Here is a list of the seven best books on previous episodes of financial euphoria and collapses
by Niranjan Rajadhyaksha
This has been an astonishing month in the global financial markets—the collapse of Lehman Brothers Holdings Inc., the sale of Merrill Lynch and Co. Inc., the nationalization of Freddie Mac, Fannie Mae and American International Group Inc., and fears that several other financial institutions are tottering.
It is hard to make sense of what is happening in New York, London and elsewhere. And while there is no shortage of newspaper commentary, blog posts and videos to keep you busy, here is a list of the seven best books I have read on previous episodes of financial euphoria and collapses. These are not academic tomes, but those that combine insight and good writing.
Here goes, in no particular order:
A Short History of Financial Euphoria, by John Kenneth Galbraith. A whistle-stop tour from tulip mania and the South Sea bubble to the Great Crash of 1920 and the junk bond meltdown of 1989—and all this in 110 pages of pithy writing. Financial innovation is all about creating new forms of leverage, says Galbraith. “The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version,” he wrote.
When Genius Failed, by Roger Lowenstein. This is a gripping story of how Long Term Capital Management, a hedge fund that had an incredibly smart bunch of people on its rolls, including two Nobel economists, collapsed in 1998. A cautionary tale about hubris.
Liar’s Poker, by Michael Lewis. A wicked and rollicking insider’s tale about the last years of the great bull market of the 1980s—which ended with the collapse of Drexel Burnham Lambert and the destruction of the US’ savings and loans institutions. You will never take an investment banker very seriously after reading this book.
The Money Game, by Adam Smith. The delightful book takes us back to the great 1960s boom in the US. The author spins out his yarn with wit and sarcasm. Economist Paul Samuelson called it a modern classic. The name gives away the main point of the book—it’s all just a game.
Reminiscences of a Stock Operator, by Edwin Lefevre. This is the fictionalized story of the life of a trader called Jesse Livermore aka the Boy Plunger. It describes the rough and tumble world of equities trading in the early decades of the 20th century, with rumours, conspiracies and cartels swirling through the markets. This was before the age of securities regulation and research reports. But an ever-relevant look into the world of trading.
Extraordinary Popular Delusions And The Madness of Crowds, by Charles Mackay. A book on behavioural finance decades before there was any subject known as behavioural finance. Written in a quaint early 18th century style, this classic covers not just investment manias such as the South Sea Bubble—in which even a certain Isaac Newton lost his shirt—but also other delusional waves such as men’s fashions and witch hunting—or what we would today perhaps call information cascades.
Fooled By Randomness: The Hidden Role of Chance In Life And In The Markets, by Nassim Nicholas Taleb. I know that Taleb’s latest book—The Black Swan: The Impact of the Highly Improbable—is now much sought after. But I prefer this earlier book, in which, as one reviewer wrote, he rolled a hand grenade down Wall Street. There is a lot of Greek philosophy,Karl Popper, the inadequacies of the normal curve—but at its heart, this book is an entertainer. Iconoclasm at its best.