The New Financial Order: Risk in the Twenty-First Century
||List Price: $29.95
Amazon.com Price: $20.97
- Media: Hardcover
Publisher: Princeton Univ Pr (02 April, 2003)
- Average Customer Review:
Based on 7 reviews.
Amazon.com Sales Rank: 4,706
Overall not very convincing
Whether it is home value insurance or other improvements that Shiller offers to fix the market, the one question that Shiller never deals with is why those policies don't already exist. He simply assumes that he is smarter than the market and that others have made mistakes in not offering these options. Might there be moral hazard problems in home value insurance? No discussion is offered. This approach of simply asserting an "optimal" arrangement without really asking why it doesn't exist if it is so "optimal" is something that infects a lot of economics, but you would think that if a service is so valuable the first question would be "why doesn't the market already provide this?" Instead Shiller's presumption that he is so smart.
A fairly interesting book
In the last two decades fascinating developments and innovations have occurred in the field of finance. Now called financial engineering, the techniques used therein are dependent on highly sophisticated constructions in mathematics. Risk analysis has been a large part of this drive for innovation in finance, and is the subject of this book. The author proposes some "radical" innovations for risk management, and it is fascinating reading. Those who welcome new ideas and proposals in finance should find the book interesting, but the book is addressed to a non-technical general audience, and so most of the mathematical justification behind the ideas is left out. However, references are given for the author's work and others he has collaborated with for the reader who needs a more quantitative approach. There are some philosophical threads in the book that are somewhat troubling, for those who do not agree with the political and moral philosophy of John Rawls (who the author uses as a "foundation"), but the substance of his ideas can still be accepted even if this philosophy is explicity rejected.
The author proposes six ideas for what he calls a "new financial order": livelihood insurance, macro markets, income-linked loans, inequality insurance, intergenerational social security, and international agreements. He also proposes the development of massive databases, what he calls GRIDS, standing for "global risk information databases", in order to provide the information that allows effective risk management, and "indexed units of account", which is a new "electronic money" that serves to optimize the negotiating of risk.
All of part three of the book is devoted to these six ideas. The author proposes 'income indexes" as a way of hedging livelihoods and compares livelihood insurance with disability insurance. Those readers in the scientific profession will appreciate his ideas on livelihood insurance, due to the extreme risk in entering a specialized scientific field at the present time. Interestingly, the author compares this risk management device with academic tenure, believing that the latter is a good example of what could be done in society as a whole. He does not elaborate though on how universities reduce the "moral risks" in the tenure system, unfortunately. Optimizing productivity in individuals who are guaranteed lifelong employment is extremely difficult, and there are strong arguments against the institution of tenure for this reason.
The author's discussion of "macro markets" is very interesting, especially if read in conjunction with his research papers. Motivating it with a real world example of the Citibank loan to Bulgaria in 1994, the interest rate of which was tied to the growth rate of the Bulgarian economy, he proposes a few ways in which risks can be hedged for everyone, such as 'perpetual futures', and 'macro securities', the latter of which he prefers and discusses at length. These are securities that are automatically issued and redeemed on demand, but only in pairs. Based again on indexes, there is a macro whose price increases when the index increases, the other going down when the index increases.The author gives several examples of the forms which these macro securities might take.
Because of its philosophical orientation, the author's ideas on "inequality insurance" may be somewhat troubling, for it is the government who is to set legislation on the level of income inequality, and prevent inequality from getting worse. But the tax system will be "framed" so as appear to enforce a measure of inequality rather than the specification of tax rates. The author explains how the inequality insurance payments would be calculated using what he calls the "after-tax Lorentz curve", coupled with the "Gini coefficient", which is a measure of how much the Lorentz curve sags. Historical evidence though casts much suspicion on the government's ability to do anything of value in the economic realm. In addition, inequality, as meausured by the author, does not say anything of the history of what led to that inequality. The history must be known before any action should be taken to correct the inequality. Inequality in and of itself does not entail corrective action be taken to dissolve the inequality.
The biggest virtue of the book is the author's awareness, and subsequent discussion, of the role of technological advancement in economic affairs, particularly the role to be played by machine intelligence. However, in my opinion, I think he is wrong when he expresses the belief that low-income workers will be at higher risk for losing their jobs because of the advances in artificial intelligence. On the contrary, these kinds of jobs will probably be the most secure, since it will not be cost effective to have robots do the kinds of tasks involved in these jobs. The highest risk will be for those who are in middle management, for the tasks that must be done in these positions can be done much more effectively by intelligent machines. Indeed, areas such as accounting, information management, financial engineering, and other areas that are information-intensive will be run entirely by machines in the near future. The resulting massive loss of jobs could be dealt with by using financial innovations along the lines of what the author proposes in this book. The enormous wealth generated by intelligent machines could be used to alleviate the financial strain that will be experienced by the people who lose their jobs to these machines. And the machines themselves may have their own unique and clever methods to solve this problem and others that arise in the coming decades.
OUTSTANDING BOOK ABOUT THE FUTURE OF RISK MANAGEMENT
In this book, Shiller presents, in a concise and simple way, the direction in which risk management should go in the future if it is to serve its purpose. He reviews the history of risk management, with demonstrations of how far it has come and how certain successes were achieved mainly through psychological framing. He then expands these concepts to areas to be tackled in the future, such as home equity insurance, GDP insurance, and livelihood insurance.
My main criticism of the book is the title, which seems overly ambitious. In my opinion, it should have been somehitng like Future Advances in Risk Management, but then again sensationalism does help sell books. Some of the criticism I found of the book is that it is overly simplistic. Like many outstanding ideas, after they are known they seem simple, but it is by no means easy to come up with them. Risk management is an area that requires a lot of development, and insurance/finance professionals are sure to gain much from the ideas in this book. If the particular ideas in the book don't match one's area, I believe it is still an important read as a source of ideas and a way of thinking that can be applied I believe in many different areas.
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