The top ten must-read books for institutional investors: Numbers 6-10

Bob's Top Ten book list
Bob's Top Ten book list

In the next few blog postings, I shall list ten books I consider unusually important, influential or interesting for institutional investors. It’s a personal list and I’m sure readers will have their own favorites I may have overlooked. If you don’t agree with me, don’t get mad but do feel free to send in a comment; if there’s enough response, I may do a follow-up once my own list is complete. So, here goes:

10. When Genius Failed.

The story of LTCM is too important a story not to know it. If ever a tale were needed to illustrate why you should never marry a model – that is to say, you should not stick through thick and thin with a single way of analyzing the world – then this is it. The folly of failing to ask “what could go wrong?” – it’s here. The time-bomb of an over-leveraged position? – it’s here. These are lessons that should have served investors well in 2008. But, as Lowenstein notes in the afterword to the 2010 edition of the book “the fall of LTCM was a warning – alas, unheeded. It was the tremor that prefaced the devastating quake.”

9. The Black Swan. 

Probably not Taleb’s best book (Fooled by Randomness has more meat to it) but certainly his most influential, and one which — once and for all — established it as a mainstream view that tails are fat and the unexpected – indeed, the completely unimagined – happens far more than we think it should. When it does, the impact can be huge.

8. Nudge.

Some of us were quoting the paper “libertarian paternalism is not an oxymoron” long before the authors expanded it, gave it a catchier title and created a book which changed how governments think. The Obama administration in the U.S. appointed Cass Sunstein Administrator of the Office of Information and Regulatory Affairs in 2009, while, in the UK, the coalition government of David Cameron went as far as creating in 2010 a “nudge unit,” with Richard Thaler as an advisor, to find applications of this principle across all areas of public policy (the official, but rarely used, name of this unit is the Behavioural Insights Team).

While it’s not an investment book per se, it’s on this list because if you’re involved in a DC plan at all, it’s this idea which best captures the current regulatory spirit. This spirit has the led to the ascendancy of choice architecture as the basis of plan design, and created the conditions for Target Date Funds to become to default option of choice for most DC plans.

7. This Time Is Different.

The point, of course, being this time is not different. Specifically, bad things happen when governments borrow too much money.1

6. Against The Gods.

Peter Bernstein’s tour de force tells how human understanding of risk has developed from ancient times to today. It plots the origins of risk as probability rather than fate, tells the story of mathematicians you’ve heard of (from Fibonacci, Bernoulli and Gauss to von Neumann, Black and Scholes) and some you probably haven’t (Girolamo Cardano; Lambert Quetelet; John Graunt). Like all history books, the story it tells is not finished: the final chapter is presciently called “Awaiting the wildness” (the book was written in the 1990s – late in a bull market when some investors may really have felt man had indeed mastered risk.) As an overview of the historical development of the ideas and techniques that underpin investment today, it remains unrivalled.

References:

Roger Lowenstein (2000). When Genius Failed: The Rise and Fall of Long-Term Capital Management. Random House.

Nassim Nicholas Taleb (2007). The Black Swan: The Impact of the Highly Improbable. Random House.

Richard H. Thaler and Cass R. Sunstein (2008). Nudge: Improving Decisions about Health, Wealth and Happiness. Yale University Press.

Carmen M. Reinhart and Kenneth S. Rogoff (2011) This Time Is Different: Eight Centuries of Financial Folly. Princeton University Press.

Peter L. Bernstein (1996). Against the Gods: The Remarkable Story of Risk. John Wiley & Sons.

 


1 Some readers may be aware of the controversy surrounding a subsequent working paper – Growth in a Time of Debt – in which the authors expanded on one of the themes of this book, but in doing so got some of their numbers wrong. The data and analysis included in the book has not been called into question.

Roger Lowenstein (2000). When Genius Failed: The Rise and Fall of Long-Term Capital Management. Random House.

Nassim Nicholas Taleb (2007). The Black Swan: The Impact of the Highly Improbable. Random House.

Richard H. Thaler and Cass R. Sunstein (2008). Nudge: Improving Decisions about Health, Wealth and Happiness. Yale University Press.

Carmen M. Reinhart and Kenneth S. Rogoff (2011) This Time Is Different: Eight Centuries of Financial Folly. Princeton University Press.

Peter L. Bernstein (1996). Against the Gods: The Remarkable Story of Risk. John Wiley & Sons.


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