Boombustology E-Book

Vikram Mansharamani

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 441

Veröffentlichungsjahr: 2011

Beschreibung

A multi-disciplinary framework through which to spot financialbubbles before they burst. Based on a popular undergraduate seminar, entitled FinancialBooms & Busts, taught by the author at Yale University,Boombustology presents a multi-disciplinary framework foridentifying unsustainable booms and forthcoming busts. The magnitude of our recent financial crisis mandates a firmunderstanding of this phenomenon before the next crisis occurs.Boombustology provides an in-depth look at several majorbooms and busts and offers a solid framework for thinking aboutfuture occurrences. * Examines why booms and busts are not random and can thereforebe identified * Focuses upon various theoretical and disciplinary lenses usefulin the study of booms and busts * Contains a framework for thinking about and identifyingforthcoming financial bubbles including several tell-taleindicators of a forthcoming bust. * Illustrates the framework in action by evaluating China as apotential bubble in the making. If you want to make better decisions in today's turbulentinvestment environment, understanding the dynamics of booms andbusts is the best place the start. Boombustology canhelp you achieve this elusive goal. Vikram Mansharamani is a Lecturer at Yale University and aglobal equity investor.

Leseprobe

Contents

Foreword

Preface : Is There a Bubble in Boom–Bust Books?

Acknowledgments

Introduction : The Study of Financial Extremes

Secrets versus Mysteries

Different Problems Necessitate Different Approaches

Financial Booms and Busts as Mysteries

Part I : Five Lenses

Chapter 1 : Microeconomic Perspectives

“Random Walks” and Accurate Prices: The Efficient Market Hypothesis

Constant Instability and Inefficiency: The Theory of Reflexivity

Reconciling Efficiency and Reflexivity

Chapter 2 : Macroeconomic Perspectives

The Magnifying Power of Leverage

Collateral Rates and Debt Dynamics

Hyman Minsky’s Financial Instability Hypothesis

Debt Deflation and Asset Prices

The Austrian Business Cycle Theory

Integrating the Macro Lenses

Chapter 3 : The Psychology Lens

The Study of Irrationality Is Born

Heuristics Gone Wild: How Rules of Thumb Lead Us Astray

Our Flawed Brains: Other Cognitive Issues

The Certainty of Uncertainty

Chapter 4 : Political Foundations

Can Anyone Own Anything?

Prices: To Guide or Be Guided?

Political Distortions of Property and Price

Chapter 5 : Biological Frameworks

Revealing the Maturity of an Unsustainable Boom

How Micro Simplicity Drives Macro Complexity

Emergent Behavior in Human Swarms

The Blind Leading the Blind

Part II : Historical Case Studies

Chapter 6 : Tulipomania

The Uniqueness of Tulips

Fertile Soil for Bubble Formation

The Boombustology of Tulipomania

The Multilens Look

Chapter 7 : The Great Depression

Castles in the Sand

From Booming Twenties to Busted Thirties

The Boombustology of the Great Depression

The Multilens Look

Chapter 8 : The Japanese Boom and Bust

Japan(ese) as Different

An Overview of the Bubble Economy

The Boombustology of the Japanese Boom and Bust

The Multilens Look

Chapter 9 : The Asian Financial Crisis

Boom Times in East Asia

Thailand Catches the Flu

The Boombustology of the Asian Financial Crisis

The Multilens Look

Chapter 10 : The U.S. Housing Boom and Bust

“Safe as Houses”

The Music Stops

The Boombustology of the U.S. Housing Boom and Bust

The Multilens Look

Part III : Looking Ahead

Chapter 11 : Spotting Bubbles before They Burst

Reflexivity and Self-Fulfilling Dynamics

Leverage, Financial Innovation, and Cheap Money

Overconfidence

Policy-Driven Distortions

Epidemics and Emergence

Conclusions

Chapter 12 : Boombustology in Action

Tendencies toward Equilibrium

Leverage, Cheap Money, and Potential Deflation

Conspicuous Consumption and Overconfidence

Rights, Moral Hazard, and Political Distortion

Consensus, Silent Leadership, and Epidemics

The Unsustainable Chinese Story

Conclusion : Hedgehogs, Foxes, and the Dangers of Making Predictions

Notes

About the Author

Index

Copyright © 2011 by Vikram Mansharamani. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Mansharamani, Vikram, author.

Boombustology : Spotting Financial Bubbles Before They Burst / Vikram Mansharamani.

p. cm

Includes index.

ISBN 978-0-470-87946-7 (hardback); ISBN 978-1-118-02857-5 (ebk); ISBN 978-1-118-02855-1 (ebk); ISBN 978-1-118-02856-8 (ebk)

1. Business cycles. 2. Financial crises. 3. Business forecasting. I. Title.

HB3711.M354 2011

338.5′42–dc22

2010045668

To my family, for their love and support

Foreword

Vikram Mansharamani’s Boombustology serves an important purpose in reminding us that narrow, model-driven approaches to understanding financial markets frequently fail. His subject, financial crises, bedevils market modelers, because crises reside in the notoriously difficult-to-assess fat tails of distributions of security returns. Not only are the fat tails hard to parse, but their impact is disproportionate to their size. Extreme events, good and bad, do more to determine longrun results for investors than do the run-of-the-mill events that fall in the center of distributions. Sensible investors pay close attention to low probability extreme negative events, like financial crises, that have the potential to wreak havoc with their portfolios.

Successful approaches to making investment decisions require more than applying state-of-the-art finance theory. In the 25 years that I have had responsibility for managing Yale University’s endowment fund, I have hired a large number of young professionals, most of them immediately after graduation from college. Many of my new hires have formal training in economics and finance, with an emphasis on model-based approaches to understanding markets. The financial world presented in the classroom is populated by rational transactors armed with perfect information. Perhaps the most fundamental difference between the academic world where students learn about markets and the real world where analysts operate in markets is the real world’s population of flesh-and-blood economic actors.

After a prospective employee signs up for a stint with the Investments Office, I supply him or her with a number of books that illustrate a common theme—the importance of actions of individuals in the functioning of our financial markets. The reading list includes Den of Thieves, James Stewart’s story of the junk bond scandals of the 1980s; When Genius Failed, Roger Lowenstein’s depiction of the collapse of Long-Term Capital Management; Conspiracy of Fools, Kurt Eichenwald’s tale of the Enron fraud; and The Big Short, Michael Lewis’s account of the subprime mortgage crisis. These books describe, in a thoroughly engaging manner, individual behavior that fails to correspond to the rational actions presupposed by academic modelers. Moreover, in each instance, the actions of all-too-human individuals profoundly influence the world’s financial markets.

Armed with the knowledge that making high-quality investment decisions requires a combination of rigorous financial modeling and informed market judgment, my colleagues in the Investments Office stand well prepared to operate in markets. By employing the best that finance theory offers, investors bring an analytical perspective to the table. By including an appreciation of the human elements of market behavior, investors exhibit a healthy skepticism of neatly packaged model results. The combination of analytical rigor and reasoned judgment informs not only the evaluation of bottom-up security selection decisions, but also the analysis of top-down asset allocation studies.

In Boombustology, Vikram Mansharamani advocates a similarly broad-based approach to understanding financial booms and busts, describing the financial world as seen through the five lenses of microeconomics, macroeconomics, psychology, politics, and biology. By employing an unusually diverse set of perspectives to increase understanding of the character of financial crises, Mansharamani gives his readers a valuable set of guideposts to help them find a safe path through future market disruptions.

A financial crisis challenges even the most thoughtful decision-making process. During my career at Yale, the endowment faced a number of major market dislocations—the market crash in October 1987, the near collapse of the financial system in 1998, the bursting of the Internet bubble in 2000, and the financial debacle of 2008. In each instance, the extreme market moves produced pitfalls and opportunities.

The crash in October 1987 highlighted the importance of a disciplined approach to maintaining asset allocation targets. On October 19, 1987, as many recall, stock markets around the world declined more than 20 percent. Less well remembered was the strong flight-to-quality rally in U.S. Treasury securities. The decline in stock prices and increase in Treasury prices presented investors with an opportunity to buy stocks low and sell Treasuries high. In fact, as I describe in my book, Pioneering Portfolio Management, fearful investors did the opposite, selling (now cheaper) stocks and buying (now more expensive) bonds. Did investors forget that buying high and selling low damages portfolio returns? In contrast, a disciplined rebalancing approach called for purchases of stocks and sales of bonds, positioning the portfolio for future success.

The September 1998 collapse of Long-Term Capital Management (LTCM) showed investors the importance of insulating portfolios, to greatest extent possible, from the actions of others. Nearly all of the positions held by LTCM made fundamental economic sense. What made no sense whatsoever was the staggering level of leverage in the LTCM portfolio, which ran as high as 250 to 1. Because of the underlying sensibility of LTCM’s positions, many other investors (including large numbers of hedge funds and the trading desks of Wall Street banks) put on similar trades. When LTCM experienced an unexpected loss, lenders began forcing sales of positions. As LTCM liquidated its massive portfolio, spreads on their otherwise sensible trades widened; that is, cheap assets became cheaper and expensive assets became more expensive. A substantial number of hedge funds suffered, as frightened investors rushed for the exits. In fact, the impact on portfolios exceeded the actual demand for liquidity, since hedge funds raised massive amounts of cash in anticipation of redemption demands. Funds that promised levels of liquidity to investors that were inconsistent with the investment horizon of underlying security positions found themselves forced to raise high levels of cash at the point of maximum opportunity. Investors in funds with sensible lockups and investors with separate accounts faced no such pressure to raise cash and positioned themselves to produce superior results. While no investor can avoid the short-term impact of adverse price moves, steadfast investors can maintain positions and benefit from the ultimate return to fair value of both cheap and expensive securities.

The March 2000 bursting of the Internet bubble showed investors the rewards of persistence in the face of market headwinds. For a number of years prior to the collapse in prices, the market for Internet stocks exhibited unmistakable signs of speculative excess. The irrational increase in prices caused pain for investors who failed to participate in the mania and even greater pain for investors who bet on a return to rationality by taking short positions in Internet stocks. Yet, those investors who persevered with bets against speculative excess not only benefited from dramatic declines in Internet stocks, but also benefited from superior performance of value-oriented securities held in the place of their speculative cousins.

The financial crisis of 2008 forced investors to confront the importance of liquidity. As markets seized up and ready access to funds disappeared, investors found that many formerly liquid assets (e.g., money market funds) became less liquid. Confronted with demands for liquidity to fund operations and to support portfolio management activities, investors generated funds from sources not disruptive to the portfolio (e.g., external borrowing) and from sources disruptive to the portfolio (e.g., sales of illiquid partnership interests). The quest for liquidity, particularly from sources that did not disturb portfolio allocations, preoccupied many investors, especially those whose portfolios emphasized allocations to private equity and real assets. Better prepared investors, who had in-place liquidity and borrowing facilities, fared much better than those who scrambled to raise funds in the chill of the crisis.

The admittedly brief descriptions of lessons learned from past crises illustrate not only the difference in character of each of the crises, but also the importance of following sensible portfolio management principles throughout a period of market disruption, a time when many investors lose their bearings. In Boombustology, Vikram Mansharamani assists investors by rolling up his sleeves and applying his perspective to analyses of five past crises, ranging from Tulipmania in seventeenth-century Holland to the subprime mortgage catastrophe in twenty-first-century America. He may be correct that the crises share “many similar characteristics” (although I am often struck by their differences), but he is certainly correct that the study of crises is most useful “if it helps one to make money, avoid losses, or, ideally, both.” Where Mansharamani falls short in his quest to help his readers make money is in addressing the critical element of timing.

The investment world fails to distinguish between early and wrong. Managers who underweighted Japan in the face of absurd valuations in the late 1980s suffered as Nikkei marched to ever higher levels, ultimately peaking at nearly 39,000 in December 1989. Investors who recognized the bubble early incurred opportunity costs (by underweighting Japan) or direct costs (by shorting Japan). In all too many instances, investors locked in losses by abandoning correct, but out-of-favor, positions when the pain of losses became intolerable. In other instances, investors profited from their anti-bubble bet, but reduced the profitability of their position by starting too soon. Precisely the same problem confronted investors during the Internet bubble in the late 1990s. Early looks a lot like wrong.

In the introduction to his book, Vikram Mansharamani makes an interesting distinction between puzzles (for which a solution exists) and mysteries (for which a solution does not yet exist). Even though his work will not assist investors in dramatic fashion unless he addresses the core (perhaps, unsolvable) mystery of the timing of market crises, Mansharamani’s broad-based approach to examining financial crises helps investors by making these extraordinarily important market events less mysterious and more puzzle-like.

David F. Swensen

Chief Investment Officer

Yale University

New Haven, Connecticut

January 4, 2011

PREFACE

Is There a Bubble in Boom–Bust Books?

While I sincerely hope that Boombustology becomes a timeless classic for students, academics, policymakers, and investors alike, my current goal is considerably more modest. I have written this book because I believe it timely. The world is in the midst of an accelerating sequence of boom and bust cycles, and despite these developments, no organized, multidisciplinary framework exists for thinking about them. This book hopes to provide that framework. Lacking such a framework, we are destined to a world of massive unintended consequences and the continual escalation of extremes—the ultimate outcome of which may be quite destructive to society and the socioeconomic–political world as we know it.

Might it be possible that our attempts to deal with apparent Japanese economic dominance resulted in the Japanese bust, which drove the Asian financial crisis, which drove the dot-com bubble, which resulted in the U.S. housing boom and bust, which is currently creating unsustainable debt loads at the government level around the world? Might it have been possible to identify these booms before they busted so as to prevent the numerous unintended consequences that follow in the wake of our attempts to address each bust? This book will address these topics.

The market for books about financial booms and busts has itself boomed over the past several years, accelerated in no small part by the recent financial crisis. Why then does it make sense to add to the noise with another treatise on financial bubbles and crashes? Surely all previously written work has addressed any pertinent issues. What can a practicing money manager and part-time college lecturer possibly add to the overflowing bookstore business section?

The mere fact that this book exists and that you stand here reading it answers these somewhat rhetorical questions. This book, which is a written version of a course that I have taught at Yale, provides a new perspective on financial booms and busts. The fact that I chose to design a course to teach at an undergraduate liberal arts college (rather than an undergraduate or graduate business school) is a telling statement about my perspective. Social occurrences are difficult to categorize as solely economic, psychological, political, or biological—they are, in fact, a complex concoction of all such phenomena. Why, then, should one limit oneself to a simple unidisciplinary lens when studying financial markets, perhaps the most complicated of social phenomena?

Financial markets are extremely complex phenomena; competing within them with the handicap of a single lens seems in many ways illogical. Unfortunately, our entire society and educational infrastructure is designed toward specialization and single-discipline analysis. Even among the leading liberal arts schools, virtually all college students are eventually channeled toward a disciplinary major such as economics, political science, psychology, history, literature, biology, or chemistry. While there are meaningful benefits in developing expertise, few multidisciplinary options are offered, let alone pursued. This is exacerbated in graduate and professional schools, and although such specialization is necessary and beneficial in most scientific pursuits, it has the potential to be counterproductive in social pursuits.

Since I entered Yale University as a college freshman, I have resisted the tendency of the establishment to channel me into a particular discipline or “box.” Rather than merely study economics or political science, I majored in Ethics, Politics and Economics—a multidisciplinary major offered at Yale and modeled after the program in Philosophy, Politics, and Economics at the University of Oxford. Incidentally, I double-majored with East Asian Studies, another multidisciplinary major.

Resisting the channel toward a specialization was tougher while pursuing a doctorate, but even here I think I managed to evade the “you must be a single-discipline expert” police that have permeated almost every corner of academia. I sought out PhD programs in the study of innovation and entrepreneurship, inherently multi-/interdisciplinary topics, and was accepted into one such program at the Massachusetts Institute of Technology. The degree I pursued was housed at the Sloan School of Management and was offered by a program called the Management of Technological Innovation and Entrepreneurship. My coursework included economics, psychology, political science, sociology, history, and law.

Even after completing my education and seeking positions in the money management business, the tendency for immediate specialization was ubiquitous. Virtually every firm with which I interviewed wanted me to become an industry analyst focused on one or two industries. Several firms suggested that it would be best to also focus on a singular geography as well. I soon determined that the established system was based on a strong and widely held view that specialization in the financial markets was a source of advantage. In effect, the industry had created a strong and pervasive culture of “siloed” thinking in which specialists were focusing on geographies and industries. It was, in the language of Isaiah Berlin, an industry of hedgehogs—people who knew “one big thing.” I instead became a fox.

In the course of forming my own investment philosophy and approach to thinking about the financial world, I developed a strong belief that a generalist approach (i.e., being a fox) was superior and that competitive insights were found not by competing against other experts but rather by looking between and across the silos. The saying “To a man with a hammer, many things look like nails” is particularly pertinent to the money-management industry, as many industry analysts are organized in silos. There are times when the worst energy idea may be better than the best consumer idea, yet such insights get lost with expert-oriented approaches. Seeking to continue my multidisciplinary life into the money-management industry, I operate as a global generalist.

Before describing what the book is, let me begin by describing what it is not. It is not a book about making day-to-day investment decisions or about the proper investment approach for a particular market. It is not about market timing. Nor is it a book that presents a unique investment philosophy. Many fine books have been written about these topics. Rather, this book is about the context in which these decisions and philosophies are implemented. It is about deciphering the needle-moving extremes that have the potential to render many traditional investment approaches useless. Rather than providing you with a map of how markets may move, Boombustology hopes to provide you a seismograph that can help identify forthcoming quakes.

Given my firm belief that insight is found by looking across and through multiple disciplines, it should come as no surprise that this book provides a multidisciplinary framework for evaluating the extremely complex social phenomenon of financial market booms and busts. This book differs from other treatments of financial extremes in three primary ways: (1) it develops and utilizes a multidisciplinary perspective, based on the findings of economics, psychology, and other disciplines; (2) it utilizes historical case studies to illustrate the power of multiple lenses; and (3) it summarizes these findings into a forward-looking framework useful in understanding and identifying future financial extremes. Upon conclusion of this book, the reader will be left with a robust understanding of the dynamics that precede, fuel, and ultimately reverse financial market extremes. It is also hoped that the reader will be well versed in the numerous indicators that telegraph the existence of a bubble.

This book is based on a course I teach at Yale that emphasizes a liberal arts approach to thinking about booms and busts. The focus is upon asset class bubbles. The book mimics the course in that it is divided into three parts. The first focuses on the five lenses that I consider to be most useful in the study of booms and busts: microeconomics, macroeconomics, psychology, politics, and biology. Why did I choose these lenses? Both micro- and macroeconomic lenses are too obvious to exclude and the recent emphasis on behavioral approaches necessitates its inclusion. Given the role of politics in developing the very foundation on which booms and busts develop, I included it as well. Space constraints limited me to five lenses, and I chose biology as the fifth to illustrate the power of a perspective external to the social sciences. I chose biology over physics as the economic emphasis on equilibrium is itself derived from physics.

Booms and busts that affect entire asset classes (versus those that might affect a particular industry or sector) are actually quite rare. As such, the second part of the book applies the five lenses to five case studies to generate a “bubble-spotting” theory. The cases chosen (Tulipmania, the Great Depression, the Japanese bubble, the Asian financial crisis, and the U.S. housing boom) were selected to represent variation in geography and time.

The third and final part of the book takes the lessons learned from Parts One and Two and develops a framework for proactively thinking about and identifying financial bubbles before they burst. The theory generated in the book is summarized in a framework presented in Part Three; I encourage researchers to test the importance of each indicator.

Topics included in the course but not in the book are the benefits of booms and busts and the coincidence of frauds and swindles with busts. Both are excluded here because they are not explicitly about the topic of identifying bubbles. Frauds, swindles, and scams are not-infrequent occurrences in boom times, but because they are unfortunately not revealed until after a bust is well developed, they are a lagging (and therefore less useful) indicator.

Chapter 1 focuses on the microeconomics of booms and busts, paying special attention to the tendency of prices under various circumstances. Given the dominant microeconomic ideas of market efficiency and supply and demand–driven equilibrium, the chapter describes them and various alternatives. The theory of reflexivity, developed by George Soros, is presented as a viable alternative to the equilibrium-seeking world of traditional microeconomics. The chapter concludes with a reconciliation of the disequilibrium suggested by reflexivity and the equilibrium assumed by microeconomics.

Chapter 2 focuses on credit cycles and financial instability. Three primary theories serve as the focus of the chapter: Irving Fisher’s debt-deflation theory of depressions, Hyman Minsky’s financial instability hypothesis, and the Austrian business cycle theory. The chapter concludes with a framework for thinking about credit cycles and their impact on asset prices.

Chapter 3 is about the cognitive biases found in most human decision making. The behavioral lens presented in this chapter focuses on the representativeness and availability heuristics that have historically guided human decision making toward appropriate answers, but that, in today’s increasingly complex, uncertain, and interconnected world, have great potential to lead us astray. Other findings from the research on decision making are considered and presented, including biases caused by anchoring and insufficient adjustment, mental accounting, fairness, and existing endowments.

Chapter 4 focuses on the politics of property rights and the means through which a society determines the relative value of its goods (i.e., prices). The logic and ramifications of politically motivated price floors and price ceilings are considered, and the chapter concludes with a short discussion of tax policies and how they have the ability to impact asset prices by motivating (or disincentivizing) particular investment decisions by investors.

Chapter 5 attempts to take an emergent perspective from the study of biology and apply it to financial markets. Epidemics, herd behavior, and swarm logic/intelligence are the focus. The chapter focuses on two key lessons: how the study of epidemics and the diffusion of diseases can inform our study of booms and busts—with specific value in helping one understand the relative maturity of a bubble—and how group behavior can have a profoundly conforming impact on its seemingly individualistic members.

Part Two of the book presents five historical cases and utilizes the five lenses from Part One to evaluate them. Specifically, Chapter 6 evaluates the Tulipmania of the 1630s, Chapter 7 applies the lenses to the Florida land boom of the mid-1920s and the Great Depression, Chapter 8 is about the Japanese boom and bust, Chapter 9 presents the Asian financial crisis, with special attention paid to Thailand as the epicenter of the events that unfolded, and Chapter 10 evaluates the U.S. housing boom and bust of the 2000s.

Chapter 11 summarizes the five lenses and the five cases in a matrix-style analysis that attempts to generate a generalized framework for identifying bubbles before they burst. Key indicators or signposts of a financial bubble are formulated, and a checklist-style evaluation emerges as a means to gauge the likelihood of an unsustainable boom.

Chapter 12 applies the framework of Chapter 11 to one of the most controversial investment considerations in the world today: China. While China has emerged to be one of the best economic growth stories of the past 30 years, there are reasons to pause and think this may not continue. At the risk of giving away the punch line, Chapter 12 concludes that many indicators are highlighting an elevated probability that China is in the midst of a bubble that may burst. The Boombustology seismograph is picking up increased prequake rumbles.

The framework developed over the following pages has helped me navigate through recent financial booms and busts. I hope it will help you do the same, for in the wise words of Mark Twain, “Although history rarely repeats itself, it often does rhyme.”

Vikram Mansharamani

Brookline, MA

December 2010

Acknowledgments

The ultimate origin of this book lies on a squash court in New Haven. After an exhausting and grueling squash match against a formidable competitor (I won), I sought his advice. “I’d like to put my PhD to work and perhaps teach a course here at Yale. What do you think?” His response set the wheels in motion: “I think it’s a great idea! See if you can teach it as a college seminar.” So it is that I must begin by thanking David Swensen for his encouragement and support in teaching a class at Yale. David is a fierce competitor, a loyal Yalie, a caring mentor, and overall class act. I feel extraordinarily lucky to have him as a friend. A course does not, however, a book make. Charley Ellis encouraged me to convert the course into a book and provided numerous introductions to facilitate its publication. Without his guidance and help, this book would not have been written.

I thank the many students I have had the pleasure of teaching. Over the course of my graduate education and subsequent years of teaching, I have met no group of students more motivated, insightful, intelligent, and analytical than the undergraduates at Yale University. They are, simply put, an absolute pleasure to teach because they exhibit natural curiosity, analytical rigor, and intellectual honesty. They have challenged me to think about this material more deeply and have helped refine my thinking.

My graduate education at MIT was an amazing experience that opened my eyes to a new way of thinking. I am particularly thankful to Michael Cusumano, my dissertation committee chair, for his patience as I wandered between academic and nonacademic pursuits. Professor Harvey Sapolsky of the Security Studies Program was a constant friend and mentor.

From a professional perspective, I have had the pleasure of working with many fine individuals over the past 20 years. Several have left major imprints on my way of thinking and have indirectly influenced the work presented here. While there are too many to mention, four of them selflessly took time to provide me with feedback, guidance, and encouragement as I wrote this book: Christopher Bodnar, Douglas Suliman, William Vens, and Matthew Vettel. I also particularly thank Dee Keesler for encouraging my teaching efforts at Yale and providing a professional environment supportive of “fox” thinking. Additional gratitude is owed to Hank Blaustein for rapidly and creatively capturing the spirit of Chapter 12.

My parents, Shobha and Vishnu Mansharamani, deserve special thanks. Without their sacrifices (financial and otherwise), I likely would not have had the opportunities in life that I have had.

Any working professional with a young family knows that time is scarce. It should therefore come as no surprise that my greatest debt of gratitude is to my family for their support in providing the time to write this book. Special acknowledgment is owed to my wife, Kristen Hanisch Mansharamani, who has tirelessly read every word. Her editorial capabilities have been tested repeatedly, initially through the writing of three graduate theses, and now through a book. Her dedication and commitment were steadfast. All errors remain hers. Actually, I think it is customary for me to take credit for the errors, but, as any spouse understands, blame is a matter of perspective!

Finally, I want to thank the editorial staff at John Wiley & Sons (especially Meg Freeborn, Claire Wesley, and Bill Falloon) for their persevering attention to detail and their unwavering commitment to my efforts, inconsistent as they may have been.

INTRODUCTION

The Study of Financial Extremes

ONE-ARMED ANALYSTS, SECRETS, MYSTERIES

Among the many noteworthy comments made by U.S. presidents over the years, perhaps one of the most pertinent with respect to the study of financial booms and busts was made by President Harry Truman: “Someone give me a one-armed economist!” The statement, made in response to the constant “on the one hand . . . on the other hand” presentation of analysis to him by his advisors, captured the discomfort most decision makers have with ambiguity and uncertainty. For better or worse, the world in which we now find ourselves is plagued with ambiguity and uncertainty. Globalization, economic interconnectedness, global warming, and international financial linkages are the reality of our sociopolitical-economic existence.