Akerlof – Balchunas – Cohen – Shiller

In today’s commentary, we offer three recommendations for an early start on this year’s summer reading. Though all three books are scholarly and extensively researched, they are also eminently readable. Here they are, in alphabetical order by author.

Nobel laureates George Akerlof and Robert Shiller, both of whom I’ve had the opportunity to meet, are pleasant and easy personalities who have combined efforts in the past with great success. Their newest offering is Phishing for Phools, the Economics of Manipulation & Deception, in which the authors dispel the notion that free markets provide us with material well-being, as if by an invisible hand. Rather, they argue, markets harm as well as help us. 

Master storytellers, Akerlof and Shiller illuminate their points with anecdotes and engage readers with imagery and analogies. Here’s a quote from the introductory text of the chapter on innovation.

“If current economics were written as music, it would be in C major. It sings praise for the free markets, as churchgoers at Christmastime stand up and sing the Hallelujah Chorus. The purpose of this book is to make economics more subtle. Being aware of the benefits of free markets should not also blind us to their defects. We want an economics in a minor key, more New World Symphony than Hallelujah Chorus. In all the previous chapters we have given examples of how phishing pollutes otherwise good economic equilibria. Here we apply this in a new context: to economists’ interpretations of economic growth.”

Akerlof and Shiller discuss Facebook, a certain creation of the New World Symphony:

“One of the best things about an electric light is the switch; it allows you to turn if off. Facebook can always be turned off; but, according to students at Yale we interviewed, its users often lack the mental discipline to do so, even when they know it would make them happier. All of our interviews pretty much followed the same course.”

We will leave readers to examine Akerlof and Shiller’s discussion of the asymmetry of Facebook’s ubiquitous “likes” and far rarer “dislikes.” Start this chapter on page 96.

Eric Balchunas is a senior ETF analyst at Bloomberg. His book is The Institutional ETF Toolbox: How Institutions Can Understand and Utilize the Fast-Growing World of ETFs, an institutional investor’s guide to utilizing exchange-traded funds and taking full advantage of the innovative new products in their expanding repertoire. (http://www.amazon.com/gp/product/B01CGEKOLM/ref=dp-kindle-redirect?ie=UTF8&btkr=1)

Eric’s experience spans decades. I’ve interviewed with him several times on Bloomberg TV, and he and I have privately discussed the evolution of the ETF from its initial launch in 1993 with SPY, its second issue in 1997 of DIA, and the subsequent broadening of the sector’s spiders at around the turn of the millennium. At Cumberland, we started to use ETFs in separate accounts in 1999 as a way to deal with the tech stock bubble. For a YouTube clip about our launch of ETF separate account usage, click here: https://www.youtube.com/watch?v=TApo-mu3JKs

We excerpt now from another page 96, this time from Eric’s book. He has covered a monumental list of ETF subtopics and identified insights worthwhile to any serious investor, including this one:

“The underlying positions in the ETF all need to be given a weighting. This can vary greatly. Most of the big, popular ETFs that institutions use are market cap weighted, which is weighting companies based on their size. However, many ETFs track indexes that don’t weight their holdings using market cap. Frequently called ‘smart beta,’ these ETFs will use dividends, fundamentals, or factors such as momentum or volatility to weight holdings. There are over 20 different weighting methodologies and counting. We will deep dive into smart beta later in the book.”

Readers are invited to jump into the pool with Eric Balchunas. We did.

Number three in this alphabetical authors list is an interesting book by Edward Cohen: Athenian Prostitution: The Business of Sex, a pioneering study that examines the sale of sex in classical Athens from a commercial (rather than from a cultural or moral) perspective. 

On still another page 96, Ed ends his chapter on protecting the city of Athens from erotic greed with this takeaway.

“But the expressive effect of a single law does not alone determine a society’s entire response to the phenomenon targeted by that legislation. Athens many not have wanted its political advisers and leaders to include individuals who planned an inappropriate emphasis on their financial advantage. The fact that prostitution remained lawful — operating through formal contractual arrangements — may have had a somewhat countervailing positive expressive effect on society’s overall attitude toward providers of commercial sex.”

What struck me most about Ed Cohen’s book is how the lessons of ancient Greek politics are still apt today. Substitute the Citizens United Supreme Court decision or the 2016 political campaign epithets hurled about money and politics, manipulation and influence. One may conclude that little has changed since Jupiter (Jupiter is Roman, the earlier used Zeus is Greek: we’ll use the Roman names here.) created Pandora as the first woman and sent her to Prometheus as punishment. Jupiter had colleagues (other gods) who quickly changed the script. Venus gave Pandora her beauty. Mercury infused her with the powers of persuasion. Apollo added music. Prometheus’ brother Epimetheus reacted warmly, welcoming his gift. Was this genuine? Or was it a seduction?

From this ancient myth came the first warning about Greeks bearing gifts as Prometheus cautioned his brother not to trust Jupiter’s presents. The famous wooden horse rolled into Troy a lot later. 

In a version of the famed legend, Pandora’s box held all the plagues that have befallen mankind. An alternate version says the box contained all the blessings of the gods. After the box was opened and its contents unleashed, only hope remained. All else escaped.

Ed Cohen is a master scholar of Greek classics. There are many citations in the Greek language. His work is a tour de force in academic research unique in its examination of Athenian prostitution and the influences and outcomes derived therefrom. I admit to reading Ed Cohen’s book and constantly referring to Thomas Bulfinch’s masterful treatise on mythology. 

We wish to thank Ed Cohen, Eric Balchunas, George Akerlof, and Robert Shiller — you have given us literary gifts.

We hope our readers enjoy.

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