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Boombustology: Spotting Financial Bubbles Before They Burst

ISBN: 978-0-470-87946-7
272 pages
March 2011
Boombustology: Spotting Financial Bubbles Before They Burst (0470879467) cover image
A multi-disciplinary framework through which to spot financial bubbles before they burst.

Based on a popular undergraduate seminar, entitled Financial Booms & Busts, taught by the author at Yale University, Boombustology presents a multi-disciplinary framework for identifying unsustainable booms and forthcoming busts.

The magnitude of our recent financial crisis mandates a firm understanding of this phenomenon before the next crisis occurs. Boombustology provides an in-depth look at several major booms and busts and offers a solid framework for thinking about future occurrences.

  • Examines why booms and busts are not random and can therefore be identified
  • Focuses upon various theoretical and disciplinary lenses useful in the study of booms and busts
  • Contains a framework for thinking about and identifying forthcoming financial bubbles including several tell-tale indicators of a forthcoming bust.
  • Illustrates the framework in action by evaluating China as a potential bubble in the making. 

If you want to make better decisions in today’s turbulent investment environment, understanding the dynamics of booms and busts is the best place the start.  Boombustology can help you achieve this elusive goal.

Vikram Mansharamani is a Lecturer at Yale University and a global equity investor.

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Foreword xi

Preface Is There a Bubble in Boom–Bust Books? xvii

Acknowledgments xxiii

Introduction The Study of Financial Extremes: One-Armed Analysts, Secrets, Mysteries 1

Secrets versus Mysteries

Different Problems Necessitate Different Approaches

Financial Booms and Busts as Mysteries

Part I Five Lenses

Chapter 1 Microeconomic Perspectives: To Equilibrium or Not? 9
"Random Walks" and Accurate Prices: The Efficient Market Hypothesis
Constant Instability and Inefficiency: The Theory of Reflexivity
Reconciling Efficiency and Reflexivity

Chapter 2 Macroeconomic Perspectives: The Impact of Debt and Deflation on Asset Markets and Prices 23
The Magnifying Power of Leverage
Collateral Rates and Debt Dynamics
Hyman Minsky’s Financial Instability Hypothesis
Debt Defl ation and Asset Prices
The Austrian Business Cycle Theory
Integrating the Macro Lenses

Chapter 3 The Psychology Lens: Homo economicus Meets Homo sapiens 45
The Study of Irrationality Is Born
Heuristics Gone Wild: How Rules of Thumb Lead Us Astray
Our Flawed Brains: Other Cognitive Issues
The Certainty of Uncertainty

Chapter 4 Political Foundations: Evaluating Property Rights, Price Mechanisms, and Political Distortions 69
Can Anyone Own Anything?
Prices: To Guide or Be Guided?
Political Distortions of Property and Price

Chapter 5 Biological Frameworks: Epidemiology and Emergence 85
Revealing the Maturity of an Unsustainable 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 103
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 117
Castles in the Sand
From Booming Twenties to Busted Thirties
The Boombustology of the Great Depression
The Multilens Look

Chapter 8 The Japanese Boom and Bust: A Credit-Fueled Bubble Economy 137
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 155
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 173
"Safe as Houses"
The Music Stops
The Boombustology of the U.S. Housing Boom and Bust
The Multilens Look

Part III Looking Ahead

Chapter 11 Spotting Bubbles before They Burst: A Method for Identifying Unsustainable Booms 193
Reflexivity and Self-Fulfi lling Dynamics
Leverage, Financial Innovation, and Cheap Money
Overconfidence
Policy-Driven Distortions
Epidemics and Emergence
Conclusions

Chapter 12 Boombustology in Action: Is China Next? 217
Tendencies toward Equilibrium
Leverage, Cheap Money, and Potential Defl ation
Conspicuous Consumption and Overconfi dence
Rights, Moral Hazard, and Political Distortion
Consensus, Silent Leadership, and Epidemics
The Unsustainable Chinese Story

Conclusion Hedgehogs, Foxes, and the Dangers of Making Predictions 243

Notes 247

About the Author 265

Index 267

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VIKRAM MANSHARAMANI is an experienced global equity investor and a Lecturer at Yale University, where he teaches a seminar called "Financial Booms and Busts." Mansharamani has a PhD and MS from the MIT Sloan School of Management, an MS in political science from the MIT Security Studies Program, and a BA from Yale University. He lives in Brookline, Massachusetts.
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March 01, 2011
Boombustology: Spotting Financial Bubbles Before They Burst

Could the investment community’s hopes for a strong Chinese economy be unfounded?  China’s booming economy is the envy of nations around the world, but according to Yale University lecturer and global equity investor Vikram Mansharamani, warning signs are proliferating that China is in for a very serious bust, perhaps very soon.  How to recognize these signs, and realize what they mean, is the subject of his book BOOMBUSTOLOGY: Spotting Financial Bubbles Before They Burst (Wiley; Hardcover; March 15, 2011; $29.95; 978-0-470-87946-7). In it, Dr. Mansharamani offers the first clearly defined methodology for determining when a nation’s financial markets are about to change from a cycle of prosperity to one of struggle.

BOOMBUSTOLOGY presents a multi-disciplinary framework for identifying unsustainable booms and their subsequent busts. In the book, which is modeled after his popular seminar at Yale University, Dr. Mansharamani applies five “lenses”—macroeconomic, microeconomic, psychological, political, and biological—to several major booms and busts in history. In doing so, he shows how booms come about culturally and socially, not just financially or economically, and also how the downward spiral that follows can be predicted—if one knows what to look for. The ability to recognize the signs of an impending financial downturn has important implications for individuals’ investment and retirement accounts as well.  By explaining the “needle-moving” extremes that render many traditional investment approaches useless, Dr. Mansharamani hopes to provide readers with a seismograph that can help identify forthcoming quakes.

Dr. Mansharamani can discuss:

  • How a multi-disciplinary approach utilizing his five lenses (microeconomics, macroeconomics, psychology, politics, and biology) might be used to interpret the latest financial news.
  • Unique and accessible indicators such as construction of the world’s tallest skyscrapers, or Sotheby’s stock price, that can be used as “bubble indicators.”
  • Several signs that China is likely to be the next bust: the unsustainable boom in property prices, the gross misallocation of capital, conspicuous consumption in wine and art markets, political tensions between central and provincial objectives, and herd behavior among investors.
  • Signposts to look for in other countries to see if they may also be headed for a bust.
  • The important role that practicing “Boombustology” can play in helping individual investors avoid unnecessary losses and protect their assets.

BOOMBUSTOLOGY is a fascinating read that will change the way you look at the culture around you and assess its financial health. It provides a unique framework for evaluating the possibility of financial ruin, and as such, will prove useful to all audiences.  

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