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Kenneth J. Arrow Lecture Series
Speculation, Trading, and Bubbles (Kenneth J. Arrow Lecture Series) by Scheinkman, José A. (2014) Hardcover
As long as there have been financial markets, there have been bubbles -- those moments in which asset prices inflate far beyond their intrinsic value, often with ruinous results. Yet economists are slow to agree on the underlying forces behind these events. In this book Jos? A. Scheinkman offers new insight into the mystery of bubbles. Noting some general characteristics of bubbles -- such as the rise in trading volume and the coincidence between increases in supply and bubble implosions -- Scheinkman offers a model, based on differences in beliefs among investors, that explains these observations.Other top economists also offer their own thoughts on the Sanford J. Grossman and Patrick Bolton expand on Scheinkman's discussion by looking at factors that contribute to bubbles -- such as excessive leverage, overconfidence, mania, and panic in speculative markets -- and Kenneth J. Arrow and Joseph E. Stiglitz contextualize Scheinkman's findings.
Hardcover
First published July 9, 2013
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About the author
José A. Scheinkman
9 books2 followersJosé Alexandre Scheinkman (born January 11, 1948) is a Brazilian-American mathematical economist, currently the Theodore A. Wells '29 Professor of Economics at Princeton University. He spent the bulk of his career at the University of Chicago, where he served as department chair immediately prior to his departure for Princeton. Prior to immigrating to the United States to study for his PhD in Economics at the University of Rochester, he grew up and was educated in Rio de Janeiro, Brazil. While his research interests have spanned a wide range of topics, he is best known for his work in mathematical economics (particularly dynamic optimization) and finance, oligopoly theory and the social economics of cities and crime; he also help spur the development of work at the intersection of economics, finance and physics. Scheinkman also famously pioneered the now-ubiquitous application of academic financial theory to practical risk management of fixed incomes during a leave he took as Vice President in the Financial Strategies Group at Goldman, Sachs & Co. during the late 1980s.
Since coming to Princeton, Scheinkman's research has focused increasingly on finance (both applied, in his work on bubbles, and mathematical, in his work with Lars Hansen). He continues his involvement in practical finance as a founder and partner of Axiom Investments, a successful hedge fund. as well as in the public affairs of Brazil through writing and consulting. He is also well known as the thesis adviser of prominent economists including Paul Romer, Albert (Pete) Kyle, Edward Glaeser, Tano Santos, Alberto Bisin and Glen Weyl. He is a member of the United States National Academy of Sciences and a Fellow of the Econometric Society and the American Academy of Arts and Sciences.
He is married to the New York psychotherapist Michele Scheinkman and is the father of Andrei Scheinkman.
Scheinkman's parents, Samuel and Sara, were members of Rio de Janeiro's small Jewish community. As leftists, his parents were dissidents during the military government in Brazil from 1964-85. Scheinkman studied for his BA in economics (1969) and MA in Mathematics (1970) at the Universidade Federal do Rio de Janeiro and the Instituto de Matemática Pura e Aplicada, also in Rio. During his studies he met his future wife, Michele Zitrin, at an annual summer retreat taken by many Jews in Rio. Together and married at the age of 22, they moved to New York so that he could study for his PhD under Lionel McKenzie and Buzz Brock at the University of Rochester. Two years into his PhD, eventually granted in 1974, Scheinkman was hired as an assistant professor in the Department of Economics at the University of Chicago, where he spent the next 26 years, with the support of Brock who had moved there.
After only three years, Scheinkman was promoted to tenure as an associate professor in 1978 and eventually as a full professor in 1981. While at Chicago, Scheinkman helped build the foundation of mathematical economics at at department often better known for economic intuition than rigorous theory. Scheinkman also participated actively in the interface between economics and physics organized by the Santa Fe Institute and often traveled to visiting positions in France, a country for which he has had a lifetime affection. He served as chair of the Department of Economics from 1995-1998. Following his chairmanship, Scheinkman moved to New York City, and Princeton University, in 1999.
Scheinkman is perhaps most closely associated with his classic six page paper from 1979 with L. M. Benveniste "On the Differentiability of the Value Function in Dynamic Models of Economics", which provides conditions on model primitives allowing for the standard differentiable treatment of infinite-horizon dynamic models.[5] At least as influential, however, is his very different work with David Kreps in 1983 showing that "Quantity precommitment and Bertrand competition yield Cournot outcomes" and thus provi
Since coming to Princeton, Scheinkman's research has focused increasingly on finance (both applied, in his work on bubbles, and mathematical, in his work with Lars Hansen). He continues his involvement in practical finance as a founder and partner of Axiom Investments, a successful hedge fund. as well as in the public affairs of Brazil through writing and consulting. He is also well known as the thesis adviser of prominent economists including Paul Romer, Albert (Pete) Kyle, Edward Glaeser, Tano Santos, Alberto Bisin and Glen Weyl. He is a member of the United States National Academy of Sciences and a Fellow of the Econometric Society and the American Academy of Arts and Sciences.
He is married to the New York psychotherapist Michele Scheinkman and is the father of Andrei Scheinkman.
Scheinkman's parents, Samuel and Sara, were members of Rio de Janeiro's small Jewish community. As leftists, his parents were dissidents during the military government in Brazil from 1964-85. Scheinkman studied for his BA in economics (1969) and MA in Mathematics (1970) at the Universidade Federal do Rio de Janeiro and the Instituto de Matemática Pura e Aplicada, also in Rio. During his studies he met his future wife, Michele Zitrin, at an annual summer retreat taken by many Jews in Rio. Together and married at the age of 22, they moved to New York so that he could study for his PhD under Lionel McKenzie and Buzz Brock at the University of Rochester. Two years into his PhD, eventually granted in 1974, Scheinkman was hired as an assistant professor in the Department of Economics at the University of Chicago, where he spent the next 26 years, with the support of Brock who had moved there.
After only three years, Scheinkman was promoted to tenure as an associate professor in 1978 and eventually as a full professor in 1981. While at Chicago, Scheinkman helped build the foundation of mathematical economics at at department often better known for economic intuition than rigorous theory. Scheinkman also participated actively in the interface between economics and physics organized by the Santa Fe Institute and often traveled to visiting positions in France, a country for which he has had a lifetime affection. He served as chair of the Department of Economics from 1995-1998. Following his chairmanship, Scheinkman moved to New York City, and Princeton University, in 1999.
Scheinkman is perhaps most closely associated with his classic six page paper from 1979 with L. M. Benveniste "On the Differentiability of the Value Function in Dynamic Models of Economics", which provides conditions on model primitives allowing for the standard differentiable treatment of infinite-horizon dynamic models.[5] At least as influential, however, is his very different work with David Kreps in 1983 showing that "Quantity precommitment and Bertrand competition yield Cournot outcomes" and thus provi
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Displaying 1 - 2 of 2 reviews
March 2, 2020
A relatively short book, it's really an academic paper with some responses attached. The theory presented is interesting enough, and even the formal model is understandable without too much of a mathematical lift. The theory of bubbles essentially boils down to this, that there are rational traders and noise traders who are overly optimistic about the asset (the optimism, though exogenous to the model can be through hopes of technological innovation for a "new economy" for example). If there are enough of those latter traders, and short selling is limited for some reason (often because the costs of borrowing may be too high for example), the holder of the asset essentially values the asset at its intrinsic (cash flow generating) value plus the value of an option to re-sell the asset to one of these optimistic traders (a put). Thus, the option to sell the asset to a "greater fool" makes it rational for the price of the asset to be above its intrinsic value.
This theory has some virtues in that it 1) more precisely defines a bubble (it is hard to know if something is overvalued, it may only be with hindsight that we think an asset was overvalued, and even then we can never be sure), and 2) it explains the increase in trading volume that tends to accompany the popping of bubbles. This theory would also explain why an increase in the supply of the asset generally causes bubbles to pop (historical examples include the insiders selling internet stock at the peak of the dot-com bubble or the proliferation of bubble stock companies during the south sea bubble). The optimistic trader can acquire the asset more easily, and this decreases the value of the put option. This put option idea also explains why low interest rates can lead to bubbles. The rho of put options is negative, and low interest rates could lead to easy leverage by these optimistic traders. If those traders have limited capital, it's possible that the option becomes close to zero in value (the greater fools can't afford to be fools). Leverage, allows these greater fools to be even bigger.
The commentary and response were interesting as well. Some of the respondents focused on how the theory did not explain why bubbles ended, or did not take into account excessive risk taking or why institutions were so leveraged (and who is lending to those optimistic traders). There's still disagreement with what should be done about bubbles, since bubbles sometimes do fund new innovations, but reduce consumption when they burst. There's a brief debate about whether private actors had skewed incentives, and if government regulators are any better. Overall, a short but enlightening read.
This theory has some virtues in that it 1) more precisely defines a bubble (it is hard to know if something is overvalued, it may only be with hindsight that we think an asset was overvalued, and even then we can never be sure), and 2) it explains the increase in trading volume that tends to accompany the popping of bubbles. This theory would also explain why an increase in the supply of the asset generally causes bubbles to pop (historical examples include the insiders selling internet stock at the peak of the dot-com bubble or the proliferation of bubble stock companies during the south sea bubble). The optimistic trader can acquire the asset more easily, and this decreases the value of the put option. This put option idea also explains why low interest rates can lead to bubbles. The rho of put options is negative, and low interest rates could lead to easy leverage by these optimistic traders. If those traders have limited capital, it's possible that the option becomes close to zero in value (the greater fools can't afford to be fools). Leverage, allows these greater fools to be even bigger.
The commentary and response were interesting as well. Some of the respondents focused on how the theory did not explain why bubbles ended, or did not take into account excessive risk taking or why institutions were so leveraged (and who is lending to those optimistic traders). There's still disagreement with what should be done about bubbles, since bubbles sometimes do fund new innovations, but reduce consumption when they burst. There's a brief debate about whether private actors had skewed incentives, and if government regulators are any better. Overall, a short but enlightening read.
December 15, 2024
A lecture about Scheinkman's theory of bubbles. A bit dry and mathy, dominated by rational expectations. Nonetheless a fascinating theory of the origin and inflection points of financial bubbles.
Displaying 1 - 2 of 2 reviews