenya, shared with us something that he had noticed there: a huge difference between the farms run by a group of nuns, which were lush and vibrant, and those run by their neighbors, which were much less impressive.

In their lives and their work they each constantly express an unwillingness to live with the injustice that they see in the world. We would have had to be deaf and blind to escape their influence. Our fathers, Dipak Banerjee and Michel Duflo, taught us the importance of getting the argument right. We do not always measure up to the exacting standard of precision they set for themselves, but we came to understand why it is the right standard. The genesis of this book was a conversation in 2005 with Andrei Shleifer, who was then editing the Journal of Economic Perspectives. He asked us to write something about the poor. While we were writing that piece, which was eventually called “The Economic Lives of the Poor,” we realized that this could be a way to bring together the many disparate facts and ideas that we have spent our lives trying to fathom. Max Brockman, our agent, then persuaded us that there might be interest in publishing a book stemming from this piece.

However, we would still like to acknowledge Josh Angrist, Rukmini Banerji, Annie Duflo, Neelima Khetan, Michael Kremer, Andreu Mas Colell, Eric Maskin, Sendhil Mullainathan, Andy Newman, Rohini Pande, Thomas Piketty, and Emmanuel Saez, who, in their own individual ways, did more to shape the thoughts that went into this book than they probably realize. We hope that they are not entirely put off by the result. We benefited immensely from the comments of a number of people on earlier drafts of the book: Daniel Cohen, Angus Deaton, Pascaline Dupas, Nicholas Kristof, Greg Lewis, Patrick McNeal, Rohini Pande, Ian Parker, Somini Sengupta, Andrei Shleifer, and Kudzai Takavarasha. Emily Breza and Dominic Leggett read through every chapter several times and came up with important ways to improve the book. The book is immensely better for that, though probably not as good as they could have made it if we had been less impatient to get it done. Our editor at PublicAffairs, Clive Priddle, was wonderful to work with: The book came to life when he took charge.


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Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A. Akerlof, Robert J. Shiller

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affirmative action, Andrei Shleifer, asset-backed security, bank run, banking crisis, collateralized debt obligation, conceptual framework, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, Deng Xiaoping, Donald Trump, Edward Glaeser, en.wikipedia.org, experimental subject, financial innovation, full employment, George Akerlof, George Santayana, housing crisis, Hyman Minsky, income per capita, inflation targeting, invisible hand, Isaac Newton, Jane Jacobs, Jean Tirole, job satisfaction, Joseph Schumpeter, Long Term Capital Management, loss aversion, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, new economy, New Urbanism, Paul Samuelson, Plutocrats, plutocrats, price stability, profit maximization, purchasing power parity, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, South Sea Bubble, The Chicago School, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, working-age population, Y2K, Yom Kippur War

“Industrial Paradox: Latin America Attracts Auto Making Facilities Despite Lag in Sales.” Wall Street Journal, August 6, pp. 1,16. Morck, Randall, Andrei Shleifer, and Robert Vishny. 1990. “The Stock Market and Investment: Is the Market a Sideshow?” Brookings Papers on Economic Activity 2:157–215. Morgenson, Gretchen. 2008. “Everyone Out of the Security Pool.” New York Times, Sunday Business, November 16, p. BU-1. Morris, Stephen A., and Hyun Song Shin. 2004. “Liquidity Black Holes.” Review of Finance 8(1):1–18. ———. 2008. “Financial Regulation in a System Context.” Brookings Papers on Economic Activity 2. “Mr. Lodge on Finance.” 1908. New York Tribune, March 13, p. 3. Mullainathan, Sendhil, and Andrei Shleifer. 2005. “Persuasion in Finance.” Unpublished paper, Harvard University. “Must Cut Prices if They Would Work.” 1894.

They maintain that the mere fact that the major event did not happen cannot be taken to mean that the market was irrational. Maybe they are right. One cannot decisively prove that the stock market has been irrational. But in all of this debate no one has offered any real evidence to think that the volatility is rational.6 The price changes appear instead to be correlated with social changes of various kinds. Andrei Shleifer and Sendhil Mullainathan have observed the changes in Merrill Lynch advertisements. Prior to the stock market bubble, in the early 1990s, Merrill Lynch was running advertisements showing a grandfather fishing with his grandson. The ad was captioned: “Maybe you should plan to grow rich slowly.” By the time the market had peaked around 2000, when investors were obviously very pleased with recent results, Merrill’s ads had changed dramatically.


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Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors by Wesley R. Gray, Tobias E. Carlisle

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activist fund / activist shareholder / activist investor, Albert Einstein, Andrei Shleifer, asset allocation, Atul Gawande, backtesting, beat the dealer, Black Swan, capital asset pricing model, Checklist Manifesto, cognitive bias, compound rate of return, corporate governance, correlation coefficient, credit crunch, Daniel Kahneman / Amos Tversky, discounted cash flows, Edward Thorp, Eugene Fama: efficient market hypothesis, forensic accounting, hindsight bias, intangible asset, Louis Bachelier, p-value, passive investing, performance metric, quantitative hedge fund, random walk, Richard Thaler, risk-adjusted returns, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, short selling, statistical model, survivorship bias, systematic trading, The Myth of the Rational Market, time value of money, transaction costs

TABLE 1.1 Long-Term Performance of Common Price Ratios (1964 to 2011) The counterargument to the empirical outperformance of value stocks is that these stocks are inherently more risky. In this instance, risk is defined as the additional volatility of the value stocks. Prolific finance researchers and founders of modern quantitative asset management analysis Eugene Fama and Ken French made this argument most forcefully in their 1992 paper, “The Cross-Section of Expected Stock Returns.” Behavioral finance researchers Joseph Lakonishok, Andrei Shleifer, and Robert Vishny argue in their 1994 paper, “Contrarian Investment, Extrapolation, and Risk,”25 that value strategies produce better returns, not because they are fundamentally riskier, but because they are contrarian to the “naïve” strategies followed by other investors. Naïve investors extrapolate poor earnings performance too far into the future, assume a downward trend in stock prices will persist or simply overreact to bad news, leading them to oversell stocks to the point that they are undervalued.

Seeking the cheapest stocks on a compound measure might provide a cross-check to help us avoid stocks with unusual accounting that look cheap on one metric but expensive on the other two. Further, if one metric underperforms for an extended period, the other two might counter its influence. CHAPTER 7 Price Ratios: A Horse Race Value strategies yield higher returns because these strategies exploit suboptimal behavior of the typical investor and not because these strategies are fundamentally riskier. —Josef Lakonishok, Andrei Shleifer, and Robert Vishny, “Contrarian Investment, Extrapolation, and Risk”1 The empirical evidence is unqualified: value stocks have beaten both glamour stocks and the market over the long term. This raises two obvious questions: (1) why would anyone buy glamour stocks, and (2) which measure of value has generated the best returns? The answer to the first question is behavioral. Expensive stocks are called “glamour” or “story” stocks for a reason.


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Smart Money: How High-Stakes Financial Innovation Is Reshaping Our WorldÑFor the Better by Andrew Palmer

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Affordable Care Act / Obamacare, algorithmic trading, Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, Black-Scholes formula, bonus culture, break the buck, Bretton Woods, call centre, Carmen Reinhart, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Graeber, diversification, diversified portfolio, Edmond Halley, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, eurozone crisis, family office, financial deregulation, financial innovation, fixed income, Flash crash, Google Glasses, Gordon Gekko, high net worth, housing crisis, Hyman Minsky, implied volatility, income inequality, index fund, information asymmetry, Innovator's Dilemma, interest rate swap, Kenneth Rogoff, Kickstarter, late fees, London Interbank Offered Rate, Long Term Capital Management, loss aversion, margin call, Mark Zuckerberg, McMansion, money market fund, mortgage debt, mortgage tax deduction, Myron Scholes, negative equity, Network effects, Northern Rock, obamacare, payday loans, peer-to-peer lending, Peter Thiel, principal–agent problem, profit maximization, quantitative trading / quantitative finance, railway mania, randomized controlled trial, Richard Feynman, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, short selling, Silicon Valley, Silicon Valley startup, Skype, South Sea Bubble, sovereign wealth fund, statistical model, transaction costs, Tunguska event, unbanked and underbanked, underbanked, Vanguard fund, web application

“I don’t think we should celebrate speedy growth in new areas,” says one of the most senior figures on Wall Street. “Growth on a rapid scale means either a brilliant discovery or a mistake: history suggests it is likely to be a mistake.” One of the most thought-provoking academic papers to come out of the 2007–2008 financial crisis is a study by Nicola Gennaioli of Pompeu Fabra University, Andrei Shleifer of Harvard University, and Robert Vishny of the University of Chicago, called “Neglected Risks, Financial Innovation and Financial Fragility.” It suffers the usual curses of the economic paper: a crushingly formulaic structure and an enormous amount of algebra. In its very broad outlines, it describes a process of financial euphoria leading to fragility and then crisis that is familiar from the works of economists like Hyman Minsky.

Peter Tufano, “Financial Innovation and First-Mover Advantages,” Journal of Financial Economics (1989); Peter Tufano, “Financial Innovation,” Handbook of the Economics of Finance (2003). 5. “The Dojima Rice Market and the Origins of Futures Trading” (Harvard Business School Case Study, November 2010). 6. Minos Zombanakis, “The Life and Good Times of Libor,” Financial World (June 2012). 7. Nicola Gennaioli, Andrei Shleifer, and Robert Vishny, “Neglected Risks, Financial Innovation and Financial Fragility,” Journal of Financial Economics (2012). 8. “Financial Globalisation: Retreat or Reset?” (McKinsey Global Institute, February 2013). 9. Marcin Kasperczyk and Philipp Schnabl, “How Safe Are Money Market Funds?,” Quarterly Journal of Economics 128 (2013). 10. Nicola Lacetera, Devin Pope, and Justin Sydnor, “Heuristic Thinking and Limited Attention in the Car Market” (NBER Working Paper 17030, June 2011). 11.


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The Inner Lives of Markets: How People Shape Them—And They Shape Us by Tim Sullivan

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Airbnb, airport security, Al Roth, Alvin Roth, Andrei Shleifer, attribution theory, autonomous vehicles, barriers to entry, Brownian motion, centralized clearinghouse, Chuck Templeton: OpenTable, clean water, conceptual framework, constrained optimization, continuous double auction, creative destruction, deferred acceptance, Donald Trump, Edward Glaeser, experimental subject, first-price auction, framing effect, frictionless, fundamental attribution error, George Akerlof, Goldman Sachs: Vampire Squid, Gunnar Myrdal, helicopter parent, information asymmetry, Internet of things, invisible hand, Isaac Newton, iterative process, Jean Tirole, Jeff Bezos, Johann Wolfgang von Goethe, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, late fees, linear programming, Lyft, market clearing, market design, market friction, medical residency, multi-sided market, mutually assured destruction, Nash equilibrium, Occupy movement, Pareto efficiency, Paul Samuelson, Peter Thiel, pets.com, pez dispenser, pre–internet, price mechanism, price stability, prisoner's dilemma, profit motive, proxy bid, RAND corporation, ride hailing / ride sharing, Robert Shiller, Robert Shiller, Ronald Coase, school choice, school vouchers, sealed-bid auction, second-price auction, second-price sealed-bid, sharing economy, Silicon Valley, spectrum auction, Steve Jobs, Tacoma Narrows Bridge, technoutopianism, telemarketer, The Market for Lemons, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, trade route, transaction costs, two-sided market, uranium enrichment, Vickrey auction, Vilfredo Pareto, winner-take-all economy

We may not even realize it, but “the market” makes us selfish in such a way that undermines the common good. Wall Street participants work harder to maximize their earnings, but in doing so, they end up poorer than the community players. This irony shows how the market, by undermining our concern for others and beliefs in the intentions of others, can end up shrinking rather than growing the economic pie. Competition Can Make Us Unethical In a 2004 essay, Harvard economist Andrei Shleifer speculated that competitive markets—the holy grail of free marketers—have the potential to make us not just selfish but downright unethical. As his point of departure, Shleifer presumes that ethical conduct is what economists call a normal good—something we consume more of as we get richer. (Ramen noodles, perennial staple of poor college students, are a classic example of an inferior good, where you consume less of it once you can afford not to.)7 The owners of a company with fat profit margins and an unassailable position in the marketplace—Google or Microsoft, for example—can afford to be honest and charitable.

Yet investors chase after fund managers whose stocks did well the previous year, indicating they believe that the high returns were the result of skill rather than luck. 5. Emily Pronin, Thomas Gilovich, and Lee Ross, “Objectivity in the Eye of the Beholder: Divergent Perceptions of Bias in Self versus Others,” Psychological Review 111, no. 3 (2004): 781. 6. The experiment was run with subjects drawn from the Israeli Defense Forces. For Hebrew-speaking subjects, the labels were the Bursa and Kommuna Games. 7. Andrei Shleifer, “Does Competition Destroy Ethical Behavior?” The American Economic Review 94, no. 2 (2004): 414. INDEX Abidjan, Ivory Coast, 167–168 Adfibs.com, 69 adverse selection, 48, 51–55, 57, 59 advertising, as money burning, 70–71 Super Bowl advertising, 70–71 AdWords, 14, 101 Airbnb, 3, 6, 50, 109, 125, 170–172 Akerlof, George, 43–51, 58–59, 64, 112 Alaskoil experiment, 55–57, 58–59 algebraic topology, 44–45 Amazon, 2, 3, 16, 50, 51, 52, 59, 74, 91, 95, 97, 108, 110, 119, 126, 128–129 American Express, 115–116 America’s Second Harvest, 154–160 Amoroso, Luigi, 21 Angie’s List, 120 “animal spirits,” 50 applied theory in economics, 45, 50, 75–76 Arnold, John, 156–158, 160 Arrow, Kenneth, 30–34, 36–37, 40, 76, 117, 180 ascending price English auctions, 83, 100 asymmetric information, 41, 44–55 attribution theory, 177–178 auctions AdWords, 14, 101 auction theory, 82–84 coat hooks, 151–152, 174 design, 14, 101–102 first-price sealed-bid, 86–87, 99–100 first-price (live), 84 internet, 94–97 types of, 81–82 wireless spectrum, 102–103 See also eBay; Vickrey auctions AuctionWeb, 40 Ausubel, Larry, 98 Azoulay, Pierre, 112 Bank of America, 113–115 barriers to entry, in marketplace, 173 baseball posting system, 79–81 Bazerman, Max, 55–57 Becker, Gary, 35, 161–162 Berman, Eli, 67 Berners-Lee, Tim, 41–42 Big Data, Age of, 15 Blu-ray-HD DVD format war, Sony, 125–126 Book Stacks Unlimited, 42–43 Boston public schools, 144–149 Boston University MBA students experiment (Bazerman and Samuelson), 55–57, 58–59 See also Alaskoil experiment bridge design, 141–142 Brown, William P., 83–84 Brownian motion, 28–29 cab drivers, Uber vs., 169–170, 172 Camp, Garrett, 170 candle auctions, 82 capitalism, free-market, 172–173 car service platform, 169–171 cash-back bonus, 116 cash-for-sludge transactions, 167–169 See also Summers, Larry centralized clearinghouses, 140–141 Champagne fairs, 105–106, 126–128 Changi POW camp, 175–177 Le Chatelier, Henry Louis, 29 Le Chatelier’s principle, 29 cheap talk, 62–66, 69 chess, difference between Cold War and, 26 See also poker, bluffing in child labor, 180 cigarettes, as currency in German POW camp, 8–9 Clarke, Edward, 93 Clavell, James, 175 clerkship offers, with federal judges, 140 coat hook, 151–152, 174 Codes of the Underworld (Gambetta), 68 Cold War, difference between chess and, 26 See also poker, bluffing in Collectible Supplies, 128–129 “College Admissions and the Stability of Marriage” (Gale and Shapley), 137 commitment, signs of, 62–63, 69–71, 72–75 community game, 178–179 competition models of, 35, 166, 172–173 platform, 124–126 unethical conduct with, 180–181 “Competition is for Losers” (Thiel), 173 competitive equilibrium, existence of, 29, 31–34, 36–37, 40, 45, 76 competitive markets, 35, 124–126, 172–174, 180–181 See also platforms competitive signaling, 70–71 congestion pricing model, 86, 94 constrained optimization, 85–86, 133 contractorsfromhell.com, 120 copycat competitors, 172–173 corporate philanthropy, 72–75 Cowles, Alfred, 25, 27 Cowles Commission for Research in Economics, 25, 27, 31, 134 “creative destruction,” 50 credit card platforms, 113–116, 123–124 criminal organizations, informational challenges of, 68 currency, at Stalag VII-A POW camp, 8–9 customer feedback, 52, 74–75 Davis, Harry, 154, 157 Debreu, Gérard, 20, 24, 25, 32–33, 36–37 decentralized match, 139–140 deferred acceptance algorithm, 137–141, 145–149 Delmonico, Frank, 164 descending price auctions, 81–82 design, auction, 14, 101–102 Digital Dealing (Hall), 94 Discover card, 115–116 distribution of income, 22 Domar, Evsey, 36–37 Dorosin, Neil, 142–144 Douglas Aircraft Company, 25 Dow, Bob, 1–2 Dow, Edna, 1–2 Drèze, Jacques, 85–86 dumping toxic waste, transactions for, 167–169 Dutch auctions, 81–82 dysfunction, market, 36, 75–77, 143 eBay adverse selection on, 51–55, 57 auction listings, 94–97 concerns on model for, 43, 46, 48 on seller motivation for giving to charities, 73–75 start of, 39–41 as two-sided market, 109, 119 e-commerce, 41–43, 52–55 “The Economic Organization of a P.O.W.


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A Failure of Capitalism: The Crisis of '08 and the Descent Into Depression by Richard A. Posner

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Andrei Shleifer, banking crisis, Bernie Madoff, collateralized debt obligation, collective bargaining, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, diversified portfolio, equity premium, financial deregulation, financial intermediation, Home mortgage interest deduction, illegal immigration, laissez-faire capitalism, Long Term Capital Management, market bubble, money market fund, moral hazard, mortgage debt, Myron Scholes, oil shock, Ponzi scheme, price stability, profit maximization, race to the bottom, reserve currency, risk tolerance, risk/return, Robert Shiller, Robert Shiller, savings glut, shareholder value, short selling, statistical model, too big to fail, transaction costs, very high income

Lee Lockwood and Christian Opp carefully checked the manuscript for technical economic errors and in the process made valuable suggestions for improving the book. Michael Aronson, Douglas Baird, Larry Bernstein, Michael Boudin, Nathan Christensen, Kenneth Dam, Benjamin Friedman, Rebecca Haw, Ashley Keller, William Landes, Jonathan Lewinsohn, Jennifer Nou, Charlene Posner, Eric Posner, Kenneth Posner, Raghuram Rajan, Andrew Rosenfield, Andrei Shleifer, and Luigi Zingales gave me extremely helpful comments on a previous draft. Friedman's help with my project deserves a special acknowledgment. I also owe special thanks to Aronson, my editor at the Harvard University Press, for his encouragement and deft management of this project, as well as for many insightful comments. None of the above is responsible for the errors that remain. February 2, 2009 A Failure of Capitalism 1 The Depression and Its Proximate Causes A Sequence of dramatic events has culminated in the present economic emergency: low interest rates, a housing bubble, the collapse of the bubble, the collapse of the banking system, frenzied efforts at resuscitation, a drop in output and employment, signs of deflation, an ambitious program of recovery.

Lubos Pastor and Pietro Veronesi, "Was There a NASDAQ Bubble in the Late 1990s?" journal of Financial Economics 81 (2006): 61. Raghuram G. Rajan, "Has Financial Development Made the World Riskier?" in The Greenspan Era: Lessons for the Future: A Symposium Spon- sored hy the Federal Reserve Bank of Kansas City (2005), 213. Robert J. Shiller, The Suhprime Solution: How To- day's Financial Crisis Happened, and What to Do about It (2008). Andrei Shleifer, Inefficient Markets: An Introduction to Behavioral Finance (2000). Mark Zandi, Financial Shock: A 5600 hmk at the Suhprime Mortgage Implosion, and How to Avoid the Next Financial Crisis (2008). Luigi Zingales, "The Future of Securities Regula- tion" (University of Chicago, Booth Graduate School of Business, Dec. 2008). Index Copyrighted image removed by Publisher Copyrighted image removed by Publisher Copyrighted image removed by Publisher Copyrighted image removed by Publisher Copyrighted image removed by Publisher Copyrighted image removed by Publisher Copyrighted image removed by Publisher Copyrighted image removed by Publisher Copyrighted image removed by Publisher Copyrighted image removed by Publisher

Falling Behind: Explaining the Development Gap Between Latin America and the United States by Francis Fukuyama

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Andrei Shleifer, Atahualpa, barriers to entry, Berlin Wall, British Empire, business climate, Cass Sunstein, central bank independence, collective bargaining, colonial rule, conceptual framework, creative destruction, crony capitalism, European colonialism, Fall of the Berlin Wall, first-past-the-post, Francis Fukuyama: the end of history, Francisco Pizarro, Hernando de Soto, income inequality, income per capita, labour market flexibility, land reform, land tenure, Monroe Doctrine, moral hazard, New Urbanism, oil shock, open economy, purchasing power parity, rent-seeking, Ronald Reagan, The Wealth of Nations by Adam Smith, total factor productivity, trade liberalization, transaction costs, upwardly mobile, Washington Consensus, zero-sum game

Specifically, “Third World countries are poor because the institutional constraints define a set of payoffs to political/economic activity that do not encourage productive activity.” See North, Institutions, Institutional Change, and Economic Performance (Cambridge: Cambridge University Press, 1990), p. 110. 5. On the importance of judicial systems, see Rafael La Porta, Florencio López de Silanes, Andrei Shleifer, and Robert M. Vishny, “Law and Finance,” Journal of Political Economy 106 (1998): 1113–1155. John H. Coatsworth and Gabriel Tortella Casares analyze the effect of the Spanish judicial system on the development of Spain and Mexico in their initial periods; see John H. Coatsworth and Gabriel Tortella Casares, Institutions and Long-Run Economic Performance in Mexico and Spain, 1800–2000, Working Paper 02/03-1 (Cambridge, MA: David Rockefeller Center for Latin American Studies, Harvard University, 2003).

Source: Polity IV Project on Political Regime Characteristics and Transitions, 1800–2004, Center for Global Policy, George Mason University and Center for International Development and Conflict Management, University of Maryland (dynamic dataset by subscription). 12 11 10 PAN PER JAM 9 CHL URY ARG MEX BRA VEN ECU DOM COL BOL 8 7 6 5 0 5 10 15 20 25 Number of Procedures to Create a Business figure 7.5 Log Gross Domestic Product (GDP) Per Capita (2004 Purchasing Power Parity) vs. Number of Procedures Needed to Create a Business. Source: Simeon Djankov, Rafael La Porta, Florencio López-de-Silanes, and Andrei Shleifer, “The Regulation of Entry,” in Quarterly Journal of Economics 117 (2002): 1–37. Log PPP GDP Per Capita in Constant 2000 USD 12 11 10 ARG MEX PAN DOM BRA COL VEN PER SLV PRY GTMECUGUY JAM NIC HND BOL 9 8 CRI URY CHL HTI 7 6 5 −3 −2.5 −2 −1.5 −1 −0.5 0 0.5 1 Rule of Law Index (World Bank) 1.5 2 2.5 figure 7.6 Log Gross Domestic Product (GDP) Per Capita (2004 Purchasing Power Parity) vs.

See, for example, Guido Tabellini, “Culture and Institutions: Economic Development in the Regions of Europe,” unpublished manuscript, Bocconi University, Milan, Italy, 2005. 24. Daron Acemoglu, Simon Johnson, and James A. Robinson, “Colonial Origins of Comparative Development: An Empirical Investigation,” American Economic Review 91 (2001): 1369–1401. 25. Simeon Djankov, Rafael La Porta, Florencio López-de-Silanes, and Andrei Shleifer, “The Regulation of Entry,” Quarterly Journal of Economics 117 (2001): 1–37. See also Hernando de Soto, The Other Path (New York: Harper & Row, 1989). 26. Acemoglu, Johnson, and Robinson, “Colonial Origins of Comparative Development.” 27. Alfred W. Crosby, Ecological Imperialism (New York: Cambridge University Press, 1986). 28. Acemoglu, Johnson, and Robinson, “Colonial Origins of Comparative Development.” 29.


pages: 584 words: 187,436

More Money Than God: Hedge Funds and the Making of a New Elite by Sebastian Mallaby

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Andrei Shleifer, Asian financial crisis, asset-backed security, automated trading system, bank run, barriers to entry, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, Bretton Woods, capital controls, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, currency peg, Elliott wave, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, fixed income, full employment, German hyperinflation, High speed trading, index fund, John Meriwether, Kenneth Rogoff, Long Term Capital Management, margin call, market bubble, market clearing, market fundamentalism, merger arbitrage, money market fund, moral hazard, Myron Scholes, natural language processing, Network effects, new economy, Nikolai Kondratiev, pattern recognition, Paul Samuelson, pre–internet, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical arbitrage, statistical model, survivorship bias, technology bubble, The Great Moderation, The Myth of the Rational Market, the new new thing, too big to fail, transaction costs

Meanwhile, other researchers acknowledged that markets were not perfectly liquid, as Steinhardt had discovered long before, and that investors were not perfectly rational, a truism to hedge-fund traders. The crash of 1987 underlined these doubts: When the market’s valuation of corporate America changed by a fifth in a single trading day, it was hard to believe that the valuation deserved much deference. “If the efficient markets hypothesis was a publicly traded security, its price would be enormously volatile,” the Harvard economists Andrei Shleifer and Lawrence Summers wrote mockingly in 1990. “But the stock in the efficient markets hypothesis—at least as it has traditionally been formulated—crashed along with the rest of the market on October 19, 1987.”8 The acknowledgment of the limits to market efficiency had a profound effect on hedge funds. Before, the prevailing line from the academy had been that hedge funds would fail. After, lines of academics were queuing up to join them.

But by 1988, when Asness arrived in Chicago, Fama was leading the revisionist charge: Along with a younger colleague, Kenneth French, Fama discovered non-random patterns in markets that could be lucrative for traders. After contributing to this literature, Asness headed off to Wall Street and soon opened his hedge fund. In similar fashion, the Nobel laureates Myron Scholes and Robert Merton, whose formula for pricing options grew out of the efficient-markets school, signed up with the hedge fund Long-Term Capital Management. Andrei Shleifer, the Harvard economist who had compared the efficient-market theory to a crashing stock, helped to create an investment company called LSV with two fellow finance professors. His coauthor, Lawrence Summers, made the most of a gap between stints as president of Harvard and economic adviser to President Obama to sign on with D. E. Shaw, a quantitative hedge fund.9 Yet the biggest effect of the new inefficient-market consensus was not that academics flocked to hedge funds.

When a whole market is out of kilter, the smart investors are especially likely to fall short. They might know that Japan’s equity bubble—or the dot-com bubble or the mortgage bubble—makes no sense, but they cannot borrow enough to bet against it with the force that would deflate it. This is why there is a limit to the power of contrarians. It is why markets swing in trends and why finance is prone to bubbles. This insight—christened “the limits to arbitrage” by the economists Andrei Shleifer and Robert Vishny—points to an opportunity that Jones could sense intuitively. Markets can move away from fundamental value because speculators lack the muscle to challenge the consensus; a trend can keep going far beyond the point at which it ceases to be rational. But if you are a trader with more ammunition and courage than the rest, you can ambush the market and jolt it out of its sleepwalk.


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The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics by William R. Easterly

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Andrei Shleifer, business climate, Carmen Reinhart, central bank independence, clean water, colonial rule, correlation does not imply causation, creative destruction, endogenous growth, financial repression, Gini coefficient, Gunnar Myrdal, Hernando de Soto, income inequality, income per capita, inflation targeting, interchangeable parts, inventory management, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, large denomination, manufacturing employment, Network effects, New Urbanism, open economy, Productivity paradox, purchasing power parity, rent-seeking, Ronald Reagan, selection bias, Silicon Valley, Simon Kuznets, The Wealth of Nations by Adam Smith, Thomas Malthus, total factor productivity, trade liberalization, urban sprawl, Watson beat the top human players on Jeopardy!, Yogi Berra, Yom Kippur War

Comparative Studies 9: Socioeconomic, Demographic, and Health Indicatorsfor Subnational Areas. Calverton, Md.: Macro International June. Mulligan, Casey B., and Xavier Sala-i-Martin. 1993. “Transitional Dynamics in TwoSector Models of Endogenous Growth.” Quarterly Journal of Economics 108 (August): 739-773. Murphy, Kevin M,, Andrei Shleifer, and Robert W. Vishny. 1989. “Industrialization and the Big Push.” Journal of Political Economy 97, no. 5 (October): 1003-1026. Murphy, Kevin M,, Andrei Shleifer, and Robert W. Vishny. 1991. ”The Allocation of Talent: Implications for Growth.” Quarterly Journal of Economics 106, no. 2 (May): 503530. Nafziger, E. Wayne. 1993. The Debt Crisis in Africa. Baltimore: Johns Hopkins University Press. Narayan, Deepa, Robert Chambers, Meera Shah, and Patti Petesch. 2000a. Crying out for Change: Voices of the Poor.


pages: 518 words: 107,836

How Not to Network a Nation: The Uneasy History of the Soviet Internet (Information Policy) by Benjamin Peters

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Albert Einstein, Andrei Shleifer, Benoit Mandelbrot, bitcoin, Brownian motion, Claude Shannon: information theory, cloud computing, cognitive dissonance, computer age, conceptual framework, continuation of politics by other means, crony capitalism, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Graeber, Dissolution of the Soviet Union, Donald Davies, double helix, Drosophila, Francis Fukuyama: the end of history, From Mathematics to the Technologies of Life and Death, hive mind, index card, informal economy, information asymmetry, invisible hand, Jacquard loom, Jacquard loom, John von Neumann, Kevin Kelly, knowledge economy, knowledge worker, linear programming, mandelbrot fractal, Marshall McLuhan, means of production, Menlo Park, Mikhail Gorbachev, mutually assured destruction, Network effects, Norbert Wiener, packet switching, Pareto efficiency, pattern recognition, Paul Erdős, Peter Thiel, Philip Mirowski, RAND corporation, rent-seeking, road to serfdom, Ronald Coase, scientific mainstream, Steve Jobs, Stewart Brand, stochastic process, technoutopianism, The Structural Transformation of the Public Sphere, transaction costs, Turing machine

For a basic review of tolkachy and other informal mechanisms in the economy, see Mark Beissinger, Scientific Management, Socialist Discipline, and Soviet Power (Cambridge: Harvard University Press, 1988); Ledeneva, Russia’s Economy of Favors; and Alena V. Ledeneva, Can Russia Modernize? Sistema, Power Networks and Informal Governance (New York: Cambridge University Press, 2013). 43. Byung-Yeon Kim, “Informal Economy Activities of Soviet Households: Size and Dynamics,” Journal of Comparative Economics 31 (3) ( 2003): 532–551. 44. Kim, “Informal Economy Activities of Soviet Households,” 532–535; Simon Johnson, Daniel Kaufmann, and Andrei Shleifer, “The Unofficial Economy in Transition,” Brookings Papers on Economic Activity 2 (1997): 159–221. 45. Ledeneva, Russia’s Economy of Favors, 12. 46. Zbigniew K. Brzezinski, The Soviet Block: Unity and Conflict, rev. ed. (New York: Praeger, 1960), 116, see also 115–124. 47. From Elet es Tudomany, December 24, 1952, and Rude Pravo, December 21, 1952, quoted in Brzezinski, The Soviet Block, 114. 48.

John, Nicholas, and Benjamin Peters. “Is the End Always Near? An Analysis and Comment on the End of Privacy, 1990–2012.” Unpublished manuscript. John, Richard. Network Nation: Inventing American Telecommunications. Cambridge: Harvard University Press, 2010. Johnson, Daniel. White King and Red Queen: How the Cold War Was Fought on the Chessboard. Boston: Houghton Mifflin, 2008. Johnson, Simon, Daniel Kaufmann, and Andrei Shleifer. “The Unofficial Economy in Transition.” Brookings Papers on Economic Activity 2 (1997): 159–221. Johnston, John. The Allure of Machinic Life: Cybernetics, Artificial Life, and the New AI. Cambridge, MA: MIT Press, 2008. Joravsky, David. Soviet Marxism and Natural Science, 1917–1932. New York: Columbia University Press, 1971. Joravsky, David. The Lysenko Affair. Chicago: University of Chicago Press, 1970.


pages: 361 words: 97,787

The Curse of Cash by Kenneth S Rogoff

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Andrei Shleifer, Asian financial crisis, bank run, Ben Bernanke: helicopter money, Berlin Wall, bitcoin, blockchain, Bretton Woods, capital controls, Carmen Reinhart, cashless society, central bank independence, cryptocurrency, debt deflation, distributed ledger, Edward Snowden, ethereum blockchain, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial exclusion, financial intermediation, financial repression, forward guidance, frictionless, full employment, George Akerlof, German hyperinflation, illegal immigration, inflation targeting, informal economy, interest rate swap, Isaac Newton, Johann Wolfgang von Goethe, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, moveable type in China, New Economic Geography, offshore financial centre, oil shock, open economy, payday loans, price stability, purchasing power parity, quantitative easing, RAND corporation, RFID, savings glut, secular stagnation, seigniorage, The Great Moderation, the payments system, transaction costs, unbanked and underbanked, unconventional monetary instruments, underbanked, unorthodox policies, Y2K, yield curve

Overall GDP is similar to that of the United States, but the share of Europe’s shadow economy is more than double; a rough estimate for the absolute size of the Eurozone underground economy would be $3 trillion. Obviously, including illegal activities (e.g., the drug trade) would increase these measures considerably. The measures of the size of the underground economy in figure 5.1 are broadly consistent with those in other recent studies, including by Rafael La Porta and Andrei Shleifer.17 They look at a variety of indicators, finding, for example, that for the upper quartile of countries by income, electricity consumption in the informal (underground) economy averages 17.6% of total electricity consumption. La Porta and Shleifer also look at such measures as self-employment, because the self-employed are more likely to underreport income. The likely size of noncompliance rates in continental Europe is underscored by the extreme measures some countries have taken to close the tax-reporting gap.

“Rules Rather Than Discretion: The Inconsistency of Optimal Plans.” Journal of Political Economy 85 (3): 473–92. Landefeld, Steven J., Eugene F. Seskin, and Barbara M. Fraumeni. 2008. “Taking the Pulse of the Economy: Measuring GDP.” Journal of Political Economy 22 (2): 193–216. Landes, David. 1999. The Wealth and Poverty of Nations: Why Some Are So Rich and Some Are So Poor. New York: W. W. Norton and Co. La Porta, Rafael, and Andrei Shleifer. 2014. “Informality and Development.” Journal of Economic Perspectives 28 (3): 109–26. Lebow, David E. 1993. “Monetary Policy at Near Zero Interest Rates.” Federal Reserve Board, Division of Research and Statistics Working Paper 136 (July). Washington, DC. Leeper, Eric. 1991. “Equilibria under Active and Passive Monetary and Fiscal Policies.” Journal of Monetary Economics 27: 129–47. Levenson, Thomas. 2011.


pages: 302 words: 83,116

SuperFreakonomics by Steven D. Levitt, Stephen J. Dubner

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agricultural Revolution, airport security, Andrei Shleifer, Atul Gawande, barriers to entry, Bernie Madoff, call centre, clean water, cognitive bias, collateralized debt obligation, creative destruction, credit crunch, Daniel Kahneman / Amos Tversky, deliberate practice, Did the Death of Australian Inheritance Taxes Affect Deaths, disintermediation, endowment effect, experimental economics, food miles, indoor plumbing, Intergovernmental Panel on Climate Change (IPCC), John Nash: game theory, Joseph Schumpeter, Joshua Gans and Andrew Leigh, loss aversion, Louis Pasteur, market design, microcredit, Milgram experiment, oil shale / tar sands, patent troll, presumed consent, price discrimination, principal–agent problem, profit motive, randomized controlled trial, Richard Feynman, Richard Feynman, Richard Thaler, selection bias, South China Sea, Stephen Hawking, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, ultimatum game, urban planning, William Langewiesche, women in the workforce, young professional

Not satisfied with just measuring the economic choices people make, Becker tried to incorporate the sentiments they attached to such choices. Some of Becker’s most compelling research concerned altruism. He argued, for instance, that the same person who might be purely selfish in business could be exceedingly altruistic among people he knew—although, importantly (Becker is an economist, after all), he predicted that altruism even within a family would have a strategic element. Years later, the economists Doug Bernheim, Andrei Shleifer, and Larry Summers empirically demonstrated Becker’s point. Using data from a U.S. government longitudinal study, they showed that an elderly parent in a retirement home is more likely to be visited by his grown children if they are expecting a sizable inheritance. But wait, you say: maybe the offspring of wealthy families are simply more caring toward their elderly parents? A reasonable conjecture—in which case you’d expect an only child of wealthy parents to be especially dutiful.

. / 101 Prison overcrowding and the ACLU “experiment”: see Steven D. Levitt, “The Effect of Prison Population Size on Crime Rates: Evidence from Prison Overcrowding Litigation,” The Quarterly Journal of Economics 11, no. 2 (May 1996). FAMILY ALTRUISM?: See Gary Becker, “Altruism in the Family and Selfishness in the Marketplace,” Economica 48, no. 189, New Series (February 1981); and B. Douglas Bernheim, Andrei Shleifer, and Lawrence H. Summers, “The Strategic Bequest Motive,” Journal of Political Economy 93, no. 6 (December 1985). AMERICANS ARE FAMOUSLY ALTRUISTIC: These figures are drawn from an Indiana University Center on Philanthropy study. From 1996 to 2006, overall American giving increased from $139 billion to $295 billion (inflation-adjusted), which represents an increase from 1.7% of GDP to 2.6% of GDP.


pages: 662 words: 180,546

Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown by Philip Mirowski

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Alvin Roth, Andrei Shleifer, asset-backed security, bank run, barriers to entry, Basel III, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Swan, blue-collar work, Bretton Woods, Brownian motion, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, constrained optimization, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, dark matter, David Brooks, David Graeber, debt deflation, deindustrialization, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, facts on the ground, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, full employment, George Akerlof, Goldman Sachs: Vampire Squid, Hernando de Soto, housing crisis, Hyman Minsky, illegal immigration, income inequality, incomplete markets, information asymmetry, invisible hand, Jean Tirole, joint-stock company, Kenneth Arrow, Kenneth Rogoff, knowledge economy, l'esprit de l'escalier, labor-force participation, liberal capitalism, liquidity trap, loose coupling, manufacturing employment, market clearing, market design, market fundamentalism, Martin Wolf, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Nash equilibrium, night-watchman state, Northern Rock, Occupy movement, offshore financial centre, oil shock, Pareto efficiency, Paul Samuelson, payday loans, Philip Mirowski, Ponzi scheme, precariat, prediction markets, price mechanism, profit motive, quantitative easing, race to the bottom, random walk, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, school choice, sealed-bid auction, Silicon Valley, South Sea Bubble, Steven Levy, technoutopianism, The Chicago School, The Great Moderation, the map is not the territory, The Myth of the Rational Market, the scientific method, The Wisdom of Crowds, theory of mind, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Vilfredo Pareto, War on Poverty, Washington Consensus, We are the 99%, working poor

Partly, it was the fault of a few high-profile economists such as Shiller, Akerlof, Krugman, and Lo, whose “behavioral” credentials within the community were, shall we say, less than robust. Partly it was due to some political appointees in the Obama administration such as Cass Sunstein who claimed (falsely, as it turned out) that behavioral economics could be used to “nudge” people into behaving more like neoclassical agents.52 Partly, it was the fault of a few bona fide behavioral finance economists (like Andrei Shleifer), who quickly whipped up a couple of toy models after the crisis, purportedly demonstrating that all agents are beset with a peculiar character flaw that causes them to ignore unlikely disastrous events, causing them to whipsaw around the true fundamental determinants of asset prices as defined by the orthodox rational-expectations model, in the face of securitization and tranching.53 But it also emanated from the vast scrum of journalists, primed to believe that once economists would just abjure “rational choice theories,” then all would become revealed.

The massive number of papers published on the EMH merely testified to the Protean character of the idol of “market efficiency,” which grew to the status of obsession within the American profession.64 One recent instance of EMH denial that has attracted the endorsement of reformers such as Adair Turner in Britain and Ezra Klein in the United States is the already-mentioned work of the Harvard economist Andrei Shleifer.65 Shleifer is a neoliberal who passes as a left-liberal economist in America, in the Lawrence Summers mold. Shleifer’s model initially “seems” to call into question the validity of certain classes of dubious artificial derivatives by suggesting someone is being misled by the market; but as usual, the devil is in the details. Shleifer combines some “behavioral” themes with a standard neoclassical model to blame the crisis on the investors, who unaccountably ignore the extreme tail risk of newly invented derivatives when they are minted.

“The Leverage Cycle,” in D. Acemoglu, K. Rogoff, and M. Woodford, eds., NBER Macroeconomics Annual 24 (2009): 1–64. Geanakoplos, John. “Managing the Leverage Cycle,” in Dopo la Crisi, (Milan: Giuffre Editione), 2010 http://dido.econ.yale.edu/P/cp/p13a/p1306.pdf. Geanakoplos, John, and Ana Fostel. “Leverage Cycles and the Anxious Economy,” American Economic Review 98 (2008): 1211–44. Gennaioli, Nicola, Andrei Shleifer, and Robert Vishny. “Neglected Risks, Financial Innovation and Financial Fragility,” NBER Working Paper 16068, 2010. Gerardi, Kristopher, Christopher Foote, and Paul Willen. “Reasonable People Did Disagree,” Boston Fed working paper (2010), at www.bos.frb.org/economic/ppdp/2010/ppdp1005.htm. Gershon, Ilana. “Neoliberal Agency,” Current Anthropology 52 (2011): 537–55. Gershon, Ilana. “Un-friend My Heart: Facebook, Promiscuity, and Heartbreak in a Neoliberal Age,” Anthropological Quarterly 84 (4) (2011): 867–96.


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Money Changes Everything: How Finance Made Civilization Possible by William N. Goetzmann

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Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, banking crisis, Benoit Mandelbrot, Black Swan, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, Cass Sunstein, collective bargaining, colonial exploitation, compound rate of return, conceptual framework, corporate governance, Credit Default Swap, David Ricardo: comparative advantage, debt deflation, delayed gratification, Detroit bankruptcy, disintermediation, diversified portfolio, double entry bookkeeping, Edmond Halley, en.wikipedia.org, equity premium, financial independence, financial innovation, financial intermediation, fixed income, frictionless, frictionless market, full employment, high net worth, income inequality, index fund, invention of the steam engine, invention of writing, invisible hand, James Watt: steam engine, joint-stock company, joint-stock limited liability company, laissez-faire capitalism, Louis Bachelier, mandelbrot fractal, market bubble, means of production, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, new economy, passive investing, Paul Lévy, Ponzi scheme, price stability, principal–agent problem, profit maximization, profit motive, quantitative trading / quantitative finance, random walk, Richard Thaler, Robert Shiller, Robert Shiller, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, spice trade, stochastic process, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, time value of money, too big to fail, trade liberalization, trade route, transatlantic slave trade, transatlantic slave trade, tulip mania, wage slave

Delaying a profitable project by ten years will cause its present value to drop by roughly half. If the project is a risky one—and most innovations are—a delay of ten years could cause the value to drop by 80%. Perhaps the fall in share prices in the early 1930s reflected the realization that those marvelous patents, so valuable when people had money in their pockets, would take a very, very long time to yield future dividends. A contrary view—proposed by Bradford DeLong and Andrei Shleifer, both deep thinkers about markets, is that the euphoria of investors about the market pushed valuation way beyond its fundamental economic worth.17 Delong and Shleifer tested this idea by gathering prices of investment funds trading in the 1920s and looking at the prices of the stocks they held. What the professors found was that investors typically paid a premium of 60% just to get the pool of stocks.

Grant (1992), p. 165. 15. Report on Protective Committees of the Securities and Exchange Commission. 1936. Part III, Committee for the Holders of Real Estate Bonds. Washington, DC: US Government Printing Office, p. 67 and ff. 16. See Nicholas, Tom. 2008. “Does innovation cause stock market runups? Evidence from the great crash.” American Economic Review 98(4): 1370–1396. 17. De Long, J. Bradford, and Andrei Shleifer. 1990. The Bubble of 1929: Evidence from Closed-End Funds. No. w3523. Cambridge, MA: National Bureau of Economic Research. 18. The following paper was read before a joint meeting of the Econometric Society and the American Statistical Association, Cincinnati, Ohio, December 31, 1932. It was reprinted in Cowles, Alfred. 1933. “Can Stock Market Forecasters Forecast?” Econometrica 1(3): 309–324. 19.

London: J. Baker. ———. 1720. The South-Sea Scheme Examin’d: And the Reasonableness Thereof Demonstrated. By a Hearty Well-Wisher to Publick Credit, third edition. London: J. Roberts. Delisle, M. Leopold. 1888. “Memoires sur les Operations Financieres des Templiers.” Mémoires de l’Institute National de France. Academie des Inscriptions Belles-Lettres, Paris 33: 11. De Long, J. Bradford, and Andrei Shleifer. 1990. The Bubble of 1929: Evidence from Closed-End Funds. No. w3523. Cambridge, MA: National Bureau of Economic Research. De Moivre, Abraham. 1756. The Doctrine of Chances: Or, a Method of Calculating the Probabilities of Events in a Play, third edition. London: Millar. Reprinted in 1967, New York: Chelsea Publishing. Demosthenes. 2003. Demosthenes: Speeches 50–59, Douglas M. Macdowell (trans.).


pages: 790 words: 150,875

Civilization: The West and the Rest by Niall Ferguson

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Admiral Zheng, agricultural Revolution, Albert Einstein, Andrei Shleifer, Atahualpa, Ayatollah Khomeini, Berlin Wall, BRICs, British Empire, clean water, collective bargaining, colonial rule, conceptual framework, Copley Medal, corporate governance, creative destruction, credit crunch, David Ricardo: comparative advantage, Dean Kamen, delayed gratification, Deng Xiaoping, discovery of the americas, Dissolution of the Soviet Union, European colonialism, Fall of the Berlin Wall, Francisco Pizarro, full employment, Hans Lippershey, haute couture, Hernando de Soto, income inequality, invention of movable type, invisible hand, Isaac Newton, James Hargreaves, James Watt: steam engine, John Harrison: Longitude, joint-stock company, Joseph Schumpeter, Kitchen Debate, land reform, land tenure, liberal capitalism, Louis Pasteur, Mahatma Gandhi, market bubble, Martin Wolf, mass immigration, means of production, megacity, Mikhail Gorbachev, new economy, Pearl River Delta, Pierre-Simon Laplace, probability theory / Blaise Pascal / Pierre de Fermat, profit maximization, purchasing power parity, quantitative easing, rent-seeking, reserve currency, road to serfdom, Ronald Reagan, savings glut, Scramble for Africa, Silicon Valley, South China Sea, sovereign wealth fund, special economic zone, spice trade, spinning jenny, Steve Jobs, Steven Pinker, The Great Moderation, the market place, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, Thorstein Veblen, total factor productivity, trade route, transaction costs, transatlantic slave trade, transatlantic slave trade, upwardly mobile, uranium enrichment, wage slave, Washington Consensus, women in the workforce, World Values Survey

., Cotton Mills and Workers in Modern Japan (Osaka, 1919) Keene, Donald, Emperor of Japan: Meiji and his World, 1852–1912 (New York, 2005) Kurlansky, Mark, 1968: The Year that Rocked the World (New York, 2005) Lamoreaux, Naomi, ‘Scylla or Charybdis? Some Historical Reflections on the Two Basic Problems of Corporate Governance’, unpublished paper (2009) La Porta, Rafael, Florencio Lopez-de-Silanes and Andrei Shleifer, ‘The Economic Consequences of Legal Origins’, Journal of Economic Literature, 46, 2 (2008), 285–332 La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer and Robert Vishny, ‘Investor Protection and Corporate Governance’, Journal of Financial Economics, 58, 1 (2000), 1–25 ———, ‘Law and Finance’, Journal of Political Economy, 106, 6 (1998), 1113–55 Leggewie, Claus, ‘1968: A Defining Year in World Politics: A Return from Cultural Nostalgia to Political Analysis’, Goethe Institute Online: http://www.goethe.de/ges/pok/dos/dos/wdp/en3045262.htm Leunig, T., ‘A British Industrial Success: Productivity in the Lancashire and New England Cotton Spinning Industries a Century Ago’, Economic History Review 56, 1 (2003), 90–117 McKendrick, Neil, John Brewer and J.


pages: 497 words: 123,718

A Game as Old as Empire: The Secret World of Economic Hit Men and the Web of Global Corruption by Steven Hiatt; John Perkins

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airline deregulation, Andrei Shleifer, Asian financial crisis, Berlin Wall, big-box store, Bob Geldof, Bretton Woods, British Empire, capital controls, centre right, clean water, colonial rule, corporate governance, corporate personhood, deglobalization, deindustrialization, Doha Development Round, energy security, European colonialism, financial deregulation, financial independence, full employment, global village, high net worth, land reform, large denomination, liberal capitalism, Long Term Capital Management, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, moral hazard, Naomi Klein, new economy, North Sea oil, offshore financial centre, oil shock, Ponzi scheme, race to the bottom, reserve currency, Ronald Reagan, Scramble for Africa, statistical model, structural adjustment programs, too big to fail, trade liberalization, transatlantic slave trade, transfer pricing, union organizing, Washington Consensus, working-age population, Yom Kippur War

There is a strong case for removing India and China from these numbers because they account for a disproportionate share of reserves, and, in China’s case, capital flight estimates are distorted by a substantial amount of “round-tripping” through Hong Kong (capital flight to Hong Kong that returns to China as “foreign” investment capital). However, even after removing those two countries, the flight wealth from developing countries turns out to be at least $1 trillion greater than their net debt. 28. See, for example, Andrei Shleifer and Daniel Wolfenzon, “Investor Protection and Equity Markets,” Journal of Financial Economics 66, no. 1 (2002), pp. 3-27; and Rafael LaPorta et al., “Legal Determinants of External Finance,” Journal of Finance 52 (1997), pp. 1131-50. Interestingly, in September 2000, Shleifer, a tenured Harvard economics professor and program director at Harvard’s Institute for International Development in Russia, was one of several key defendants named in a $100 million lawsuit filed by the U.S. government.

Interestingly, in September 2000, Shleifer, a tenured Harvard economics professor and program director at Harvard’s Institute for International Development in Russia, was one of several key defendants named in a $100 million lawsuit filed by the U.S. government. The suit alleged that, while managing a USAID-funded economic reform effort in Russia during the 1990s, Shleifer had engaged in the “unauthorized use of inside information to commit securities fraud, use of public money for private gain, tax evasion and submission of phony bills … a garden-variety, free-market scam.” See U.S. v. President and Fellows of Harvard College, Andrei Shleifer, Jonathan Hay, Nancy Zimmerman, and Elizabeth Herbert (U.S. District Court of Boston, Civil Action 00119977, September 26, 2000). The suit was settled in July 2005 with a $26.5 million payment by Harvard and a $2 million payment by Professor Shleifer. 29. See Henry, Pirate Bankers. 30. For the world’s forty-nine poorest countries, by UN designation, real per capita incomes, adjusted for purchasing parity (PPP) differentials, grew an average of just 0.7 percent yearly from 1980 to 2005, and for the rest of low- and middle-income countries—excluding China and India—incomes grew an average of just 0.8 percent yearly.


pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

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Albert Einstein, Andrei Shleifer, anti-communist, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black-Scholes formula, Bretton Woods, British Empire, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, corporate raider, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, global supply chain, Gunnar Myrdal, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, Ponzi scheme, price discrimination, price stability, principal–agent problem, profit maximization, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, unorthodox policies, value at risk, Vanguard fund, Vilfredo Pareto, wealth creators, zero-sum game

According to this theory, which also reflects the influence of Keynes, investing is essentially a game played between sophisticates and boobs. The sophisticates are assumed to be fully rational, with access to reams of information and an ability to sift significant news from irrelevant ephemera, which statisticians refer to as noise. The boobs are naive and mentally limited. In the description of Andrei Shleifer, a Harvard professor who played a leading role in developing the noise trader model, they “follow the advice of financial gurus, fail to diversify, actively trade stocks and churn their portfolios, sell winning stocks and hold on to losing stocks, thereby increasing their tax liabilities, buy and sell actively and expensively managed mutual funds, follow stock price patterns and other popular models.”

America’s Portfolio Managers Grow More Bullish on Stocks and Interest Rates,” Barron’s, May 3, 1999, 31–38. 181 Pension fund investment in the Internet bubble: Eli Ofek and Matthew Richardson, “DotCom Mania: The Rise and Fall of Internet Stock Prices,” Journal of Finance 57, no. 3 (June 2003): 1122. 181 “From an efficient markets perspective . . .”: Markus K. Brunnermeier and Stefan Nagel, “Hedge Funds and the Technology Bubble,” Journal of Finance 59, no. 5 (October 2004): 2013–40. 182 “follow the advice of financial . . .”: Andrei Shleifer, Inefficient Markets: An Introduction to Behavioral Finance (New York: Oxford University Press, 2000), 10. 183 “[R]ational arbitrage can . . .”: Ibid., 174. 184 “This risk comes from . . .”: Ibid., 14–15. 184 “We were too early in calling . . .”: Mitchell Pacelle, “Soros to Appoint a CEO After Firm’s Chaotic Year,” Wall Street Journal, August 10, 1999, C1. 185 Fama update on the efficient market hypothesis: Eugene G.


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Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined by Lasse Heje Pedersen

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activist fund / activist shareholder / activist investor, algorithmic trading, Andrei Shleifer, asset allocation, backtesting, bank run, banking crisis, barriers to entry, Black-Scholes formula, Brownian motion, buy low sell high, capital asset pricing model, commodity trading advisor, conceptual framework, corporate governance, credit crunch, Credit Default Swap, currency peg, David Ricardo: comparative advantage, declining real wages, discounted cash flows, diversification, diversified portfolio, Emanuel Derman, equity premium, Eugene Fama: efficient market hypothesis, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, Gordon Gekko, implied volatility, index arbitrage, index fund, interest rate swap, late capitalism, law of one price, Long Term Capital Management, margin call, market clearing, market design, market friction, merger arbitrage, money market fund, mortgage debt, Myron Scholes, New Journalism, paper trading, passive investing, price discovery process, price stability, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, selection bias, shareholder value, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, survivorship bias, systematic trading, technology bubble, time value of money, total factor productivity, transaction costs, value at risk, Vanguard fund, yield curve, zero-coupon bond

Subrahmanyam (1998), “A Theory of Overconfidence, Self-Attribution, and Security Market Under- and Over-Reactions,” Journal of Finance 53, 1839–1885. De Bondt, W. F. M., and R. Thaler (1985), “Does the Stock Market Overreact?” The Journal of Finance 40(3), 793–805. De Long, J. B., A. Shleifer, L. H. Summers, and R. J. Waldmann (1990), “Positive Feedback Investment Strategies and Destabilizing Rational Speculation,” The Journal of Finance 45, 379–395. De Long, J. B., Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann (1993), “Noise Trader Risk in Financial Markets,” Journal of Political Economy 98, 703–738. de Roon, F., T. E. Nijman, and C. Veld (2000), “Hedging Pressure Effects in Futures Markets,” Journal of Finance 55, 1437–1456. Dechow, Patricia M., Richard G. Sloan, and Amy P. Sweeney (1996), “Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC,” Contemporary Accounting Research 13, 1–36.

New Evidence from a Bootstrap Analysis,” Journal of Finance 61, 2551–2595. Kosowski, Robert, Narayan Y. Naik, and Melvyn Teo (2007), “Do Hedge Funds Deliver Alpha? A Bayesian and Bootstrap Analysis,” Journal of Financial Economics 84, 229–264. Krishnamurthy, Arvind, and Annette Vissing-Jorgensen (2012), “The Aggregate Demand for Treasury Debt,” Journal of Political Economy 120, 233–267. Lakonishok, Josef, Andrei Shleifer, and Robert W. Vishny (1994), “Contrarian Investment, Extrapolation, and Risk,” The Journal of Finance 49(5), 1541–1578. Lamont, Owen (2012), “Go Down Fighting: Short Sellers vs. Firms,” Review of Asset Pricing Studies 2, 1–30. Lamont, Owen, and Richard H. Thaler (2003), “Can the Stock Market Add and Subtract? Mispricing in Tech Stock Carve-Outs,” Journal of Political Economy 111(2), 227–268.


pages: 300 words: 77,787

Investing Demystified: How to Invest Without Speculation and Sleepless Nights by Lars Kroijer

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Andrei Shleifer, asset allocation, asset-backed security, Bernie Madoff, bitcoin, Black Swan, BRICs, Carmen Reinhart, cleantech, compound rate of return, credit crunch, diversification, diversified portfolio, equity premium, estate planning, fixed income, high net worth, implied volatility, index fund, intangible asset, invisible hand, Kenneth Rogoff, market bubble, money market fund, passive investing, pattern recognition, prediction markets, risk tolerance, risk/return, Robert Shiller, Robert Shiller, selection bias, sovereign wealth fund, too big to fail, transaction costs, Vanguard fund, yield curve, zero-coupon bond

A number of friends were also instrumental in the book’s completion by giving comments on early drafts as I stumbled towards a coherent argument: Steven Felsher with his extremely thorough system of numbering each paragraph (there were 8001 in one draft), former office mate Edwin Datson, Mark Hunter, Stuart Hamilton, Chris Rossbach with his sharp pencil, Paul Amery from Index Universe, Coenraad Vrolijk from Blackrock, Morten Bech from the Bank of International Settlements, Stéphane Guibaud from London School of Economics, and my former professors Andrei Shleifer from Harvard University and Jay Light from Harvard Business School. Finally, I would like to thank all those in and around the finance industry who consistently encouraged me to write about this subject and helped in various ways. While the book in general suggests investing in ways that lead to lower fees to the financial industry, the people I talked to had their customers’ interests as their first objective.

Infotopia: How Many Minds Produce Knowledge by Cass R. Sunstein

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affirmative action, Andrei Shleifer, availability heuristic, Build a better mousetrap, c2.com, Cass Sunstein, cognitive bias, cuban missile crisis, Daniel Kahneman / Amos Tversky, Edward Glaeser, en.wikipedia.org, feminist movement, framing effect, hindsight bias, information asymmetry, Isaac Newton, Jean Tirole, jimmy wales, market bubble, market design, minimum wage unemployment, prediction markets, profit motive, rent control, Richard Stallman, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, slashdot, stem cell, The Wisdom of Crowds, winner-take-all economy

For Hayek’s general views on these topics, see, Law, Legislation, and Liberty, vol. 1 (It’s “Liberty”). 44. Friedrich Hayek, “The Origins and Effects of Our Morals: A Problem for Science,” in The Essence of Hayek, 318, 330. 45. See Robert MacCoun et al., Drug War Heresies: Learning from Other Vices, Times, and Places (New York: Cambridge University Press, 2001). 46. The Federalist No. 14 (James Madison). 47. For a good overview, see Andrei Shleifer, Inefficient Markets: An Introduction to Behavioral Finance (Oxford: Oxford University Press, 2000). 48. See Richard Thaler, ed., Advances in Behavioral Finance, vol. 2 (Princeton, NJ: Princeton University Press, 2005). 49. In fact, some rigorous tests have raised doubts about it. See ibid. 50. Robert Shiller, Irrational Exuberance, 2d ed. (Princeton, NJ: Princeton University Press, 2005), 2, 5. 51.

Economic Gangsters: Corruption, Violence, and the Poverty of Nations by Raymond Fisman, Edward Miguel

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accounting loophole / creative accounting, Andrei Shleifer, Asian financial crisis, barriers to entry, blood diamonds, clean water, colonial rule, congestion charging, crossover SUV, Donald Davies, European colonialism, failed state, feminist movement, George Akerlof, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Live Aid, mass immigration, megacity, oil rush, prediction markets, random walk, Scramble for Africa, selection bias, Silicon Valley, South China Sea, unemployed young men

Perhaps not surprisingly, when change did come, it was brought about by popular uprising, violent protest, and rioting in the streets that ultimately forced President Suharto to step down. 10. “Politics, legal systems and corruption in Indonesia: A historical overview.” INSEAD teaching note, 2002. 11. “Bribes, Extortion a Way of Life for Many in Sicily,” Associated Press, August 15, 1992. 12. Economists Andrei Shleifer and Robert Vishny were the first to note the benefits of centralized corruption in the aptly titled article, “Corruption,” Quarterly Journal of Economics, 1993. 13. See Mara Faccio, “Politically Connected Firms,” American Economic Review, 96(1), March 2006, pp. 369–86. 14. See Don Wolfernsberger, “Punishing Disorderly Behavior in Congress: The First Century,” mimeo, the Woodrow Wilson Center, 2006. 15.


pages: 580 words: 168,476

The Price of Inequality: How Today's Divided Society Endangers Our Future by Joseph E. Stiglitz

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affirmative action, Affordable Care Act / Obamacare, airline deregulation, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collapse of Lehman Brothers, collective bargaining, colonial rule, corporate governance, Credit Default Swap, Daniel Kahneman / Amos Tversky, Dava Sobel, declining real wages, deskilling, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, framing effect, full employment, George Akerlof, Gini coefficient, income inequality, income per capita, indoor plumbing, inflation targeting, information asymmetry, invisible hand, jobless men, John Harrison: Longitude, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, London Interbank Offered Rate, lone genius, low skilled workers, Marc Andreessen, Mark Zuckerberg, market bubble, market fundamentalism, mass incarceration, medical bankruptcy, microcredit, moral hazard, mortgage tax deduction, negative equity, obamacare, offshore financial centre, paper trading, Pareto efficiency, patent troll, Paul Samuelson, payday loans, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, Simon Kuznets, spectrum auction, Steve Jobs, technology bubble, The Chicago School, The Fortune at the Bottom of the Pyramid, The Myth of the Rational Market, The Spirit Level, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, ultimatum game, uranium enrichment, very high income, We are the 99%, wealth creators, women in the workforce, zero-sum game

An explanation for this separation, in terms of costly and imperfect information, was provided by J. E. Stiglitz, “Credit Markets and the Control of Capital,” Journal of Money, Banking, and Credit 17, no. 2 (1985): 133–52. There is a large subsequent literature on these topics. See, e.g., Aaron S. Edlin and Joseph E. Stiglitz, “Discouraging Rivals: Managerial Rent-Seeking and Economic Inefficiencies,” American Economic Review 85, no. 5 (December 1995): 1301–12; and Andrei Shleifer and Robert W. Vishny, “A Survey of Corporate Governance,” Journal of Finance 52, no. 2 (June 1997): 737–83. 39. John Bogle, the founder of Vanguard Group, an investment management company that manages approximately $1.6 trillion in funds, in his comments on Bebchuk and Fried, Pay without Performance. The Bogle quotation is from p. 483 of a review and summary of Bebchuk and Fried by Henry Tosi in Administrative Science Quarterly 50, no. 3 (September 2005): 483–87. 40.

Brock, and Leslie Young, Black Hole Tariffs and Endogenous Policy Theory: Political Economy in General Equilibrium (New York: Cambridge University Press, 1989). Not surprisingly an army of lawyers is ready to come to the defense of the legal profession and to challenge these findings. See George L. Priest, “Lawyers, Liability, and Law Reform: Effects on American Economic Growth and Trade Competitiveness” (1993), Faculty Scholarship Series, available at 624.http://digitalcommons.law.yale.edu/fss_papers/624. 36. See Andrei Shleifer and Robert W. Vishny, The Grabbing Hand: Government Pathologies and Their Cures (Cambridge: Harvard University Press, 1998). 37. The theory is that fear of punishment after the fact will provide incentives for firms to behave well. But firms well armed with lawyers know that they often will escape punishment. And besides, taking risks with the environment increases profits today, and shortsighted managers are more concerned with the reality of today’s profits than what might happen to profits sometime in the future.


pages: 740 words: 217,139

The Origins of Political Order: From Prehuman Times to the French Revolution by Francis Fukuyama

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Admiral Zheng, agricultural Revolution, Andrei Shleifer, Asian financial crisis, Ayatollah Khomeini, barriers to entry, Berlin Wall, blood diamonds, California gold rush, cognitive dissonance, colonial rule, conceptual framework, correlation does not imply causation, currency manipulation / currency intervention, demographic transition, Deng Xiaoping, double entry bookkeeping, endogenous growth, equal pay for equal work, European colonialism, failed state, Fall of the Berlin Wall, Francis Fukuyama: the end of history, Francisco Pizarro, Hernando de Soto, hiring and firing, invention of agriculture, invention of the printing press, Khyber Pass, labour market flexibility, land reform, land tenure, means of production, offshore financial centre, out of africa, Peace of Westphalia, principal–agent problem, RAND corporation, rent-seeking, Right to Buy, Scramble for Africa, selective serotonin reuptake inhibitor (SSRI), spice trade, Stephen Hawking, Steven Pinker, the scientific method, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, trade route, transaction costs, Washington Consensus, zero-sum game

Hayek, Law, Legislation and Liberty (Chicago: University of Chicago Press, 1976), 1:72. 13 This argument was the basis for the attack made by Hayek and the economist Ludwig von Mises on socialist central planning in the 1930s and ’40s. See Friedrich A. Hayek, “The Use of Knowledge in Society,” American Economic Review 35, no. 4 (1945): 519–30. See also Fatal Conceit: The Errors of Socialism (Chicago: University of Chicago Press, 1988). 14 Hayek, Law, Legislation and Liberty, pp. 72–74. 15 Ibid., p. 85. 16 See, for example, Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny, “Legal Determinants of External Finance,” Journal of Political Economy 52 (1997): 1131–50; and “Law and Finance,” Journal of Political Economy 106 (1998): 1113–55. This literature has sparked a large debate. It is not clear that common law systems provide clear advantages over civil law ones with regard to economic growth. Hayek himself, though preferring common law, noted that the Justinian Code on which civil law systems were based was itself the product of incremental accumulation of decisions by Roman jurists.

Lang, Olga. 1946. Chinese Family and Society. New Haven: Yale University Press. Lariviere, Richard W. 1989. “Justices and Panditas: Some Ironies in Contemporary Readings of the Hindu Legal Past.” Journal of Asian Studies 48(4):757–69. Larmour, Peter. 1997. Governance and Reform in the South Pacific. Canberra: ANU National Centre for Development Studies. La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny. 1997. “Legal Determinants of External Finance.” Journal of Political Economy 52:1131–50. ———. 1998. “Law and Finance.” Journal of Political Economy 106:1113–55. Laslett, Peter, ed. 1972. Household and Family in Past Time. Cambridge: Cambridge University Press. LeBlanc, Steven A., and Katherine E. Register. 2003. Constant Battles: The Myth of the Noble Savage. New York: St.


pages: 358 words: 106,729

Fault Lines: How Hidden Fractures Still Threaten the World Economy by Raghuram Rajan

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accounting loophole / creative accounting, Andrei Shleifer, Asian financial crisis, asset-backed security, assortative mating, bank run, barriers to entry, Bernie Madoff, Bretton Woods, business climate, Clayton Christensen, clean water, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, diversification, Edward Glaeser, financial innovation, fixed income, floating exchange rates, full employment, global supply chain, Goldman Sachs: Vampire Squid, illegal immigration, implied volatility, income inequality, index fund, interest rate swap, Joseph Schumpeter, Kenneth Rogoff, knowledge worker, labor-force participation, Long Term Capital Management, market bubble, Martin Wolf, medical malpractice, microcredit, money market fund, moral hazard, new economy, Northern Rock, offshore financial centre, open economy, price stability, profit motive, Real Time Gross Settlement, Richard Florida, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, school vouchers, short selling, sovereign wealth fund, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, upwardly mobile, Vanguard fund, women in the workforce, World Values Survey

See Frankel, “The Risk of Relying on Reputational Capital”; David Streitfield, “In Appraisal Shift, Lenders Gain Power and Critics,” New York Times, August 19, 2009. 11 Riepenhoff and Haddox, “Risky Refinancings.” 12 Bradley Keoun and Steven Church, “New Century, Biggest Subprime Casualty, Goes Bankrupt,”Bloomberg.com, www.bloomberg.com/apps/news?pid=20601087& refer=home&sid=aXHDSbOcAChc, accessed March 10, 2010. 13 See Atif Mian and Amir Sufi, “The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis,” Quarterly Journal of Economics 124, no. 4 (November 2009): 1449–96. 14 For a model of how volume can swamp incentives, see Andrei Shleifer and Robert Vishny, “Unstable Banking,” NBER Working Paper 14943, National Bureau of Economic Research, Cambridge, MA, 2009. 15 See Frankel, “The Risk of Relying on Reputational Capital.” 16 Peter Wallison, “Barney Frank: Predatory Lender,” Wall Street Journal, October 16, 2009. Chapter Seven. Betting the Bank 1 This example borrows from Joshua Coval, Jakub Jurek, and Erik Stafford, “The Economics of Structured Finance,” Harvard Business School Working Paper 09–060, Cambridge, MA, 2008. 2 Tim Rayment, “The Man with the Trillion Dollar Price on His Head,” Sunday Times, May 17, 2009. 3 Ibid. 4 Shareholder Report on UBS’s Writedowns, UBS, Zurich, April 18, 2008. 5 See the colorful account in Lawrence McDonald and Patrick Robinson, A Colossal Failure of Common Sense (New York: Crown Business, 2009). 6 Eric Dash and Julie Creswell, “The Rush to Riches that Undid Citigroup: Banking Giant’s Management Failed to Monitor the Risks Tied to Its Deals,” International Herald Tribune, November 24, 2008. 7 Andrew Ellul and Vijay Yerramilli, “Stronger Risk Controls, Lower Risk: Evidence from U.S.


pages: 411 words: 108,119

The Irrational Economist: Making Decisions in a Dangerous World by Erwann Michel-Kerjan, Paul Slovic

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Andrei Shleifer, availability heuristic, bank run, Black Swan, Cass Sunstein, clean water, cognitive dissonance, collateralized debt obligation, complexity theory, conceptual framework, corporate social responsibility, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-subsidies, Daniel Kahneman / Amos Tversky, endowment effect, experimental economics, financial innovation, Fractional reserve banking, George Akerlof, hindsight bias, incomplete markets, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, iterative process, Kenneth Arrow, Loma Prieta earthquake, London Interbank Offered Rate, market bubble, market clearing, money market fund, moral hazard, mortgage debt, Pareto efficiency, Paul Samuelson, placebo effect, price discrimination, price stability, RAND corporation, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, source of truth, statistical model, stochastic process, The Wealth of Nations by Adam Smith, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, ultimatum game, University of East Anglia, urban planning, Vilfredo Pareto

They maintain that the mere fact that the major event did not happen cannot be taken to mean that the market was irrational. Maybe they are right. One cannot decisively prove that the stock market has been irrational. But in all of this debate no one has offered any real evidence to think that the volatility is rational.6 The price changes appear instead to be correlated with social changes of various kinds. Andrei Shleifer and Sendhil Mullainathan have observed the changes in Merrill Lynch advertisements. Prior to the stock market bubble, in the early 1990s, Merrill Lynch was running advertisements showing a grandfather fishing with his grandson. The ad was captioned: “Maybe you should plan to grow rich slowly.” By the time the market had peaked around 2000, when investors were obviously very pleased with recent results, Merrill’s ads had changed dramatically.


pages: 337 words: 89,075

Understanding Asset Allocation: An Intuitive Approach to Maximizing Your Portfolio by Victor A. Canto

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accounting loophole / creative accounting, airline deregulation, Andrei Shleifer, asset allocation, Bretton Woods, buy low sell high, capital asset pricing model, commodity trading advisor, corporate governance, discounted cash flows, diversification, diversified portfolio, fixed income, frictionless, high net worth, index fund, inflation targeting, invisible hand, John Meriwether, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market bubble, merger arbitrage, money market fund, new economy, passive investing, Paul Samuelson, price mechanism, purchasing power parity, risk tolerance, risk-adjusted returns, risk/return, Ronald Reagan, selection bias, shareholder value, Sharpe ratio, short selling, statistical arbitrage, survivorship bias, the market place, transaction costs, Y2K, yield curve, zero-sum game

Financial Analysts Journal 56, No. 1 (January/February 2000): 26–33. Jeffrey, Robert H. “The Folly of Stock Market Timing.” Harvard Business Review (July/August 1984): 102–10. Jensen, Michael C. “The Performance of Mutual Funds in the Period 1945–1964.” Journal of Finance 23 (May 1968): 389–416. La Jolla Economics. “The Rise of the en Y Is Bullish for the World Economy.” Economic Study (September 28, 1999). La Porta, Rafael, Josef Lakonishok, Andrei Shleifer, and Robert Vishny. “Good News for Value Stocks: Further Evidence on Market Efficiency.” Journal of Finance 52, No. 2 (June 1997): 859–74. Lanstein, Ronald, Kenneth Reid, and Barr Rosenburg. “Persuasive Evidence of Market Inefficiency.” Journal of Portfolio Management 11 (1985): 9–17. Lee, Joan, and Don Phillips. “Tactical Asset Allocation: Differentiating Tactical Asset Allocation from Market Timing.”


pages: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

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activist fund / activist shareholder / activist investor, Andrei Shleifer, asset-backed security, bank run, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, bonus culture, Bretton Woods, business climate, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, computer age, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, discovery of the americas, diversification, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, Fractional reserve banking, full employment, God and Mammon, Gordon Gekko, greed is good, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, labour market flexibility, liberal capitalism, light touch regulation, London Interbank Offered Rate, London Whale, Long Term Capital Management, manufacturing employment, Mark Zuckerberg, market bubble, market fundamentalism, mass immigration, means of production, Menlo Park, money market fund, moral hazard, moveable type in China, Myron Scholes, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, paradox of thrift, Paul Samuelson, Plutocrats, plutocrats, price stability, principal–agent problem, profit motive, quantitative easing, railway mania, regulatory arbitrage, Richard Thaler, rising living standards, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, short selling, Silicon Valley, South Sea Bubble, spice trade, Steve Jobs, technology bubble, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, tulip mania, Upton Sinclair, Veblen good, We are the 99%, Wolfgang Streeck, zero-sum game

I also foresaw to a fair extent the great financial crisis, although I have to admit that I did not identify every one of its multiple causes.87 To have done so when the structure of the financial system was changing very rapidly would have taken superhuman prescience. The reason so many people did predict these bubbles was that, on most conventional measures of market valuation observed over decades, the markets were hopelessly overvalued. In Fama’s world, when markets are high, investors’ expectations of future returns should be low, and they should be high when markets are low. Yet there is now academic evidence from Robin Greenwood and Andrei Shleifer at Harvard University that when markets are close to their peak, investors are most bullish because they tend to extrapolate recent rises in prices into the future when they form their expectations. In short, they expect the highest future returns when markets are close to a cyclical peak. And when markets are down, they are gloomy for the same reason. The Harvard economists reach this conclusion on the basis of several surveys of investor opinion, together with the relevant economic and market data.88 This chimes with what I have seen repeatedly in bull and bear markets since the 1960s.


pages: 305 words: 89,103

Scarcity: The True Cost of Not Having Enough by Sendhil Mullainathan

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American Society of Civil Engineers: Report Card, Andrei Shleifer, Cass Sunstein, clean water, computer vision, delayed gratification, double entry bookkeeping, Exxon Valdez, fault tolerance, happiness index / gross national happiness, impulse control, indoor plumbing, inventory management, knowledge worker, late fees, linear programming, mental accounting, microcredit, p-value, payday loans, purchasing power parity, randomized controlled trial, Report Card for America’s Infrastructure, Richard Thaler, Saturday Night Live, Walter Mischel, Yogi Berra

Katinka Matson helped us see that in the mix of many ideas there was a book worth writing. The emerging drafts benefited from the wisdom of good friends, colleagues, and loved ones. We especially thank Bindu Ananth, Samura Atallah, Amber Batata, Emily Breza, Andy Conway, Katherine Edin, Alissa Fishbane, Lawrence Katz, Michael Lewis, Lori Lieberman, Jens Ludwig, Anastasia Mann, Frank Schilbach, Antoinette Schoar, Heather Schofield, Josh Schwartzstein, Sharoni Shafir, Andrei Shleifer, Richard Thaler, Laura Trucco, Nick Turk-Browne, and Eric Wanner. The research for this book was generously supported by the Kellogg Foundation, the National Science Foundation, the Canadian Institute for Advanced Research, the John Simon Guggenheim Memorial Foundation, and the National Institute on Aging, as well as our home institutions, Harvard and Princeton. Students in the classes we taught as the book was taking shape—two at Princeton and two at Harvard—were an excellent early audience, attentive, receptive, and critical.


pages: 326 words: 106,053

The Wisdom of Crowds by James Surowiecki

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AltaVista, Andrei Shleifer, asset allocation, Cass Sunstein, Daniel Kahneman / Amos Tversky, experimental economics, Frederick Winslow Taylor, George Akerlof, Howard Rheingold, I think there is a world market for maybe five computers, interchangeable parts, Jeff Bezos, John Meriwether, Joseph Schumpeter, knowledge economy, lone genius, Long Term Capital Management, market bubble, market clearing, market design, moral hazard, Myron Scholes, new economy, offshore financial centre, Picturephone, prediction markets, profit maximization, Richard Feynman, Richard Feynman, Richard Feynman: Challenger O-ring, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, The Nature of the Firm, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Toyota Production System, transaction costs, ultimatum game, Yogi Berra, zero-sum game

An especially good account of the relationship between behavioral finance and traditional finance theory is Robert Shiller, “From Efficient Markets Theory to Behavioral Finance,” Journal of Economic Perspectives 17 (2003): 83–104. There’s also lots of good material on irrationality in Shiller’s Irrational Exuberance (Princeton: Princeton University Press, 2000). The limits of arbitrage are well explained in Andrei Shleifer, Inefficient Markets: An Introduction to Behavioral Finance (New York: Oxford University Press, 2000). And a mountain of evidence and intelligent analysis is marshaled in support of the proposition that investor psychology matters in Kent Daniel, David Hirshleifer, and Siew Hong Teoh, “Investor Psychology in Capital Markets: Evidence and Policy Implications,” Journal of Monetary Economics 49 (2002): 139–209.


pages: 350 words: 103,988

Reinventing the Bazaar: A Natural History of Markets by John McMillan

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accounting loophole / creative accounting, Albert Einstein, Alvin Roth, Andrei Shleifer, Anton Chekhov, Asian financial crisis, congestion charging, corporate governance, corporate raider, crony capitalism, Dava Sobel, Deng Xiaoping, experimental economics, experimental subject, fear of failure, first-price auction, frictionless, frictionless market, George Akerlof, George Gilder, global village, Hernando de Soto, I think there is a world market for maybe five computers, income inequality, income per capita, informal economy, information asymmetry, invisible hand, Isaac Newton, job-hopping, John Harrison: Longitude, John von Neumann, Kenneth Arrow, land reform, lone genius, manufacturing employment, market clearing, market design, market friction, market microstructure, means of production, Network effects, new economy, offshore financial centre, ought to be enough for anybody, pez dispenser, pre–internet, price mechanism, profit maximization, profit motive, proxy bid, purchasing power parity, Ronald Coase, Ronald Reagan, sealed-bid auction, second-price auction, Silicon Valley, spectrum auction, Stewart Brand, The Market for Lemons, The Nature of the Firm, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, War on Poverty, Xiaogang Anhui farmers, yield management

According to the watch-dog organization Transparency International, Indonesia had the dubious distinction of being the world’s third most corrupt country in 1999, while Russia came in seventeenth place.8 How then did markets operate in Indonesia under extensive corruption, while in Russia markets were stifled? The differing effects of corruption in Indonesia and Russia are explained by a theory of Andrei Shleifer and Robert Vishny.9 If the fire inspector, the tax evaluator, the customs official, the state-bank loan officer, and the business-license registrar each have the power to damage a firm, they can all extort profits from it. Under free-for-all extortion, each knows that any money left with the firm will probably be taken by some other bureaucrat, so each takes as much as possible. With everyone separately putting his hand in the till, however, the firms are discouraged from investing.


pages: 1,242 words: 317,903

The Man Who Knew: The Life and Times of Alan Greenspan by Sebastian Mallaby

airline deregulation, airport security, Andrei Shleifer, anti-communist, Asian financial crisis, balance sheet recession, bank run, barriers to entry, Benoit Mandelbrot, Bretton Woods, central bank independence, centralized clearinghouse, collateralized debt obligation, conceptual framework, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, energy security, equity premium, fiat currency, financial deregulation, financial innovation, fixed income, Flash crash, forward guidance, full employment, Hyman Minsky, inflation targeting, information asymmetry, interest rate swap, inventory management, invisible hand, Kenneth Rogoff, Kitchen Debate, laissez-faire capitalism, Long Term Capital Management, low skilled workers, market bubble, market clearing, Martin Wolf, money market fund, moral hazard, mortgage debt, Myron Scholes, new economy, Nixon shock, Northern Rock, paper trading, paradox of thrift, Paul Samuelson, Plutocrats, plutocrats, popular capitalism, price stability, RAND corporation, rent-seeking, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, Saturday Night Live, savings glut, secular stagnation, short selling, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, unorthodox policies, upwardly mobile, WikiLeaks, women in the workforce, Y2K, yield curve, zero-sum game

See also Carlson, “A Brief History of the 1987 Stock Market Crash.” 63. Wayne Angell, interview by the author, June 13, 2013. 64. If the great inflation of the 1970s had proved the pitfalls of excessive government activism, the great crash of 1987 was the first in a series of contrary lessons, demonstrating that markets also had their pitfalls. 65. “The limits to arbitrage” was a phrase coined by the economists Andrei Shleifer and Robert Vishny. For a longer explanation of the triple critique of the efficient markets hypothesis, see Sebastian Mallaby, More Money Than God: Hedge Funds and the Making of a New Elite (New York: Penguin, 2010), 104–8. 66. As illustrated repeatedly in this book, the common view of Greenspan as a believer in efficient markets is mistaken. He believed that markets are efficient to a first order of approximation, which they are; he never believed they were perfectly efficient or, for that matter, stable.

Woodward, Maestro, 171. See also Alan Greenspan, The Age of Turbulence: Adventures in a New World (New York: Penguin Books, 2008), 172. Slifman notes that Greenspan’s view that profits were relatively easy to measure was not shared by staff experts. Larry Slifman, e-mail to the author, October 7, 2015. 29. In his academic writing, Summers had pointed to the limits of market efficiency. See, for example, Andrei Shleifer and Lawrence H. Summers, “The Noise Trader Approach to Finance,” Journal of Economic Perspectives 4, no. 2 (Spring 1990). 30. Woodward, Maestro, 171. 31. Isabelle Clary, “Rate Hike Request Reported: Eight of 12 District Banks Are Said to Have Appealed to the Fed to Raise the Discount Rate,” Philadelphia Inquirer, September 18, 1996. 32. The result of this investigation is unclear, though Meyer speculates that the chairman discovered the leaker and “dealt with this person directly and quietly.”


pages: 471 words: 124,585

The Ascent of Money: A Financial History of the World by Niall Ferguson

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Admiral Zheng, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collateralized debt obligation, colonial exploitation, commoditize, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, deglobalization, diversification, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Glaeser, Edward Lloyd's coffeehouse, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, German hyperinflation, Hernando de Soto, high net worth, hindsight bias, Home mortgage interest deduction, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, iterative process, John Meriwether, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour mobility, Landlord’s Game, liberal capitalism, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, Naomi Klein, negative equity, Nick Leeson, Northern Rock, Parag Khanna, pension reform, price anchoring, price stability, principal–agent problem, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, quantitative hedge fund, RAND corporation, random walk, rent control, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, structural adjustment programs, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Malthus, Thorstein Veblen, too big to fail, transaction costs, value at risk, Washington Consensus, Yom Kippur War

Knight, Risk, Uncertainty and Profit (Boston, 1921). 9 John Maynard Keynes, ‘The General Theory of Employment’, Economic Journal, 51, 2 (1937), p. 214. 10 Daniel Kahneman and Amos Tversky, ‘Prospect Theory: An Analysis of Decision under Risk’, Econometrica, 47, 2 (March 1979), p. 273. 11 Eliezer Yudkowsky, ‘Cognitive Biases Potentially Affecting Judgment of Global Risks’, in Nick Bostrom and Milan Cirkovic (eds.), Global Catastrophic Risks (Oxford University Press, 2008), pp. 91-119. See also Michael J. Mauboussin, More Than You Know: Finding Financial Wisdom in Unconventional Places (New York / Chichester, 2006). 12 Mark Buchanan, The Social Atom: Why the Rich Get Richer, Cheaters Get Caught, and Your Neighbor Usually Looks Like You (New York, 2007), p. 54. 13 For an introduction, see Andrei Shleifer, Inefficient Markets: An Introduction to Behavioral Finance (Oxford, 2000). For some practical applications see Richard H. Thaler and Cass R. Sunstein, Nudge: Improving Decisions About Health, Wealth, and Happiness (New Haven, 2008). 14 See Peter Bernstein, Capital Ideas Evolving (New York, 2007). 15 See for example James Surowiecki, The Wisdom of Crowds (New York, 2005); Ian Ayres, Supercrunchers: How Anything Can Be Predicted (London, 2007). 16 Daniel Gross, ‘The Forecast for Forecasters is Dismal’, New York Times, 4 March 2007. 17 The classic work, first published in 1841, is Charles MacKay, Extraordinary Popular Delusions and the Madness of Crowds (New York, 2003 [1841]). 18 Yudkowsky, ‘Cognitive Biases’, pp. 110f. 19 For an introduction to Lo’s work, see Bernstein, Capital Ideas Evolving , ch. 4.


pages: 390 words: 119,527

Armed Humanitarians by Nathan Hodge

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Andrei Shleifer, anti-communist, Berlin Wall, British Empire, clean water, colonial rule, European colonialism, failed state, friendly fire, IFF: identification friend or foe, jobless men, Khyber Pass, kremlinology, land reform, Mikhail Gorbachev, old-boy network, Potemkin village, private military company, profit motive, RAND corporation, Ronald Reagan, Silicon Valley, South China Sea, The Wealth of Nations by Adam Smith, too big to fail, walking around money

Mostly I was describing lunch.18 Foreign aid budgets were often singled out by conservatives as a waste of taxpayer money—and aid programs to Eastern Europe and the former Soviet Union in the 1990s set new standards for corruption and mismanagement. In Russia, USAID hired the Harvard Institute for International Development to advise the government on privatization. The project was directed by Andrei Shleifer, a Russian-born émigré and tenured professor of economics at Harvard; another consultant to the project was Jonathan Hay, a Rhodes Scholar and former World Bank consultant. Both men, it turned out, had a massive conflict of interest: While helping the Russian government design the rules for a market economy, they were simultaneously making personal investments in Russia.19 The U.S. government later implicated both men in a conspiracy to defraud the government, and Harvard University eventually paid $26.5 million to the U.S. government to settle a lawsuit after a U.S.


pages: 386 words: 122,595

Naked Economics: Undressing the Dismal Science (Fully Revised and Updated) by Charles Wheelan

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affirmative action, Albert Einstein, Andrei Shleifer, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, capital controls, Cass Sunstein, central bank independence, clean water, collapse of Lehman Brothers, congestion charging, creative destruction, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, Daniel Kahneman / Amos Tversky, David Brooks, demographic transition, diversified portfolio, Doha Development Round, Exxon Valdez, financial innovation, fixed income, floating exchange rates, George Akerlof, Gini coefficient, Gordon Gekko, greed is good, happiness index / gross national happiness, Hernando de Soto, income inequality, index fund, interest rate swap, invisible hand, job automation, John Markoff, Joseph Schumpeter, Kenneth Rogoff, libertarian paternalism, low skilled workers, lump of labour, Malacca Straits, market bubble, microcredit, money market fund, money: store of value / unit of account / medium of exchange, Network effects, new economy, open economy, presumed consent, price discrimination, price stability, principal–agent problem, profit maximization, profit motive, purchasing power parity, race to the bottom, RAND corporation, random walk, rent control, Richard Thaler, rising living standards, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, Silicon Valley, Silicon Valley startup, South China Sea, Steve Jobs, The Market for Lemons, the rule of 72, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, transaction costs, transcontinental railway, trickle-down economics, urban sprawl, Washington Consensus, Yogi Berra, young professional, zero-sum game

Dugger, “A Cruel Choice in New Delhi: Jobs vs. a Safer Environment,” New York Times, November 24, 2000. 6. “A Useful Poison,” The Economist, December 14, 2000. 7. “Fighting Malaria,” The Economist, May 1, 2003. 8. “A Useful Poison,” The Economist, December 14, 2000. 9. Gary Becker and Guity Nashat Becker, The Economics of Life (New York: McGraw-Hill, 1996). 10. Simeon Djankov, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer, The Regulation of Entry, NBER Working Paper No. W7892 (National Bureau of Economic Research, September 2000). 11. Geeta Anand, “India’s Colleges Battle a Thicket of Red Tape,” Wall Street Journal, November 13, 2008. 12. Stephen Castle, “Europe Relaxes Rules on Sale of Ugly Fruits and Vegetables,” New York Times, November 13, 2008. 13. Nicholas Lemann, “The Quiet Man: How Dick Cheney Rose to Power,” The New Yorker, May 7, 2001. 14.


pages: 483 words: 134,377

The Tyranny of Experts: Economists, Dictators, and the Forgotten Rights of the Poor by William Easterly

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air freight, Andrei Shleifer, battle of ideas, Bretton Woods, British Empire, business process, business process outsourcing, Carmen Reinhart, clean water, colonial rule, correlation does not imply causation, creative destruction, Daniel Kahneman / Amos Tversky, Deng Xiaoping, desegregation, discovery of the americas, Edward Glaeser, en.wikipedia.org, European colonialism, Francisco Pizarro, fundamental attribution error, germ theory of disease, greed is good, Gunnar Myrdal, income per capita, invisible hand, James Watt: steam engine, Jane Jacobs, John Snow's cholera map, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, M-Pesa, microcredit, Monroe Doctrine, oil shock, place-making, Ponzi scheme, risk/return, road to serfdom, Silicon Valley, Steve Jobs, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, Thomas L Friedman, urban planning, urban renewal, Washington Consensus, World Values Survey, young professional

Walter Ullmann, The Individual and Society in the Middle Ages (Baltimore, MD: The Johns Hopkins Press, 1966), 17. 11. Ullman, The Individual and Society, 23, 25. 12. Luigi Guiso, Paola Sapienza, and Luigi Zingales, “Long Term Persistence,” NBER Working Paper 14278, National Bureau of Economic Research, Cambridge, MA, 2008, 8; available at: http://www.nber.org/papers/w14278.pdf, accessed August 24, 2013. 13. Guiso et al., “Long Term Persistence,” 10. 14. J. Bradford De Long and Andrei Shleifer, “Princes and Merchants: European City Growth Before the Industrial Revolution,” Journal of Law and Economics 36, no.2 (October 1993): 671–702. 15. Giorgio Falco, The Holy Roman Republic: A Historic Profile of the Middle Ages, trans K. V. Kent (New York: A. S. Barnes and Company, 1964), 229. 16. Guiso et al., “Long Term Persistence.” 17. Avner Greif, Institutions and the Path to the Modern Economy: Lessons from Medieval Trade (Cambridge UK: Cambridge University Press, 2006); Avner Greif, “Contract Enforceability and Economic Institutions in Early Trade: The Maghribi Traders’ Coalition,” American Economic Review 83, no. 3 (June 1993): 525–48. 18.

Making Globalization Work by Joseph E. Stiglitz

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affirmative action, Andrei Shleifer, Asian financial crisis, banking crisis, barriers to entry, Berlin Wall, business process, capital controls, central bank independence, corporate governance, corporate social responsibility, currency manipulation / currency intervention, Doha Development Round, Exxon Valdez, Fall of the Berlin Wall, Firefox, full employment, Gini coefficient, global reserve currency, Gunnar Myrdal, happiness index / gross national happiness, illegal immigration, income inequality, income per capita, incomplete markets, Indoor air pollution, informal economy, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), inventory management, invisible hand, John Markoff, Kenneth Arrow, Kenneth Rogoff, low skilled workers, manufacturing employment, market fundamentalism, Martin Wolf, microcredit, moral hazard, North Sea oil, offshore financial centre, oil rush, open borders, open economy, price stability, profit maximization, purchasing power parity, quantitative trading / quantitative finance, race to the bottom, reserve currency, rising living standards, risk tolerance, Silicon Valley, special drawing rights, statistical model, the market place, The Wealth of Nations by Adam Smith, Thomas L Friedman, trade liberalization, trickle-down economics, union organizing, Washington Consensus, zero-sum game

The other is ideological: the Bush administration has consistently opposed efforts to create and strengthen multilateral institutions; an international bankruptcy court, which might naturally evolve as a result of an attempt to create a sovereign debt restructuring mechanism, would be seen as an anathema. 28. American bankruptcy law recognizes this difference; there is a separate chapter (Chapter 9) of bankruptcy law dealing with public bodies. 29. Andrei Shleifer, a professor at Harvard, and a close friend and associate of then undersecretary of the Treasury Larry Summers, was appointed to advise Russia on its privatization through an AID (America's development agency) contract with Harvard. (At the time, Treasury played a central role in designing economic policies toward Russia.) Amidst charges of the Harvard adviser using insider information for trading and inside connections to get a license for establishing a finance firm, AID suspended and then canceled the contract, and sued to recover what it had spent.


pages: 432 words: 127,985

The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry by William K. Black

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accounting loophole / creative accounting, affirmative action, Andrei Shleifer, business climate, cognitive dissonance, corporate governance, corporate raider, Donald Trump, fear of failure, financial deregulation, friendly fire, George Akerlof, hiring and firing, margin call, market bubble, money market fund, moral hazard, offshore financial centre, Ponzi scheme, race to the bottom, Ronald Reagan, short selling, The Market for Lemons, transaction costs

Payback: The Conspiracy to Destroy Michael Milken and His Financial Revolution, New York: HarperBusiness. Fukuyama, Francis. 1995. Trust: The Social Virtues and the Creation of Prosperity, New York: Free Press. General Accounting Office (GAO) Thrift Failures. 1989. Jackson, Brooks. 1988. Honest Graft: Big Money and the American Political Process. New York: Knopf. Johnson, Simon, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer. 2000. “Tunnelling.” American Economic Association Papers and Precedings 90 (2):22–26. Jorion, Phillipe. 1995. Big Bets Gone Bad, San Diego: Academic Press. Kammer, Jerry. 1987. Arizona Republic, July 1. Kane, Edward J. 1985. The Gathering Crisis in Federal Deposit Insurance, Cambridge, Mass.: MIT Press. ———. 1989. The S&L Insurance Mess: How Did it Happen? Washington, D.C.: Urban Institute Press.


pages: 464 words: 139,088

The End of Alchemy: Money, Banking and the Future of the Global Economy by Mervyn King

Andrei Shleifer, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bretton Woods, British Empire, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crowdsourcing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Doha Development Round, Edmond Halley, Fall of the Berlin Wall, falling living standards, fiat currency, financial innovation, financial intermediation, floating exchange rates, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, German hyperinflation, Hyman Minsky, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, large denomination, liquidity trap, Long Term Capital Management, manufacturing employment, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Nick Leeson, North Sea oil, Northern Rock, oil shale / tar sands, oil shock, open economy, paradox of thrift, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, quantitative easing, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Satoshi Nakamoto, savings glut, secular stagnation, seigniorage, stem cell, Steve Jobs, The Great Moderation, the payments system, Thomas Malthus, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, yield curve, Yom Kippur War, zero-sum game

. —— (1960), A Program for Monetary Stability, Fordham University Press, New York. Friedman, Milton and Anna Schwartz (1963), A Monetary History of the United States, 1867–1960, Princeton University Press, Princeton, New Jersey. Fukuyama, Francis (1992), The End of History and the Last Man, Free Press, New York. Geithner, Timothy (2014), Stress Tests: Reflections on Financial Crises, Crown Publishers, New York. Gennaioli, Nicola, Andrei Shleifer and Robert Vishny (2015), ‘Neglected Risks: The Psychology of Financial Crises’, National Bureau of Economic Research Working Paper 20875, mimeo, Cambridge, Massachusetts. Gibbon, Edward (1776), The History of the Decline and Fall of the Roman Empire, page number references to the Everyman edition of 1993, Random House, London. Gigerenzer, Gerd (2002), Calculated Risks: How to Know When Numbers Deceive You, Simon and Schuster, New York. —— (2007), Gut Feelings: The Intelligence of the Unconscious, Viking Books, New York. —— (2014), Risk Savvy: How to Make Good Decisions, Allen Lane, London. —— (2015), Simply Rational, Oxford University Press, Oxford.


pages: 651 words: 180,162

Antifragile: Things That Gain From Disorder by Nassim Nicholas Taleb

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Air France Flight 447, Andrei Shleifer, banking crisis, Benoit Mandelbrot, Berlin Wall, Black Swan, Chuck Templeton: OpenTable, commoditize, creative destruction, credit crunch, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, discrete time, double entry bookkeeping, Emanuel Derman, epigenetics, financial independence, Flash crash, Gary Taubes, George Santayana, Gini coefficient, Henri Poincaré, high net worth, hygiene hypothesis, Ignaz Semmelweis: hand washing, informal economy, invention of the wheel, invisible hand, Isaac Newton, James Hargreaves, Jane Jacobs, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, knowledge economy, Lao Tzu, Long Term Capital Management, loss aversion, Louis Pasteur, mandelbrot fractal, Marc Andreessen, meta analysis, meta-analysis, microbiome, money market fund, moral hazard, mouse model, Myron Scholes, Norbert Wiener, pattern recognition, Paul Samuelson, placebo effect, Ponzi scheme, principal–agent problem, purchasing power parity, quantitative trading / quantitative finance, Ralph Nader, random walk, Ray Kurzweil, rent control, Republic of Letters, Ronald Reagan, Rory Sutherland, selection bias, Silicon Valley, six sigma, spinning jenny, statistical model, Steve Jobs, Steven Pinker, Stewart Brand, stochastic process, stochastic volatility, The Great Moderation, the new new thing, The Wealth of Nations by Adam Smith, Thomas Bayes, Thomas Malthus, too big to fail, transaction costs, urban planning, Vilfredo Pareto, Yogi Berra, Zipf's Law

., 1937, La prévision: ses lois logiques, ses sources subjectives. Institut Henri Poincaré. De Finetti, B., 1974, Theory of Probability, Vol. 1. London: John. De Finetti, B., 1989, “Probabilism.” Erkenntnis 31(2): 169–223. De la Hunty, A., S. Gibson, and M. Ashwell, 2006, “A Review of the Effectiveness of Aspartame in Helping with Weight Control.” Nutrition Bulletin 31(2):115–128. De Long, J. Bradford, and Andrei Shleifer, 1993, “Princes and Merchants: European City Growth Before the Industrial Revolution.” Journal of Law and Economics 36: 671–702. De Soto, H., 2000, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. Basic Books. De Vany, A., 2011, The New Evolution Diet. Vermilion. Delon, Michel, ed., 1997, Dictionnaire européen des lumières. Presses Universitaires de France.


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The Bankers' New Clothes: What's Wrong With Banking and What to Do About It by Anat Admati, Martin Hellwig

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Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, bonus culture, break the buck, Carmen Reinhart, central bank independence, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversified portfolio, en.wikipedia.org, Exxon Valdez, financial deregulation, financial innovation, financial intermediation, fixed income, George Akerlof, Growth in a Time of Debt, income inequality, invisible hand, Jean Tirole, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, Larry Wall, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, margin call, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Nick Leeson, Northern Rock, open economy, peer-to-peer lending, regulatory arbitrage, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Satyajit Das, shareholder value, sovereign wealth fund, technology bubble, The Market for Lemons, the payments system, too big to fail, Upton Sinclair, Yogi Berra

“Resolution of Banking Crises: The Good, the Bad and the Ugly.” IMF Working Paper 10/146. International Monetary Fund, Washington, DC. ———. 2012. “Systemic Banking Crisis Database: An Update.” IMF Working Paper 163. International Monetary Fund, Washington, DC. La Porta, R., F. Lopez-de-Silanes, and A. Shleifer. 1999. “Corporate Ownership around the World.” Journal of Finance 54: 471–517. La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny. 1997. “Legal Determinants of External Finance.” Journal of Finance 52: 1131–1150. ———. 1998. “Law and Finance.” Journal of Political Economy 106: 1113–1155. ———. 2000a. “Agency Problems and Dividend Policies around the World.” Journal of Finance 55 (1): 1–33. ———. 2000b. “Investor Protection and Corporate Governance.” Journal of Financial Economics 58 (1–2): 3–27. Laux, Christian, and Christian Leuz. 2010.


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Political Order and Political Decay: From the Industrial Revolution to the Globalization of Democracy by Francis Fukuyama

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Affordable Care Act / Obamacare, Andrei Shleifer, Asian financial crisis, Atahualpa, banking crisis, barriers to entry, Berlin Wall, blood diamonds, British Empire, centre right, clean water, collapse of Lehman Brothers, colonial rule, conceptual framework, crony capitalism, deindustrialization, Deng Xiaoping, double entry bookkeeping, Edward Snowden, Erik Brynjolfsson, European colonialism, facts on the ground, failed state, Fall of the Berlin Wall, first-past-the-post, Francis Fukuyama: the end of history, Francisco Pizarro, Frederick Winslow Taylor, full employment, Gini coefficient, Hernando de Soto, Home mortgage interest deduction, income inequality, information asymmetry, invention of the printing press, iterative process, knowledge worker, land reform, land tenure, life extension, low skilled workers, manufacturing employment, means of production, Menlo Park, Mohammed Bouazizi, Monroe Doctrine, moral hazard, new economy, open economy, out of africa, Peace of Westphalia, Port of Oakland, post-industrial society, Post-materialism, post-materialism, price discrimination, quantitative easing, RAND corporation, rent-seeking, road to serfdom, Ronald Reagan, Scientific racism, Scramble for Africa, Second Machine Age, Silicon Valley, special economic zone, stem cell, the scientific method, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, too big to fail, trade route, transaction costs, Tyler Cowen: Great Stagnation, Vilfredo Pareto, women in the workforce, World Values Survey, zero-sum game

Heidenheimer and Michael Johnston, eds., Political Corruption, 3rd ed. (New Brunswick, NJ: Transaction, 2001); Robert Leiken, “Controlling the Global Corruption Epidemic,” Foreign Policy 105 (1997): 55–73; Robert Klitgaard, Controlling Corruption (Berkeley: University of California Press, 1988), and Tropical Gangsters: One Man’s Experience with Development and Decadence in Deepest Africa (New York: Basic Books, 1990); Andrei Shleifer and Robert W. Vishny, “Corruption,” Quarterly Journal of Economics 108, no. 3 (1993): 599–617; Johnston, Syndromes of Corruption: Wealth, Power, and Democracy (New York: Cambridge University Press, 2005. 4. See for example the definition in Johnston, Syndromes of Corruption, p. 11. 5. On the Wanli emperor, see Fukuyama, Origins of Political Order, p. 312. 6. See José Anson, Oliver Cadot, and Marcelo Olarreaga, Import-Tariff Evasion and Customs Corruption: Does Pre-Shipment Inspection Help?


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The Intelligent Investor (Collins Business Essentials) by Benjamin Graham, Jason Zweig

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3Com Palm IPO, accounting loophole / creative accounting, air freight, Andrei Shleifer, asset allocation, buy low sell high, capital asset pricing model, corporate governance, corporate raider, Daniel Kahneman / Amos Tversky, diversified portfolio, Eugene Fama: efficient market hypothesis, George Santayana, hiring and firing, index fund, intangible asset, Isaac Newton, Long Term Capital Management, market bubble, merger arbitrage, money market fund, new economy, passive investing, price stability, Ralph Waldo Emerson, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, sharing economy, short selling, Silicon Valley, South Sea Bubble, Steve Jobs, survivorship bias, the market place, the rule of 72, transaction costs, tulip mania, VA Linux, Vanguard fund, Y2K, Yogi Berra

Useful summaries and links can be found at: www.investorhome.com/mutual. htm#do, www.ssrn.com (enter “mutual fund” in the search window), and www.stanford.edu/˜wfsharpe/art/art.htm. 3 That’s not to say that these funds would have done better if their “super-star” managers had stayed in place; all we can be sure of is that the two funds did poorly without them. 4 There’s a second lesson here: To succeed, the individual investor must either avoid shopping from the same list of favorite stocks that have already been picked over by the giant institutions, or own them far more patiently. See Erik R. Sirri and Peter Tufano, “Costly Search and Mutual Fund Flows,” The Journal of Finance, vol. 53, no. 8, October, 1998, pp. 1589–1622; Keith C. Brown, W. V. Harlow, and Laura Starks, “Of Tournaments and Temptations,” The Journal of Finance, vol. 51, no. 1, March, 1996, pp. 85–110; Josef Lakonishok, Andrei Shleifer, and Robert Vishny, “What Do Money Managers Do?” working paper, University of Illinois, February, 1997; Stanley Eakins, Stanley Stansell, and Paul Wertheim, “Institutional Portfolio Composition,” Quarterly Review of Economics and Finance, vol. 38, no. 1, Spring, 1998, pp. 93–110; Paul Gompers and Andrew Metrick, “Institutional Investors and Equity Prices,” The Quarterly Journal of Economics, vol. 116, no. 1, February, 2001, pp. 229–260. 5 Amazingly, this illustration understates the advantage of index funds, since the database from which it is taken does not include the track records of hundreds of funds that disappeared over these periods.


pages: 687 words: 189,243

A Culture of Growth: The Origins of the Modern Economy by Joel Mokyr

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Andrei Shleifer, barriers to entry, Berlin Wall, clockwork universe, cognitive dissonance, Copley Medal, creative destruction, David Ricardo: comparative advantage, delayed gratification, deliberate practice, Deng Xiaoping, Edmond Halley, epigenetics, Fellow of the Royal Society, financial independence, framing effect, germ theory of disease, Haber-Bosch Process, hindsight bias, income inequality, invention of movable type, invention of the printing press, invisible hand, Isaac Newton, Jacquard loom, Jacquard loom, Jacques de Vaucanson, James Watt: steam engine, John Harrison: Longitude, Joseph Schumpeter, knowledge economy, labor-force participation, land tenure, law of one price, Menlo Park, moveable type in China, new economy, phenotype, price stability, principal–agent problem, rent-seeking, Republic of Letters, Ronald Reagan, South Sea Bubble, statistical model, survivorship bias, the market place, The Structural Transformation of the Public Sphere, The Wealth of Nations by Adam Smith, transaction costs, ultimatum game, World Values Survey, Wunderkammern

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Adaptive Markets: Financial Evolution at the Speed of Thought by Andrew W. Lo

Albert Einstein, Alfred Russel Wallace, algorithmic trading, Andrei Shleifer, Arthur Eddington, Asian financial crisis, asset allocation, asset-backed security, backtesting, bank run, barriers to entry, Berlin Wall, Bernie Madoff, bitcoin, Bonfire of the Vanities, bonus culture, break the buck, Brownian motion, business process, butterfly effect, capital asset pricing model, Captain Sullenberger Hudson, Carmen Reinhart, Chance favours the prepared mind, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, corporate governance, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, Daniel Kahneman / Amos Tversky, delayed gratification, Diane Coyle, diversification, diversified portfolio, double helix, easy for humans, difficult for computers, Ernest Rutherford, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, Fractional reserve banking, framing effect, Gordon Gekko, greed is good, Hans Rosling, Henri Poincaré, high net worth, housing crisis, incomplete markets, index fund, interest rate derivative, invention of the telegraph, Isaac Newton, James Watt: steam engine, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Pasteur, mandelbrot fractal, margin call, Mark Zuckerberg, market fundamentalism, martingale, merger arbitrage, meta analysis, meta-analysis, Milgram experiment, money market fund, moral hazard, Myron Scholes, Nick Leeson, old-boy network, out of africa, p-value, paper trading, passive investing, Paul Lévy, Paul Samuelson, Ponzi scheme, predatory finance, prediction markets, price discovery process, profit maximization, profit motive, quantitative hedge fund, quantitative trading / quantitative finance, RAND corporation, random walk, randomized controlled trial, Renaissance Technologies, Richard Feynman, Richard Feynman, Richard Feynman: Challenger O-ring, risk tolerance, Robert Shiller, Robert Shiller, short selling, sovereign wealth fund, statistical arbitrage, Steven Pinker, stochastic process, survivorship bias, The Great Moderation, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Malthus, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Triangle Shirtwaist Factory, ultimatum game, Upton Sinclair, US Airways Flight 1549, Walter Mischel, Watson beat the top human players on Jeopardy!, WikiLeaks, Yogi Berra, zero-sum game

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