On the Bookshelf

The impact of crowds displaying similar financial behaviors has been at the root of the past few financial crises, according to University of San Francisco Professor Ludwig B. Chincarini. In his book “The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal” (Bloomberg Press, 2012), the author blames crowd behavior for the collapse of Long-Term Capital Management LTCM, the financial crisis of 2008, the flash crash and Greece’s sovereign debt problems.

Chincarini points to two primary actions as the underlying culprits. The first is what behavioral economists refer to as herding behavior. This is the tendency of large groups of people to adopt the same attitudes and behaviors. Chincarini points to the large number of firms that mimicked LTCM’s strategies as a big contributor to the fund’s collapse. The second action is how crowds change the risk dynamic. In discussing the flash crash, the author explains how liquidity quickly vanished, leading to exaggerated price volatility.

Market historians will enjoy reading this book; it also shines in its explanations of complex financial strategies and why the crises were so severe.

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