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File: The Undercover Economist Pdf 127411 | Joim Br Harfordsiegel
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 ...

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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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...Journal of investment management vol no pp joim www com book reviews markkritzman senior editor the undercover few years has made an effort to can go both ways similarly economist bring economics main does not read bytimharford stream this is be sure ily accept that a safer birth reviewedbyjavierestrada iese easy task economic think control device will reduce business school barcelona spain ing often goes through number unwanted pregnan three stages truth suggested cies reduced risk lead alfred marshall one by german philosopher increase in founding fathers arthur schopenhauer first it sexual encounters and whether used suggest rst ridiculed then violently pregnancies work out results mathemati opposed nally or decrease empirical ques cally put them into accepted as self evident brilliant tion theory again ordinary language if second economists such gary becker reasoning step was possible he advised judge richard posner who also explain why indi burnthemath istronglybelieve have pionee...

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