A Crisis of Beliefs: Investor Psychology and Financial Fragility.

• Date: 01 January 2019
• Author: Zuluaga, Diego

A Crisis of Beliefs: Investor Psychology and Financial Fragility

Nicola Gennaioli and Andrei Shleifer

Princeton, N.J.: Princeton University Press, 2018, 264 pp.

Investment fund pioneer Sir John Templeton wrote that "bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria." There is a long line of economists and financial historians who have studied investor propensity to sudden mood swings. Charles Kindleberger wrote a celebrated history of financial panics that remains a reference four decades after publication. Hyman Minsky pointed to the recurrence of abrupt reversals at the peak of speculative manias, prompting a plunge that resembles Wile E. Coyote's when he realizes there is no ground under him. Robert Shiller won a Nobel Prize for documenting excess volatility in stock prices that fundamental factors cannot explain.

Identifying periodic bouts of irrationality in security markets is thus not an academic innovation. But so far, researchers have struggled to sketch out the policy implications, for both private investors and public authorities, of their findings. Can "irrational exuberance," as Federal Reserve chairman Alan Greenspan characterized the market's mood in the mid-1990s, be diagnosed, quantified, and acted upon?

A Crisis of Beliefs, by Bocconi University's Nicola Gennaioli and Harvard's Andrei Shleifer, has the reader pining for an affirmative...