Category: Books

Books that we read and our thoughts about them.

Book Review: Why Nations Fail

In Why Nations Fail: The Origins of Power, Prosperity and Poverty (Amazon,) authors Daron Acemoglu and James A. Robinson compress over 15 years of research on what drives the growth of nations.

Some hard-hitting excerpts:

  • Poor countries are poor because those who have power make choices that create poverty. They get it wrong not by mistake or ignorance but on purpose.
  • Growth moves forward only if not blocked by the economic losers who anticipate that their economic privileges will be lost and by the political losers who fear that their political power will be eroded.
  • Many of the micro-market failures that are apparently easy to fix may be illusory: the institutional structure that creates market failures will also prevent implementation of interventions to improve incentives at the micro level.

India is a bit like the hapless victim in the old Ajit joke, immersed in a vat of liquid oxygen. The liquid will not let it live and the oxygen will not let it die.

Recommendation: must read!

Book Review: The Dictator’s Handbook

In the book, The Dictator’s Handbook: Why Bad Behavior is Almost Always Good Politics (Amazon,) authors Bruce Bueno de Mesquita and Alastair Smith systematically present the idea that whether it be an autocracy, a democracy or something in between, leaders do whatever keeps them in power, regardless of the national interest.

From the book:
Our starting point is the realization that any leader worth her salt wants as much power as she can get, and to keep it for as long as possible.

Paying supporters, not good governance or representing the general will, is the essence of ruling.

In politics, coming to power is never about doing the right thing. It is always about doing what is expedient.

Having competent ministers, or competent corporate board members, can be a dangerous mistake. Competent people, after all, are potential (and potentially competent) rivals.

The three most important characteristics of a coalition are: (1) Loyalty; (2) Loyalty; (3) Loyalty. Successful leaders surround themselves with trusted friends and family, and rid themselves of any ambitious supporters.

Recommendation: Worth a read. Or, you could just watch this video instead:

Book Review: The Quants

In the book The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It (Amazon,) Scott Patterson provides a peek into the world of quantitative finance with the meltdown of 2007/2008 as a backdrop.

The book is gripping. It almost reads like a whodunit. It is like a modern-day update to Schwager’s Market Wizards series. However, I am not sure I agree with the book’s narrative that quantitative models caused and made volatility worse. In reality, an unwind of any crowded trade can trigger a doom loop of volatility. And in a margin call, the most liquid assets are the first to go. Secondly, for a book that covers statistical arbitrage, long/short value and momentum strategies and capital structure arbitrage using credit default swaps, missing Bridgewater and their risk-parity model is a big one.

Recommendation: Worth a read.

Book Review: The Smartest Guys in the Room

In The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron (Amazon,) Bethany McLean and Peter Elkind chronicle the rise and fall of Enron.

Before the sub-prime crisis and Lehman Brothers bankruptcy, Enron was the poster child of greed gone wild. No other company had ever committed such a massive accounting fraud. Enron’s published financial statements were completely divorced from its underlying business economics. And the system of checks and balances that were supposed to prevent such frauds were corrupted by conflicts of interest within the gatekeepers. Wall Street analysts did not dig too deep because Enron was a massive source of investment banking revenue, its auditor signed off on everything because accounting was a loss-leader for their much more lucrative consulting practice and neither Enron’s board of directors nor the rating agencies that rated its debt cared to peek under the hood.

The following passage from the book captures Enron’s mindset:

The after-the-fact rationalizations were strikingly similar to the mind-set that produced the Enron disaster in the first place. The arguments were narrow and rules-based, legalistic in the hairsplitting sense of the word. Some were even arguably true—in the way that Enron itself defined truth. The larger message was that the wealth and power enjoyed by those at the top of the heap in corporate America demand no sense of broader responsibility. To accept those arguments is to embrace the notion that ethical behavior requires nothing more than avoiding the explicitly illegal, that refusing to see the bad things happening in front of you makes you innocent, and that telling the truth is the same thing as making sure that no one can prove you lied.

Recommendation: worth a read.

Book Review: Radical Markets

In Radical Markets – Uprooting Capitalism and Democracy for a Just Society (Amazon,) the authors propose a number of “radical” ideas to fix democracy and capitalism. It is a riveting read, especially if you find the current system lacking in a number of areas.

Two ideas that stood out:

  1. To fix corruption in property assessments for taxation, allow owner self-assessments, publish those prices and allow anybody to pay that price to the owner and occupy the property. Radical but effective!
  2. Get rid of one-person-one-vote by allowing people to trade their “voice credits.” The buyer of these voice credits owns a square-root of those may votes. For example, if someone is very passionate about building a steel fly-over, they can start buying these VCs from citizens who are indifferent to it. A 100 such VCs translate to 10 votes in favor. This can then be defeated by 11 individual voters who cast one vote each. A near perfect solution to make sure that minority voices are not swamped by majoritarian rule while still making sure that the majority carries!

Some of the ideas around trading VCs and voting mechanisms can be implemented within smaller groups – apartment building associations, for example – right away. However, the ideas around immigration might never see the light of day. The book is worth a read even if you are not looking for radical ideas – the authors set the current problems that our systems face in their historical context.

The logical end point of institutional investment and diversification is the coordination of all capital to extract maximum wealth from consumers and workers.
A simple but Radical reform can prevent this dystopia: ban institutional investors from diversifying their holdings within industries while allowing them to diversify across industries.

Recommendation: Must Read!