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Economics is not widely considered to be one of the sexier sciences. The annual Nobel Prize winner in that field never receives as much publicity as his or her compatriots in peace, literature, or physics. But if such slights are based on the notion that economics is dull, or that economists are concerned only with finance itself, Steven D. Levitt will change some minds. In Freakonomics (written with Stephen J. Dubner), Levitt argues that many apparent mysteries of everyday life don't need to be so mysterious: they could be illuminated and made even more fascinating by asking the right questions and drawing connections. For example, Levitt traces the drop in violent crime rates to a drop in violent criminals and, digging further, to the Roe v. Wade decision that preempted the existence of some people who would be born to poverty and hardship. Elsewhere, by analyzing data gathered from inner-city Chicago drug-dealing gangs, Levitt outlines a corporate structure much like McDonald's, where the top bosses make great money while scores of underlings make something below minimum wage. And in a section that may alarm or relieve worried parents, Levitt argues that parenting methods don't really matter much and that a backyard swimming pool is much more dangerous than a gun. These enlightening chapters are separated by effusive passages from Dubner's 2003 profile of Levitt in The New York Times Magazine, which led to the book being written. In a book filled with bold logic, such back-patting veers Freakonomics, however briefly, away from what Levitt actually has to say. Although maybe there's a good economic reason for that too, and we're just not getting it yet. --John Moe

Steven Levitt and Stephen Dubner Answer The Amazon.com Significant Seven

Steven Levitt and Stephen Dubner, author and co-author of this season's bestselling quirky hit, Freakonomics: A Rogue Economist Explores the Hidden Side of Everything, graciously answered the Amazon.com Significant Seven questions that we like to run by every author.

Levitt and Dubner answer the Amazon.com Significant Seven questions

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Reviews (118)

interesting, but not rocket science
Unlike a lot of economics books this book is pretty fair and unbiased. I don't think it is as funny as some readers thought, but the subjects are interesting. Most of it is common sense. Like that teachers cheat to make their students look smarter on standardized tests and real estate agents won't necessarily being doing everything they can to help you. As a graduate student in economics, I find is reasoning for the decline in crime being attributed to abortion highly speculative. Common sense would tell you that "aborting" fetuses that are likely to become criminals will reduce crime, only if that mother doesn't have as many children as she would if abortion were illegal. The author does a good job of staying away from the politics of abortion.

This book is good for the layman but is nothing new to the average economists. I personally think that it has been given too much praise and attention.

Thought provoking but falls a bit short
While Levitt has the propensity to ask many interesting and thought-provoking questions, his data analysis is often suspect to the same tunnel vision which he attributes to many academic studies. Levitt seems so intent on proving the "conventional wisdom" wrong that he immediately accepts data from a single source as long as it provides a sensational conclusion. For instance, just about all of Levitt's conclusions on education and parenting come from a single ECLS study conducted 15 years ago. The early chapters on information and cheating are quite solid and alone may be worth the price of the book. However once Levitt tackles education, crime, and parenting his down-to-earth anecdotal approach becomes insufficient to explain these complex issues. Freakonomics is similar to many other pop-science bestsellers in that it makes its subject more approachable through oversimplified explanations and conclusions.

A Great, Quick Read, Perfect for Summer
I very much have enjoyed reading this book.As a grade school teacher, it doesn't surprise me that teachers cheat on their students' end-of-the-year assessments; what is surprising is that this is rarely talked about and people seem to be shocked and surprised when, on the rare occasion, someone gets caught.With the pressure to have one's students earn high scores coming from both parents and administrators, how could it not happen?Much more is expected of teachers today, and not all are up to the hard work, time and energy.But this book isn't only about teachers--you'll learn about drug dealers and how they organize their gangs quite similar to corporations; you'll be surprised that sumo wrestlers cheat (I actually hadn't thought about them or the game, but there is a way they can cheat), among other topics. Perhaps the most controversial notion is about what brought down crime levels in the 1980s, a time when everyone predicted crime would rise.It's an interesting idea, but Levitt doesn't provide much support, which was disappointing.

Layman's LanguageAnalyses of Various Social Canards
Too often articles or books written by economists are couched in arcane verbiage and statistics.Levitt avoids this, and the result is a very interesting, though-provoking review of several social myths.

He begins by summarizing the status of crime in the mid-1990's - high, and projected to go much higher with the coming "teenager boom."Instead, it began a long, steep decline.The most common "explanations" were "roaring economy," "gun control," and "innovative policing." Levitt then goes on to summarize data that convincingly reture them all.For example, a good economy might decrease economic crimes, but why did violent crimes drop even more?Further, why didn't crime also fall during the booming '60s?As for innovative policing, Levitt reports that the declines began prior to this initiative, and that its prime contribution was through adding policeman (accounting for about 10% of the drop).Similarly he refutes the logic for crediting increased rights of citizens to carry guns, and gun buy-backs, while the drop in crack prices is credited with 15% of the drop.

Levitt then reports the results of Romania's strong anti-abortion posture in the 60s - a large contingent of resented children, many of whom became serious problems when they grew up.Finally, the "shocker" - Levitt presents various data that provide a solid case for concluding that the drop in crime was primarily due to Roe v. Wade making abortions available to lower-income women - many of whom would have had problems raising the unwanted children.

Other topics addressed by Levitt include documenting cheating associated with "high-stakes" (eg. potential job loss, raises, school closure) pupil testing (estimated at about 5% in Chicago Public Schools), documenting and explaining the lack of drug traffic profits for most of those involved (rakeoffs by those at higher levels).Another interesting and useful topic covered is how society often misplaces efforts into low-payoff efforts to protect children (eg. child-resistant packaging, flame-retardant pajamas, avoiding being seated near front-seat airbags, and keeping their children out of homes with guns), instead of the much higher-payoff of keeping children away from homes with swimming pools.

Throughout the book, Levitt carefully summarizes supporting data, while also informing readers of how similar data are often misused.His "bottom-line," so to speak, is for the reader to become more aware of the effect of incentives, and the frequent lack of factual bases for conventional thinking.

An interesting, useful two-hour read.

Revelations?!only if you're the type to wear shades at night
while interesting, the subject matter of this book is not sublime, the questions are not revolutionary and the 'answers' are soooo not comprehensive. though a contribution is likely, to claim that crime went down simply because of abortion is silly. and duh swimming pools are 'more dangerous' if you look at data collected from past incidences. but you cannot claim this to be true of the inherent/accidental potential for danger of a swimming pool compared to a gun. this book seems to ignore that probability is only predictive if circumstances are equal. and that sometimes a name might carry significance beyond where it can get you in life. but perhaps that one is more than what can expected of educated white men. Still... fun reading, great cover. And I'm sure levitt's classes are more intellectually engaging than this book. ah! one more thing: drug dealers live at home because 'Gator boots, with the pimped out gucci suit/ Ain't got no job, but I stay sharp/ Can't pay my rent, cause all my money's spent/ But thats ok, cause I'm still fly/ Got a quarter tank gas in my new e-class/ But that's alright cause I'm gon' ride/ Got everything in my moma's name/ But I'm hood rich da dada dada da' - Still Fly by Big Tymers ... Read more

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Sequels often disappoint when compared to their predecessors, but author Robert Shiller has proved the exception to the rule with his second edition of Irrational Exuberance. When the original book released in 2000, Shiller's prescient analysis of bubble-like market behavior provided perspective on the painful meltdown of stock-price valuations that subsequently occurred. Five years later, the Yale professor's bearish predictions about real-estate valuations are enough to give any savvy investor or homebuyer pause.

Shiller is one of several well-known economists and pundits who've begun a running dialogue in the last few years around the drawbacks of unchecked free markets. Few writers, though, dissect the phenomenon of bubble behavior as clearly and thoroughly as Shiller does. As with the first edition of his book, Shiller begins this one with reams of quantitative data around the late 1990s stock-market runup. This new edition adds data on real-estate price trends in the early 2000s, and points out the striking parallels between the earlier stock-market boom and bust, and current trends with housing prices in the United States. Shiller actually believes the two phenomena are related; as investors lost confidence in the stock market and moved their money into real estate, one asset class fell while the other rose. According to Shiller's analysis, the pattern is destined to repeat itself.

Aside from the initial data, the real strength of Irrational Exuberance is the straightforward, almost clinical way in which it explains why things happen as they do. The book walks readers through structural reasons for market bubbles, then ventures into "softer" analyses which professional economists less confident than Shiller would be scared to touch. It examines cultural factors behind market bubbles, such as hype-mongering news media, and psychological factors, such as herd behavior.

Another improvement in this latest edition of Shiller's book is his inclusion of more personal commentary, and he mentions the influence that his wife, herself a clinical psychologist, has had on his intellectual development and his view of psychological impacts on economic behavior. Other personal insights from Shiller center on experiences he had while touring and lecturing around the first book, and some of the most interesting passages are those in which he describes common questions or feedback from his audience, and what he thought in reaction--but didn't voice while on his tour.

In the end, Shiller closes his book with an intriguing set of policy proposals. He argues for a revamping of the U.S. social security system, a new system of house-price insurance for homeowners, and risk reduction through portfolio diversification. Fans of the brainy academic will note with approval that Shiller practices what he preaches: he has begun trying to implement some of his ideas in the real world through two private consulting firms he has founded, Macro Securities Research and Macro Financial. The hope is if Shiller's as correct with this second book as he was with his first, readers will all learn something from these new companies. --Peter Han ... Read more

Reviews (62)

Antidote to Stocks for the Long Run
Shiller explains why the incredible 225% increase in the Dow Jones Industrial Average from the beginning of 1994 through the end of 1999 was unsustainable: "as a rule and on average, years with low price-earnings ratios have been followed by high returns, and years with high price-earnings ratios have been followed by low or negative returns." Writing in 2000 when the price-earnings ratio on the S&P500 was nearly 45, compared to a long-run average of about 20, Shiller was preparing us for a bursting of the stock-price bubble. His message was sobering and prescient then as well as good education now. Caution: the reader will have to whack through thickets of details in Chapter 1 such as "The average real return in the stock market (including dividends) was -2.6% a year for the five years following January 1966, -1.8% a year for the next ten years, -0.5% a year for the next fifteen years, and 1.9% a year for the next twenty years."
In Part 3: Psychological Factors, Shiller outlines principles of behavioral finance. For example, past prices and stories help form people's views of the stock market. He reviews classic experiments in psychology, which documented the significance of peer pressure and trust in experts. Shiller's interpretation is that people take uncritically what experts on the stock market offer, presumably that stock prices will continue to rise, which encourages them to be overconfident.
The author puts forth a good explanation of efficient markets theory but applies much criticism. He proclaims: "I see no reason to doubt the thesis that smarter people will, in the long run, tend to do better at investing." Reading and understanding Irrational Exuberance will help put the individual investor in the company of those "smarter people."

I'm puzzled by the y-axis choices in Figure 1.1 (page 6).
I work in statistical data analysis, and I opened this book with high expectations.But then on page 6 I encountered Figure 1.1, titled "Stock Prices and Earnings, 1871-2000", which has a visual design that troubles me.Both lines on the graph are plotted with the same x axis (the years from 1860 to 2020), and I have no problem with that.The Stock Price line is plotted against a y axis that is labeled along the left-hand edge of the graph, and the range chosen for this axis (0 to 1600) seems quite appropriate for the data plotted, which range from about 70 to about 1450.The Stock Earnings line is plotted against its own y axis that is labeled along the right-hand edge of the graph, and I have no problem with the existence of the second y axis.But what troubles me is that the range of this second y axis has been chosen so that the entire range of the data plotted in the earnings line (about 5 to about 40) has been squished into the very bottom of the graph, using a vertical distance that corresponds roughly to the range from 2 to 190 on the y axis for Stock Price.This apparently arbitrary visual juxtaposition of two unrelated y-axis scales leaves me unable to trust any visual trend comparisons I might be tempted to make between the two lines.Can someone explain to me why one of these three alternatives that make more sense to me wasn't chosen?(1) Plot both the Stock Price and the Stock Earnings on the same y-axis scale (from 0 to 1600), or (2) plot the Stock Price on its own y axis as shown but plot the Earnings Price on a y axis that runs from 0 at the bottom of the graph's right-hand edge to about 45 on the graph's right-hand edge, or (3) normalize both graphs to percentages of their values for some year (1871, perhaps).Thanks.Any comments from Edward Tufte ("The Visual Display of Quantitative Information") would be most welcome indeed.

decent, but somewhat disappointing
For those haven't read other behavioral econ articles / books, this is probably worthwhile.However, though the first two articles are well written and informative, the remainder of the book is mostly ponderous unsupported assertions and innuendo.It's nothing new to those who've read a bit about this stuff before.

Regarding the "updated for the real estate bubble" claims:The real estate information is not very well integrated - it looks like it was opportunistically inserted.Ironically, it looks like Shiller and his publishers are trying to "time the market" - rushing a book to market hoping to "catch the top" of another asset class cycle and thus get two data points showing him to be a guru of bubbles.(In addition, his mention of Prop 13 in California is superficial and not informative.)

It also appears at many places that writing has not been updated at all since the first edition.It can make for some confusing reading at times.

Maybe he doesn't want to give away lots of data he's accumulated, but it would be helpful to evaluate his assertions.Without it most of the book does not rise above well informed discussion over a few beers.

indepth analysis on market behavior
In a welcome second edition of the book, Shiller sets up his main theses using the real estate "bubble" (or if you prefer, "boom") example.The first part of the book focuses on a historical analysis of the "bubble" scenarios and uses the recent real estate phenomenon to explain the context of his arguments. He systematically argues against all the reasons cited for the real estate boom (population, construction costs, etc.) In the second part, he focuses on causes for these speculative behaviors of investors and their changing perceptions on risk. His classification of factors into precipitating and amplifying groups is an interesting approach.He then proceeds to explain cultural, political and psychological factors to reason why he thinks investors behave in a "speculative" mode. His attack on the cable TV news media and their "noisy" coverage of business news is an amusing and thought-provoking read.

Any serious investor for the long term (and short term) will find the insights on market behavior very useful in analysing his/her own behavior. The efficient market theory, "greater fool" theory, etc. will also need a more critical look after reading Shiller's comments.

This thought provoking book is an excellent read along with Jeremy Siegel's (one of the authors friends/advisors) book which takes a much more positive perspective on market trends and more importantly, market behavior.

While the strength of the arguments will keep the reader interested, the book is no easy week-end read. It needs to be read in a slow pace to absorb the gravity of the arguments. But that shouldnt deter a serious investor. A must have.

Market psychology with a political ending
This is a chronicle of inverstor perceptions and expectations of themarket both in the late '90s and in other periods, particularly the roaring '20s.Pretty boring stuff.More psychology than finance.

The reason I gave this book one star is that in the final part of the book Shiller makes an political statement that is unrelated to the book's thesis.He campaigns against investing even part of Social Security funds in the stock market.He urges us to reaffirm our group responsibility to the elderly instead.It sounds like something the AARP would have said.

In other parts of the book he talks about what demographic or generational trends may mean for the market or the public perception of the market.When he turns to social security he doesn't mention demographics, however.Of course, demographic trends portend bankruptcy for Social Security as it is currently structured.It's intellectually dishonest to talk about demographics and generational differences in other contexts but omit those factors when it comes to social security.

If he had left out this political lobbying he would have a boring but well researched book.He pulled a bait and switch at the end that detracts from the rest of the book. ... Read more

Book Description

From one of our most perceptive commentators and winner of the National Book Award, a comprehensive look at the new world of globalization, the international system that, more than anything else, is shaping world affairs today.

As the Foreign Affairs columnist for The New York Times, Thomas L. Friedman has traveled the globe, interviewing people from all walks of contemporary life: Brazilian peasants in the Amazon rain forest, new entrepreneurs in Indonesia, Islamic students in Teheran, and the financial wizards on Wall Street and in Silicon Valley.

Now Friedman has drawn on his years on the road to produce an engrossing and original look at globalization. Globalization, he argues, is not just a phenomenon and not just a passing trend. It is the international system that replaced the Cold War system; the new, well-greased, interconnected system: Globalization is the integration of capital, technology, and information across national borders, in a way that is creating a single global market and, to some degreee, a global village. Simply put, one can't possibly understand the morning news or one's own investments without some grasp of the system. Just one example: During the Cold War, we reached for the hot line between the White House and the Kremlin--a symbol that we were all divided but at least the two superpowers were in charge. In the era of globalization, we reach for the Internet--a symbol that we are all connected but nobody is totally in charge.

With vivid stories and a set of original terms and concepts, Friedman offers readers remarkable access to his unique understanding of this new world order, and shows us how to see this new system. He dramatizes the conflict of "the Lexus and the olive tree"--the tension between the globalization system and ancient forces of culture, geography, tradition, and community. He also details the powerful backlash that globalization produces among those who feel brutalized by it, and he spells out what we all need to do to keep the system in balance. Finding the proper balance between the Lexus and the olive tree is the great drama of he globalization era, and the ultimate theme of Friedman's challenging, provocative book--essential reading for all who care about how the world really works. ... Read more

Reviews (321)

McDonald's Theory of Conflict Avoidance and More
I've been a fan of Thomas Friedman's New York Times foreign affairs column since September 11, when I found his voice about the Arab world and how it relates to this tragedy and our daily lives here in the United States. This book created a helpful foundation for understanding our changing planet.

The premise on which he bases the book is that there is a conflict in our world between olive trees, which represent our cultural heritage and identity, our spirituality and our rituals, and the Lexus, which is manufactured in technologically advanced factories for people who have cashed in on the globalized American capitalist system and can afford the amenities, and can buy them in increasing outlets worldwide.

Friedman makes a convincing case that this current era of Globalization (he suggests that an earlier era in the late 19th and ealier 20th centuries incited the backlashes that we call today Communism, Socialism and Facism) has replaced the former world order created by the Cold War. Then, everything was bipolar, and nations aligned themselves and propped themselves up
politically and financially with their alliances to either the Soviet Union or the United States. Now, Friedman states, there is only globalization, or global capitalism, and if your nation isn't plugged into it, your people will suffer.

Sometimes the full-bore theme of this book feels heavy, that there is no alternative to market capitalism worldwide seems a little biased, to me. But, Friedman, thankfully, doesn't only concentrate on this, but gives thought, particularly at the end of the book, to the public policies that nations can initiate to protect their olive trees, while not turning their backs on the Lexus.

He has some interesting theories, too, that I enjoyed reading about, particularly the idea that no country with a McDonald's franchise has ever attacked another country with a McDonald's franchise. (His first edition came out before NATO v Yugoslavia, but he still stands by it, as NATO isn't a nation...) His
idea here is that market capitalism can be a stabilizing force in the world because once people have a big enough middle class to support franchises like McDonald's they are hard pressed to risk their lifestyles for war.

I found this edition, which came out in 2000 to be somewhat painful, as his passages about what he calls "super-empowered individuals," who don't need to be in control of a country or its military to attack other nations or groups, somewhat vaguely but eerily predicted the September 11 plot. His position that the
increasing democratization of finance/capital, information and technology can improve life and destabilize it too are convincing, especially in what we've seen happen since the book was published.

The book, written in a pleasant, colloquial style with a lot of well-known examples is engaging and easy to read. I strongly recommend it.

An overview, but not enough for "understanding"
Over the years, New York Times reporter Tom Friedman has earned a reputation for his crisp and engaging writing and his ability to present the complex world events in ways that are easy to understand. If you're looking for an introduction to issues involved in the globalization of commerce, this is one of the best books on the market for it. Friendman's descriptions of things like the "electronic herd" of global capital investment and his McDonald's theory of international conflict bring a lot of sense to an otherwise confusing landscape of issues.

This strength of the book is also its limitation. Friedman is a clear writer because he paints with a broad brush. There is a strong bias at work here, but Friedman tends to try to keep hidden both his bias and points of debate that would contradict his theses. For example, he argues that market capitalism is now the one and only way to participate in the global economy, ignoring that there are several distinct flavors of "market capitalism" (US, Japanese, and European, for example) with very different rules and very different outcomes. Reading Friedman, one might assume that the Asian tigers had achieved their success by following the US model (which is the laissez-faire approach also advocated by the World Bank), while in fact they achieved robust growth through an approach more or less like that followed by the Japanese, which involved a combination of protectionism, currency management, and mandated savings. Friedman uses the 1997 Asian economic meltdown to argue that this Japanese-style approach is no longer valid and that global capital investment will not return until they better conform to the financial market transparency typical of the US. During the current slump, however, capital has fled from the US back to many of these economies because of their performance and not because of their transparency.

The question with globalization isnt whether it's "good" or "bad," but whether and how it should be managed. If you're looking for a more in-depth discussion of these issues and a more honest revelation of the author's biases, there are better books available, such as William Greider's "One World, Ready or Not." But this book isn't a bad place to get your feet wet.

Sort of rambles, has some great anecdotes and analogies.
The Lexus and the Olive Tree is an important book, but in many ways Thomas Friedman renders his own creation irrelevant. He is almost schizophrenic in his writing style, arguing with himself as if he has yet to make up his mind about the things he is writing. In some ways, it seems like he just prefers to share anecdotes (which are vivid and usually humorous) from his travels around the world, rather than the typical kinds of fact-based research one finds in these sort of books. The result is that the reader can understand some of the concepts, but they can also get a little tedious, and it is hard to translate the anecdotes into something that I assimilate into my worldview.

Furthermore, Friedman seems to love to quote people at length, but one wonders if indeed he is quoting word-for-word, or if he is just sort of crafting something to fit his book out of a vaguely similar comment the person may have made. But, then one thinks again, because the book is almost a little choppy in places because Friedman quotes random characters from all around the world for pages upon pages. One would prefer that he just paraphrase or use shorter quotes.

Because it was written 5 years ago, some of the reading is tedious (he explains what a DVD player is, for example), and in some areas he seems to be caught up in the "irrational" dot-com whirlwind. In his revised version of the book, it sort of just drones on, pontificating for about 20-30 pages too much. Thomas Friedman is a very personable guy, and he has a lot of interesting things to say about the world, but honestly, one doesn't care for his own political/religious philosophy being injected, mostly toward the end of the book. It was just awkward to read through the final chapter or two; the book has multiple personality disorder in some regards.

One almost feel like the book is written for an audience of Dick Gephardts. He wants to win the protectionist wing of the Democratic Party over with the book. He seems to be speaking to them. Maybe he is speaking to Republicans as well, but if so, he lectures a little too sanctimoniously on the environment and the notion of a social safety net (he calls Republicans "mean-spirited voices... uninterested in any compromise" and tries to argue that Africa, with its near-anarchy in places, would be a Republican's dream) to win conservatives over entirely. He sort of just randomly breaks into prostheletyzing, arguing, for example, "That the NRA should feel guilty about the Colombine massacres went without saying." Why even go into that? That's just tacky.

Finally, a reader gets sort of annoyed reading his own made-up terms (Golden Straightjacket, Electronic Herd, etc.), over and over, particularly since none of them caught on whatsoever in the past half-decade since the book came out.

Some of it is dead on, though, particularly when he writes as an observer of the world rather than an activist, and this book is a good way to conceptualize globalization for those who are having a hard time adapting their political ideology in the post-Cold War era. In general, I'd say The Lexus and the Olive Tree starts off strong, ends weak, and that's a shame. It was on track to get 5 stars from me, even with the early tributes to Al Gore and other political cheap shots, but the final part of the book was just THAT lacking, that it falls to 3 stars.

Basic, almost insulting.
In the book friedman describes several interesting points ranging from the trade offs of culture and capitalism, to the basic efficiencies of different economies, though the way he describes things is almost insulting. The metaphors and anologies used seem to indicate a journalist writing for the elderly or those who have no idea what a digital medium is. Being a young student this quickly wore on my attention span.

I tried to read the book twice and failed becuase I get so fed up with his style. For example, he has a tendency to end paragraphs with exclamations that are as corny as the saying "click on that!" This drove me to the point where I would read the entire paragraph except the last sentence, obviously not the best way to read a book.

The good news is that the liberal bias seen in From Beirut to Jeuraslim(sp) is nowhere to be seen, replaced by ideas that only the free-est of the free markets would survive, a complete contradiction to his pro-arab Beruit book.

I would recommend milton friedman over thomas friedman, anyday, if you want an accurate portrayal of the power of the free market.

Excellent primer for the novice and interested alike
Friedman's book "The Lexus and the Olive Tree" is an excellent illustration of basic globalization principles and strategies, told in simple and easy language for the layman's point of view. The heavy use of anecdotal evidence also lends a comfortable "storytelling" perspective that generally keeps the reader's attention focused.

One of the things that interested me about this book was Friedman's attempted placement of his work alongside other authors on similar subjects. In the introduction, he plainly states that his purpose in writing this book is not only to fully explain the concept, analysis, and anecdotal evidence of globalization, but also to add to the body of knowledge that is shaping and defining the post-Cold War era in history. Citing other seminal works that have been described as groundbreaking descriptions of this time in history, he lists 3 other books that he hopes to complement on that very subject: "The End of History and the Last Man" by Francis Fukuyama, "The Clash of Civilizations" by Samuel Huntington, and the collected works (books and articles) of Robert Kaplan. In truth, I have recently read all 3 of these selections and can honestly agree that Friedman has successfully accomplished his goal.

For the most part, I already understood globalization (and how it ties in with the greater subject of economics and capitalism) so I thought I might get bored with his tedious simplification and excessive detail... but surprisingly, I found this not to be the case. Overall, I found Friedman to definitely be an expert on the subject, which is often rare for newspaper journalists - and especially the NY Times foreign affairs correspondent who covers the entire planet. This subject is less about "foreign affairs" than economics... but then again, Friedman was the Wall Street correspondent at the Times before he took the foreign affairs desk.

One caveat, though.... this book was published before 9/11 - the first edition was 1999 and the 2nd was in early 2001. So one or two of his predictions didn't pan out, but as to globalization I don't think he'd change much in a 3rd edition. I can only think of one subject in the book where Friedman was dead wrong - his idea that stronger US relations with eastern Europe (specifically the Baltic states) was a bad idea because it might antagonize Russia. Turns out NATO expansion into Europe has gone relatively well... and Russia has practically eliminated their early protestations since 9/11, and in fact are already looking to stronger ties directly with NATO.

Having read those other 3 works, I can honestly say that Friedman has penned a true masterpiece on the post-Cold War body of knowledge. And Friedman is mostly pro-globalization too (unlike the anarchist WTO and G-8 protestors that get all the press), even when he objectively presents both sides of the argument. His overall thesis is basically this: globalization is here to stay, there really isn't anything people can do to stop it (much like the sunrise), so it's best to get used to it, understand it, and realize how you can find yourself moving with it instead of against it. In the end, Friedman uses his considerable journalistic (if not storytelling) talents to offer a subject where readers at all levels of economic expertise can find something to enjoy. ... Read more

Book Description

In this revolutionary bestseller, Harvard professor Clayton M. Christensen says outstanding companies can do everything right and still lose their market leadership, or worse, disappear completely. And he not only proves what he says, he tells others how to avoid a similar fate.

Focusing on "disruptive technology" of the Honda Supercub, Intel's 8088 processor, and the hydraulic excavator, Christensen shows why most companies miss "the next great wave." Whether in electronics or retailing, a successful company with established products will get pushed aside unless managers know when to abandon traditional business practices. Using the lessons of successes and failures from leading companies, The Innovator's Dilemma presents a set of rules for capitalizing on the phenomenon of disruptive innovation.

Reviews (125)

Great Book About Business Strategies, Must Read for Managers
Comment: This review is done as a class project for the San Jose State University MBA e-commerce course by Ji Luo.

Dr. Christensen's book offered me a fresh perspective into looking at how large established business failed. As the author explained it, the standard process that governs sound management could be the same one that destroys the company. I found his use of graphics and quantities data sufficient as well as very useful in understand concepts such as the S-curve and the value networks. The detailed analysis shows that the author has done quite a bit of research into the topic and that makes the data more credible to me. His writing style is very easy to understand and organized. First few chapters go into how disruptive technology can destroy a company if not harnessed. His later chapters list guidelines on how to avoid the pitfalls. These guidelines are followed thoroughly by many case studies and quotes from industry leaders. While company's policies shouldn't be based on a few guidelines and the situations in a person's particular industry may find the guidelines hard to follow, the author's particular views are irrefutable and should at least be considered by the managers. It's really exciting to see him link the same principles to so many varying industries from high tech to low tech. The overarching principle of sustaining technology and disruptive technology and how a company should embrace it could be applied to any large established industry.

People who are interested in the business world should read this book and should especially be read by top managers in large corporation because many of them are ultimately responsible for success or failure of implementing disruptive technology. However, this is not a perfect book. I am a bit skeptical as to whether these rules apply to medium sized companies or companies with low margins. Therefore, my opinion is that the guidelines listed here really only applies to large organization with a lot of resources to divide. Also, The author sometimes repeat his points more than he should. He tends to concentrate so much on the hard disk drive industry that he left less room to get into deeper analysis into other industries.

Overall, I think this is a great read for anyone interested in business and wondered about how large companies such as Montgomery Wards could go belly-up or why Digital Corporation disappeared from our vocabulary.

A "must own" for managers and business executives
This is the best book on strategy I have ever read (and I've read a few in my time). In his book, "The Innovator's Dilemma", Clayton M. Christensen, business professor at Harvard, explains why established firms fail, more often than none, when confronted with disruptive technologies.

Disruptive technology is different from radical innovation. Such technology initially proposes attributes that are not valued by current, mainstream customers. The technology is initially attractive to a small market segment -- making it unattractive for larger firms. Therefore lies the innovator's dillema: how to allocate resources to developing a technology that will target a smaller market and at lower margins.

Thoughout his book, Mr. Christensen develops a framework for managers and executives (also valid and valuable for consultants and analysts) to be able to resolve this dillema.

If you are to read only one book on business this year, the Innovator's Dillema should be it.

The reviewer is a certified management consultant and earned his MBA from the Schulich School of Business at York University and completed the Wharton School Multinational Marketing and Management Program. He is also a Professional Engineer and holds a Bachelor of Applied Science in Engineering from the University of Toronto.

Good introduction to a nice Theory
Not quite as easy to read as I would have liked. Christensen describes some very interesting & plausible theories, but is somewhat confined into employing the computer disk industry as the rapidly changing example which both demonstrates & proves his theories, and its not necessarily the most exciting case material. Other products only get a minor look-in.

What I did like is how he covers the footnotes at the end of each Chapter - so if they don't interest you, you can skip over them, but if they do interest you, then you don't have to struggle to the back of the book. I wish more authors & publishers would use that technique.

One quibble - given his Economics background - of course there are plenty of graphs, and 99% of them are straight lines - there are no time dependent variances in his world.

Read this before you read the Innovators Solution.

Driven by disks
Clay Christensen combines the science of empirical research with the art of organizational behavior in his best-selling "The Innovator's Dilemma." The book provides tangible advice on how to foster innovation within a corporate environment. His case studies draw from the successes and failures of American companies within numerous industries (disk drives, excavators, motorcycles, software). Christensen's strong points include a creative presentation of data, lucid writing and frank admission that the advice in his book is not a one-size-fits-all panacea for management challenges. But a heads-up to readers: perhaps 50% of the book centers on the disk-drive manufacturing industry. Although the lessons learned in hard drives are interesting, a more balanced approach would have been welcome. "The Innovators Dilemma" is a well written management how-to, in the same league as classics by Peters or Hammer. The book seems to be written for managers in large organizations, but entrepreneurs will probably find the material just as beneficial.

Fantastic book for anyone . . . especially business students
This was a fantastic book. I began reading it less than half way through the MBA program I am in and I was amazed at how many of the arguments others were making in class fell apart. This book helped me better analyze several aspects of many of my classes and I only wish I would have read it sooner.

I continued on and read the Innovator's Solution, and while I thought it was also a good book, I got much more out of the Innovator's Dilemma, though I still recommend both of them. ... Read more

Book Description

John Meriwether, a famously successful Wall Street trader, spent the 1980s as a partner at Salomon Brothers, establishing the best--and the brainiest--bond arbitrage group in the world. A mysterious and shy midwesterner, he knitted together a group of Ph.D.-certified arbitrageurs who rewarded him with filial devotion and fabulous profits. Then, in 1991, in the wake of a scandal involving one of his traders, Meriwether abruptly resigned. For two years, his fiercely loyal team--convinced that the chief had been unfairly victimized--plotted their boss's return. Then, in 1993, Meriwether made a historic offer. He gathered together his former disciples and a handful of supereconomists from academia and proposed that they become partners in a new hedge fund different from any Wall Street had ever seen. And so Long-Term Capital Management was born.
        In a decade that had seen the longest and most rewarding bull market in history, hedge funds were the ne plus ultra of investments: discreet, private clubs limited to those rich enough to pony up millions. They promised that the investors' money would be placed in a variety of trades simultaneously--a "hedging" strategy designed to minimize the possibility of loss. At Long-Term, Meriwether & Co. truly believed that their finely tuned computer models had tamed the genie of risk, and would allow them to bet on the future with near mathematical certainty. And thanks to their cast--which included a pair of future Nobel Prize winners--investors believed them.
        From the moment Long-Term opened their offices in posh Greenwich, Connecticut, miles from the pandemonium of Wall Street, it was clear that this would be a hedge fund apart from all others. Though they viewed the big Wall Street investment banks with disdain, so great was Long-Term's aura that these very banks lined up to provide the firm with financing, and on the very sweetest of terms. So self-certain were Long-Term's traders that they borrowed with little concern about the leverage. At first, Long-Term's models stayed on script, and this new gold standard in hedge funds boasted such incredible returns that private investors and even central banks clamored to invest more money. It seemed the geniuses in Greenwich couldn't lose.
        Four years later, when a default in Russia set off a global storm that Long-Term's models hadn't anticipated, its supposedly safe portfolios imploded. In five weeks, the professors went from mega-rich geniuses to discredited failures. With the firm about to go under, its staggering $100 billion balance sheet threatened to drag down markets around the world. At the eleventh hour, fearing that the financial system of the world was in peril, the Federal Reserve Bank hastily summoned Wall Street's leading banks to underwrite a bailout.
        Roger Lowenstein, the bestselling author of Buffett, captures Long-Term's roller-coaster ride in gripping detail. Drawing on confidential internal memos and interviews with dozens of key players, Lowenstein crafts a story that reads like a first-rate thriller from beginning to end. He explains not just how the fund made and lost its money, but what it was about the personalities of Long-Term's partners, the arrogance of their mathematical certainties, and the late-nineties culture of Wall Street that made it all possible.
        When Genius Failed is the cautionary financial tale of our time, the gripping saga of what happened when an elite group ofinvestors believed they could actually deconstruct risk and use virtually limitless leverage to create limitless wealth. In Roger Lowenstein's hands, it is a brilliant tale peppered with fast money, vivid characters, and high drama. ... Read more

Reviews (114)

Engrossing read
The author gives an engrossing read about the LTCM debacle in this book. His writing style, in my opinion, really captures my attention and almost turns the book into a Grisham-style page-turner. After reading the book, you will have a better idea of the reasons why the fund failed. Also, you will gain more qualitative knowledge about hedge funds, derivatives markets and investing in general. However, if you are looking for equations and quantitative stuff, then sorry man, you will be greatly disappointed. Don't expect to find the Black-Scholes equation here. Nor do I think it's necessary. As a finance student, I'm tired of having to know the complex equations and quantitative stuff inside-out, without the slightest idea of how they should be used and their limitations.
If you have the basic idea or training in quantitative finance, the this book is a must-read. It sheds light on the untold stories in derivatives trading. The downfall of LTCM should be a very somber and sobering reminder of the limitations of the derivatives markets. Too much credit is given to "risk management" and "quantitative finance". I think every portfolio manager and derivatives trader should keep this in mind.

BIG MEN MAKE SMALL MISTAKES!
Small traders who break the simple rules are called 'dumb' by the professionals in the industry in their magazine articles, interviews on radio & TV etc. Here we have a group of top academics including Nobel Prize winners in economics who headed a firm that made some of the most silly 'mistakes' that caused them to lose over FOUR BILLION DOLLARS1 The reason: simple over-trading and mis-management of funds - just what the little guy is always told not to do!

This book gives a brief introduction to the various players involved. It gives an indicationl of the greed involved, not only by over-leveraging but by forcing investors to take back their money so the partners could put all their money in the fund and make all the profits for themselves. Interestingly, they did these people a great favor by preventing them from going broke.

Later in the book, when the crisis is really brought forward, we are given a detail day to day account of the stress and problems that the fund managers were creating for themselves and the rest of Wall Street as many banks and other financial institutions had tied up hundreds of millions with this firm. In the end the Federal Reserve arranged a bailout with fourteen major banks to save day.

Ironically, the super-losers went and created another fund after this big crash and sure enough they raised a few hundred millions in trading capital so the 'bright' fellows can get running again!

Not enough Cream on the Coffee
1997, 30 year Treasury Bonds Fell to 5.58; traders were selling short to hedge against riskier bonds, treasuries rallied and spreads increased between bonds; Japanese bonds dropped opposite of the bet by LTCM.

Blame the Asian flu, IMF unresponsiveness, and Salomon Barney Smith abandonment of its arbitrage positions as causes for the evaporation of 4 billion dollars LTCM within months. LTCM was too big, possessing $128 billion in assets and $3.6 billion in the bank and 2/5 of money belonging to the owners. Notation derivates reaching leverage 100 to 1 preventing rapid sell off and bankruptcy out of question, for bankruptcy would have caused a world cascade economic crash and loses reaching above $1 trillion. Bankruptcy was not an option; LTCM was too big to fail and the Fed knew it. LTCM only chance was too secure money from warranties, loans, or a buy out; none of which in the end would save them. In the end, the Feds 16 banks would invest $250 million each with a total accumulation of $4 billion dollars rescuing LTCM and the partners would leave with relatively nothing in their pockets. How did smartest guys on Wall Street fail? How did the impossible happen?

1997, Indonesia, Rupiah dropped 85 percent as currency traders forced devaluation revealing a corrupt banking practices and overextension of bad credit; volatility rose to 27 percent.

1998 LTCM bet that no future recession would occur and believed the Bond margins would narrow. Instead, the world economy were experience new global forces as communism was breaking down, China's GNP was heating up, and East Germany was experiencing new economic freedoms. A U.S - 56 point margin increase on the swap, England - 45 point margin, and German - 20 point margin and LTCM was losing money on all of its markets. LTCM had previously negotiated a warrant by UBS and UBS was being seriously exposed while LTCM was claiming "Future expected returns are good" although Equity Volume was in trouble, Swap margins were increasing, and Treasuries were falling as investors fled to safer securities and as Treasuries were being bought up their rates dropping to 5.56.

With Indonesia falling - all eyes were turned to Russia. There was no rescue by the IMF for the Russian ruble. Shares in Europe and Turkey were weak and Venezuelans were buying dollars all the while swaps margins increased. Aug 21, the Dow fell 280 points and investors continued to prefer the safest bonds, the 30 year treasures, US swaps increased to 76 points, 20 points in one day, Britain swaps increased to 62 points and mortgage spreads spread to 121 points, high yield climbed to 276, and treasurers were at 13. LTCM lost $558 million in a single day, 15 percent of their capital. LTCM was certain the markets would correct rationally and the spreads converge. Losses accumulated faster because leverages increased. Additional $200 million in funding was requested from Merrill Lynch. Hedge funds were not considered a bank and so credit extension regulation was constrained. The drop in LTCM performance caused banks to tighten their credit lines to hedge funds. In fact, the hedge funds poor performance screamed default and banks demanded their entitlement to repayment. LTCM was very close to insolvency. Mattone told Meriwether, "when you're down by half, people figure you can go down all the way" and "your out". Aug 31, the DOW crashed 512 points, Hong Kong Authority stopped supporting local markets by buying local shares. For the month of Aug, LTCM had lost $1.9 billion, 45 percent of its equity capital, and still had $125 billion in derivative assets. Death was imminent, the leveraging could not be stopped, LTCM was immobilized by its size, and Bear was threatening to suspend trading. After reviewing LTCM books, Bear allowed LTCM trades and gave a harsh warning, if they dropped below $500 million all trades would halt.

Sep 10, LTCM experiences a sum lose of $500 million dollar for five days of trading. LTCM still has 7,000 derivative contracts totaling $1.4 trillion dollars.

In 1987, Alan Greenspan was appointed as chairman of the Federal Reserves. Greenspan did not totally understand hedge funds, they were fairly private, and the Fed had no authority over them. Greenspan was nervous about the credit lines extended too these funds. Some call the funds, banks. What were the hedge funds? What is a bank?

The New York Fed keeps in touch with its branches and they talk with private industry, so supposedly the Fed keeps a pulse on the private sector. The Fed has a trading desk and trades $450 billions in treasuries, buying and selling to affect the amount of available money supply. If the Fed buys treasures, this act increase money supply and gives banks more money for banks to loan, and interest rates decrease. If the Fed buys back treasures, this act decrease money supply and makes less available loanable money and interest rates rise.

The volatility of LTCM was rising because it was so vulnerable. LTCM was being pressured by Goldman as they continued buying down increasing spreads. Goldman exasperated the European bond market cutting apart LTCM.

Warren Buffet was a seemly friend but of no help to LTCM. Berkshire Hathaway made an offer: 250 million for $3.57 billion to stabilize the fund and all partners fired. Legal confusion forfeited the deal. The last thing the economy wanted was an economic meltdown, so the Fed offered a deal and the LTCM partners were out in the cold with tears in their eyes, a perfect model (Merton, Black, Scholes) and not enough liquid money to save them against the impossible.

"...in crisis, correlations go to 1"
The author of this book is a journalist - not a trader or banker - and it's helpful to remember that as you read through this moralistic account of LTCM's rise and fall.

Lowenstein has the audacity to write of Merton, a Nobel Laureate, that he held a "naive belief in perfect markets." Perfect markets may be mythical, but the author is not qualified to call this view naive. The output of the model is as important as the tenability of its' assumptions.

In the end, the fund was too big and successful, not hubristic, to remain in its' sphere of expertise (bond arbitrage) and was forced to become the 800-pound gorilla in other markets like merger arbitrage. Yes, the top two traders were arrogant (a requirement for traders) but the markets broke the fund, not Hilibrand and Haghani.

More details on the transactions would have been interesting but these may have burdened the flow of the book.

There are copious footnotes and the author does a nice job of outlining the players and their stakes in the fund.

Ideology and greed defy common sense
There should be a sinking feeling in the pit of your stomach as you read this book. Long-Term Capital Management was almost guaranteed to fail from its outset and, when the end finally did come, the fund's collapse almost took a big chunk of Wall Street with it. The scary part is that there are more LTCMs out there, operating without regulatory oversight and all subject to wrong-headed economic hypothesizing as the basis for their trading operations.

The poison pill at the center of Long-Term Capital Management's very being was the efficient market theory, an almost universal belief among economists and financiers alike that free markets always operate in the most effective, logical manner possible over the long term. They don't, of course, and that refusal to acknowledge fundamental human irrationality led LTCM over the brink.

Lowenstein does an outstanding job of untangling the fund's complicated derivatives trades and explaining how the fund eventually over-leveraged itself into a sudden collapse. We normally read business stories like this for the thrill of seeing moral hazard at work, seeing the rich fall from grace and thinking how well-deserved that fate is. I would recommend, however, that you approach this book as a template for how the next Great Depression could spring from the simultaneous self-destruction of derivatives trading firms. And thanks to Roger Lowenstein, you don't have to be a genius to see how it could happen. ... Read more

Book Description

"The hour of capitalism's greatest triumph" writes Hernando de Soto, "is, in the eyes of four-fifths of humanity, its hour of crisis." In The Mystery of Capital, the world-famous Peruvian economist takes up the question that, more than any other, is central to one of the most crucial problems the world faces today: Why do some countries succeed at capitalism while others fail?

In strong opposition to the popular view that success is determined by cultural differences, de Soto finds that it actually has everything to do with the legal structure of property and property rights. Every developed nation in the world at one time went through the transformation from predominantly informal, extralegal ownership to a formal, unified legal property system. In the West we've forgotten that creating this system is what also allowed people everywhere to leverage property into wealth. This persuasive book revolutionizes our understanding of capital and points the way to a major transformation of the world economy. ... Read more

Reviews (87)

Profound!!!
De Soto and Tom Friedman (The Lexus and the Olive Tree) are the two authors that make economics accessible. I have just graduated high school, and after basic economics, I understand what de Soto is saying. De Soto is one of the rare economists that has ditched the books and "gotten his hands dirty." He doesn't only forumlates theories, but also applies them in the real world. His research team is spread across the world - in nations such as Egypt, Haiti, Peru, and the Phillipines.

After reading this book, I have become cinvinced that the major problem in the developing and former communist world is the lack of property rights- de Soto's theory. He not only defends his theory, but explains how these thrid world countries can tap into the 9.3 trillion dollars worth of dead capital in their slums, shantys and "suburbs." The proposal is to adopt the society informal property laws into the national formal law in order to allow the poor to claim legal rights to their assets, and therefore allowing them to use their assets as collatoral for loans from banks. He is not idealistic -- he recognizes the problems and the obstacles that have to be met.

This book is fantastic. I read it in four days, and I am not a fast reader, especially econ books I HIGHLY recommend it.

-Joe

de Sota supplies one component for economic growth
The Mystery of Capital attempts to "reopen the exploration of the source of capital and thus explain how to correct the economic failures of poor countries." I believe the author makes an interesting argument within the book concerning the failure of capitalism to catch on in developing and post-communist countries. His argument deals with institutions we here in the West take for granted-property rights and other legal institutions. The connection between these legal institutions and economic growth is clear-and de Sota is clear on this point as well.

He states that an individual living outside the West faces an impenetrable wall of rules that bar them from legally established social and economic activities-such as deleterious bureaucracies that retard growth by wielding red-tape. De Sota sent teams to Peru, the Philippines, Egypt, and Haiti and they experienced firsthand how it takes several years to obtain legal verification of assets-years compared to days here in the West. Under these burdens, individuals create new laws-extralegal laws. These social contracts have created a vibrant but undercapitalized sector. This sector is known in economic layman's terms as the underground or informal economy. The author estimates that over half on the inhabitants in developing countries engage in this sector-using Dead Capital. The value of the assets in the informal markets are huge-surpassing the assets of rich countries sometimes. De Sota has brought attention to the core of the problem-he then states that the solution can be found at the heart of the countries.

He supplies the formula to fix the backwardness of the nascent capitalist nations. The first objective is to unify the many social contracts already existing in the extralegal sector into one, all encompassing social contract-by listening to the "barking dogs", or the people. Past attempts with this aim have failed because they have lacked the legitimacy and support from the current extralegal world. De Sota creates a bridge to fix this dilemma-a bridge that integrates old social property customs into a new all encompassing social contract. By working with their people, government leaders can forge a new regulatory framework. The second task is a task of a political nature because the plan outlined above requires the support of the poor, the elite, and the lawyers. The poor will gain the most because they will greatly increase their economic lifestyles with a more unified social property system that will enable them to use their assets as full functioning capital. The elite will harvest gains as well; they will benefit from an expanded market and growing capitalist economy. The lawyers must not use the current law, but instead fine-tune the law and change it to make it work for all.

De Sota's real world studies and solutions make sense in my mind. He identified a problem and supplied the solution. He may fall short though in his solution because a complex capitalist economy requires much more infrastructure than only property rights-of course I mean other forms of capital, such as human capital. By De Sota is on the right tract; a capitalist economy demands strict and discrete property laws that enable individuals to utilize their assets. His premise is right-under capitalism, the rich get richer, and the poor get poorer. In the third world, the poor don't have access to their assets, and they thus flounder in the extralegal sector.

One of the single best books on Economics I've read
Many of the other reviewers have given excellent in depth summaries of DeSoto's book, and I will not regurgitate what others have already done a good job of saying. I will just say this: if you want to know why 3rd world countries are 3rd world countries, and what Gov'ts around the world can do to create prosperity for their people, read this book. Nations are poor because of ill-guarded private property rights. It's that simple. They aren't poor because of lack of socialism (quite the opposite), they aren't poor because of lack of resources, it's because "It's the property rights, stupid!"

Books like this can give hope to the pessimist, that it is possible to end serious poverty in the world. Relative poverty will always exist, but the civilization-destabilizing poverty that exists in the Arab world, in Latin America, *can* be cured if Gov'ts would just put in place a system that allows capital (ie entreprenuers) to grow from the natural resources within the country. Replace Socialism w/ Rule of Law. I hope every member of the Iraqi CPA has read this book and heeded its lessons...

Packed With Knowledge!
Hernando de Soto's ideas cannot and should not be ignored. This book will open many eyes to the nature of capital. The author suggests a radically simple yet enormously challenging way of bringing the world's impoverished billions onto the track of capitalism and development: give them legal property rights to what they "own." The author's intriguing case is that a lack of property rights - not a lack of entrepreneurial zeal or competence - stymies development in the former East Bloc and Third World countries. This seemed to be a shockingly original notion when the author first propounded it in his bestseller The Other Patch, and it still does. If the book has a flaw, we warn, it is that the author's undisguised missionary ardor sometimes makes one wonder whether he is merely a zealot. Even if he were one, the book would merit reading.

Thoughts that come on doves' feet guide the world...
Other reviewers have commented on De Soto's originality in relation to prevailing economic tradition. They have also praised his style - very clear prose, interspersed by passages of honest elegance. Yet, for me, at least, what stands out most about De Soto is his interest in discovery, in reawakening a long forgotten question.

Who asks oneself seriously what capital is today? Is one even generally capable of understanding the question of what capital is? I doubt it - the first reaction is ridicule. Of course one knows what capital is, for one lives in a capitalistic society. One can hardly take such a question seriously.

Yet, this provocative question moves this book. De Soto has carried out first-hand research among the boiling global centres of 'marginal' economic activity. He has not looked for the 'right' theoretical answer to the question of capital, rather, he has tried to discover a way to pose, and answer, the question meaningfully. Meaningfully for whom? To those who have forgotten - those in the West - and to those who wish to learn in the developing world and the former communist nations. What is capital?

Other reviewers have criticised De Soto for redundancy, repetition. These criticisms are off the mark. De Soto has discovered the conceptual solution to the question of the potential of capital: a legitimate system of representation of property. Yet, he can not simply elaborate it in a few words, for one does not still understand the question he is answering. Because it is disturbing and fleeting, it is very difficult to grasp. Thus it requires constant reformulation. Shakespeare used parallel structure, De Soto uses masterful analogies (I particularly like his profound observation on something so seemingly apparent as barking dogs).

De Soto also tries to situate his thought within diverse traditions of Western thought, combining Continental philosophy with American analytics (it is rare to see someone who is capable of synthesizing Derrida with Wittgenstein, to say nothing of Searle!). He seems to be trying to say the same thing in many different ways - yet it is very difficult to understand what that thing (capital) is. De Soto helps the reader by offering many different pathways to the thing (capital) itself.

I feel that De Soto might have engaged more deeply with Plato's thoughts on representation and his analysis of the cave parable is somewhat superficial. A more in-depth engagement might provide the basis for a rethinking of some of the precepts behind private property and capital, which De Soto simply accepts as given. This is a personal quibble only, however, as such speculation would reduce the clarity of the book, and thereby reduce its tremendous practical value for concrete action, obviously the author's main intent.

De Soto has written a masterpiece around a a simple kernal of truth. It seems so obvious in hindsight! Yet, it is the very stillness of those words in which it is expressed which will bring on a storm. ... Read more

Book Description

During his fourteen years as Yale's chief investment officer, David F. Swensen has transformed the management of the university's portfolio. Largely by focusing on nonconventional strategies, including a heavy allocation to private equity, Swensen has achieved an annualized return of 16.2 percent, which has propelled Yale's endowment into the top tier of institutional funds. Now, this acknowledged leader of fund managers draws on his experience and deep knowledge of the financial markets to provide a compendium of powerful investment strategies.

Swensen presents an overview of the investment world populated by institutional fund managers, pension fund fiduciaries, investment managers, and trustees of universities, museums, hospitals, and foundations. He offers penetrating insights from his experience managing Yale's endowment, ranging from broad issues of goals and investment philosophy to the strategic and tactical aspects of portfolio management. Swensen's exceptionally readable book addresses critical concepts such as handling risk, selecting investment advisers, and negotiating the opportunities and pitfalls in individual asset classes. Fundamental investment ideas are illustrated by real-world concrete examples, and each chapter contains strategies that any manager can put into action.

At a time when it is becoming increasingly difficult to cope with the relentless challenges provided by today's financial markets, Swensen's book is an indispensable roadmap for creating a successful investment program for every institutional fund manager. Any student of markets will benefit from Pioneering Portfolio Management. ... Read more

Reviews (10)

Truly unique insight into institutional portfolio management
Swensen's book is a must-read for endowment managers and other institutional investors, particularly those who take a fund-of-funds approach (as does Yale, where Swensen is Chief Investment Officer). Swensen aptly lays out the investment policy that has enabled Yale to consistently outperform other U.S. endowments. As Yale's CIO, Swensen has set a target portfolio allocation that departs significantly from the still heavily U.S. equity and debt-focused strategy of most endowments. Swensen's approach includes a large allocation to asset classes that are not highly correlated to the U.S. public equity market. He outlines these "alternative" classes in his book, giving the reader an excellent view of how alternative investments can increase risk-adjusted portfolio returns.

Perhaps the biggest contribution of Swensen's book, however, is the debunking of myths that still lull fiducaries into making the wrong decisions, for example when it comes to picking investment managers. Swensen advises against chasing managers who have performed well simply because of their past performance. If attributes such as personal integrity and the right fee structure are lacking, solid past performance can become a liability, not an asset. Swensen describes the example of private equity firm KKR-- after tremendous early successes, the flood of investor capital into KKR enabled the firm's partners to set up a fee structure that ensured big payoffs for themselves even if their funds underperformed. This is just one of many valuable lessons the reader will draw from Swensen's book.

Thoughtful, cautious, and quite readable
This book provides some well thought out advice on how to invest. It deals mainly with strategies appropriate to handling multi-billion dollar portfolios, but many of the ideas would apply to ordinary investors as well. But because he is mostly very cautious about what strategies to use, the advice won't be terribly surprising to experienced investors, and won't satisfy many risk-tolerant investors.
The one area in which I disagree with the book is his overly confident rejection of technical analysis. While most simple versions of technical analysis have not shown impressive results, and it may well be that none work with investments of the size that Yale makes, the number of successful traders who make some use of technical analysis (for example, most of those interviewed in Jack Schwager's books) should not be dismissed lightly.

Many good insights
David Swensen reveals many insights available only from experience which are valuable for individuals and boards responsible for guiding large portfolios. I wished for more detail regarding the manager selection guidelines and asset allocation/reallocation criteria however we must respect that this information is proprietary.

A must-have for MBA students and investment professionals
First of all, Swensen and Takahashi's team puzzled me by its consistent performance to beat the benchmark for over 15 years, with last year¡¯s stunning annual return of 41%, leading the assets under management to easily surpass $10 Billion. The book is not only a great resource to look into the minds of the people who made this happen but also a wonderful application of finance, investment, asset allocation, strategy and management that you are learning in business school. Without mentioning the merits of the finance theory and investment techniques, the book is presenting a compelling case study of how investment office fits into the picture of institution building.

Second, the fascinating aspects of the book is the ¡°unconventional approach¡±, not just simply statistics and financial modeling, for long-time horizon investing. For example, in asset allocation and manager selection, it can come from topdown analysis with support of quantitative modeling and sophisticated simulation; it also can come from scientific findings and number crunching to uncover the value creation process, which usually leads to the later asset allocation strategy to fully take advantage of the discoveries.

Third, the stress and analysis of alternative investment assets and absolute returns are also worthy of mentioning. Contrary to what traditional financial theories or books focusing on efficient markets, Swensen¡¯s book casts a lot of insights on the less-covered alternative asset classes and less efficient markets. Interestingly, they never seem to be constrained by their own defined class by constantly exploring those asset classes. For example, Swensen is famous for backing venture capital and private equity. It is true that they took the plunge well before others did. Nevertheless, they explore much more than that --other inefficient markets and conventionally less-discovered places.

Finally, there are some more things that I would love to see in the book¡¯s next edition or a new book. One intriguing aspect of Yale Investment Office is its consistently great performance, which happens to coincide with the very volatile years from 1985-2001. Think about the Black Monday in 1997, the stagnation (coupled with high inflation) in late 1980s, bull market, bear market, Asian Financial Crises, Russian Default, Internet bubbles in 2000 and recent bubble-burst. How they weather through the storms as well as sunny days in a systematic way would be really worthy of reading. How do they deal with financial innovation, such as some exotic financial instruments and hedge funds?

In general, I would rate this book the highest score, with high hopes for another book from their team.

Original thought and a rare look into an important world
I give this the highest rating available for two reasons: First, it gives rare insight into the forces driving generally any institution and in particular investments by endowments and foundations. Second, Mr. Swenson provides surprisingly original and expectedly sophisticated thoughts on a number of new and crucial aspects of portfolio management from a wholistic and asset-class specific perspective. He also provides a fresh look at new or often brushed over topics including alternative investments, evaluation of quantitative strategies, and evaluation of managers within each asset class. Although the investments of the Yale Endowment are well known, I knew little about David Swenson prior to reading this book. I came away very impressed with his thoughts. He managed to provide insight and make interesting a lot of topics previously thought simple.

Generally speaking there are two sources of capital available, those from individuals and those from institutions. Every other investment institution(ie, investment banks, mutual funds, hedge funds, brokerages) are simply intermediaries that help transform investment capital into working capital. Understanding the needs of both individuals and institutions is crucial from a number of perspective. For an economist, both groups represent fundamental causal mechanisms in the flow of capital. For anyone in the investment business from stock brokers to investment bankers to hedge fund managers, both individuals and institutions represent a significant potential source of revenue. More information than we need to know is available about the individual. However, surprisingly little good information is available about institutional investors. If anything, the first half of this book provides a useful look into the views of an institutional investor.

Aside from providing a look at the industry, this book was undoubtedly insightful from a pure finance/investment perspective. Mr. Swenson manages to shed light on a lot of topics that were previously taken for granted. Examples include his illustration that on a risk adjusted basis, private equity funds(LBO and venture capital)on average don't perform that well. Only top-tier funds are beating the "market" (S&P500), and only they're worth investing in. Moreover, he's even shed light on the much whispered....never talked about fact that perhaps private equity managers are overcompensated.

His examination of alternative investments is only one aspect of the book. He also provides a fresh look at other important topics that often go unnoticed such as the limitations of mean-variance optimization in asset allocation, active vs. passive fund managers, the role of real estate within the overall portfolio, the significance of REITs, and many others. ... Read more

Book Description

PRAISE FOR Modern Investment Management

"This powerful book brilliantly discovers the routes to superior investment results in the roots of economic theory. In the process, it combines elegance of presentation with the highest levels of lucidity. The authors offer lessons that neither the scholar nor the investor-in-action can afford to ignore."
––Peter Bernstein, bestselling author of Capital Ideas: The Improbable Origins of Modern Wall Street and Against the Gods: The Remarkable Story of Risk

"In Modern Investment Management: An Equilibrium Approach, Bob Litterman and his colleagues at Goldman Sachs Asset Management provide the reader with a gentle introduction to modern financial theory and a survey of their own monumental contributions to theory and practice. The role of the late Fischer Black is amply noted."
––Harry M. Markowitz, 1990 Nobel Prize Laureate in Economics

"This comprehensive guide to equilibrium investing is perhaps the finest demonstration of the relevance of financial theory to investment practice. Both the academy and industry owe a huge debt to this exceptionally talented team for reuniting their paths. Study this book carefully and keep it close at hand if you are serious about investing or teaching about it."
––Mark Kritzman, Managing Partner, Windham Capital Management Boston and Research Director, The Research Foundation of the Association for Investment Management and Research (AIMR)

"This book develops a powerful framework for making better investment decisions. The equilibrium approach frees you up to focus on what you know, without being blinded by what you don’t know."
––Andre Perold, Professor, Senior Associate Dean, Faculty Director
Harvard Business School

"An invaluable investment manual ably supported by the highest-quality financial theory, but well peppered with common sense. The fund manager and the institutional investor ignore this book at their peril. It will be a key reference book for our pension plan."
––David Morgan, Chief Executive, Coal Pension Trustees Services Ltd.

"This novel and ambitious book breaks new ground in demonstrating how modern investment theory can be refined and adapted to practice. The authors’ experience as investment professionals in a sophisticated institutional setting lends much credibility to their skillful blending of rigorous analysis, intuition, and real-world application."
––Robert F. Stambaugh, Ronald O. Perelman Professor of Finance
The Wharton School, University of Pennsylvania ... Read more

Reviews (2)

Oldschool
Nicely written from a journalistic perspective but rather old fashioned. Many mistakes and deliberate false claims in order to suit product interests of Goldman Sachs. Examples:

In the chapter on asset liability management there is always an analytical case for equities. However the only reason is that GS does not allow duration as a choice variable. Otherwise beta (in their formula) would become one and the optimal equity allocation is zero. Accidental? I doubt it.

They also claim to have found (earlier) a better method than Stambaugh on dealing with missing data. However either you publish or you shut up.

Waste of time for serious quants

The definitive equilibrium investing title
My highest commendations to the asset management team at Goldman Sachs. They have come together and created a highly comprehensive tome that covers all the bases within the realm of modern investment theory. Their solid equilibrium approach is applied to all areas, from traditional investments to alternative asset classes, from institutional funds to private wealth, using analysis and real world applications. Incredibly thorough, extremely recommended. ... Read more

Reviews (49)

Natural Capitalism is a MUST READ for MBA's, CEO's, Politici
Throughout this extensively researched book, the three authors (Paul Hawken, Amory Lovins and Hunter Lovins) eloquently describe the mind-set required of businesses that wish to evolve their models of business successfully into the next millennium.

By providing a mix of real-world examples, coupled with logical extensions to the philosophies that have dominated main stream economic theories for the majority of the 20th century - the authors allow us to peak through the curtain - to catch a glimpse of what the world will be like in 50 years time.

Natural Capitalism espouses a vision of a world where long term profit is the driving force behind global strategy, where 'whole system thinking' dominates rather than simplistic compartmentalised agendas.

We have only just discovered the technologies that allow us to assess the impact of the techno-industrial systems which we have grown over the past 150 years. With a little imagination, and a lot of logic Natural Capitalism gently points out the way forward. Toward a trajectory where the (re)application of such systems can construct a new environment, together with the economic opportunities and rewards that come from such an evolution...

This a must read book for all entrepreneurs, businessmen, politicians, researchers, economists, environmentalists, educationalists in fact just about anybody who wishes to live both comfortably, profitably and in harmony during the next century. It argues for an extension to the economic theories that pervade organisational thinking, for a more realistic assessment of the life cycle costs involved in business processes, and above all for a more realistic assessment of the value of natural resources.

This book will help you think. This book will help you live. This book will help you work. This book will help add value to your life... READ IT!

Beyond Darwin
As this new century begins, if there