“Boombustology offers a compelling and pragmatic framework for understanding the forces that propel markets to excessive levels in boom times only to see them bust when those forces no longer apply. In this very enjoyable book, Vikram Mansharamani takes the reader on a tour through some of the most notable booms/busts in history, illustrating how one can view them through the application of his microeconomic, macroeconomic, psychological, political, and biological lenses. The analysis is robust.”

—SANDRA URIE, Chairman Emeritus & former Chief Executive Officer, Cambridge Associates LLC

“Far too few people take bubbles seriously until it's too late. Vikram Mansharamani's book should encourage investors and borrowers alike to question whether they're just riding a wave they don't understand. And whether, at the back of their minds, they are relying on being part of a big enough crowd to get bailed out by a kindly taxpayer if things turn sour… . Either way, Boombustology should provoke thought about the context in which some investments and loans are made.”

—SIR PAUL TUCKER, Chair, Systemic Risk Council; author of Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State; former Deputy Governor, Bank of England

“Vikram Mansharamani has written a book that makes economic theory vividly accessible—while providing innovative and nuanced analysis that will challenge the assumptions of even the most seasoned experts. He forces readers to think about how booms and subsequent busts move across the globe and across markets, becoming more exaggerated as more capital chases fewer opportunities. Highly recommended!”

—KIM Y. LEW, Chief Investment Officer, Carnegie Corporation of New York

“Boombustology presents a practical approach to thinking about a world that is characterized by massive global economic uncertainty. While many academics conduct thoughtful analysis of market dynamics, Mansharamani provides a useful framework for investors, allocators, and their advisors to better appreciate the context within which they make their decisions. A must-read.”

—LORI VAN DUSEN, Founder & Chief Executive Officer, LVW Advisors

“By employing an unusually diverse set of perspectives to increase understanding of the character of financial crises, Mansharamani gives his readers a valuable set of guideposts to help them find a safe path through future market disruptions.”

—DAVID F. SWENSEN, Chief Investment Officer, Yale University

“Asset class bubbles are by far the most important events in the life of both stock markets and economies. Boombustology is a comprehensive, informative, and entertaining look into how bubbles form, what really constitutes a bubble, and, critically, the causes and circumstances of bubbles breaking. It is essential reading for any bubbliophile.”

—JEREMY GRANTHAM, Co-founder & Chief Investment Strategist, GMO

“If there's one thing that cleaves Wall Street's winners from its losers, it's the ability to say, ‘I've seen this movie, and I know how it ends.' Vikram Mansharamani's Boombustology will entertain readers with an entire film festival of past, present, and future investment disaster flicks that will make them laugh, make them cry, and save their bacon.”

—WILLIAM J. BERNSTEIN, bestselling author of The Investor's Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between

“Investors are attracted to bubbles. To paraphrase Orwell, they find themselves playing with fire without even knowing that fire is hot. Vikram Mansharamani's highly readable book will set them right. It provides a sound intellectual framework for identifying bubbles before they burst. If you buy only one investment book this year, make it Boombustology.”

—EDWARD CHANCELLOR, author of Devil Take the Hindmost: A History of Financial Speculation

“Through an artful and accessible melding of theoretical frameworks and historical cases, Boombustology provides the essential tools to identify and navigate the financial booms and busts that can be so hazardous to one's portfolio. Required reading for all investors.”

—PAUL A. REEDER, President, PAR Capital Management

“Who is the better investor: the generalist or the expert specialist? In this spirited book, Vikram Mansharamani brings to life five famous boom-bust episodes and argues for a multidisciplinary, generalist approach. Boombustology is an engaging read for specialists and generalists alike.”

—JOHN GEANAKOPLOS, James Tobin Professor of Economics at Yale University; External Professor, the Santa Fe Institute; and Partner, Ellington Capital Management

Money is not humanity's best subject, a proposition whose truth I can easily demonstrate. Imagine if, upon Cleopatra's death in 30 BC, some public-spirited heir to the Egyptian ruler had made a gift to posterity of a $100 deposit in the Bank of Perpetuity. “Just reinvest the interest at 2% forever and ever,” the donor would have told the teller, “and don't allow a single withdrawal.” So it was done.

This benefaction, seemingly a trifle on the day of deposit, would by now have grown to $41,034,747,782,825,800,000.00. Expressed more manageably, it would represent 58.5 doublings of the original $100, or $5,351,505,546.32 for each of the citizens of the world, of whom, at last count, there were 7,667,888,490. Imagine it: everyone on the face of the earth a billionaire five times over.

But, of course, there was not then, and is not now, any Bank of Perpetuity. Leveraged financial institutions are usually as mortal the people who manage them. Besides, as Vikram Mansharamani illustrates throughout this grand tour of financial thought and financial history, human progress is not continuous but cyclical. Humanity builds up only to tear down. Booms give way to busts, and vice versa. Compound interest is, indeed, a marvel, but we earthlings have to eat and pay the landlord. So it is that wealth, rather than piling higher and higher from generation to generation, is most often consumed by the generation that produces it (or its immediate, temporarily grateful, heirs).

Some may object that with, first, the Industrial Revolution, and, second, today's digital revolution, progress has indeed become cumulative. And so it may be in science and technology. But with regard to investing, central banking, and economic policy-making generally, progress still appears illusory. Buying high and selling low, chasing the hot new mutual fund, piling on leverage, putting in place legal incentives to risky and counterproductive action—we humans seem to keep stepping on the same rakes.

In academic circles, there is a certain scorn for the notion of cyclicality, whether in the stock market averages, the credit markets, or real estate. Asset prices move randomly, one strain of financial thought has it, and markets are quick to absorb and reflect all available information. The upshot is that you, whoever you are and whatever you think you may know, have no real chance of outperforming the S&P 500 or the corresponding bond or real estate index. This being the case, you should abandon security analysis—indeed, even the reading of this informative volume—and send your money to the index fund of your choice.

Mansharamani does some of his best work on the red-hot topic of indexation and on the related question of the “efficiency” of markets. Reading these accounts of boom and bust, whether in contemporary China and Japan or in seventeenth-century Holland or in 1930s America, I am reinforced in my conviction that markets are just as efficient as the people who operate in them—just as unflappable, clear-sighted, rational, and coolly calculating. Which is only to say that markets, like people, are sometimes off their rockers. How to identify these flights of fancy is the principal theme of this volume.

Boombustology may also be read as a persuasive brief for the liberal arts. For anyone who has chosen not to disappear down the rabbit hole of hyper-specialization, Mansharamani has words of hope and encouragement. The more varied the knowledge and experience that one can bring to bear on a problem, he observes, the better one's chances of solving it.

Those odds against success in investment are, in any case, daunting, if only because of the biases we bring to simple acts of perception. Seeing clearly is hard enough even when considerations of money aren't fogging one's mental spectacles. To support this contention, allow me to refer you to the story of the discovery, in 1991, of a 5,300-year-old corpse in a melting glacier in the Italian Alps. Teams of forensic doctors performed repeated X-rays and CAT scans on the Copper Age remains. They could see no signs of external injury, though signs of broken ribs led them to conjecture that Iceman, as they called the specimen, was the victim of foul play.

Only belatedly did one of the examining physicians notice the flint arrowhead lodged less than an inch from Iceman's left lung. The discovery chagrined the many examiners who had missed it. “This is just absolutely astounding to me,” said one, “that this little thing is truly there after all the scrutinizing we've done over these images. We've pulled our hair out and fussed and fretted and tried to drag all these details out, and yet there's probably an arrowhead in there. It makes a person very humble.”

How much humbler must be the seeker of financial evidence. At least, in the case of a forensic examination, no stock options hang in the balance, and the examiners are neither long nor short the body on the examining table. It's a very different proposition in the emotionally charged business of buying low and selling high.

The somewhat downcasting truth of the matter, as Mansharamani observes, is that people in markets bear an alarming resemblance to social insects: bees or locusts or ants. They cluster and swarm because independent thought (given the financial stakes) is too frightening to attempt.

Just after the Armistice that ended World War I, Hugh S. Johnson, known to history as the chief of Franklin Roosevelt's ill-fated National Recovery Administration, was conversing with a federal prisoner. Johnson at the time was a brigadier general in the Army. The prisoner was a well-educated associate of the communist Leon Trotsky.

Johnson asked the captive how the communist movement could possibly take hold in the United States:

“Did you ever see in a sunbeam, in a wood on a still and sultry day, millions of midges hovering in a swarm?” the prisoner asked (as Johnson related in his 1935 memoir, The Blue Eagle: From Egg to Earth”).

“Yes,” Johnson replied.

Did you ever see them suddenly move over to one side or the other, say three feet—all preserving the same distance and relative position?”

“Yes.”

“What made them do that?”

“Well, a breeze perhaps.”

The prisoner corrected his captor: “I said, a still day—but did you ever see them move back after just a few minutes?”

Johnson indicated that he had.

“Well, what made them do that? I'll tell you. There are mass movements in human psychology—just as there are inexplicable mass movements in all sorts of life.”

Mansharamani's sentiments, exactly.

While I sincerely hope that Boombustology becomes a timeless classic for students, academics, policymakers, and investors alike, my current goal is considerably more modest. I have written this book because I believe it useful. The world is in the midst of an accelerating sequence of boom and bust cycles, and despite these developments, no organized, multidisciplinary framework exists for thinking about them. This book hopes to provide that framework. Lacking such a framework, we are destined to a world of massive unintended consequences and the continual escalation of extremes—the ultimate outcome of which may be quite destructive to society and the socioeconomic-political world as we know it.

Might it be possible that our attempts to deal with apparent Japanese economic dominance resulted in the Japanese bust, which drove the Asian financial crisis, which drove the dotcom bubble, which resulted in the U.S. housing boom and bust, which is currently creating unsustainable debt loads at the government level around the world? Might it have been possible to identify these booms before they busted to prevent the numerous unintended consequences that follow in the wake of our attempts to address each bust? This book will address these topics.

The market for books about financial booms and busts has itself boomed over the past several years, accelerated in no small part by the recent financial crisis. Why then does it make sense to add to the noise with another treatise on financial bubbles and crashes? Surely all previously written work has addressed any pertinent issues.

The mere fact that this book exists and that you are reading it answers these somewhat rhetorical questions. This book, a written version of a course that I taught at Yale for years, provides a different perspective on financial booms and busts. The fact that I chose to design and teach the course at an undergraduate liberal arts college (rather than a business school) is a telling statement about my perspective. Social occurrences are difficult to categorize as solely economic, psychological, political, or biological—they are, in fact, a complex concoction of all such phenomena. Why, then, should one limit oneself to a simple uni-disciplinary lens when studying financial markets, perhaps the most complicated of social phenomena?

Financial markets are extremely complex developments; competing within them with the handicap of a single lens seems in many ways illogical. Unfortunately, our entire society and educational infrastructure is designed toward specialization and single-discipline analysis. Even among the leading liberal arts schools, virtually all college students are eventually channeled toward a disciplinary major such as economics, political science, psychology, history, literature, biology, or chemistry. While there are meaningful benefits in developing expertise, few multidisciplinary options are offered, let alone pursued. This is exacerbated in graduate and professional schools, and although such specialization is necessary and beneficial in most scientific pursuits, it has the potential to be counterproductive in navigating complex and emergent social phenomena.

Since I entered Yale University as a college freshman (in the pre-cell phone, pre-email era!), I have resisted the tendency of the establishment to channel me into a particular discipline or “box.” Rather than merely study economics or political science, I majored in Ethics, Politics, and Economics—a multidisciplinary major offered at Yale and modeled after the program in Philosophy, Politics, and Economics at the University of Oxford. Incidentally, I double-majored with East Asian Studies, another multidisciplinary major.

Resisting the channel toward a specialization was tougher while pursuing a doctorate, but even here I think I managed to evade the “you must be a single-discipline expert” police who have permeated almost every corner of academia. I sought out PhD programs in the study of innovation and entrepreneurship, inherently multi-/interdisciplinary topics, and was accepted into one such program at the Massachusetts Institute of Technology. The degree I pursued was housed at the Sloan School of Management and was offered by a program called the Management of Technological Innovation and Entrepreneurship. My coursework included economics, psychology, political science, sociology, history, and law.

Even after completing my education and seeking positions in the money-management business, the tendency for immediate specialization was ubiquitous. Virtually every firm with which I interviewed wanted me to become an industry analyst focused on one or two industries. Several firms suggested that it would be best to also focus on a singular geography as well. I soon determined that the established system was based on a strong and widely held view that specialization in the financial markets was a source of advantage. In effect, the industry had produced a pervasive culture of “siloed” thinking in which most practitioners focused on geographies and industries. It was, in the language of Isaiah Berlin, an industry of hedgehogs—people who knew “one big thing.” I opted to become a fox.

In the course of forming my own investment philosophy and approach to thinking about the financial world, I developed a strong belief that a generalist approach (i.e. being a fox) was superior and that competitive insights were found not by competing against other experts but rather by looking between and across the silos. The saying “To a man with a hammer, many things look like nails” is particularly pertinent to the money-management industry. There are times when the worst energy idea may be better than the best consumer idea, yet such insights get lost with expert-oriented approaches.

Before describing what the book is, let me begin by describing what it is not. It is not a book about making day-to-day investment decisions or about the proper investment approach for a particular market. It is not about market timing. Nor is it a book that presents a unique investment philosophy. Many fine books have been written about these topics. Rather, this book is about the context in which these decisions and philosophies are implemented. It is about deciphering the needle-moving extremes that have the potential to render many traditional investment approaches useless. Rather than providing you with a map of how markets may move, Boombustology hopes to provide you a seismograph that can help identify forthcoming quakes.

This book differs from other treatments of financial extremes in three primary ways: (i) it develops and utilizes a multidisciplinary perspective, based on the findings of economics, psychology, and other disciplines; (ii) it utilizes historical case studies to illustrate the power of multiple lenses; and (iii) it summarizes these findings into a forward-looking framework useful in understanding and identifying future financial extremes. After completing this book, you will be left with a robust understanding of the dynamics that precede, fuel, and ultimately reverse financial market extremes. It is also hoped that you will be well versed in the numerous indicators that telegraph the existence of a bubble.

The first section of the book focuses on the five lenses that I consider to be most useful in the study of booms and busts: microeconomics, macroeconomics, psychology, politics, and biology. Why did I choose these lenses? Both micro- and macroeconomic lenses are too obvious to exclude, and the recent emphasis on behavioral approaches necessitates its inclusion. Given the role of politics in developing the very foundation on which booms and busts develop, I included it as well. Space constraints limited me to five lenses, and I chose biology as the fifth to illustrate the power of a perspective external to the social sciences. I chose biology over physics because the economic emphasis on equilibrium is itself derived from physics. It would be eminently reasonable to include sociology and the culture/power dynamics that affect the context as well, and you'll notice that many of the case studies discuss these issues. The lenses utilized are not exhaustive and should be thought of as illustrative. I encourage you to add more lenses as you analyze bubbles.

Booms and busts that affect entire asset classes (versus those that might affect a particular industry or sector) are relatively rare. As such, the second part of the book applies the five lenses to several case studies to generate a “bubble-spotting” theory. The cases chosen were selected to represent variation in geography and time. The list of cases could be much longer, for sure. Again, space constraints limit a more comprehensive approach.

The third and final part of the book takes the lessons learned from Parts I and II and develops a framework for proactively thinking about and identifying financial bubbles before they burst. The theory generated in the book is summarized in a framework presented in Part III; I encourage researchers to test the importance of each indicator.

Topics often associated with the study of bubbles but not included in the book are the benefits of booms and busts and the coincidence of frauds and swindles with busts. Both are excluded here because they are not explicitly about the topic of identifying bubbles. Frauds, swindles, and scams are not-infrequent occurrences in boom times, but because they are unfortunately not revealed until after a bust is well developed, they are often a lagging (and therefore less useful) indicator.

Chapter 1 focuses on the microeconomics of booms and busts, paying special attention to the tendency of prices under various circumstances. Given the dominant microeconomic ideas of market efficiency and supply and demand–driven equilibrium, the chapter describes them and various alternatives. The theory of reflexivity, developed by George Soros, is presented as a viable alternative to the equilibrium-seeking world of traditional microeconomics. The chapter concludes with a reconciliation of the disequilibrium suggested by reflexivity and the equilibrium assumed by microeconomics.

Chapter 2 focuses on credit cycles and financial instability. Three primary theories serve as the focus of the chapter: Irving Fisher's debt-deflation theory of depressions, Hyman Minsky's financial instability hypothesis, and the Austrian business cycle theory. The chapter concludes with a framework for thinking about credit cycles and their impact on asset prices.

Chapter 3 is about the cognitive biases found in most human decision-making. The behavioral lens presented in this chapter focuses on the representativeness and availability heuristics that have historically guided human decision-making toward appropriate answers, but that, in today's increasingly complex, uncertain, and interconnected world, have great potential to lead us astray. Other findings from the research on decision-making are considered and presented, including biases caused by anchoring and insufficient adjustment, mental accounting, fairness, and existing endowments.

Chapter 4 focuses on the politics of property rights and the means through which a society determines the relative value of its goods (i.e. prices). The logic and ramifications of politically motivated price floors and price ceilings are considered, and the chapter concludes with a short discussion of tax policies and how they have the ability to impact asset prices by motivating (or disincentivizing) particular investment decisions by investors.

Chapter 5 attempts to take an emergence perspective from the study of biology and apply it to financial markets. Epidemics, herd behavior, and swarm logic/intelligence are the focus. The chapter focuses on two key lessons: how the study of epidemics and the diffusion of diseases can inform our study of booms and busts—with specific value in helping us understand the relative maturity of a bubble—and how group behavior can have a profoundly conforming impact on its seemingly individualistic members.

Part II of the book presents six historical cases and utilizes the five lenses from Part I to evaluate them. Specifically, Chapter 6 evaluates the Tulipomania of the 1630s; Chapter 7 applies the lenses to the Florida land boom of the mid-1920s and the Great Depression; Chapter 8 is about the Japanese boom and bust; Chapter 9 presents the Asian financial crisis, with special attention paid to Thailand as the epicenter of the events that unfolded; and Chapter 10 evaluates the U.S. housing boom and bust of the 2000s. Chapter 11 takes the Chinese investment bubble (originally profiled as a potential bubble in the first edition of the book) and evaluates the 2010–2015 period through the five lenses.

Chapter 12 summarizes the five lenses and the six cases in a matrix-style analysis that attempts to generate a generalized framework for identifying bubbles before they burst. Key indicators or signposts of a financial bubble are formulated, and a checklist-style evaluation emerges as a means to gauge the likelihood of an unsustainable boom.

Chapter 13 applies the framework of Chapter 12 to one of the most controversial investment considerations in the world today: The potential for India to be the next big growth story. While India has emerged to be one of the best economic growth stories in the recent past, there are reasons to pause and think this may not continue. At the risk of giving away the punch line, Chapter 13 concludes that many indicators are highlighting an elevated probability that the Indian growth story is unsustainable and that investors have been viewing the country's prospects through rose-colored lenses. The Boombustology seismograph is picking up increased pre-quake rumbles.

I'm also pleased to include an addendum to the book with my thoughts on the highly distortive impact of passive investing. While this is not strictly an asset bubble, per se, passive investment is creating bubbly—and therefore unsustainable—dynamics in a host of asset classes. The fundamental logic behind passive investing is that prices are correct. Yet as this strategy (effectively one that buys and sells securities independent of price) gains in popularity, it is increasingly distorting the very foundation of its promise. Passive investors have effectively converted from price-takers (assuming prices are correct) into price-makers (based on the relative inflow and outflow of capital) that are unaware of their new role. The bursting of this passive “bubble” is highly likely to have dire consequences for many investing strategies.

The framework developed over the following pages has helped me navigate through financial booms and busts. I hope it will help you do the same, for in the wise words of Mark Twain, “Although history rarely repeats itself, it often does rhyme.”

The ultimate origin of this book lies on a squash court in New Haven. After an exhausting and gruelling squash match against a formidable competitor, I sought his advice. “I'd like to put my PhD to work and perhaps teach a course here at Yale. What do you think?” His response set the wheels in motion: “I think it's a great idea! See if you can teach it as a college seminar.” So it is that I must begin by thanking David Swensen for his encouragement and support in teaching a class at Yale. David is a fierce competitor, a loyal Yalie, a caring mentor, and overall class act. I feel extraordinarily lucky to have him as a friend. A course does not, however, a book make. Charley Ellis encouraged me to convert the course into a book and provided numerous introductions to facilitate its publication. Without his guidance and help, this book would not have been written.

I thank the many students I have had the pleasure of teaching. Over the course of my graduate education and subsequent years of teaching, I have met no group of students more motivated, insightful, intelligent, and analytical than the undergraduates at both Yale and Harvard. They are, simply put, an absolute pleasure to teach because they exhibit natural curiosity, analytical rigor, and intellectual honesty. They have challenged me to think about this material more deeply and have helped refine my thinking.

My graduate education at MIT was an amazing experience that opened my eyes to a new way of thinking. I am particularly thankful to Michael Cusumano, my dissertation committee chair, for his patience as I wandered between academic and non-academic pursuits. Professor Harvey Sapolsky of the Security Studies Program was a constant friend and mentor.

From a professional perspective, I have had the pleasure of working with many great people over the past 25 years. Several have left major imprints on my way of thinking and have indirectly influenced the work presented here. There are way too many to mention specifically. I want to explicitly thank Hank Blaustein for rapidly and creatively capturing the spirit of the “naked emperor” identified by the Boombustology analyst in a fabulous cartoon. Brendan Coffey deserves special mention as a collaborator who assisted me with many of the updates captured in this second edition, and I’m grateful for the research support provided by my colleague Lily Jampol-Auerbach. My parents, Shobha and Vishnu Mansharamani, deserve special thanks. Without their sacrifices (financial and otherwise), I likely would not have had the opportunities in life that I have had.

Any working professional with a young family knows that time is scarce. It should therefore come as no surprise that my greatest debt of gratitude is to my family for their support in providing the time to write this book. Special acknowledgment is owed to my wife, Kristen Hanisch Mansharamani, who has tirelessly read every word. Her editorial capabilities have been tested repeatedly, initially through the writing of three graduate theses, and now through a book. Her dedication and commitment were steadfast.

Finally, I want to thank the editorial staff at John Wiley & Sons for their persevering attention to detail and their unwavering commitment to my efforts, inconsistent as they may have been.