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Too Smart for Our Own Good

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Too Smart for Our Own Good

Ingenious Investment Strategies, Illusions of Safety, and Market Crashes

McGraw-Hill,

15 min read
10 take-aways
Audio & text

What's inside?

“Free-lunch” investment strategies contribute to the cycle of financial crises. 

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Editorial Rating

8

Qualities

  • Analytical
  • Concrete Examples
  • Insider's Take

Recommendation

You might think that financial crises are mathematically unlikely events, but they happen with surprising frequency. Author and equity manager Bruce I. Jacobs says there’s something wrong about that. He believes that people’s attitudes about risk, liquidity and leverage are often delusional and naive because financial professionals sell them “free-lunch” strategies that promote flawed thinking about efficient markets and rational investors. Despite a tendency for repetition, Jacobs offers some hard-hitting wisdom gleaned from his detailed knowledge and experience in market investing. Fund managers and investors of all types will find value in his exploration of the common causes of financial calamities.

Summary

Is the Financial Sector “Too Smart For Its Own Good”?

Misconceptions and gullibility cause some investors to make the same financial mistakes over and over again. People are attracted to the myth of low-risk, high-return investment opportunities. They fall for the same flawed narratives about risk management,  liquidity and leverage. Markets applaud some kudos-laden theories and a few years’ worth of positive track records during a bull market. Continuing profitability has investors piling in and bubbles forming. Then the crisis comes, which inevitably sees investors trying furiously to offload assets into a panicking market.

Some have used phrases such as “a perfect storm” to describe the worst financial crises, but what’s theoretically extremely unlikely seems to occur with alarming frequency. The reason financial crises are so surprisingly common is due to the not-so-smart set of typical mistakes and fallacies to which actors within the financial system fall prey. Three different episodes of boom and bust can illustrate these habitual tendencies.

About the Author

Bruce I. Jacobs is the co-founder and co-director of Jacobs Levy Equity Management. He is the author of several books on investing and financial crises.

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