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Boombustology: Spotting Financial Bubbles Before They Burst

Book Description

A multi-disciplinary framework through which to spot financial bubbles before they burst.

Based on a popular undergraduate seminar, entitled Financial Booms & Busts, taught by the author at Yale University, Boombustology presents a multi-disciplinary framework for identifying unsustainable booms and forthcoming busts.

The magnitude of our recent financial crisis mandates a firm understanding of this phenomenon before the next crisis occurs. Boombustology provides an in-depth look at several major booms and busts and offers a solid framework for thinking about future occurrences.

  • Examines why booms and busts are not random and can therefore be identified

  • Focuses upon various theoretical and disciplinary lenses useful in the study of booms and busts

  • Contains a framework for thinking about and identifying forthcoming financial bubbles including several tell-tale indicators of a forthcoming bust.

  • Illustrates the framework in action by evaluating China as a potential bubble in the making.

If you want to make better decisions in today's turbulent investment environment, understanding the dynamics of booms and busts is the best place the start. Boombustology can help you achieve this elusive goal.

Vikram Mansharamani is a Lecturer at Yale University and a global equity investor.

Table of Contents

  1. Copyright
  2. Foreword
  3. PREFACE: Is There a Bubble in Boom–Bust Books?
  4. Acknowledgments
  5. INTRODUCTION: The Study of Financial Extremes: ONE-ARMED ANALYSTS, SECRETS, MYSTERIES
    1. Secrets versus Mysteries
    2. Different Problems Necessitate Different Approaches
    3. Financial Booms and Busts as Mysteries
  6. I. Five Lenses
    1. 1. Microeconomic Perspectives: TO EQUILIBRIUM OR NOT?
      1. 1.1. "Random Walks" and Accurate Prices: The Efficient Market Hypothesis
        1. 1.1.1. Implications of Financial Efficiency
        2. 1.1.2. The Boom and Bust of Efficiency
      2. 1.2. Constant Instability and Inefficiency: The Theory of Reflexivity
        1. 1.2.1. Implications of Reflexivity
        2. 1.2.2. The Reluctant Recognition of Reflexivity
      3. 1.3. Reconciling Efficiency and Reflexivity
    2. 2. Macroeconomic Perspectives: THE IMPACT OF DEBT AND DEFLATION ON ASSET MARKETS AND PRICES
      1. 2.1. The Magnifying Power of Leverage
      2. 2.2. Collateral Rates and Debt Dynamics
      3. 2.3. Hyman Minsky's Financial Instability Hypothesis
      4. 2.4. Debt Deflation and Asset Prices
      5. 2.5. The Austrian Business Cycle Theory
        1. 2.5.1. Underlying Beliefs: Macroeconomics and Capital Structure
        2. 2.5.2. Malinvestment and Overconsumption: Central Banks and Money Creation
      6. 2.6. Integrating the Macro Lenses
    3. 3. The Psychology Lens: HOMO ECONOMICUS MEETS HOMO SAPIENS
      1. 3.1. The Study of Irrationality Is Born
      2. 3.2. Heuristics Gone Wild: How Rules of Thumb Lead Us Astray
        1. 3.2.1. Representativeness
        2. 3.2.2. Availability
      3. 3.3. Our Flawed Brains: Other Cognitive Issues
        1. 3.3.1. The Power of Irrelevance: Anchoring and Adjustment
        2. 3.3.2. Framing and Preference Reversal
        3. 3.3.3. How "Fairness" Impacts Decisions
        4. 3.3.4. Mental Accounting: Why a Dollar Is Not a Dollar
        5. 3.3.5. The Endowment Effect: Why It's Worth More to You if You Already Have It
        6. 3.3.6. The Congruence Heuristic and the Confirmatory Bias
      4. 3.4. The Certainty of Uncertainty
    4. 4. Political Foundations: EVALUATING PROPERTY RIGHTS, PRICE MECHANISMS, AND POLITICAL DISTORTIONS
      1. 4.1. Can Anyone Own Anything?
      2. 4.2. Prices: To Guide or Be Guided?
        1. 4.2.1. The Market-Oriented Approach
        2. 4.2.2. The Price-Dictation Method
        3. 4.2.3. Government Meddling with the Price Mechanism
      3. 4.3. Political Distortions of Property and Price
    5. 5. Biological Frameworks: EPIDEMIOLOGY AND EMERGENCE
      1. 5.1. Revealing the Maturity of an Unsustainable Boom
      2. 5.2. How Micro Simplicity Drives Macro Complexity
        1. 5.2.1. Locusts
        2. 5.2.2. Bees
        3. 5.2.3. Ants
      3. 5.3. Emergent Behavior in Human Swarms
        1. 5.3.1. Swarm Processes and Group Dynamics
        2. 5.3.2. Information Cascades and Herd Behavior
      4. 5.4. The Blind Leading the Blind
  7. II. Historical Case Studies
    1. 6. Tulipomania: A BUBBLE IN SEVENTEENTH-CENTURY HOLLAND
      1. 6.1. The Uniqueness of Tulips
      2. 6.2. Fertile Soil for Bubble Formation
      3. 6.3. The Boombustology of Tulipomania
        1. 6.3.1. Microeconomics
        2. 6.3.2. Holland's Liquidity and Money
        3. 6.3.3. The Psychological State of Tulipjobbers
        4. 6.3.4. Political and Regulatory Considerations
        5. 6.3.5. More than Botanical Biology
      4. 6.4. The Multilens Look
    2. 7. The Great Depression: FROM ROARING TWENTIES TO YAWNING THIRTIES
      1. 7.1. Castles in the Sand
      2. 7.2. From Booming Twenties to Busted Thirties
      3. 7.3. The Boombustology of the Great Depression
        1. 7.3.1. Disequilibrium Tendencies
        2. 7.3.2. Inappropriate Interest Rates
        3. 7.3.3. The Psychological State of the Time
        4. 7.3.4. Political and Regulatory Conditions
        5. 7.3.5. Epidemic Thinking, Silent Leadership
      4. 7.4. The Multilens Look
    3. 8. The Japanese Boom and Bust: A CREDIT-FUELED BUBBLE ECONOMY
      1. 8.1. Japan(ese) as Different
      2. 8.2. An Overview of the Bubble Economy
        1. 8.2.1. The Land Boom and Trophy Properties
        2. 8.2.2. The Art Market Meets the Bubble Economy
        3. 8.2.3. The Stock Market Goes Vertical
        4. 8.2.4. Bursting of the Bubble
      3. 8.3. The Boombustology of the Japanese Boom and Bust
        1. 8.3.1. The Reflexive Foundation of the Asset Boom: Land as Collateral
        2. 8.3.2. The Effects of Macroeconomic Policy
        3. 8.3.3. The Psychology of Conformity
        4. 8.3.4. Political and Regulatory Conditions
        5. 8.3.5. Housewives, Preschool, and Pollock
      4. 8.4. The Multilens Look
    4. 9. The Asian Financial Crisis: THE MIRAGE OF A MIRACLE
      1. 9.1. Boom Times in East Asia
      2. 9.2. Thailand Catches the Flu
      3. 9.3. The Boombustology of the Asian Financial Crisis
        1. 9.3.1. The Reflexivity of Confidence
        2. 9.3.2. Miracle or Myth?
        3. 9.3.3. "Hasn't Happened" Is Not "Can't Happen"
        4. 9.3.4. Crony Capitalism as Cultural Coping
        5. 9.3.5. Asian Harmony vs. Western Individualism
      4. 9.4. The Multilens Look
    5. 10. The U.S. Housing Boom and Bust: THE HOMEOWNER'S SOCIETY CREATES THE PEOPLE'S PANIC
      1. 10.1. "Safe as Houses"
      2. 10.2. The Music Stops
      3. 10.3. The Boombustology of the U.S. Housing Boom and Bust
        1. 10.3.1. Reflexivity Relationships Between Credit and Collateral
        2. 10.3.2. Cheap Money = Expensive Housing
        3. 10.3.3. "House Values Don't Go Down"
        4. 10.3.4. Homes for Everyone!
        5. 10.3.5. Epidemics and Emergence
      4. 10.4. The Multilens Look
  8. III. Looking Ahead
    1. 11. Spotting Bubbles before They Burst: A METHOD FOR IDENTIFYING UNSUSTAINABLE BOOMS
      1. 11.1. Reflexivity and Self-Fulfilling Dynamics
        1. 11.1.1. Tulipomania
        2. 11.1.2. The Great Depression
        3. 11.1.3. The Japanese Boom and Bust
        4. 11.1.4. The Asian Financial Crisis
        5. 11.1.5. The U.S. Housing Boom and Bust
        6. 11.1.6. Red Flags of Reflexivity
      2. 11.2. Leverage, Financial Innovation, and Cheap Money
        1. 11.2.1. Tulipomania
        2. 11.2.2. The Great Depression
        3. 11.2.3. The Japanese Boom and Bust
        4. 11.2.4. The Asian Financial Crisis
        5. 11.2.5. The U.S. Housing Boom and Bust
        6. 11.2.6. Signs of Unsustainable Credit Conditions
      3. 11.3. Overconfidence
        1. 11.3.1. Tulipomania
        2. 11.3.2. The Great Depression
        3. 11.3.3. The Japanese Boom and Bust
        4. 11.3.4. The Asian Financial Crisis
        5. 11.3.5. The U.S. Housing Boom and Bust
        6. 11.3.6. It's Different This Time
      4. 11.4. Policy-Driven Distortions
        1. 11.4.1. Tulipomania
        2. 11.4.2. The Great Depression
        3. 11.4.3. The Japanese Boom and Bust
        4. 11.4.4. The U.S. Housing Boom and Bust
        5. 11.4.5. Unintended Consequences of Policy Developments
      5. 11.5. Epidemics and Emergence
        1. 11.5.1. Tulipomania
        2. 11.5.2. The Great Depression
        3. 11.5.3. The Japanese Boom and Bust
        4. 11.5.4. The Asian Financial Crisis
        5. 11.5.5. The U.S. Housing Boom and Bust
        6. 11.5.6. Maturity and Consensus
      6. 11.6. Conclusions
    2. 12. Boombustology in Action: IS CHINA NEXT?
      1. 12.1. Tendencies toward Equilibrium
      2. 12.2. Leverage, Cheap Money, and Potential Deflation
      3. 12.3. Conspicuous Consumption and Overconfidence
      4. 12.4. Rights, Moral Hazard, and Political Distortion
      5. 12.5. Consensus, Silent Leadership, and Epidemics
      6. 12.6. The Unsustainable Chinese Story
  9. CONCLUSION: Hedgehogs, Foxes, and the Dangers of Making Predictions
  10. Notes
  11. About the Author