Today we want to tell you about some good old-fashioned summer reading. But before we do, a brief note on today's Fed announcement.
Much as we expected, the Fed was generally unfazed by recent market jitters and headlines of credit woes. By the end of the trading session, the stock market seemed to have indicated that if the Fed isn't overly worried about credit, neither should it. The S&P 500 finished up nicely today. Rate cuts in the immediate future seem remote at this time—if anything, Bernanke's statement was rather hawkish. The Fed made it rather clear potential inflation continues to be its main focus, not housing, the economy, or a credit crunch. See yesterday's MarketMinder commentary for our detailed thoughts: "No Credit Messiah Necessary" (8/6/2007).
Now back to the bibliophilic topic at hand. The publishing world has lately taken a liking to the dismal science—you might even say economics is undergoing something of a renaissance in the literary world. Indeed, economics has become chic dinner conversation again via a rather curious avenue: psychology.
MarketMinder has long touted the importance of recent advances in neuroscience and cognitive studies for studying and understanding markets and investing. You can peruse the "Behavioral Finance" category of our past daily commentaries for over 25 daily missives on psychology and markets. Or, see our recurring column, "Neuroeconomics" for even more coverage.
Merging economics and psychology has produced some fascinating, and very accessible reads lately. Seeing markets as a function of human behavior instead of just mathematics is empowering—you'll probably find you know a lot more about economics than you thought. (Economists tend to use fancier words to make their concepts more formal…and also probably to feel important.)
Daniel Gross has written an interesting review of two new economics books in last week's New York Times Book Review.
Thy Neighbor's Stash
By Daniel Gross, The New York Times
Gross's first review is an anthropological study of wealth disparity in the US.
How Rising Inequality Harms the Middle Class
By Robert H. Frank.
We'd recommend ignoring the polarizing rhetoric about income gaps and wage disparity, and instead focus on the book's fascinating analysis of human motivation. Gross cites a "societywide arms race for goods" that gives insight to how humans really think—not as "rational" in an objective sense, but always in a relative way.
For instance, it may be true that everyone has a bigger and nicer TV today than they did 30 years ago, but the guy with the 40 inch set is jealous of the richer guy with the 60 inch flatscreen. Why? Because people are generally more interested in their standing relative to others than any absolute gains they may enjoy. This is a quirk of behaviorism that's also a very powerful economic insight. It is a way of looking at the world through the eyes of science and evolution, not classical theories about rational economic man. For more on this topic, see our past commentary harking all the way back to 3/22/07, "This Ain't a Scene…it's a (Cognitive) Arms Race."
Additionally, a spate of new books detailing all sorts of curious examples of psychology and economics in action are sprouting up:
The Economic Naturalist: In Search of Explanations for Everyday Enigmas
By Robert H. Frank
More Sex Is Safer Sex: The Unconventional Wisdom of Economics
By Steven E. Landsburg
Discover Your Inner Economist: Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist
By Tyler Cowen
Lastly, there's nothing better than a feud between economists, is there? Economists John Lott and Steven Levitt are both very bright individuals, and they disagree on just about everything. This makes for some interesting debate. Luckily, they've written dueling books to detail the argument!
Freedomnomics: Why the Free Market Works and Other Half-Baked Theories Don't
By John R. Lott, Jr.
Freakonomics: A Rogue Economist Explores the Hidden Side of Everything
By Steven D. Levitt and Stephen J. Dubner
Details of the feud can be found here:
John Lott, Loaded
By Robert VerBruggen, The American
While none of these books are going to teach you to beat the stock market, they will provide fascinating insights into the psychology of economics and the reasons behind our often irrational behavior. And just as important, they're entertaining and stimulating additions to any summer reading list.