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Vikram Mansharamani

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Subtitle: Spotting Financial Bubbles Before they Burst, John Wiley, N.Y. 2011, 272 pgs., paperback


Reviewer Comment: a very different method for analysis of financial bubbles. The author uses five very different tools:
In the first section he describes the characteristics of the five categories and how they influence human behavior in financial activity
microanalysis: the study of investor actions inside the markets, - fundamentals - theory such as supply and demand - presumed equilibrium and an expectation - the efficient market as the norm -and especially reflexivity.
macroeconomics: analysis of the characteristics of markets such as credit levels and cycles, market instability, leverage, debt versus asset values, debt-deflation theory, concepts about business cycles
psychology: the role of human ways of thinking about problems, the cognitive basis, decision making, rational analysis versus irrationality, guessing, rules of thumb, herd influences,
political influence: government manipulation, interest group power, reaction to government actions, property rights, taxation
biological characteristics: mathematics of transmision in a group, human swarms, behavior,
In the second section he presents five very different actual historical events (processes) in which finanical 'bubbles' (that is excessive monetary values of assets) developed and then 'burst' in which the monetary values of assets rapidly declined.
In the third section, chapter 11, he reorganizes the material to consider information from the five historical cases together in the contexts of the five analytical categories and draws conclusions about what appears to have been dominate triggers creating the 'booms' and 'busts'.
In chapter 12 he shifts the subject to current China to consider what the conclusions from the application of the five analytical tools on the five historical cases might provide us to assist prediction about the future of a 'boom' and 'bust' coming in China.
Finally, he offers thoughts about what investors today might benefit from adopting the analytical tools described in the book.


Forward: By David Swensen, one of the author's mentors who encouraged him to write this book.
He recommends it for its broad based treatment of investing. But he notes that the author did not devote attention to a critical aspect of investing, namely, Timing. The importance of being neither too early or too late in taking appropriate action. It is the 'mystery' of timing that may be 'unsolvable'. In his preface the author specifically notes that the book is not about market timing.


Preface: Dr. Mansharamani states his purpose, his desired outcome for the reader. "I have written this book bcause Ibelieve it timely. " Investors need a multidisciplinary framework upon which to base their investment decisions. "This book hopes to provide that framework." He briefly describes the content and purpose for each chapter.


Introduction - The Study of Financial Extremes: One-Armed Analysts, Secrets, Mysteries
Secrets versus Mysteries
Different Problems Necessitate Diffferent Approaches
Financial Booms and Busts as Mysteries


Part I Five Lenses


Chapter 1 - Microeconomic Perspectrives: To Equilibrium or Not?
"Random Walks" amd Acurate Prices The Effficient Market Hypothesis
Constant Instability and Ineffiiency The Theory of Reflexivity
Reconciling Efficiency and Reflexivity


Chapter 2 - Macroeconomics Perspectives: The Impact of Debt and Deflation on Asset Markets and Prices.
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: Homo Economicus meets Homo Sapiens
The Study of Irrationality is Born
Heuristics Gone Wild: How Rules of Thumb Lead Us Astray
Our Flawed Brains: Other Cognitive Issues
The Certanity of Uncertanity


Chapter 4 -Political Foundations: Evaluating Property Rights, Price Mechanisms, and Political Distortions
Can Anyone Own Anything?
Prices: To Guide or Be Guided?
Political Distortions of Property and Price


Chapter 5 - Biological Frameworks: Epidemiology and Emergence
Revealing the Maturity of an Unsustanable 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: A Bubble in Seventeenth-Century Holland
The Uniqueness of Tulips
Fertile Soil for Bubble Formation
The Boombustology of Tulipomania
The Multilens Look


Chapter 7 - The Great Depression: From Roaring Twenties to Yawning Thirties
Castles in the Sand
From Booming Twenties to Busted Thirties
The Boombustology of the Great Depresssion
The Multilens Look


Chapter 8 - The Japanese Boom and Bust: A Credit-Fueled Bubble Economy
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: The Mirage of a Miracle
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: The Homeowner's Society Creates the People's Panic
"Save as Houses"
The Music Stops
The Boombustology of the U.S. Housing Boom and Bust
The Multilens Look


Chapter 11 - Spotting Bubbles before They Burst: A Method for Identifying Unsustainable Booms
Reflexivity and Self-Fulling Dynamics
Leverage, Financial Innovation, the Cheap Money
Policy Driven Distortions
Epidemics and Emergence


Chapter 12 - Boombustology in Action: is China Next?
Tendencies toward Equilibrum
Leverage, Cheap Money, and Potential Deflation
Conspicuous Consumption and Over Confidence
Rights, Moral Hazard, and Political Distortion
Consensus, Silent Leadership, and Epidemics
The Unsustainable Chinese Story


Conclusion - Hedghogs, Foxes, and the Dangers of Making Predictions



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