mansharamani - boombustology; spotting financial bubbles before they burst (2011)

[...]... lens, is presented as a useful tool in deciphering the mysteries of bubbles before they burst Specific topics emerging from these five lenses include equilibrium tendencies, reflexivity, credit dynamics, overconfidence, anchoring and adjustment, price mechanisms, property rights, epidemics, and emergence 7 Part-1.indd 7 1/29/11 8:30:40 AM Part-1.indd 8 1/29/11 8:30:41 AM 1 C H A P T E R Microeconomic Perspectives... about and identifying financial bubbles before they burst The theory generated in the book is summarized in a framework presented in Part Three; I encourage researchers to test the importance of each indicator Topics included in the course but not in the book are the benefits of booms and busts and the coincidence of frauds and swindles with busts Both are excluded here because they are not explicitly about... Chapter 11 summarizes the five lenses and the five cases in a matrix-style analysis that attempts to generate a generalized framework for identifying bubbles before they burst Key indicators or signposts of a financial bubble are formulated, and a checklist-style evaluation emerges as a means to gauge the likelihood of an unsustainable boom Chapter 12 applies the framework of Chapter 11 to one of the most... longrun results for investors than do the run-ofthe-mill events that fall in the center of distributions Sensible investors pay close attention to low probability extreme negative events, like financial crises, that have the potential to wreak havoc with their portfolios Successful approaches to making investment decisions require more than applying state-of-the-art finance theory In the 25 years that I... particularly pertinent to the money-management industry, as many industry analysts are organized in silos There are times when the worst energy idea may be better than the best consumer idea, yet such insights get lost with expert-oriented approaches Seeking to continue my multidisciplinary life into the money-management industry, I operate as a global generalist ■ ■ ■ Before describing what the book...TOC.indd x 1/29/11 12:21:41 PM Foreword V ikram Mansharamani s Boombustology serves an important purpose in reminding us that narrow, model-driven approaches to understanding financial markets frequently fail His subject, financial crises, bedevils market modelers, because crises reside in the notoriously difficult-to-assess fat tails of distributions of security returns Not only are... frauds and swindles with busts Both are excluded here because they are not explicitly about the topic of identifying bubbles Frauds, swindles, and scams are not-infrequent occurrences in boom times, but because they are unfortunately not revealed until after a bust is well developed, they are a lagging (and therefore less useful) indicator ■ ■ ■ Chapter 1 focuses on the microeconomics of booms and busts,... market disruption, a time when many investors lose their bearings In Boombustology, Vikram Mansharamani assists investors by rolling up his sleeves and applying his perspective to analyses of five past crises, ranging from Tulipmania in seventeenth-century Holland to the subprime mortgage catastrophe in twenty-first-century America He may be correct that the crises share “many similar characteristics” (although... the reality of our sociopolitical-economic existence Boombustology takes President Truman’s memorable phrase and flips it on its head “Someone give me a five-armed analyst!” is my mantra It is no longer enough for us to evaluate the bipolar possibilities suggested by a two-armed individual The world is more complex, more uncertain, more dynamic, and more volatile than ever before It is no longer enough... abandoning correct, but out-of-favor, positions when the pain of losses became intolerable In other instances, investors profited from their anti-bubble bet, but reduced the profitability of their position by starting too soon Precisely the same problem confronted investors during the Internet bubble in the late 1990s Early looks a lot like wrong In the introduction to his book, Vikram Mansharamani makes an . Cataloging-in-Publication Data: Mansharamani, Vikram, author. Boombustology : Spotting Financial Bubbles Before They Burst / Vikram Mansharamani. p. cm Includes index. ISBN 97 8-0 -4 7 0-8 794 6-7 (hardback);. ISBN 97 8-0 -4 7 0-8 794 6-7 (hardback); ISBN 97 8-1 -1 1 8-0 285 7-5 (ebk); ISBN 97 8-1 -1 1 8-0 285 5-1 (ebk); ISBN 97 8-1 -1 1 8-0 285 6-8 (ebk) 1. Business cycles. 2. Financial crises. 3. Business forecasting ii 1/29/11 8:28:53 AM1/29/11 8:28:53 AM Vikram Mansharamani, PhD John Wiley & Sons, Inc. BOOM BUST OLOGY BEFORE THEY BURST SPOTTING FINANCIAL BUBBLES ffirs.indd iiiffirs.indd iii 1/29/11