Why I stopped halfway through ‘Currency Wars’

Basically, because it was ‘economics lite’. Fluffy, and perhaps worth buying if you couldn’t find anything else in the airport bookshop, but without the depth to really engage with some of the important topics it touches on. 

There were some parts I found interesting. The history of the gold standard, and the mechanics around the Bretton-Wood system are something I don’t know much about at all, so I found that interesting. A much better read, though, is Lords of Finance, by Liaquat Ahamed – even though it doesn’t delve much into the mechanics of the gold standard (or much more than Currency Wars), it’s a much better book. 

But there are several points where Currency Wars is disappointingly shallow. I’ve read enough pop-economics books that by now I’m heartily sick of hearing simple stories about ‘the one equation that brought down Wall St’ (for Rickards, its’ VaR); and I was intensely annoyed by the condescension in his explanation of a normal curve. Yes, we get it, the normal curve isn’t an appropriate model for return distributions; it’d be nice if an author went a little further than that. 

But as well as the obvious over-simplifications, there were areas where I have a decent understanding of the material; and the way the book skims through (in some cases erroneously), makes me suspicious about the other material (where my knowledge isn’t as strong). 

Take for example his treatment of Kahneman and Tversky’s work (because of course, there’s the obligatory mention of behavioural economics). 

In the most famous set of experiments, Kahneman and Tversky showed that subjects, given the choice between two monetary outcomes, would select the one with the greater certainty of being received even though it did not have the highest expected return. A typical version of this is to offer a subject the prospect of winning money structured as a choice between: A) $4,000 with an 80 per cent probability of winning, or B) $3,000 with a 100 per cent probability of winning. For supporters of efficient market theory, this is a trivial problem. Winning $4,000 with a probability of 80 percent has an expected value of $3,200 (or $4,000 x .80). Since $3,200 is greater than the alternative choice of $3,000, a rational wealth-maximizing actor would chose A. Yet in one version of this, 80 per cent of the participants chose B. Clearly the participants had a preference for the “sure thing” even if its theoretical value was lower. In some ways, this is just a formal statistical version of the old saying “A bird in the hand is worth two in the bush.” Yet the results were revolutionary – a direct assault on the cornerstone of financial economics. 

Ugh. It’s been a while since I read Judgement under uncertainty or Choices, values and frames, but I don’t remember there being an experiment that simple (although it may have been one condition of several in their demonstration of framing). 

Because in fact you can get that level of risk aversion under fairly obvious economic models – basically, you just assume that the agent has a diminishing marginal value for money. Voila – risk aversion

But where prospect theory added something to the mix was in highlighting that the reference point in assessing utility is context dependent; that is, the shape of the curve shifts in response to your context. So that the shape of your utility curve (and, in turn, how risk averse you are) can shift from decision to decision, in response to your context and environment. So that, in fact, contestants who’ve just gone from a winning to a losing position on Deal or No Deal are likely to be less risk-averse than contestants going from a poor to a strong position (there’s this paper by Post, van den Assem, Baltussen and Thaler, although I’m pretty sure there are others). 

Which is an important point, and it adds something quite rich to the discussion of how people make decisions. But that’s a much more nuanced point than the simple fact that people are risk-averse, which is even more blindingly obvious, and you could demonstrate with a simpler model than the context dependent one that prospect theory gives you. 

Rickard’s treatment of behavioural economics was disappointing enough (in conjunction with the poor writing and superficial treatment of several other issues) that I’m not going to bother finishing the book. Currency valuation, and the mechanisms involved and how they connect to geo-politics are an important set of issues; but this book isn’t the one to read. 


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s