Publication Date: September 29, 1994 Availability: Usually dispatched within 1-2 business days
Customer Reviews:
A bubble explained in an afternoon December 5, 2008 As previous reviewers state, this is a short book. In fact it's more like an essay, so you don't actually get much for your money. But it is worth shelling out for. Galbraith is one of those economists who manages to put things very simply and clearly, and this book will be an easy read for anyone. Some have accused Galbraith of being overly simplistic, and in a way the writing style could lull you into thinking that he isn't giving you the full story.
But in fact in the case of speculative bubbles the story really isn't that complicated, much as it seems we want to believe it is (complex explanations make it seem more justifiable that we were fooled). So what you really get is a straightforward run through how the process occurs. There are some really simple truths in the book - like the fact that we assume that people who are making a lot of money must know what they are doing. Basically we mistake luck for skill, and as the bubble continues to grow this only confirms the belief that something solid must be behind it. Hence more and more are drawn in, and feed the bubble further. There's also a great passage on what happens after the bubble bursts, where he argues that people avoid talking about the simple reality that we've all been taken in by seemingly endlessly rising asset prices.
Finally, since the book is so short you can get through it in an afternoon. So if you want a simple primer in bubbles this is ideal.
PS. If Galbraith stimulates your interest in bubbles, a longer and more detailed (but still very readable) book is Irrational Exuberance by Robert Shiller which I can't recommend highly enough.
how market speculation can destroy intelligence February 23, 2006 7 out of 8 found this review helpful
this small book shows in a logical way how speculation can make intelligent people do stupid things.galbraith shows in detail how money can in a practical sense buys up the intelligence of those involved in it.the recent dot.com mania demonstrates galbraiths analysis at work,as people were swept away in the dot.com tide.galbraith is a true prophet,may he live to a hundred.
Bubble Story July 2, 2001 32 out of 33 found this review helpful
IN THIS SMALL but witty and well-crafted book, Galbraith chronicles the major speculative episodes, from the seventeenth-century tulipmania to the junk-bond follies of the eighties. The book was first published in 1990 and thus the recent dotcom-bubble burst is not covered. Nevertheless, the Harvard professor's book is still worth reading. A reason is that he claims to have identified common patterns in the history of financial euphoria. 'In small ways the history of the great speculative boom and its aftermath does change. Much, much more remains the same', he predicts.
The perennial features are these. Some seemingly new and desirable artifact or development captures the financial imagination of a large number of people (say, group 1). The arrival of tulips in Western Europe, gold in Louisiana, the advent of joint-stock companies (corporations), real estate in Florida, or the economic designs of Reagan are all examples. The price of the object of speculation goes up. The object when bought today is worth more tomorrow. This attracts new buyers and assures a further price increase. Those in group 1 are persuaded that the new price-enhancing circumstance is under control, and expect the market to stay up and go up, perhaps indefinitely. The individual or institution that discovered the novelty (in group 2) is thought to be ahead of the mob. Fewer in number, individuals of group 2 perceive the speculative mood of the moment, try to get the maximum reward from the increase as it continues, and plan to be out before the eventual crash. The affluence of group 2 is wrongly associated, by group 1, with a miraculous financial genius. When something triggers the ultimate reversal, group 2 decides now is time to get out. Group 1 finds its illusion abruptly destroyed. Both groups sell or try to sell. The market collapses.
Galbraith observes that, in this process, 'speculation buys up the intelligence of those involved'. The crowd converts the individual in group 1 from possessing reasonable good sense to stupidity. Those in group 2 also make errors of vanity by thinking they will beat the speculative game. It seems that 'all people are most credulous when they are most happy'. Reputable public and financial opinion reinforces euphoria by condemning those who express doubt or dissent by warning of a crash. The celebrated Yale economist Irving Fisher, for instance, spoke out sharply against Roger Babson, who foresaw the crash of 1929. But the critic must wait until after the crash for any approval, Galbraith laments.
Despite the fact that common features in speculative episodes recur, history counts little because a financial disaster is quickly forgotten by a new, self-confident generation. Something is perceived as a financial novelty merely because the financial memory is short: 'financial operations do not lend themselves to innovation'. Insightfully, Galbraith notices that all financial innovation involves the creation of debt leveraged against more limited assets. This is the case of banks, whose debt is leveraged on a given volume of hard cash. This is also the case of the holding companies created in the 1920s, whose stockholders issued bonds and preferred stock to buy other stocks. And this is the case, too, of the junk bonds of the mergers-and-acquisitions mania in the 1980s, when high-risk, higher-interest bonds were issued in greater volume against the credit of the companies being taken over. As Galbraith puts it: 'the world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version'.
However a crisis may strike at any moment whenever a debt is perceived to become dangerously out of scale in relation to the underlying means of payment. After the crash, group 1 expresses anger against the 'financial genius' of group 2. 'Financial genius is before the fall', Galbraith prophesies. Group 1 finally realizes that having more money may mean that a person in group 2 is indifferent to moral constraints. Group 2 could have even gone beyond the law, as far as leverage is concerned. Incarceration of some individuals of group 2 may follow. Leverage is seen as morally disputable at last.
Talks of regulation and reform follow. However, the speculation itself or the aberrant optimism that lay behind it will not be discussed. 'Nothing is more remarkable than this: in the aftermath of speculation, the reality will be all but ignored.' Why? Because it is easier for group 1 to blame one individual or a few individuals in group 2 than to take responsibility for its own widespread naivety. And also because there is a need to find a cause for the crash that is external to the market itself. After all, the market is believed to be 'a neutral and accurate reflection of external influences; it is not supposed to be subject to an inherent and internal dynamic of error'. The deficit in the federal budget was, for instance, blamed for the 1987 crash. Another anecdotal account of Black Monday has been that the crash was caused by portfolio insurance computer programs which sold stocks as the market went lower.
Galbraith's book is compulsory reading for economists, especially those working on behavioural finance or econophysics. Being an antidote to illusory financial euphoria, the book is thus of interest to the general public as well. Galbraith's own sense of deja vu towards speculative financial bubbles enabled him to predict the crash of 19 October 1987. People really seem to be intrinsically unable to prevent getting stuck in the error-prone dynamics of bull markets, as in his 'bubble story'. But perhaps they have already learned some minor lessons on how to better protect themselves in the aftermath of crashes. Indeed despite the fact that the Black Monday crash was nearly twice as severe as the stock market collapse of 1929, it did not trigger a depression. Likewise the internet-bubble burst of 2000 had a surprisingly modest effect on wealth. Will we finally learn to learn from history?
ok as in introduction, but other texts provide more depth May 1, 2001 18 out of 19 found this review helpful
I bought this book after having read, and enjoyed immensely, Edward Chancellor's "Devil Take the Hindmost". Chancellor's text is a very readable book which serves as an excellent intoduction to financial speculation and bubble-mania. I bought Galbraith on the expectation of some greater insights - Galbraith's book on the Great Crash of 1929 is after all the definitive work on that episode. What I got was an introductory essay on the subject with a few, but not enough (at least for me), acute words of wisdom from the great man.
I should have noted that this book is described as a primer. Neverthless, this is 100 page book that could easily have been fitted into half that with a proper font and pagination. One shouldn't judge a book by its length, rather its quality, but I have to say I was expecting rather more for my money.
All that said, Galbraith's book is an interesting read and his insights into the popular linking of money and intelligence in particular are well articulated. He also resists the temptation to say "I told you so", one of a very few who could rightly claim the foresight to do so.
This is not a bad book, merely an introductory essay. For the interested reader I would suggest jumping straight in with The Great Crash, or turning to Devil Take The Hindmost for a popularist, but nevertheless scholarly overview.
