Book Review: Mean Markets and Lizard Brains

Since I'm reading about a book a week, in a variety of topics including economics, financial markets, financial instruments, behavioural finance, psychology, neuro-psychology, computer science, I thought it would be worthwhile to share the reviews of some these books from time to time with you.

I have already mentioned many books in my posts, but this way, they will have more impact... I will nonetheless try to keep the review short.

So to begin with my very first review, I will talk about Mean Markets and Lizard Brains: How to Profit from the New Science of Irrationality by Terry Burnham. Please note that there are two editions of this book, and that I'm dealing with the 2nd one, which is the most up to date.

The book description tells us the following:

Everyone from journalists to market pros are turning to behavioral finance to explain, analyze, and predict market direction. In contrast to old-school assumptions of cool-headed rationality, the new behavioral school embraces hot-blooded human irrationality as a core feature of both individuals and financial markets. [...] In Mean Markets and Lizard Brains, Terry Burnham, an economist who has a proven ability to translate complex topics into everyday language, reveals the biological causes of irrationality. The human brain contains ancient structures that exert powerful and often unconscious influences on behavior. This "lizard brain" may have helped our ancestors eat and reproduce, but it wreaks havoc with our finances. Going far beyond cataloguing our financial foibles, Dr. Burnham applies this novel approach to all of today's most important financial topics: the stock market, the economy, real estate, bonds, mortgages, inflation, and savings. This broad and scholarly investigation provides an in-depth look at why manias, panics, and crashes happen, and why people are built to want to buy at irrationally high prices and sell at irrationally low prices. Most importantly, by incorporating the new science of irrationality, readers can position themselves to profit from financial markets that often seem downright mean. Mean Markets and Lizard Brains skillfully identifies the craziness that is part of human nature, helps us see it in ourselves, and then shows us how to profit from a world that doesn't always make sense.

Given that I am very much interested in the "lizard brain" and have read a lot about it, and that I am also very much interested in behavioural finance, I thought the book would be an interesting read, although I although considered that I might not learn anything new from it.

In the preface of the second edition, written in June 2008, the author explains how much he was right on all his predictions made in 2005, and that in order to make the second edition, he kept the original first edition text, and just added new comments at the end of each chapter.

The first part of the book (chapters 1 to 3) explain in details why people behave irrationally, and why the "efficient market hypothesis" is wrong in our real world.

These chapters were actually quite a good read and give a very good introduction to the world of behavioural finance. Unfortunately, Terry Burnham then starts talking about monetary policy, financial markets, and economics, and in my opinion he doesn't have any real understanding of any of these. There are many OMG moments, some of which I'm quoting here:

"As Professor Friedman has shown, the amount of money affects economic activiy. Thus a decrease in the amount of money would like harm the overall economy"

OMG: The strongest economic growth periods were all during a stable currency. The Friedmanites have been proven wrong 100 times by the real world, yet, ignorant parrots keep on repeating these nonsensical theories.

If such a currency is used [speaking about tangible currency] [...] then the ability to create money is taken out of the government's hand [...] the entire society would have less money.

OMG: He believes government printing money is a good idea...

Speaking about Japan, he tries to explain why deflation is bad:

[Our host in Tokyo] told us that every year she meets with her landlord to discuss the magnitude of the rent decrease for the following year. [...]

The second problem with deflation is that people really hate taking pay cuts.

Well, this is true, but hey, people love also decreasing rents right? You cannot have your eat your cake and have it as well. I'm guessing when people know that prices decline, they are more prone to also accept a pay cut. The right balance will be found. Burnham is not being rational here. Yet that's the topic of his book!

Then he goes on to explain how much Larry Summers is a great economist who defined the right rate of inflation for the economy to be prosperous and how much the Fed and the government are in control of inflation:

"U.S. inflation rates will be determined by the future decisions made by the Federal Reserve. A prediction of inflation must be based on future decisions of the monetary authorities."

These statements can be true in the case of Zimbabwe, were money is simply printed, but they are not true in the case of the US or the UE where the Central Banks exchange money for debt. Debt cannot grow for ever, as we have been reminded by the collapse of banks and sovereigns during the past couple of years.

Even better:

"The U.S. Monetary authorities did not create inflation."

IF not what have they been doing since 1913?

Extremely different outcomes suggest that people in power determine the inflation rate. [...] I side with those who believe that individuals in charge of the monetary policy determine the inflation rate.

Yet again, history (Great Depression and Greater Depression) prove that this is wrong. Yet he is parroting.

Silly investment advice then keep on coming. Here's the first one:

"Inflation protected bond is always at least as good as the standard bond and usually much better".

NO! If that was the case, nobody would buy anything but TIPS!

Here's the second, just a few lines later:

Company profits have a built-in inflation protection

Since when? Why? How?

Here's yet again an investment perl. He explains why treasuries are a good investment, why the total debt does not matter, and that you cannot lose money:

Because dollars can be created by the United States at no cost, the same would be true if the U.S. debt totaled $35 trillion or $350 trillion. So we still haven't figured out why anyone would be worried about the United States' debt to the world.

Just a few more before finishing:

Because Social Security currently has a surplus, combining it with other accounts makes the deficit look smaller.

[Speaking about the collapse of real estate prices] Japan [...] did not suffer an economic depression

 Chapter Nine is about Real Estate, and the subtitle is "Live in your Home, Make your Money at Work". I thought I would see some lucid analysis, specially given all the talk about lizard brains, irrationality, etc. But that subtitle is very misleading...

Is there a housing bubble? No.

Keep in mind that the book is written in 2008, after the collapse of the subprime market, etc. Yet, he goes on and on:

Can we say that housing was in a bubble and has the bubble now burst? I think not.

Concluding is very difficult. What do I think about this book? Chapters 1 to 3: I'd say 8/10. But then the rest, is 0/10 and is just misinformation and waste of time...

At several occasions, I pinched myself. Yet I do not believe that he is making jokes or that the whole book is just about fooling around. I think he is dead serious...