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.
Investing in a changed global environment is the key theme behind “Money Shift: How to Prosper From What You Can’t Control” (John Wiley & Sons, 2012). In it, OppenheimerFunds Chief Economist Jerry Webman argues that investors need to alter their approach to investments.
Citing the aging populations of developed countries, the growing wealth and younger populations of emerging countries, and macro issues such as sovereign debt, Webman advises readers to take a more active and selective approach toward managing their portfolios. He suggests looking for companies operating in markets that cater to expanding customer bases, have competitive advantages within those markets and have component management. Webman particularly advocates looking in emerging markets for opportunities. He further advises complementing an equity portfolio with a mixture of bonds, commodities, gold, real estate and potentially hedge fund strategies.
Webman sticks to acknowledged demographic and economic trends, while giving investors some guidance. The one thing we would have liked to see, however, is more specificity on the strategies the author suggests.