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A Demon of Our Own Design Epub: A Book Review
If you are interested in learning more about the complex and often unpredictable nature of financial markets, you might want to read A Demon of Our Own Design, a book by Richard Bookstaber, a former Wall Street risk manager and regulator. In this book, Bookstaber argues that financial markets are not efficient and rational, but rather prone to creating their own crises and disasters. He uses his insider knowledge and experience to illustrate how market innovations, regulations, and human behaviors can interact in unexpected and dangerous ways, leading to systemic risks and meltdowns. In this article, we will review the main argument, evidence, and implications of the book, and provide some FAQs for those who want to know more.
A Demon Of Our Own Design Epub
The main argument of the book: How financial markets create their own crises
Bookstaber's main argument is that financial markets are not stable and self-correcting, but rather unstable and self-destructive. He claims that financial markets are like complex systems that can exhibit emergent properties, feedback loops, and nonlinear dynamics. These features make them hard to understand, predict, and control. Moreover, he argues that financial markets are not only complex, but also tightly coupled, meaning that they have many interdependencies and interactions that can amplify shocks and propagate failures across the system. He compares financial markets to nuclear power plants or space shuttles, which are also complex and tightly coupled systems that can suffer from catastrophic accidents.
According to Bookstaber, financial markets create their own crises because they are constantly evolving and innovating. He explains that market participants, such as traders, investors, bankers, regulators, and rating agencies, are always trying to gain an edge over their competitors by creating new products, strategies, models, and rules. However, these innovations often have unintended consequences that increase the complexity and tight coupling of the system. For example, he shows how derivatives, such as options and futures contracts, can create leverage, volatility, and contagion effects that can destabilize the market. He also shows how regulations, such as capital requirements and margin calls, can create incentives for risk-taking and liquidity crunches that can exacerbate market crashes.
The main evidence of the book: Examples of market failures and systemic risks
Bookstaber supports his argument by providing several examples of market failures and systemic risks that he witnessed or participated in during his career as a risk manager and regulator. He analyzes some of the most notorious financial crises of the past decades, such as the 1987 stock market crash, the 1998 Long-Term Capital Management (LTCM) collapse, the 2000 dot-com bubble burst, and the 2007-2008 subprime mortgage crisis. He reveals how these crises were not caused by external shocks or random events, but rather by internal flaws and vulnerabilities of the financial system.
For instance, he explains how the 1987 stock market crash was triggered by a combination of portfolio insurance strategies, index arbitrage trading, and computerized trading programs that created a positive feedback loop that drove prices down rapidly. He also explains how the LTCM collapse was caused by a hedge fund that used excessive leverage and mathematical models to exploit arbitrage opportunities in various markets. However, the fund failed to account for rare events and liquidity risks that occurred during the Russian default crisis in 1998. He also explains how the subprime mortgage crisis was fueled by a securitization process that transformed risky loans into highly rated securities that were sold to investors around the world. However, the process relied on faulty assumptions, ratings, and incentives that created a moral hazard and a misalignment of interests among the market participants.
The main implications of the book: What can we learn from the book and how can we prevent future disasters?
Bookstaber's book has several implications for both market participants and regulators who want to understand and prevent future financial disasters. He suggests that traditional approaches to risk management and regulation, such as diversification, hedging, and capital adequacy, are not sufficient or effective in dealing with complex and tightly coupled systems. He argues that these approaches often fail to capture the nonlinear and emergent behaviors of the system, and can even create more problems by increasing the complexity and tight coupling of the system.
Instead, he proposes some alternative approaches that are based on the principles of complexity theory and engineering. He recommends that market participants and regulators should adopt a more humble and adaptive attitude towards the financial system, and acknowledge its inherent uncertainty and unpredictability. He also recommends that they should adopt a more holistic and systemic perspective, and focus on the interactions and interdependencies among the components of the system. He also recommends that they should adopt a more precautionary and resilient approach, and design the system in a way that reduces its complexity and tight coupling, and increases its transparency and robustness.
Conclusion: A summary of the main points and a recommendation for the readers
In conclusion, A Demon of Our Own Design is a book that offers a unique and insightful analysis of the financial system and its crises. The book challenges the conventional wisdom that financial markets are efficient and rational, and shows how they are complex and irrational. The book provides several examples of market failures and systemic risks that illustrate how financial markets create their own crises. The book also provides some suggestions for market participants and regulators who want to understand and prevent future disasters. The book is written in an engaging and accessible style, with many anecdotes and stories from the author's experience. The book is suitable for anyone who is interested in learning more about the financial system and its challenges. We highly recommend this book to our readers.
FAQs: Some common questions and answers about the book
Q: Who is the author of the book?
A: The author of the book is Richard Bookstaber, a former Wall Street risk manager and regulator who has worked for some of the most prominent financial institutions, such as Morgan Stanley, Salomon Brothers, Citigroup, Moore Capital, Bridgewater Associates, and the U.S. Securities and Exchange Commission. He has a PhD in economics from MIT, and has published several academic papers and books on finance, economics, and risk management.
Q: What is an epub format?
A: An epub format is a digital file format that is designed for reading e-books on various devices, such as computers, tablets, smartphones, e-readers, etc. An epub format allows for flexible layout, reflowable text, embedded images, hyperlinks, bookmarks, etc. An epub format can be downloaded from various online sources or converted from other file formats.
Q: Where can I find an epub version of the book?
A: You can find an epub version of the book on various online platforms or websites that offer e-books for download or purchase. For example, you can find an epub version of the book on Amazon Kindle Store, Google Play Books, Apple Books, Barnes & Noble Nook Store, Kobo Store, etc. You can also find an epub version of the book on some free or public domain websites that offer e-books for download or sharing. For example, you can find an epub version of the book on Project Gutenberg, Internet Archive, Open Library, etc.
Q: How can I read an epub version of the book?
A: You can read an epub version of the book by using an e-book reader application or software that supports epub format. For example, you can read an epub version of the book by using Amazon Kindle App, Google Play Books App, Apple Books App, Barnes & Noble Nook App, Kobo App, etc. You can also read an epub version of the book by using some web browsers or extensions that support epub format. For example, you can read an epub version of the book by using Google Chrome Browser, Firefox Browser, Microsoft Edge Browser, etc.
Q: What are some other books similar to this one?
A: Some other books similar to this one are:
The Black Swan: The Impact of the Highly Improbable, by Nassim Nicholas Taleb
The Big Short: Inside the Doomsday Machine, by Michael Lewis
Flash Boys: A Wall Street Revolt, by Michael Lewis
Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System - and Themselves, by Andrew Ross Sorkin
This Time Is Different: Eight Centuries of Financial Folly, by Carmen M. Reinhart and Kenneth S. Rogoff