Grab Instantly A Crisis Of Beliefs: Investor Psychology And Financial Fragility Depicted By Nicola Gennaioli Released Through Digital Format

economic theory is a very elegant and internally consistent body of mathematics that aims to explain human behavior, This “colossus” has however recently succumbed, in the authors words, to a series of “daring and effective hit and run attacks,” p,both from mainstream economists with co author Andrei Shleifer very much at the forefront but also from the currently fashionable field of behavioral Economics.
Thefinancial crisis, which the theory struggles to explain, was rather inconvenient as well, Perhaps a coup de grace, even, A theory is not dead, however, until you have another one to put in its place, Even then, in the words of Gunnar Myrdal, “in Economics, all doctrines live persistently no new theories ever supplant the old, ” Thats where “a Crisis of Beliefs” comes in, “A Crisis of Beliefs” is a bold first attempt to broaden the foundations of the field by layering it on top of the imperfect judgement and behavior of humans.
After first motivating the discussion by summarizing their previous work on Neglected Risk and its potential role in the crisis of, Gennaioli and Shleifer introduce the concept of Diagnostic Beliefs, which humans form based on the behavioral heuristic of Representativeness, an idea due to rock star psychologists Tversky and Kahneman.
Rational Expectations are but a special case of “Diagnostic Beliefs” and therefore do fit within this framework, To make a long story short, Representativeness is the heuristic whereby because atof the Irish population red haired people are ten times prevalent among the Irish than they are among all Caucasians of whom they are but, the moment we see somebody with red hair we mistakenly, if you do the math presume they must be Irish.
Applied to the observation of past investment returns, it plays havoc with future investment decisions, the small print on all investment advisories notwithstanding.
The math is easy to follow, and thats a good thing: Economics may not yet be tangled in String Theory, but if you dont know your stochastic calculus and your differential geometry you cant get an advanced degree in the subject any longer.
This is a return to the times when you could get a Nobel for something as elegant as the Capital Asset Pricing Model: I read the whole thing in the tube.
Proofs, for the less trusting, are to be found in the Appendix, The

summary is as follows: if we accept that Representativeness is a decent approximation for the heuristic along which investment decisions are made, then we can build a model for the economy where investment cycles are built in from the start: output that turns out to be higher than expected will lead us to overinvest in the next cycle but our expectations from that next round are likelier than not to be frustrated, because they were founded on the unrealistic heuristic of Representativeness, which now kicks in the other way.
And so on. Its very very elegant. Im not sure it works with asset markets as well as it works for investment in the real economy and Ive no idea how Id implement it in continuous time, but it works as advertised.
Personally, Id like to see an economist model Chuck Princes brain when he explained that “when the musics playing youve got to get up and dance,” because Im reasonably convinced thats precisely the human trait that keeps us in the game even when we know were malinvesting: its our competitors for the house in the good school district that were fighting, not the housing market itself.
But that takes nothing away from what is guaranteed to be a classic, Buy and read it now, so you can tell your kids one day you were there from ground zero, its a great book especially around psychology that influences financial markets especially credit, However, this book is not available to read on the kindle hardware its a print replica book so that is a BIG BUMMER.
To the authors please make it available on the kindle to be read, Excellent thesis and ideas but the writing style is a bit off putting, For anyone interested in understanding why no one could predict the GFCThis book will open new roads to be explored Nice book with A LOT of information! How beliefs shape financial markets and expose the economy to major risksThe collapse of Lehman Brothers in Septembercaught markets and regulators by surprise Nicola Gennaioli and Andrei Shleifer walk readers through the unraveling of Lehman and the ensuing meltdown of the US financial system and present new evidence to illustrate the destabilizing role played by the beliefs of home buyers investors and regulators Using the latest research in psychology and behavioral economics they present a new theory of belief formation that explains why the financial crisis came as such a shock to so many peopleand how financial and economic instability persist A Crisis of Beliefs is a must read for anyone seeking to navigate today's unpredictable financial watersHow beliefs shape financial markets and expose the economy to major risks

The collapse of Lehman Brothers in Septembercaught markets and regulators by surprise.
Nicola Gennaioli and Andrei Shleifer walk readers through the unraveling of Lehman and the ensuing meltdown of the US financial system, and present new evidence to illustrate the destabilizing role played by the beliefs of home buyers, investors, and regulators.
Using the latest research in psychology and behavioral economics, they present a new theory of belief formation that explains why the financial crisis came as such a shock to so many peopleand how financial and economic instability persist.
A Crisis of Beliefs is a mustread for anyone seeking to navigate today's unpredictable financial waters, How beliefs shape financial markets and expose the economy to major risks

The collapse of Lehman Brothers in Septembercaught markets and regulators by surprise.
Nicola Gennaioli and Andrei Shleifer walk readers through the unraveling of Lehman and the ensuing meltdown of the US financial system, and present new evidence to illustrate the destabilizing role played by the beliefs of home buyers, investors, and regulators.
Using the latest research in psychology and behavioral economics, they present a new theory of belief formation that explains why the financial crisis came as such a shock to so many peopleand how financial and economic instability persist.
A Crisis of Beliefs is a mustread for anyone seeking to navigate today's unpredictable financial waters, .