The Myth of the Rational Voter: People Vote Like Idiots, and Why

I’ve recently finished reading The Myth of the Rational Voter: Why Democracies Choose Bad Policies which builds a framework for understanding why the electorate commonly vote for such idiotic proposals, especially related to economics. The author, Bryan Caplan, delivers a wonderfully well researched book that is engagingly written, a tough tasks for what is actually an economics book. He tears apart rational voting theory, the idea that the idiots balance out and smart people make the last few % points of decision, and explains an economic take on why voters make poor decisions.

Bryan Caplan explains that in voting most actors are rationally ignorant and rationally irrational. Without going through all the analysis most people are rationally ignorant because they make a rational decision to forgo the effort required to fix their ignorance since voting has such a small expected payoff. People are rationally irrational for much the same reason, taking an easy or socially accepted position rather than figuring out the correct solution out of a rational lazyness. Basically, since we understand that our vote counts so little we make little effort to make vote in an intelligent way.

I highly recommend picking this one up, it will give you a whole new set of tools in understanding politics and participating in debate and it is an incredibly interesting read.

The Conquest of Cool

The Conquest of Cool

I just finished reading The Conquest of Cool: Business Culture, Counterculture, and the Rise of Hip Consumerism. This book addresses the common mythos of how out of touch corporate america was during the cultural changes of the 1960s. The common belief is that the counter culture rebelled against corporate America while it tried to co-opt counter cultural themes. Thomas Frank argues that corporate America created as much of the cultural change as it co-opted, and he backs it up with plenty of research and examples. He lucidly explains how corporate America rebelled against itself, co-opted the images and slogans of the cultural revolution, and then pushed these themes forward through their own change. Corporate America was not a passive beast manipulated and changed by the cultural revolution but an active participant in the transformation. Overall, an entertaining, in depth, and enlightening read.

The Revolution by Ron Paul

The Revolution by Ron Paul

I recently read over Ron Paul’s The Revolution as  a sort of homework prior to going to see my better half’s family for the holidays. I have to say that I was pleasantly surprised. Like many in the economically conservative camp I lean pretty libertarian when it comes to money and politics. Also like many in the conservative camp, I thought that the Dr. was a bit insane since I had heard snippets of his positions during the Republican primaries.

This book lays out his views, principles, and many of his positions that he tried to articulate during the Republican primary. He lays out a compelling case for his positions, many of which that are more moderate than you think. Some of his more outlandish ideas, such as scrapping the Department of Education, are clearly, and reasonably laid out. Dr. Paul merely requests that the government obtain the power to create and run these organizations from the people via a clearly laid out constitutional amendment. His strongest disagreement is with the expansion of powers under the commerce clause.

I recommend any fiscal conservative and moderate liberal take a few hours and read this brief book. It spells out a reasonable and moderate conservative platform that should be well considered during the reconstruction of the Republican platform in the next few years.

Against the Gods: The Remarkable Story of Risk

I recently finished Against the Gods: The Remarkable Story of Risk by Peter Bernstein. A surprisingly engaging book about the development of the knowledge of statistics and ultimately risk. Yes, I said an engaging book about statistics and risk. Peter does a great job explaining how we developed an understanding of statistics, how that developed in to game theory, strategy, risk management, and ultimately the transfer of risk through derivatives. Written in ’95 it does not contain any analysis of the crisis we’re currently undergoing, but he does have some points that seem appropriate for our current situation. I would recommend this to anyone with an interest in mathematics, history, and especially the history of knowledge. Mr. Bernstein is able to paint the path of not just the development of statistics and risk, but how we approach and understand the world around us. I highly recommend it.

Understanding Liquidity Risk

Liquidity Risk is another term that has been circulating around this financial crisis. The problem is that some asset that you want to buy or sell is thinly traded so you either cannot purchase, borrow, or sell as expected. Such thinly traded markets may at times require you to pay a hefty premium to participate.

This is the current situation with Mortgage Backed Securities. There is not a liquid market for these instruments, so banks cannot sell them without taking a huge cut in price from what they believe they are valued at. Remember, while markets help discover the appropriate prices for securities, these prices are also affected by supply and demand. The fact that a dollar is worth, well, a dollar, doesn’t matter if there is no one to trade with. You might have to take 90 cents in order to find someone willing to make the trade, even if fair value says a dollar is a dollar. In highly liquid markets arbitragers exist to, in effect, provide liquidity and profit from even the tiniest mispricings. Those willing to take a position in illiquid markets usually gain a premium compared to liquid analogs, such as off-the-run and on-the-run treasury bills.

So, is this new? Has Wall Street never seen such illiquid markets? Hardly. Richard Bookstaber’s wonderful Book, A Demon of our Own Design, details several situations where this has happened before and why it might happen again. I’ll use one of these as an example, Long Term Capital Management. Bear Stearns and Lehman Bros were both victims of an inability to find funding or dispose of assets due to illiquid markets in the exact same way as Long Term Capital Management was. As Demon describes, LTCM basically built its business on being short illiquid and long liquid trades. Since illiquid positions are harder to open there is a premium to be had for companies willing to be illiquid. Since these securities can, in some cases, be hedged with highly liquid positions it was in theory a free way to make money.

Eventually, these markets can turn against you, even against all logic about fair value, and force you out of your position.Again, Lehman & Bear were both in the same situation. They needed to sell assets but buyers knew they were trying to liquidate and withdrew their orders. They would only buy assets on these markets (highly illiquid, they knew who they were trading with) at very steep discounts, knowing that either they bought them at discount now, or during the bankruptcy hearing. Only through the JP purchase could Bear Stearns hope to keep itself halfway alive.

I’d recommend checking out  A Demon of our Own Design if you’re interested in understanding Liquidity Risk and how it affects large institutional investors, investment banks, and hedge funds. It is an engaging read and not as techinical as it might appear at first blush.

Book Review: ‘The Age of Turbulence’ by Alan Greenspan

A very belated review of Alan Greenspan’s book put out last year: The Age of Turbulence: Adventures in a New World. Known for writing inscrutable Federal Reserve statements he has composed a book containing invaluable insight into the economy, government, and monetary policy.

The maestro uses the first two thirds of the book detailing his own history. He details his education, starting an advisory firm, and working with the government. Read this book for this section alone. His insight in to the function of government with regards to markets and economics is invaluable. He sat at the levers of financial control during boom and bust, under Republicans and Democrats, and did so remarkably well. His one mistake, which he analyzes in the book, is holding rates down too long after 9/11.

The final third of the book presents a road map for economic policy and economic future of the United States.  When the book was released last year, this was the portion that received the most negative reviews. He was seen as missing the point, causing the problems, and woefully inaccurate. What a difference a year can make. While this section can be a bit dry at times, he does make a compelling case for our future troubles regarding social security and medicare.

Finally, I know in today’s political climate there are many people that will skip a book like this simply because it was written by a self described Republican. The book is very non-partisan, reflecting the way Greenspan worked during his time on capital hill. The only slant the book takes is the natural one from a free market economist towards libertarian ideals, but this is relatively minor. For the most part anything of political sensitivity is appropriately guarded and nuanced so that no reasonable person would disagree.