Tag Archives: Financial crisis

Adaptive Markets – Financial Evolution at the Speed of Thought – by Andrew W. Lo – A Book Review by Bill Dahl

For a scholar who writes of his early life: “In second grade, my mother received a note from my teacher informing her that I might be “retarded”—the term of art in those days—and could use some extra help.” P. 125 — Welcome to a marvelous book by Andrew W. Lo.


Andrew W. l.o is the Charles E. and Susan T. Harris Professor of Finance at the MIT Sloan School of Management and director of the MIT Laboratory for Financial Engineering. He is the author of Hedge Funds and the coauthor of A Non-Random Walk Down Wall Street and The Econometrics of Financial Markets (all Princeton University Press). He is also the founder of AlphaSimplex Group, a quantitative investment management company based in Cambridge, Massachusetts.

What’s great about this book are several things:

  1. You do NOT have to be a graduate student at MIT to enjoy this book. If you enjoy cutting edge multi-disciplinary insights into human behavior, this book is for you.
  2. This book requires unlearning – for me, authors that do this are rare and invaluable.
  3. This book FINALLY begins the arduous process of integrating the science from a multitude of fields into a coherent thesis: :”A new explanation for the contradictions and paradoxes discovered in the battle between the rationalists and the behavioralists. I call this new explanation the Adaptive Markets Hypothesis.”  P. 185.
  4. The author is a superb story teller with no intellectual ax to grind.  His wonderful heart comes through in the way he writes…it just makes the reading experience vastly more enjoyable. Thank you.The nature of our understanding of economics, finance and human behavior is changing (as it must). As one who enjoys writing and research in this genre, I find, as the author states; “But every time I finished one book, I felt impelled to read another because of gaps or inconsistencies in what I’d just read.” P. 302 Adaptive Markets put an end to this experience for me (although I WILL continue reading!!!).

That’s why Adaptive Markets – Financial Evolution at the Speed of Thought – by Andrew W. Lo  is so darn important. The work is very much an integration of the most compelling scientific findings from a myriad of fields that Lo sutures together in a straightforward and coherent manner. It is also a body of work that will undoubtedly inspire additional research.

Evolutionary biology represents an organizing framework for Lo’s reasoning. I found the framework very illuminating. A few quotes from the book:

“The Adaptive Markets Hypothesis tells us that profit-taking alone isn’t enough to explain market success in organizing human behavior. We’re motivated by fear and greed, but also by a sense of fairness, and perhaps most important, by our imaginations.” P. 417

Just as the human eye is susceptible to optical illusions, the human brain is susceptible to illusions about risk and probability.” P. 62

“Economic rationality isn’t wrong; it’s just incomplete.” P. 200

Financial evolution proceeds at the speed thought, where several generations of ideas can come and go within the time span of a productive working lunch.” P. 231

A financial crisis can be as disruptive to people’s lives as a major war.” P. 320

“This means that culture is also subject to evolution, to the same processes of variation, selection, and replication as a biological species or a mental narrative”. P. 345

There are important interactions between culture and environment, in some cases reinforcing bad behavior.” P. 352.

This is a terribly important work. I hope it will inspire the essential, civil dialog and research endeavors that are currently woefully underfunded to explore the emerging, new frontiers in finance – and our understanding of all the audiences in these environments.

I HIGHLY recommend this superb work.




The Many Panics of 1837: People, Politics, and the Creation of a Transatlantic Financial Crisis by Jessica M. Lepler

Superb! Period!


Far too many financial histories inhabit the shelves and stacks that have one thing in common: an intellectual agenda in search of support. This work is a uniquely refreshing exception. It is a work that distinctly deserves the scholarly recognition it has received – from many, diverse audiences.

Lepler Many Panics

I enjoy reading in this subject area. This particular work was delicious for me for a myriad of reasons. Here are a few:

1. Linguistics – Lepler’s appreciation for the words, terms and phrases people used to describe their life experience was precious to me. It is too often overlooked by other authors.

2. The sheer depth and breadth of Lepler’s research was, to say the least, unique and vividly rewarding for her readers.

3. Lepler’s appreciation for the impact of “culture” was quite apparent – again and again – enlightening.

4. AGAIN – Far too many authors who write financial histories seem to have a thesis that they attempt to validate via the introduction of a supporting narrative – such is the human penchant to “be right” and get at “the truth.” Lepler’s methodology and multi-dimensional approach to the issue of “many” panics was terribly refreshing.

5. It was a pleasure to read a financial history book that was authored by a bonafide historian vs. an economist or a political hack with an agenda. The author’s objective dedication to her scholarly craft was apparent on every page.

6. The author’s critiques of other works were, in my opinion, “spot on.” I was grateful for the courage to say what she wrote.

7. I adored the characters brought to life. It made the book fascinating.

8. Lepler’s appreciation for epistemology was apparent throughout.

9. The author’s contributions from the “phrenology folks” were priceless.

10. Lepler’s focus on the impact of communication (or lack thereof) between persons, media outlets of the day, groups and organizations (and governments) is a fundamentally important dimension of the author’s contribution.

As Lepler states on page 253: “Even when economic events seem beyond the control of any individual, the shaping of their meaning remains within our grasp.” – How marvelously this work remained true to this statement – in every sense of the phrase.

My edition of the “Many Panics” by Jessica M. Lepler is marked up like a child writing with crayon on a kitchen wall. This book is a treasure for me and I have learned to become a better researcher and story teller because of it. It is simply VERY rare to have the privilege to devour and digest such a magnificent work. I sincerely hope that Lepler’s dedication to a tireless methodological approach for source documents will serve to inspire other historians and writers – and students – as this work inspired me. This work will occupy a prominent position in my personal library. I will refer to it quite often.



A Nation of Deadbeats by Scott Reynolds Nelson

When you read this book you garner a vastly deeper appreciation for the terms scholar, historian, research and story teller. You also are blessed with a unique narrative regarding the history of America’s financial disasters in the nineteenth century. I’ve done quite a bit of reading in this genre – and this book is a MUST READ.


A Nation of Deadbeats
I truly enjoyed this work. Actually, I became immersed in the narrative and learned more than I could have hoped.

This work has encouraged me to continue to “explore the places where maps have failed us…pushing along in the dark.” (p. 254). Yet, the historical evolution of U.S. capitalism that this work recounts, illuminated the absence of pre-existing maps from which to plot the path ahead. However, this work also revealed for me that man, at every juncture, with his seemingly eternal penchant for wealth and power, and organization – emerged, and injected itself at every opportunity.

For me, this book distinctly reinforced the incontrovertible evidence inhabiting the historical record; when you combine man and money, the emergence of mayhem is a matter of fact. Although we currently live in a time where our culture suggests that we know most everything, can control our environments, and predetermine outcomes of socio-economic (and geo-political) policies – I remain a healthy skeptic…particularly as it relates to ALL things economic. Again, this volume is a reminder to me to remain sensitive to the alerts from my “crap detector” (attached to my forehead, swiveling in a 360, 24-7 – and – solar powered). The “smugness” that inhabits our intellectual, social, economic and political discourse today remains, in my opinion, one of our most profound, enduring weaknesses – as a species – particularly as folks continue to espouse rigidly militant “certainty” about issues; past, current and future. I, for one, appreciate those who possess a high regard for questions vs. those who attempt to cram answers down my throat…as the author’s commentary at the end of the book, directed at his colleagues, elicited deeply appreciative smirks from this reader.

Yes, as some of the author’s final remarks in this book indicate, I too have ongoing concerns about the unregulated and mysterious miasma of rogue waves of capital that seemingly slosh between the shores of our globe…outside the cognitive awareness of the ordinary citizen…capital without margin (“margins impose safety”… p. 251), incalculable leverage, incomprehensible risk, and a source of instability whose magnitude and morph I remain acutely concerned with…as inertia continues to thrust us into places where maps are under construction…pushing along in the dark.…to a yet, unknown destination. Yet, the human motivations remain seemingly unchanged.

This particular work is profoundly appreciated by this reader. Thank you so very much Mr. Reynolds.

I highly recommend it.


Economiasma – Recalling Stinky SOX? – December 5, 2011 – by Bill Dahl

Here’s my Weekly Whiff of Economic $cents for December 5, 2011:

It only took 60 Minutes (Steve Kroft – correspondent, James Jacoby – producer) less than 35 minutes on their December 4, 2011 broadcast entitled Prosecuting Wall Street, to remind us that “justice” can also be spelled “just us.”

It also brought back to mind a phrase from author and investigative journalist, Suzanne McGee. McGee’s phrase is “willful amnesia.” She used it in the following context in her most recent book:

  “In place of the magical thinking that dominated Wall Street in the years leading up to the near collapse of the financial market had arisen a kind of willful amnesia. Surely, the large legacy institutions, those that were caught up in the storm but had so far survived more or less intact) reasoned, the events of 2007 and 2008 were nothing more than a giant nightmare from which they were awakening. Announcing Citigroup’s first-quarter results in early 2009,  Vikram Pandit, its CEO, suggested that write-downs on troubled assets may be largely behind us.” (1) (emphasis above is mine – .p.310)

Well, nightmares just bad dreams – they aren’t real, Financial crises are.The first things humans seem to do when encountering an unseemly odor is to is activate our willful amnesia defense mechanisms: (think stinky socks for a moment) —

a. Plug your nose.

b. Hold your breath.

c. Move away from the smell.

d. Try to forget the experience as quickly and completely as possible.

e. Draw a breath of fresh air when “you’re in the clear.”

Supposedly, The Sarbanes Oxley Act of 2002 (aka SOX) was designed to prevent future financial scandals (lying to investors, the government, employees – and the world etc.), by certifying the financial integrity of a company’s financial reporting, internal controls and procedures. The financial scandals at Worldcom, Tyco and Enron (to name a few stinky socks whose miasma decimated the financial viability of millions of real people and vaporized billions of dollars) motivated the genesis of this legislation, prescribing criminal and civil penalties for violations by companies and individual officers of companies. In a nutshell, SOX was intended to prevent the defense of willful amnesia by publicly traded companies and their officers in the future.

Well, here we are…in the future. As the 60 minutes segment of December 4, 2011 vividly pointed out last night, not one of the major financial institutions (specifically, Countrywide and Citigroup profiled by 60 Minutes) has been prosecuted under SOX. The U.S. Justice Dept. was to have used the framework and penalties woven into SOX as the detection system required to catch the whiff of festering impropriety, investigate the source of the $cent,  and cleanse the situation before those relying on falsehoods become victims of the toxins produced.

According to 60 Minutes, SOX has become SO what! Clearly, the U.S. Justice Dept. has succumbed to the human tendency toward willful amnesia – avoiding the stench detected by two credible whistle blowers (whom the U.S. Justice Dept. has never spoken with).

America is struggling mightily to forget the $cent of the financial crisis — still wafting about us. The gains from the crisis were privatized (the equilibrium of financial system was restored), while the losses were socialized (that means you and I, your family and mine — taxpaying American citizens ). Many of us still have conventional mortgages whose values were grossly inflated by the bubble—whose real property values underlying said mortgages have been decimated by the same.

Justice or Just us? Still stinks doesn’t it?



(1) Excerpt from McGee, Susan Chasing Goldman Sachs – How The Masters of the Universe Melted Wall Street Down … and Why They’ll Take Us to The Bring Again, Crown Business New York, NY Copyright © 2010 by Suzanne McGee, p.310

Boomerang – Travels in the New Third World by Michael Lewis – Review by Bill Dahl

Boomerang – Travels in the New Third World is the result of author/investigative journalist Michael Lewis expedition abroad…to find out what happened in the EU to countries like Greece, Ireland, Iceland and Germany — as a result (ongoing) of the global financial crisis that began (?) in 2007.

Frankly, the level of absurdity that became reality/ordinary course leading up to the financial cataclysm within these countries is baffling, it’s laughable – then again, it’s not funny at all. It’s the story of what happens during the life cycle of an economic bubble, which Lewis defines as follows:

“A bubble is inflated by nothing firmed than people’s expectations. The moment that people cease to believe that house prices will rise forever, they will notice what a terrible long term investment real estate has become, and flee the market, and the market will crash….it was sustainable so long as it went unquestioned and it went unquestioned as long as it appeared sustainable.” (pp.90-91)

You simply must read this book (written for the layperson – translation: MBA NOT required to thoroughly enjoy it). The humor in the book is unanticipated and will likely make some howl with spontaneous laughter.

I’ll use a quote near the end of this book to capture how I felt when I had completed it:

“All the forces in the state are lined up to preserve the status quo. To preserve the delusion. And here – this place – is where reality hits.” (p. 199).

Unfortunately (or fortunately), Boomerang leaves one with the unavoidable impression thta:

1. The “delusion” of preserving things the way they are regarding national, state and municipal government financing – is just that – a delusion.

2. To expound “sunny economic days” will be here by next week – is delusional.

3. As Friedman and Mandelbaum state in their newest book, ” One thing we know for sure: The path to a happy ending begins with the awareness that something is wrong, that changes are necessary, and that we the people have to be the agents of those changes.” (p.348 – “That Used to Be Us”).

To garner a more complete appreciation for a. what is wrong b. the necessary changes c. how to become an agent of said change — one would truly benefit from reading Boomerang.

I did. I hope you will too.



13 Bankers by Simon Johnson and James Kwak

A splendid contribution – supplying yet another perspective on the genesis and aftermath of the U.S. and global financial crisis.

13 Bankers

Simon Johnson hails from MIT’s Sloan School of Management (Kurtz Professor of Entrepreneurship) and the Peterson Institute for International Economics. James Kwak is a former software entrepreneur and a  former consultant for McKinsey and Company. They co-author the well regarded economic blog, The Baseline Scenario.

The thesis of the book is summarized in the following:

“Our goal today is to change the conventional wisdom about enormous banks. In the long term, the most effective constraint on the financial sector is public opinion. Today, anyone proposing to end the regulation of pharmaceuticals or to suspend government supervision of nuclear power stations would not be taken seriously. Our democratic system allows the expression of all views, but we filter those views based on a collective assessment of which are sensible and which are not. The best defense against a massive financial crisis is a popular consensus that too big to fail is too big to exist.” P. 221

“Without a privileged inner core of thirteen (or fewer) bankers, the financial sector will be composed of thousands of small companies and dozens or hundreds of medium-to-large companies, including hedge funds and private equity firms. The financial lobby will continue to be strong by virtue of its sheer size, and the community bankers will retain their clout in Congress. But the distortion of the playing field in favor of a small number of mega banks will come to an end.” P.219. Emphasis is mine.

The authors clearly tout the need for systemic financial regulatory reform, particularly as it relates the the largest of the large U.S. financial institutions. They do a superb job of unmasking the myth that “if it’s complex, it must be innovative.” Listen to Johnson and Kwak:

“But there is no law of physics or economics that dictates that all financial innovations are beneficial, simply because someone can be convinced to buy them. The core function of finance is financial inter mediation – moving money from a place where it is not currently needed to a place where it is needed. The key questions for any financial innovation are whether it increases financial inter mediation and whether that is a good thing.” P. 108 (Emphasis is mine)….think about the recent SEC allegations regarding Goldman-Sachs.

Innovation is sometimes based upon herd-instinct and a misplaced trust (in any industry for that matter).  The authors make a case that is difficult to argue with for the largest U.S. financial institutions (13 Bankers) when they declare:

“Never before has so much taxpayer money been dedicated to save an industry from the consequences of its own mistakes. In the ultimate irony, it went to an industry that had insisted for decades that it had no use for the government and would be better off regulating itself-and it was overseen by a group of policymakers who agreed that government should play little role in the financial sector.” P. 164.

Economic bubbles, particularly the one these authors focus on, are based on what turns out to be speculative excesses, irrational exuberance, myths, greed — and the suspension of disbelief, in the face of the deployment of a myriad of so-called financial innovations, that U.S. citizens will pay for for generations to come.

As the authors suggest; “At this crucial juncture in our history, as America emerges from a deep recession into an uncertain economic future.” P. 190. Yet what we do with what we understand has happened requires vastly more deliberation. We should be skeptical of what appear to be “common sense” sound bites and the adrenal rush toward “quick fixes.”

After all, we’re attempting to regulate human behavior aren’t we?