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JOURNAL OF INVESTMENT MANAGEMENT,Vol. 4, No. 2, (2006), pp. 82–85
©JOIM2006
JOIM
www.joim.com
BOOK REVIEWS
MarkKritzman, Senior Editor
THE UNDERCOVER few years has made an effort to can go both ways. Similarly,
ECONOMIST bring economics to the main- an economist does not read-
ByTimHarford stream. This is not, to be sure, ily accept that a safer birth-
(ReviewedbyJavierEstrada, IESE an easy task. Economic think- control device will reduce the
Business School, Barcelona, Spain) ing often goes through the number of unwanted pregnan-
three stages of truth suggested cies; the reduced risk will lead
Alfred Marshall, one of the by the German philosopher to an increase in the number of
founding fathers of Economics, Arthur Schopenhauer: First it sexual encounters, and whether
used to suggest that one first is ridiculed; then it is violently unwanted pregnancies increase
work out results mathemati- opposed; and finally is it is or decrease is an empirical ques-
cally, and then put them into accepted as self-evident. Brilliant tion Theory, again, can go both
ordinary language. If the second economists such as Gary Becker ways. Economic reasoning can
step was not possible, he advised: and Judge Richard Posner, who also be used to explain why indi-
Burnthemath!Istronglybelieve have pioneered the application viduals may rationally choose
that the beauty of economics of economic analysis to “non- to get fatter or to have more
lies in the intuition behind economic” issues, have spent accidents, however strange that
the math, that the economic manylong years on the first two maysound.
approach has much to teach stages before finally arriving at
to non-economists, and that the third. Harford’sbookconsistsofaselec-
a course of essential economic tion of topics chosen to illustrate
thinking should be required Agoodeconomistdoesnotread- theeconomicshidingbehindour
either in high-school or in all ily accept the idea that recycling everyday lives. He discusses, for
college degrees. It is in this light paper increases the number of example, the complex issue of
that books like The Undercover trees. Ifplantingtreesismadeless price discrimination with sim-
Economist, by Tim Harford, are attractivebythereduceddemand ple examples such as the differ-
always welcomeanduseful. for paper, the supply of trees will ent prices Starbucks charges for
shrink, and whether the num- different types of coffee, the dif-
Harford is one of several ber of trees increases or decreases ferent prices Disneyland offers
economists who over the last is an empirical question. Theory to locals and tourists, and the
82 SECONDQUARTER2006
BOOKREVIEWS 83
different prices for the same why they had mixed results in current popularity of these top-
items observed in two differ- the US. ics.) And I would have replaced
ent Marks & Spencer stores just those three chapters with discus-
1,500 feet away from each other. Perhaps in an effort to reach a sions on the economic approach
wider audience, Harford steers to “non-economic” issues such
Harford also discusses externali- away from microeconomic rea- as crime, education, discrimina-
ties, a core issue in economics, soning and tackles some hot tion, marriage, sex, and sports,
with stories about traffic jams macro issues, such as poverty, to name but a few.
in big cities, the recent conges- globalization, and China. In a
tion tax drivers must now pay in nutshell (and oversimplifying), Readers who enjoy Harford’s
London, andthemarketforper- poverty is explained as stem- book may also want to consider
mitstoemitsulfurdioxideinthe ming from corruption and weak Freakonomics by Steven Levitt
US. He also deals with the eco- institutions; globalization as the andStephen Dubner; Sex, Drugs
nomics of information, address- consequence of David Ricardo’s & Economics by Diane Coyle;
ing issues such as moral hazard theoryofcomparativeadvantage; Naked Economics by Charles
and adverse selection, and again and China’s growth as the result Wheelan; Hidden Order by
brings them to the mainstream of Deng Xiaoping’s replacement David Friedman; Free Lunch by
withseveralexamplessuchaswhy of a socialist system that gave the David Smith; and Fair Play
healthinsurancerestsontheexis- wrong incentives with a market- by Steven Landsburg. A special
tence of asymmetric information oriented system that does the mentiongoestothebookthat,in
(or, as he calls it, mutual igno- opposite. (I did say I was over- myview,remainsthebenchmark
rance), why companies spend simplifying!) and still the best of this type,
heavilyonadvertisement,and,of The Armchair Economist, also by
course, whyitisdifficulttobuya Anydownsides?Yes, most books Steven Landsburg.
decentusedcar. have them and this one is no
exception. Iwouldhavecertainly In short, Tim Harford should
Gametheory, which has become liked to see the name and insight be congratulated for his effort
inevitably intertwined with eco- of Ronald Coase in the discus- to bring the essential economic
nomics (particularly after the sion of externalities. (The mar- approach into the mainstream.
Nobel prizes awarded to John ket for trading pollution permits He is witty, entertaining, and
Harsanyi, John Nash, and was inspired by his theorem.) above all, insightful. I have no
Reinhard Selten in 1994, and I would have liked to see a bet- doubt that you will both enjoy
to Robert Aumann and Thomas ter and longer discussion of the andlearnfromreadingthisbook.
Schellingin2005),isnotignored economicapproachtoindividual
in the book. In one of the decision making. (Why people
chapters I found most interest- mighthavemoreaccidentswhen THE FUTURE FOR
ing, Harford insightfully dis- seatbelts become mandatory? INVESTORS
cusses the government auctions Why people might get fatter By Jeremy Siegel
for third-generation (3G) cell- whenlow-fatfoodsbecomepop- (ReviewedbyJavierEstrada, IESE
phoneservices, carefully explain- ular?) I could have lived without Business School, Barcelona, Spain)
ing why the auctions largely the chapters on poverty, global-
failed in New Zealand, why they ization, and China. (They seem Veryfewbooksachievethehonor
were successful in the UK, and tobetheretoridethewaveofthe of becoming instant classics, and
SECONDQUARTER2006 JOURNAL OF INVESTMENT MANAGEMENT
84 BOOKREVIEWS
JeremySiegel’s Stocks for the Long whilepayinghighdividends.Itis The fourth part, “The Aging
Run, now in its third edition, precisely the reinvestment of these Crisis and the Coming Shift
is most likely one of those. dividends at low stock prices that in Global Economic Power,” is
Siegel’s new book,The Future for yields the highest returns. (And it perhaps the one which readers
Investors, is plainly and simply is for this reason that, despite of finance books will be most
a must-read follow-up. It is said all the bad news for tobacco unfamiliar with. Siegel skillfully
that the sequel a movie is usu- companies over the last several first scares investors with some
ally not as good as the first; when years, Phillip Morris, now Altria demographic trends (the aging
it comes down to Siegel’s sequel, Group, is the best performing of the population, the retire-
this commonly-held belief does of all the original components of mentofbabyboomers)andtheir
not apply. the S&P500.) implications (unfunded pension
funds, declining stock prices),
Thefactthatthisbookisasequel In the second part, “Overvalu- and then gives them hope with
of the first (Siegel calls it a “nat- ing the Very New,” Siegel gives a “global solution” (the popula-
ural extension”) is made clear in investorsafewhintstohelpthem tion in developing countries is
thepreface, inwhichSiegelstates spot bubbles (watch for inten- much younger and will eventu-
thatinthespeakingengagements sive and increasing media cov- ally buy the baby boomers’ assets
that followed the publication of erage, watch for high valuations thuspreventingamarketslump).
his first book he was often asked based on concepts and names
two questions: (1) Which stocks instead of earnings) and renews Finally, inthelastpart,“Portfolio
shouldinvestors buy for the long hischargesagainstgrowthstocks. Strategies,” Siegel tackles some
run? and (2) What will happen Standing on the shoulders of well-known issues, such as inter-
toportfolioswhenbabyboomers Warren Buffett and Peter Lynch, national diversification, country
retireandstartsellingtheirs?This he makes a convincing argu- versus industry diversification,
book largely is an attempt to ment for avoiding hyped stocks the home bias, and the lack of
answer both questions. ingrowthindustriesandfocusing a positive relationship between
on the best stocks of struggling growth and returns (the fastest
The book is divided into five industries instead. growing countries are not those
parts. In the first, “Uncovering that deliver the largest returns
the Growth Trap,” Siegel takes In the third part, “Sources because growth tricks investors
one step further a message that of Shareholder Value,” Siegel into overpaying for stocks). And
comes out clear in his first book: defines the concepts of bear showing a flair for marketing,
Dividends are the main driver market protector and return he offers investors the D-I-V
of stock returns. At the same accelerator, and links both to directive: Investors should focus
time, he advises investors to stay dividends, the underlying theme on companies that have sus-
clear from hot stocks and indus- of the book. Dividends provide tainable cash flows and return
tries; it is when investors pay protection against bear markets themasdividends; should recog-
toomuchforglamourstocksthat whenreinvestedatthelowprices nize the international economic
subsequent returns are poor. In prevailing in these markets; they forces that are shifting power
fact, Siegel shows that the best also enhance returns once the away from the US, Europe,
returns are obtained in out-of- extra shares bought at depressed and Japan toward China, India,
favor companies that manage to prices eventually go up in and the developing world;
survive negative trends all the price. and should buy stocks with
JOURNAL OF INVESTMENT MANAGEMENT SECONDQUARTER2006
BOOKREVIEWS 85
reasonable valuations relative to treatment of transaction costs buyingafewextrasharesisalways
their expected growth. and taxes, both of which are expensive once transaction costs
particularly relevant when buy- are taken into account.
I have a few quibbles with some ing high-dividend stocks. I also
issues but they haven’t prevented havesomereservationsaboutthe All in all, I found the book thor-
me from largely agreeing with ability of small investors to rein- oughlyenjoyableandinstructive.
Siegel’s views and recommen- vest their dividends, given that if I have been recommending it to
dations. Just for the record, I their stake in a company is small practitioners and students, and
would have liked to see a better so will be their dividends, and certainly I recommend it to you.
SECONDQUARTER2006 JOURNAL OF INVESTMENT MANAGEMENT
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