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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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