Jerry Z. Muller on The Tyranny of Metrics

Today, organizations of all kinds are ruled by the belief that the path to success is quantifying human performance, publicizing the results, and dividing up the rewards based on the numbers. But in our zeal to instill the evaluation process with scientific rigor, we’ve gone from measuring performance to fixating on measuring itself. The result is a tyranny of metrics that threatens the quality of our lives and most important institutions. In this timely and powerful book, Jerry Muller uncovers the damage our obsession with metrics is causing—and shows how we can begin to fix the problem. Complete with a checklist of when and how to use metrics, The Tyranny of Metrics is an essential corrective to a rarely questioned trend that increasingly affects us all.

What’s the main idea?

We increasingly live in a culture of metric fixation: the belief in so many organizations that scientific management means replacing judgment based upon experience and talent with standardized measures of performance, and then rewarding or punishing individuals and organizations based upon those measures. The buzzwords of metric fixation are all around us: “metrics,” “accountability,” “assessment,” and “transparency.” Though often characterized as “best practice,” metric fixation is in fact often counterproductive, with costs to individual satisfaction with work, organizational effectiveness, and economic growth.

The Tyranny of Metrics treats metric fixation as the organizational equivalent of The Emperor’s New Clothes. It helps explain why metric fixation has become so popular, why it is so often counterproductive, and why some people have an interest in pushing it. It is a book that analyzes and critiques a dominant fashion in contemporary organizational culture, with an eye to making life in organizations more satisfying and productive.

Can you give a few examples of the “tyranny of metrics?”

Sure. In medicine, you have the phenomenon of “surgical report cards” that purport to show the success rates of surgeons who perform a particular procedure, such as cardiac operations. The scores are publicly reported. In an effort to raise their scores, surgeons were found to avoid operating on patients whose complicated circumstances made a successful operation less likely. So, the surgeons raised their scores. But some cardiac patients who might have benefited from an operation failed to get one—and died as a result. That’s what we call “creaming”—only dealing with cases most likely to be successful.

Then there is the phenomenon of goal diversion. A great deal of K-12 education has been distorted by the emphasis that teachers are forced to place on preparing students for standardized tests of English and math, where the results of the tests influence teacher retention or school closings. Teachers are instructed to focus class time on the elements of the subject that are tested (such as reading short prose passages), while ignoring those elements that are not (such as novels). Subjects that are not tested—including civics, art, and history—receive little attention.

Or, to take an example from the world of business. In 2011 the Wells Fargo bank set high quotas for its employees to sign up customers who were interested in one of its products (say, a deposit account) for additional services, such as overdraft coverage or credit cards. For the bank’s employees, failure to reach the quota meant working additional hours without pay and the threat of termination. The result: to reach their quotas, thousands of bankers resorted to low-level fraud, with disastrous effects for the bank. It was forced to pay a fortune in fines, and its stock price dropped.

Why is the book called The Tyranny of Metrics?

Because it helps explain and articulate the sense of frustration and oppression that people in a wide range of organizations feel at the diversion of their time and energy to performance measurement that is wasteful and counterproductive.

What sort of organizations does the book deal with?

There are chapters devoted to colleges and universities, K-12 education, medicine and health care, business and finance, non-profits and philanthropic organizations, policing, and the military. The goal is not to be definitive about any of these realms, but to explore instances in which metrics of measured performance have been functional or dysfunctional, and then to draw useful generalizations about the use and misuse of metrics.

What sort of a book is it? Does it belong to any particular discipline or political ideology?

It’s a work of synthesis, drawing on a wide range of studies and analyses from psychology, sociology, economics, political science, philosophy, organizational behavior, history, and other fields. But it’s written in jargon-free prose, that doesn’t require prior knowledge of any of these fields. Princeton University Press has it classified under “Business,” “Public Policy,” and “Current Affairs.” That’s accurate enough, but it only begins to suggest the ubiquity of the cultural pattern that the book depicts, analyzes, and critiques. The book makes use of conservative, liberal, Marxist, and anarchist authors—some of whom have surprising areas of analytic convergence.

What’s the geographic scope of the book?

In the first instance, the United States. There is also a lot of attention to Great Britain, which in many respects was at the leading edge of metric fixation in the government’s treatment of higher education (from the “Teaching Quality Assessment” through the “Research Excellence Framework”), health care (the NHS) and policing, under the rubric of “New Public Management.” From the US and Great Britain, metric fixation—often carried by consultants touting “best practice”—has spread to Continental Europe, the Anglosphere, Asia, and especially China (where the quest for measured performance and university rankings is having a particularly pernicious effect on science and higher education).

Is the book simply a manifesto against performance measurement?

By no means. Drawing on a wide range of case studies from education to medicine to the military, the book shows how measured performance can be developed and used in positive ways.

Who do you hope will read the book?

Everyone who works in an organization, manages an organization, or supervises an organization, whether in the for-profit, non-profit, or government sector. Or anyone who wants to understand this dominant organizational culture and its intrinsic weaknesses.

Jerry Z. Muller is the author of many books, including Adam Smith in His Time and Ours and Capitalism and the Jews. His writing has appeared in the New York Times, the Wall Street Journal, the Times Literary Supplement, and Foreign Affairs, among other publications. He is professor of history at the Catholic University of America in Washington, D.C., and lives in Silver Spring, Maryland.

Jonathan Haskel & Stian Westlake on Capitalism without Capital

Early in the twenty-first century, a quiet revolution occurred. For the first time, the major developed economies began to invest more in intangible assets, like design, branding, R&D, and software, than in tangible assets, like machinery, buildings, and computers. For all sorts of businesses, from tech firms and pharma companies to coffee shops and gyms, the ability to deploy assets that one can neither see nor touch is increasingly the main source of long-term success. But this is not just a familiar story of the so-called new economy. Capitalism without Capital shows that the growing importance of intangible assets has also played a role in some of the big economic changes of the last decade.

What do you mean when you say we live in an age of Capitalism without Capital?

Our book is based on one big fact about the economy: that the nature of the investment that businesses do has fundamentally changed. Once businesses invested mainly in things you could touch or feel like buildings, machinery, and vehicles. But more and more investment now goes into things you can’t touch or feel: things like research and development, design, organizational development—“intangible’ investments. Today, in developed countries, businesses invest more each year intangible assets than in tangibles. But they’re often measured poorly or not at all in company accounts or national accounts. So there is still a lot of capital about, but it has done a sort of vanishing act, both physically and from the records that businesses and governments keep.

What difference does the rise of intangible investments make?

The rise of intangible investment matters because intangible assets tend to behave differently from tangible ones—they have different economic properties. In the book we call these properties the 4S’s—scalability, sunkenness, synergies, and spillovers. Intangibles can be used again and again, they’re hard to sell if a business fails, they’re especially good when you combine them, and the benefits of intangible investment often end up accruing to businesses other than the ones that make them. We argue that this change helps explain all sorts of important concerns people have about today’s economy, from why inequality has risen so much, to why productivity growth seems to have slowed down.

So is this another book about tech companies?

It’s much bigger than that. It’s true that some of the biggest tech companies have lots of very valuable intangibles, and few tangibles. Google’s search algorithms, software, and prodigious stores of data are intangibles; Apple’s design, brand, and supply chains are intangibles; Uber’s networks of drivers and users are intangible assets. Each of these intangibles is worth billions of dollars. But intangibles are everywhere. Even brick and mortar businesses like supermarkets or gyms rely on more and more intangible assets, such as software, codified operating procedures, or brands. And the rise of intangibles is a very long-term story: research by economists like Carol Corrado suggests that intangibles investment has been steadily growing since the early twentieth century, long before the first semiconductors, let alone the Internet.

Who will do well from this new intangible economy?

The intangible economy seems to be creating winners and losers. From a business point of view, we know that around the world, there’s a growing gap between the leading businesses in any given industry and the rest. We think this leader-laggard gap is partly caused by intangibles. Because intangibles are scalable and have synergies with one another, companies that have valuable intangibles will do better and better (and have more incentives to invest in more), while small and low performing companies won’t, and will lag ever further behind.

There is a personal dimension to this too. People who are good at combining ideas, and who are open to new ideas, will do better in an economy where there are lots of synergies between different assets. This will be a boon for educated, open-minded people, people with political, legal, and social connections, and for people who live in cities (where ideas tend to combine easily with one another). But others risk being left further behind.

Does this help explain the big political changes in recent years?

Yes—after the EU referendum in the UK and the 2016 presidential election in the US, a lot of pundits were asking why so many so-called “left behind” communities people voted for Brexit or Donald Trump. Some people thought they did so for cultural reasons, others argued the reasons were mainly economic. But we would argue that an intangible economy, these two reasons are linked: more connected, cosmopolitan places tend to do better economically in an intangible economy, while left-behind places suffer from an alienation that is both economic and cultural.

You mentioned that the rise of intangible investment might help explain why productivity growth is slowing. Why is that?

Many economists and policymakers worry about so-called secular stagnation: the puzzling fact that productivity growth and investment seems to have slowed down, even though interest rates are low and corporate profits are high, especially since 2009. We think the growing importance of intangibles can help explain this in a few ways.

  • There is certainly some under-measurement of investment going on—but as it happens this explains only a small part of the puzzle.
  • The rate of growth of intangible investment has slowed a bit since 2009. This seems to explain part of the slow-down in growth (and also helps explain why the slowdown has been manly concentrated in total factor productivity)
  • The gap between leading firms (with lots of intangibles) and laggard firms (with few) may have created a scenario where a few firms are investing in a lot of intangibles (think Google and Facebook) but for most others, it’s not worth it, since their more powerful competitors are likely to get the spillover benefits.

Does the intangible economy have consequences for investors?

Yes! Company accounts generally don’t record intangibles (except, haphazardly, as “goodwill” after an acquisition). This means that, as intangible assets become more important, corporate balance sheets tell investors less and less about the true value of a company. Much of what equity analysts spend their days doing is, in practice, trying to value intangibles.

And there’s lots of value to be had here: research suggests that equity markets undervalue intangibles like organizational development, and encourage public companies to underinvest in intangibles like R&D. But informed investors can take advantage of this—which can benefit both their own returns and the performance of the economy.

Jonathan, you’re an academic, and Stian, you are a policymaker. How did you come to write this book together?

We started working together in 2009 on the Nesta Innovation Index, which applied some of the techniques that Jonathan had worked on to measure intangibles to build an innovation measurement for the UK. The more we thought about, the clearer it became that intangibles helped explain all sorts of things. Ryan Avent from the Economist asked us to write a piece for their blog about one of these puzzles, and we enjoyed doing that so much we thought we would try writing a book. One of the most fun parts of writing the book was being able to combine the insights from academic economic research on intangibles and innovation with practical insights from innovation policy.

CapitalismJonathan Haskel is professor of economics at Imperial College Business School. Stian Westlake is a senior fellow at Nesta, the UK’s national foundation for innovation. Haskel and Westlake are cowinners of the 2017 Indigo Prize.

The Greatest Showman and the Deceptions of American Capitalism

by Edward J. Balleisen

BalleisenPerhaps unsurprisingly, The Greatest Showman, the new cinematic musical about the nineteenth-century American impresario of entertainment P. T. Barnum, unabashedly takes liberties with the historical record. As reviewers have already documented (Richard Brody in the New Yorker, Bruce Chadwick for History News Network), it fabricates matters large and small, as is the wont of Hollywood screenwriters and directors who work on biopics, while ignoring a host of truthful vignettes that cry out for cinematic treatment. As a historian of business fraud, I found myself especially disappointed that the musical steered clear of many aspects of Barnum’s career that speak powerfully to elements of our own moment, including the rise of a Barnum-esque publicity hound and conductor of media misdirection from the White House, and the constant turmoil swirling over allegations of fake news. And yet, The Greatest Showman does get some of the larger implications of Barnum’s life right—especially his injection of a democratic style of hullabaloo into American capitalism.

A full inventory of the film’s flights of fancy would require catalogue length. But a sampling conveys the minimal concern for fidelity to historical detail. The movie portrays the young Barnum as the poorly-clad son of an impoverished Connecticut tailor, rather than the child of a respectable proprietor who had a number of well-to-do relatives and also owned a store and inn. It gives Barnum experiences that he never had (begging and stealing food as an orphaned New York City street urchin; clerking for an insurance company). It depicts his move into the world of entertainment as occurring sometime well after the establishment of the railroad, perhaps even after the Civil War, rather than in the 1830s.

The Greatest Showman ignores Barnum’s earliest promotions of lotteries, curiosities and hoaxes, including his cruel exhibition of the elderly African-American slave woman Joice Heth as supposedly the 161-year old former wet-nurse of George Washington, and his willingness to profit further after her death through a public autopsy, experiences that laid the groundwork for his management of the American Museum. The screenwriters (Bill Condon and Jenny Bicks) have Barnum buy the museum on a wholly fictional mix of frustration, fantasy, and fraud, made possible by his fraudulent provision of fake collateral to a New York City bank that lends him the necessary $10,000. Instead of coming to grips with the actual Barnum’s vociferous advocacy of temperance, the film conjures up a hard-drinking man who makes deals over whiskeys in saloons. Rather than showing how Barnum consistently found new performers over the years, it brings together the midget Charles Stratton (known on stage as Tom Thumb), the Siamese twins Change and Eng, and the other members of the troupe within weeks of Barnum’s purchase of the American Museum.

The historical Barnum had a falling out with the famed Swedish singer Jenny Lind not because he refused her amorous advances in the middle of their American tour (the musical’s explanation), but because she tired of his relentless focus on maximizing the returns from her concerts. A key antagonist for Barnum in The Greatest Showman is one “Bennett,” portrayed as a stiff-collared, high-toned theatre critic of the New York Herald. The actual James Gordon Bennett was the publisher of that paper, who proved more than happy to go along with hoaxes and sensationalism himself, using both to help cement his newspaper’s position as the first penny newspaper that catered to the broad masses. The character of Barnum’s high society sidekick Philip Carlyle is entirely fictional, as in his relationship with Anne Wheeler, an African-American female trapeze artist. One last illustration—the film attributes the fire that destroyed Barnum’s New York City Museum to neighborhood toughs who did not like his business, rather than the actual arsonist, a Confederate sympathizer who wished toward the end of the Civil War to strike a blow against the Union.

Of course, by indulging a willingness to elide facts or push outright lies in the service of a hokey story, the makers of The Greatest Showman adopt Barnum’s own modus operandi as a purveyor of entertainment. And the movie does a creditable job of engaging with some of Barnum’s larger cultural significance—his recognition that publicity and HYPE of any kind was often a marketing asset; his understanding that the public would be forgiving of misrepresentations and humbug if they, on balance, enjoyed the eventual show; his embrace of difference and variation within the human condition as worthy of celebration (if also exploitation); his compulsion to expand operations to take advantage of new opportunities, even at the cost of incurring gargantuan debts; his relentless focus on the American mythos of democratic opportunity, whether through his own experience (as carefully narrated in his autobiographies) or those of the stars in his shows. As the film implies, there was indeed deep-seated antagonism to Barnum’s business practices and willingness to engage in fakery, though the complaints came overwhelmingly from pulpits and the pages of evangelical newspapers, rather than protesters who made their presence known outside the Museum. And Barnum did in fact seek to defuse those critiques through the promotion of respectable performers such as Jenny Lind, alongside his curiosities, penchant for misdirection, and outright fakery.

Nonetheless, The Greatest Showman also missed many opportunities to explore episodes in Barnum’s life that have renewed resonance in the early twenty-first century. One crucial theme here concerns Barnum’s engagement with American race relations, both as promoter and in his post-Civil War forays in Connecticut politics and public service. Barnum’s often dehumanizing treatment of people of color and his evolving political views on race will surely occasion much commentary amid the current dramatic growth in ethnocentric nationalism and racially-grounded politics, as in a recent Smithsonian Magazine piece by Jackie Mansky. Other contemporary developments that suggest the value of reconsidering Barnum’s historical significance, closer to my own expertise, include the reoccurrence of massive business frauds, the emergence of enduring conflict over the appropriate role of government in consumer and investor protection, and diminished faith in institutions of all sorts.

The musical, for example, overlooks Barnum’s own bankruptcy in 1855, brought about because of his misplaced faith in the promises of a clock manufacturer who was willing to relocate his operation to Barnum’s adopted home town of Bridgeport, Connecticut, as part of an industrial development scheme. Barnum freely endorsed the Jerome Clock Company’s loans, opening himself up to devastating losses when the company failed, losses made worse by the firm’s eventual forging of Barnum’s endorsement on many additional notes. Yet he also sidestepped the worst consequences of that failure by illegally transferring assets into his wife’s name, a move that greatly facilitated his ability to get back on his financial feet, and for which he never faced public condemnation or legal penalty. Barnum’s insolvency thus speaks to the reality that even the savviest operators can be victims of imposition; and that well-connected perpetrators of commercial deceit have often been able to sidestep the most damaging fallout from their actions.

Another fascinating episode that The Greatest Showman ignores is Barnum’s growing focus on debunking the deceit of other purveyors of rhetorical (or actual) snake oil. By the 1860s, the promoter sought to legitimize his own brand of hokum and bluster not only by adding unquestionably respectable acts to his museum and eventual circus, but also by exposing frauds in many sectors of American life.  Compiled in his 1866 volume, Humbugs of the World, these endeavors targeted misrepresentations in retail trade, medicine, and religion (especially in the realm of spiritualism). Here Barnum intuited the great power associated with well-constructed strategies of deflection—that one could gain trust in part by setting oneself up as an arbiter of untrustworthiness. Perhaps there is no greater contemporary practitioner of this particular form of showmanship than the current occupant of the White House. Donald Trump has rarely hesitated to get out ahead of critiques of his own business and political practices by casting the first stones, as through his allegations of malfeasance by political opponents (the pleas during the 2016 general election campaign to investigate Hillary Clinton and “Lock Her Up”) or representatives of the media (the incessant allegations of FAKE NEWS.) In addition to muddying factual waters, such strategies can shore up support among the faithful, sustaining the conviction that their champion is fighting the good fight, and could not possibly be engaging in duplicitous behavior of his own.

In the end, The Greatest Showman cares most about exploring fictionalized or wholly fictional romantic tensions—those between Barnum and his wife Charity and between the Philip Carlyle and Anne Wheeler—as well as the degree to which Barnum lives up to his purported insistence on an inclusive respect for his socially marginalized performers. These choices constrain the musical’s capacity to engage deeply with Barnum’s historical significance as an entrepreneur who played an outsized role in creating modern mass entertainment. And so a multitude of opportunities go begging. Barnum’s many legacies, however, continue to reverberate in contemporary America, whether one focuses on the the dynamics of social media saturation, the process of invented celebrity, the sources of abiding racial tensions,  the implications of pervasive commercial dissembling, or the nature of popular skepticism about expert appraisals of reality. And so the ground remains open for cultural reinterpretations of the Great Showman’s life and times.  If the twentieth-century is any guide, we won’t have to wait too long for another cinematic treatment—every generation or so, some movie-maker finds the resources to put Barnum back on the screen.[1]

[1] Previous films include “The Mighty Barnum” (1934), “The Greatest Show on Earth” (1952), “Barnum” (1986), and “P. T. Barnum” (1999).

Edward J. Balleisen is professor of history and public policy and vice provost for Interdisciplinary Studies at Duke University. He is the author of Fraud: An American History from Barnum to Madoff. He lives in Durham, North Carolina.

Barry Eichengreen on How Global Currencies Work

At first glance, the modern history of the global economic system seems to support the long-held view that the leading world power’s currency—the British pound, the U.S. dollar, and perhaps someday the Chinese yuan—invariably dominates international trade and finance. In How Global Currencies Work, three noted economists provide a reassessment of this history and the theories behind the conventional wisdom. Read on to learn more about the two views of global currencies, changes in international monetary leadership, and more.

Your title refers to “two views” of global currencies. Can you explain?
We distinguish the “old view” and the “new view”—you can probably infer from the terminology to which view we personally incline. In the old view, one currency will tend dominate as the vehicle for cross-border transactions at any point in time. In the past it was the British pound; more recently it has been the U.S. dollar; and in the future it may be the Chinese renminbi, these being the currencies of the leading international economies of the nineteenth, twentieth, and twenty first centuries. The argument, grounded largely in theory, is that a single currency has tended to dominate, or will dominate, because it pays for investors and producers when engaging in cross-border transactions; specifically, it pays for them to do cross-border business in the same currency as their partners and competitors. This pattern reflects the convenience value of conformity—it reflects what economists refer to as “network externalities.” In this view, it pays to quote the prices of one’s exports in the same units in which they are quoted by other exporters; this makes it easy for customers to compare prices, enabling a newly competitive producer to break into international markets. It pays to denominate bonds marketed to foreign investors in the same currency as other international bonds, in this case to make it easier for investors to compare yields and maximize the demand for the bonds in question.

In what we call the new view, on the other hand, several national currencies can coexist—they can play consequential international roles at the same point in time. In the modern world, it is argued, network externalities are not all that strong. For one thing, interchangeability costs are low as a result of modern financial technology. The existence of deep and liquid markets allows investors and exporters to do business in a variety of different currencies and switch all but effortlessly between them—to sell one currency for another at negligible cost. The existence of hedging instruments allows those investors to insure themselves against financial risks—specifically, against the risk that prices will move in unexpected ways. Prices denominated in different currencies are easy to compare, since everyone now carries a currency converter in his or her pocket, in the form of a smartphone. These observations point to the conclusion, which is compelling in our view, that several national currencies can simultaneously serve as units of account, means of payment and stores of value for individuals, firms and governments engaged in cross-border transactions.

In our book we provide several kinds of evidence supporting the relevance of the new view, not just today but in the past as well. We suggest that the old view is an inaccurate characterization of not just the current state of affairs but, in fact, of the last century and more of international monetary history.

What exactly motivated you to write this book?
We were worried by the extent to which the old view, which pointed to a battle to the death for international monetary supremacy between the dollar and the renminbi, continues to dominate scholarly analysis and popular discourse. This misapprehension gives rise to concerns that we think are misplaced, and to policy recommendations that we think are misguided. Renminbi internationalization, the technical name for policies intended to foster use of China’s currency in cross-border transactions not just within China itself but among third countries as well, is not in fact an existential threat to the dollar’s international role. To the contrary, it is entirely consistent with continued international use of the greenback, or so our evidence suggests.

In addition, making a convincing case for the new view requires marshaling historical, institutional and statistical material and analyzing the better part of a century. We though this extensive body of evidence cried out for a book-length treatment.

To what revisions of received historical wisdom does your analysis point?
We use that historical, institutional and statistical analysis to show that the old view of single-currency dominance is inaccurate not just for today but also as a description of the situation in the first half of the twentieth century and even in the final decades of the nineteenth. In the 1920s and 1930s, the pound sterling and the dollar both in fact played consequential international roles. Under the pre-World War I gold standard, the same was true of sterling, the French franc and the German mark. Our reassessment of the historical record suggests that the coexistence of multiple international currencies, the state of affairs toward which we are currently moving, is not the exception but in fact the rule. There is nothing unprecedented or anomalous about it.

And, contrary to what is sometimes asserted, we show that there is no necessary association between international currency competition and financial instability. The classical gold standard was a prototypical multiple international and reserve currency system by our reading of the evidence. But, whatever its other defects, the gold standard system was a strikingly stable exchange-rate arrangement.

Finally, we show that, under certain circumstances at least, international monetary and financial leadership can be gained and lost quickly. This is contrary to the conventional wisdom that persistence and inertia are overwhelmingly strong in the monetary domain owing to the prevalence of network effects. It is contrary to the presumption that changes of the guard are relatively rare. It is similarly contrary to the presumption that, once an international currency, always an international currency.

So you argue, contrary to conventional wisdom, that changes in international monetary leadership can occur quickly under certain circumstances.  But what circumstances exactly?
The rising currency has to confront and overcome economic and institutional challenges, while the incumbent has to find it hard to keep up. Consider the case of the U.S. dollar. As late as 1914 the dollar played essentially no international role despite the fact that the U.S. had long since become the single largest economy. This initial position reflected the fact that although the U.S. had many of the economic preconditions in place—not only was it was far and away the largest economy but it was also the the number-one exporter—it lacked the institutional prerequisites. Passage of the Federal Reserve Act in 1913 corrected this deficiency. The founding of the Fed created a lender and liquidity provider of last resort. And the Federal Reserve Act authorized U.S. banks to branch abroad, essentially for the first time. World War I, which disrupted London’s foreign financial relations, meanwhile created an opening, of which the U.S. took full advantage. Over the first post-Fed decade, the greenback quickly rose to international prominence. It came to be widely used internationally, fully matching the role of the incumbent international currency, the British pound sterling, already by the middle of the first post-World War I decade.

The shift to dollar dominance after World War II was equally swift. Again the stage was set by a combination of economic and institutional advances on the side of the rising power and difficulties for the incumbent. The U.S. emerged from World War II significantly strengthened economically, the UK significantly weakened. In terms of institutions, the U.S. responded to the unsettled monetary and financial circumstances of the immediate postwar period with the Marshall Plan and other initiatives extending the country’s international financial reach. The UK meanwhile, was forced to resort to capital controls and stringent financial regulation, which limited sterling’s appeal.

What are the implications of your analysis for the future of the international monetary and financial system?
The implications depend on the policies adopted, prospectively, by the governments and central banks that are the issuers of the potential international currencies. Here we have in mind not just the dollar and the renminbi but also the euro, the Euro Area being the third economy, along with the U.S. and China with the economic scale that is a prerequisite for being able to issue a true international currency. If all three issuers follow sound and stable policies, then there is no reason why their three currencies can’t share the international stage for the foreseeable future—in effect there’s no reason why they can’t share that stage indefinitely. The global economy will be better off with three sources of liquidity, compared to the current status quo where it is all but wholly dependent on one.

In contrast, if one or more of the issuers in question follows erratic policies, investors will flee its currency, since in a world of multiple international and reserve currencies they will have alternatives—they will have somewhere to go. The result could then be sharp changes in exchange rates.  The consequence could be high volatility that would wreak havoc with national and international financial markets. So while a world of multiple international currencies has benefits, it also entails risks. Policy choices—and politics—will determine  whether the risks or benefits dominate in the end.

EichengreenBarry Eichengreen is the George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley. His books include Hall of Mirrors, Exorbitant Privilege, Globalizing Capital, and The European Economy since 1945Arnaud Mehl is principal economist at the European Central Bank. Livia Chiţu is an economist at the European Central Bank.

Rachel Schneider & Jonathan Morduch: Why do people make the financial decisions they make?

Deep within the American Dream lies the belief that hard work and steady saving will ensure a comfortable retirement and a Financialbetter life for one’s children. But in a nation experiencing unprecedented prosperity, even for many families who seem to be doing everything right, this ideal is still out of reach. In The Financial Diaries, Jonathan Morduch and Rachel Schneider draw on the groundbreaking U.S. Financial Diaries, which follow the lives of 235 low- and middle-income families as they navigate through a year. Through the Diaries, Morduch and Schneider challenge popular assumptions about how Americans earn, spend, borrow, and save—and they identify the true causes of distress and inequality for many working Americans. Combining hard facts with personal stories, The Financial Diaries presents an unparalleled inside look at the economic stresses of today’s families and offers powerful, fresh ideas for solving them. The authors talk about the book, what was surprising as they conducted their study, and how their findings affect the conversation on inequality in a new Q&A:

Why did you write this book?
We have both spent our careers thinking about households and consumer finance, and our field has reams and reams of descriptive data about what people do—savings rates, the number of overdrafts, the size of their tax refunds. We have lots of financial information but very little of the existing data helped us understand why—why people make the financial decisions they make, and why they get tripped up. So we decided to spend time with a group of families, get to know them very well, and track every dollar they earned, spent, borrowed, and shared over the course of one year. By collecting new and different kinds of information, we were able to understand a lot of the why, and gained a new view of what’s going on in America.

What did you learn about the financial lives of low- and moderate-income families in your year-long study?
We saw that the financial lives of a surprising number of families looks very different from the standard story that most people expect. The first and most prominent thing we saw is how unsteady, how volatile households’ income and expenses were for many. The average family in our study had more than five months a year when income was 25% above or below their average.

That volatility made it hard to budget and save—and it meant that plans were often derailed. How people were doing had less to do with the income they expected to earn in total during the year and more to do with when that income hit paychecks and how predictable that was. Spending emergencies added a layer of complexity. In other words, week-to-week and month-to-month cash flow problems dominated many families’ financial lives. Their main challenges weren’t resisting temptation to overspend in the present, or planning appropriately for the long term but how to make sure they would have enough cash for the needs they knew were coming soon.

The resulting anxiety, frustration, and a sense of financial insecurity affected families that were technically classified as middle class.

How does this tie into the economic anxiety that fueled Trump’s election?
The families we talked to revealed deep anxieties that are part of a broader backdrop for understanding America today. That anxiety is part of what fueled Trump, but it also fueled Bernie Sanders and, to an extent, Hillary Clinton. A broad set of the population feels rightly that the system just isn’t working for them.

For example, we met Becky and Jeremy, a couple with two kids who live in small town Ohio where Trump did well. Jeremy is a mechanic who fixes trucks on commission. Even though he works full-time, the size of his paychecks vary wildly depending on how many trucks come in each day. This volatility in their household income means that while they’re part of the middle class when you look at their annual income, they dipped below the poverty line six months out of the year.

One day we met with Becky, who was deciding whether or not to make their monthly mortgage payment a couple of weeks early. She had enough money on hand, but she was wavering between paying it now so she could rest easy knowing it was taken care of, or holding onto the money because she didn’t know what was going to happen in the next couple weeks, and was afraid she might need the money for something else even more urgent. She was making decisions like this almost every day, which created not only anxiety but a sense of frustration about always feeling on the edge.

Ultimately, Jeremy decided to switch to a lower-paying job with a bigger commute doing the exact same work – but now he’s paid on salary. They opted for stability over mobility. Becky and Jeremy helped us see how the economic anxiety people feel is not only about having enough money, but about the structure of their economic lives and the risk, volatility, and insecurity that have become commonplace in our economy.

One of the most interesting insights from your book is that while these families are struggling, they’re also working really hard and coming up with creative ways to cope. Can you share an example?
Janice, a casino worker in Mississippi, told us about a system she created with multiple bank accounts. She has one bank account close to her she uses for bill paying. But she also has a credit union account where she has part of her paycheck automatically deposited. This bank is an hour away, has inconvenient hours, and when they sent her an ATM card, she cut it in half. She designed a level of inconvenience for that account on purpose, in order to make it harder to spend that money. She told us she will drive the hour to that faraway bank when she has a “really, really need”—an emergency or cost that is big enough that she’ll overcome the barriers she put up on purpose. One month, she went down there because her grandson needed school supplies, which was a “really, really need” for her. The rest of the time, it’s too far away to touch. And that’s exactly how she designed it.

We found so many other examples like this one, where people are trying to create the right mix of structure and flexibility in their financial lives. There’s a tension between the structure that helps you resist temptation and save, and the flexibility you need when life conspires against you. But we don’t have financial products, services, and ideas that are designed around this need and the actual challenges that families are facing. This is why Janice has all these different banks she uses for different purposes—to get that mix of structure and flexibility that traditional financial services do not provide.

How does this tie into the conversation we’ve been having about inequality over the last decade or so?
Income and wealth inequality are real. But those two inequalities of income and assets are hiding this other really important inequality, which is about stability. What we learned in talking to families is that they’re not thinking about income and wealth inequality on a day-to-day basis—they’re worrying about whether they have enough money today, tomorrow, and next week. The problem is akin to what happens in businesses. They might be profitable on their income statement, but they ran out of cash and couldn’t make payroll next week.

This same scenario is happening with the families we met. We saw situations where someone has enough income or is saving over time, but nonetheless, they can’t make ends meet right now. That instability is the hidden inequality that’s missing from our conversation about wealth and income inequality.

How much of this comes down to personal responsibility? Experts like Suze Orman and Dave Ramsey argue you can live on a shoestring if you’re just disciplined. Doesn’t that apply to these families?
The cornerstone of traditional personal finance advice from people like Orman and Ramsey is budgeting and discipline. But you can’t really do that without predictability and control.

We met one woman who is extremely disciplined about her budget, but the volatility of her income kept tripping her up. She is a tax preparer, which means she earns half her income in the first three months of the year. She has a spreadsheet where she runs all her expenses, down to every taxi she thinks she might need to take. She budgets really explicitly and when she spends a little more on food one week, she goes back and looks at her budget, and changes it for the next few weeks to compensate. Her system requires extreme focus and discipline, but it’s still not enough to make her feel financially secure. Traditional personal finance advice just isn’t workable for most families because it doesn’t start with the actual problems that families face.

What can the financial services industry do to better serve low- and moderate-income families?
The financial services industry has a big job in figuring out how to deal with cash flow volatility at the household level, because most of the products they have generated are based on an underlying belief that households have a regular and predictable income. So their challenge is to develop new products and services—and improve existing ones—that are designed to help people manage their ongoing cash flow needs and get the right money at the right time.

There are a few examples of innovative products that are trying to help households meet the challenges of volatility and instability. Even is a new company that helps people smooth out their income by helping them automatically save spikes, or get a short-term “boost” to cover dips. Digit analyzes earning and spending patterns to find times when someone has a little extra on hand and put it aside, again automatically. Propel is looking to make it much easier and faster for people to get access to food stamps when they need them. There are a number of organizations trying to bring savings groups or lending circles, a way of saving and borrowing with friends and family common everywhere in the developing world, to more people in the United States.

There is lots of scope for innovation to meet the needs of households—the biggest challenge is seeing what those needs are, and how different they are from the standard way of thinking about financial lives and problems.

Jonathan Morduch is professor of public policy and economics at the New York University Wagner Graduate School of Public Service. He is the coauthor of Portfolios of the Poor (Princeton) and other books. Rachel Schneider is senior vice president at the Center for Financial Services Innovation, an organization dedicated to improving the financial health of Americans.

The Financial Diaries

FinancialThe Financial Diaries by Jonathan Morduch and Rachel Schneider details the results of a groundbreaking study they conducted of 235 low- and middle-income families over the course of one year. What they found is that the conventional life-cycle method of approaching finances, wherein a family saves steadily to prepare for eventual retirement, is unrealistic for many. This book combines hard facts with the personal stories of people struggling to make ends meet, even in a time when America is experiencing unprecedented prosperity. You’ll meet a street vendor, a tax preparer, and many more as Schneider and Morduch challenge popular assumptions about how Americans earn, spend, borrow, and save. Read on to learn more about the everyday challenges of a casino dealer from central Mississippi.


Janice Evans has worked at the Pearl River Resort— a family-friendly destination on the Choctaw reservation in central Mississippi with water slides, a spa, two golf courses, a steakhouse, and a casino—for close to twenty years, since she was in her mid-thirties. She works the night shift, starting at 8am and finishing up at 4am. As a single, African American mother with a high school degree, she makes $8.35 per hour, but in a good week she can double that in tips. Customers can put chips in her “toke box,” and at the end of each shift they are collected and counted; the equivalent amount in dollars is then added to Janice’s next paycheck. She does well during the summer months, but fall is much slower. Her income also rises and falls based on where the local college football team is playing that year—when they play near Pearl River people often come to the casino after a game, and when they don’t the casino does not get that business. Over the course of the year Janice makes just over $26,000, or an average of about $2,200 a month. However, due to the fluctuating income from tips, her actual take home pay each month can vary from around $1,800 to approximately $2,400. That represents a 30% deviation between paychecks. Just before the study began, Janice’s son Marcus was laid off from his maintenance job when his employer lost a contract; as a result, he and his three-year-old daughter moved in with Janice. Since he no longer had an income, he qualified for food stamps, an average of $125/month, but this income was unsteady as well: at one point the local social services agency mistook Janice’s income for Marcus’s and canceled his food stamps. It took two months to get them back. And while he also qualified for unemployment benefits, several months passed before the first check arrived. Altogether, the benefits boosted the household’s net income to $33,000, but with the increased funds came increased inconsistency. Whereas before Janice’s income swung 30%, it now swung 70% from high to low months. Given the nature of Janice’s work in a seasonal, low-skill, tipped job and the unreliability of Marcus’s benefits, you might assume that her family’s income would be among the most erratic of the 235 households studied in the U.S. Financial Diaries. In fact, it’s not—the degree of inconsistency in Janice’s household was on par with most families that the authors got to know throughout the course of their study. Morduch and Schneider’s study of families who struggle with income volatility revealed new insights into how Americans make money, borrow, spend, and save.


To learn more, pick up a copy of The Financial Diaries by Jonathan Morduch and Rachel Schneider.

Kenneth Rogoff: The Compactness of Big Bills

Today in our blog series by Kenneth Rogoff, author of The Curse of Cash:

From Rachel Maddow of MSNBC, comes a video story marvelously explaining why criminals, tax evaders, and corrupt official so love large denomination notes. Here, an apparently corrupt Nigerian official (who pleads innocence) finds $100s very convenient for stashing cash. The story comes at the top of the show.

I am grateful to Larry Kintisch of Blauvelt NY for drawing my attention to this story. Yes, there is a world of difference between a “less-cash society” as my book argues, and a cash-less society that the cash lobby likes to point to as a scare tactic for maintaining the absurd status quo.

The paperback edition of The Curse of Cash: How Large Denomination Bills Aid Tax Evasion and Crime and Constrain Monetary Policy will be coming out early this summer; now with an analysis of Indian demonetization and other issues that have arisen in the past year.

Read other posts in the series here.

Andrew Lo on Adaptive Markets: Financial Evolution at the Speed of Thought

Half of all Americans have money in the stock market, yet economists can’t agree on whether investors and markets are rational and efficient, as modern financial theory assumes, or irrational and inefficient, as behavioral economists believe. In this groundbreaking book, Andrew Lo cuts through this debate with a new framework, the Adaptive Markets Hypothesis, in which rationality and irrationality coexist. Adaptive Markets shows that the theory of market efficiency isn’t wrong but merely incomplete. Lo’s new paradigm explains how financial evolution shapes behavior and markets at the speed of thought. An ambitious new answer to fundamental questions in economics, Adaptive Markets is essential reading for anyone who wants to know how markets really work. We asked him to explain the Adaptive Markets Hypothesis, the strengths and limitations on the current theories, and how this new thinking can be practically applied.

What led you to write this book?

AL: Ever since I was a graduate student in economics, I’ve been struggling with the uncomfortable observation that economic theory doesn’t seem to work in practice. As elegant as this theory is, there are so many examples where the data just don’t support the theory that, after a while, I started wondering just how useful our theories were. For example, stock market prices don’t follow random walks, market prices don’t always seem rational, and people often make poor decisions, especially when it comes to financial matters. But it takes a theory to beat a theory. Rather than just criticizing existing theories, I decided to develop an alternative—this book describes the personal journey I took to arrive at that alternative, which I call the Adaptive Markets Hypothesis.

What’s the Adaptive Markets Hypothesis?

AL: The Adaptive Markets Hypothesis is my solution to the longstanding debate in financial economics between two competing camps. One camp consists of the disciples of the Efficient Markets Hypothesis, who believe that investors are rational decision makers and market prices fully reflect all available information. The opposing camp consists of the psychologists and behavioral economists who believe that investors are irrational and market prices are driven by “animal spirits.” It turns out that both camps have correctly captured certain aspects of human behavior, but neither camp offers a complete picture of how investors and markets behave. The Adaptive Markets Hypothesis fills this gap.


AL: By drawing on recent research in psychology, neuroscience, evolutionary biology, and artificial intelligence, I show that human behavior is the result of several different components of the brain, some of which produce rational behavior while others produce more instinctive emotional behavior. These components often work together, but occasionally they compete with each other. And for obvious evolutionary reasons, rationality can be trumped by emotion and instinct when we’re confronted with extreme circumstances like physical threats—we “freak out.” The problem is that these hardwired responses to physical threats are also triggered by financial threats, and freaking out is generally not the best way to deal with such threats. Therefore, investors and markets have a split personality: sometimes they’re quite rational but every so often, they freak out.

Are you suggesting that the Efficient Markets Hypothesis, which dominates financial thinking today, is wrong?

AL: No! On the contrary, the Efficient Markets Hypothesis is one of the most useful, powerful, and beautiful pieces of economic reasoning that economists have ever proposed. Generations of investors and portfolio managers have been saved from bad investment decisions because of the Efficient Markets Hypothesis, which says that if something seems too good to be true, it probably is. The Efficient Markets Hypothesis is not wrong; it’s merely incomplete. Its focus is the behavior of investors and markets in normal business environments, where the “wisdom of crowds” rules the day. What’s missing is the “madness of mobs,” when investors are reacting emotionally and instinctively in response to extreme business environments—good or bad—leading either to irrational exuberance or panic selling. The Adaptive Markets Hypothesis provides a more complete framework in which both types of behaviors are possible. The combination of these behaviors yields a much richer set of implications for price dynamics, investment strategies, risk management, and financial regulation.

Who is the intended audience for this book?

AL: My intention was to write this book for the general reader, but only time will tell whether or not I’ve succeeded. In fact, I’m hoping that there’s something for everyone in this book. For example, readers wondering whether or not it’s possible to beat the stock market using mathematical models will want to read Chapter 2, “If You’re So Smart, Why Aren’t You Rich?” For readers already convinced that it’s possible and want to understand the neuroscientific basis of irrational behavior, they’ll want to read Chapter 3, “If You’re So Rich, Why Aren’t You Smart?” No book on finance would be complete without a discussion of how the recent financial crisis could have happened to us—a country with one of the most sophisticated financial systems in the world—and that’s Chapter 9, “Fear, Greed, and Financial Crisis.” And for readers interested in getting a glimpse of the future of the financial industry and the amazing things that can be accomplished with finance if used properly, there’s Chapter 12, “To Boldly Go Where No Financier Has Gone Before.” Although the book is based on my academic research, I’ve worked hard to translate “academic-speak” into plain English, using simple analogies and real-life examples to make the research come alive. In fact, there’s not a single equation or mathematical formula in the book, which is no easy feat for someone from MIT!

In Adaptive Markets you take an interdisciplinary view of financial markets, bringing in cognitive neuroscience, biology, computer science, and engineering. How did you come to bring all of these seemingly disparate fields together and why is that important?

AL: Although I do enjoy learning new things and have broad-ranging interests, when I started my academic career as a financial economist, I had no interest or intention in doing “interdisciplinary” research. I was perfectly happy spending my days and nights working on traditional neoclassical financial economics—portfolio theory, derivatives pricing models, asset pricing models, financial econometrics, and so on. But the more I tried to fit financial theories to data, the more frustrated I became that these theories performed so poorly. So I started trying to understand why the theories broke down and how they could be fixed. I began by studying behavioral economics and finance, which led me to psychology, which then to the cognitive neurosciences, and so on. I was dragged—sometimes kicking and screaming—from one field of study to the next in my quest to understand why financial markets don’t work the way we think (and want them to). This process ultimately led me to the Adaptive Markets Hypothesis, which is a very satisfying (for me, at least) integration of various disciplines that have something to say about human behavior. I’m especially pleased by the fact that Adaptive Markets reconciles the two competing schools of thought in financial economics, both of which are compelling in their own right even though they’re incomplete.

Why do we need to understand the evolution of finance?

AL: Many authors and academics will use evolution as a metaphor when referring to the impact of change. In Adaptive Markets, I use evolution quite literally because financial markets and institutions are nothing short of evolutionary adaptations that Homo sapiens has developed to improve our chances of survival. Therefore, if we really want to understand how the financial system works, how it changes over time and circumstances, and what we can do to improve it, we need to understand the evolution of finance. And unlike animal species, which evolve from one generation to the next, the financial system evolves at the speed of thought.

You argue that economics wishes it were more like the hard science of physics where 99% of all observable phenomena can be explained with three laws. Will we ever have a complete understanding of how financial markets function?

AL: It’s true that most economists—myself included—suffer from a psychological disorder called “physics envy.” We wish we could explain 99% of economic behavior with three laws like the physicists but this is a pipe dream. The great physicist Richard Feynman put it best when he said, “Imagine how much harder physics would be if electrons had feelings!” I tell all my students at the start of the semester that all economic theories are approximations to a much more complex reality, so the key question for investors and portfolio managers is not “is the theory correct?” but rather, “how good is the approximation?” The answer to this question lies largely in the environment, which plays a huge role in evolutionary theories. Whether we’ll ever be able to develop a truly complete theory of human behavior—and, therefore, how financial markets function—is hard to say. But I do believe that we can get much closer to that complete theory through the Adaptive Markets Hypothesis.

How can investors and portfolio managers incorporate the Adaptive Markets Hypothesis into their investment philosophies?

AL: The Adaptive Markets Hypothesis has a relatively straightforward but sweeping implication for all investment philosophies, and that has to do with change. During normal business environments, the principles of Efficient Markets are an excellent approximation to reality. For example, from the 1930s to the early 2000s, a period where the U.S. stock market had relatively consistent average returns and volatility, a long-only passive investment strategy of 60% stocks and 40% bonds produced pretty decent returns, particularly for those who were investing over a 10- or 20-year horizon. The problem is that this approach doesn’t always work. When market conditions change and we experience large macro shocks like the financial crisis of 2008, then simple heuristics like 60/40 no longer work as well because financial markets have changed in their dynamics. Today’s markets are now much more responsive to intervention by governments and their central banks and punctuated by the irregular cycle of fear and greed. So since 2007 and 2008, we’ve seen a very different market dynamic than over the previous six decades. The point of Adaptive Markets is not simply to be wedded to any static theory, but rather to understand how the nature of markets can change. And once it does change, we need to change with it. John Maynard Keynes put it best when, in responding to criticism that he flip-flopped on the gold standard, he said, “When the facts change, sir, I change my mind. What do you do?”

Can you give an example of how change might impact today’s investors?

AL: One important implication of Adaptive Markets for investors and portfolio managers is that passive investing is changing and we have to adapt. John Bogle—the founder of the Vanguard Group and the father of passive investing and index funds—had an incredibly important insight in the 1970s which he calls the “Cost Matters Hypothesis:” reducing trading costs can have a huge impact on wealth accumulation. Bogle has done more for the individual investor than anyone else I can think of; he democratized the investment process. Thanks to technological innovations like automated trading, electronic market-making, and big data analytics, we’re ready to take the next evolutionary step that builds on Bogle’s legacy. For example, like the trend in healthcare towards personalized medicine, we can now create personalized indexes that are passive portfolios designed to achieve specific goals for a given individual. You might be more risk tolerant than your neighbor so your portfolio will have more equities, but because you work in the financial industry and she works in big pharma, your personalized portfolio will have fewer financial stocks and hers will have fewer biopharma stocks. Also, personalized indexes can manage the risk more actively to suit an individual’s threshold of “pain.” Current financial wisdom criticizes investors who don’t invest for the long run, and I’ve always thought such criticism to be terribly unfair. After all, how easy is it for someone to stick with an investment that’s lost 50% of its value over just a few months? Well, that’s exactly what happened between the fourth quarter of 2008 and the first quarter of 2009. Traditional investment advice is a bit like trying to prevent teenage pregnancies by asking teenagers to abstain—it’s not bad advice, but it’s unrealistic. Why not manage the risk of an individual’s portfolio more actively so as to reduce the chances of freaking out?

Finance has developed a bad reputation in the popular press, particularly in the aftermath of the recent financial crisis. Does the Adaptive Markets Hypothesis have anything to say about this and how things can be improved?

AL: Absolutely. At the heart of all bad behavior, regardless of the industry or context, is human nature. Humans are the Curious George of the animal kingdom, but there’s no “man in the yellow hat” to bail us out when we get into trouble. Homo sapiens has evolved in some remarkable ways and we’re capable of extraordinary things, both good and bad. The same social and cultural forces that give rise to wonderful organizations like the Peace Corps, the Red Cross, and Doctors without Borders can sometimes lead to much darker and destructive organizations. The only way for us to deal more effectively with the negative aspects of society is to acknowledge this dual nature of human behavior. Chapter 11 of Adaptive Markets, titled “Fixing Finance,” is devoted entirely to this objective. We have to be careful not to throw out the baby with the bathwater—the financial system definitely can be improved, but we shouldn’t vilify this critically important industry because of a few bad actors.

What are some specific proposals for how to fix finance?

AL: Well, before we can fix finance, we need to understand where financial crises come from, and the Adaptive Markets Hypothesis has a clear answer: crises are the product of human behavior coupled with free enterprise. If you can eliminate one or both of these two components, you can eliminate financial crises. Otherwise, financial crises are an avoidable fact of modern life. Human misbehavior is a force of Nature, not unlike hurricanes, flash floods, or earthquakes, and it’s not possible to legislate away these natural disasters. But this doesn’t mean we can do anything about it—we may not be able to prevent hurricanes from occurring, but we can do a great deal to prepare for them and reduce the damage they do. We can do a lot to prepare for financial crises and reduce the damage they do to those individuals and institutions least able to withstand their devastating consequences. This perspective is important because it goes against the traditional narrative that financial crises are caused by a few greedy unscrupulous financiers and once we put them in jail, we’ve taken care of the problem. The Adaptive Markets perspective suggests something different: the problem is us. Specific proposals for dealing with crises include: using new technologies in data science to measure economic activity and construct early warning indicators of impending crises; studying crises systematically like the way the National Transportation Safety Board studies airplane crashes so we know how to make the financial system safer; creating adaptive regulations that change with the environment, becoming more restrictive during booms and less restrictive during busts; and systematically measuring individual behavior and corporate culture quantitatively so we can engage in “behavioral risk management.”

Now that you’ve written this book, where do you see your research going from here?

AL: Well, this is still early days for the Adaptive Markets Hypothesis. There’s so much left to be done in exploring the implications of the theory and testing the implications empirically and experimentally whenever possible. The Efficient Markets Hypothesis took decades and hundreds of academic studies to get established, and the same will be true of this one. One of my goals in writing this book is to motivate my academic and industry colleagues to start this vetting process. In the same way that Darwin’s theory of evolution had to be tested and challenged from many different perspectives, the Adaptive Markets Hypothesis has to go through the gauntlet of academic scrutiny. One important implication of the Adaptive Markets perspective is that we need to change the way we collect data and test theories in financial economics. For example, traditional tests of financial theories involve collecting stock market prices and analyzing the statistical properties of their risks and returns. Contrast this approach with how an ecologist would study a newly discovered tropical island in an effort to preserve it. He would begin by first cataloguing the flora and fauna, identifying the key species, and measuring their biomasses and behaviors. Next, he would determine the food chain, environmental threats, and predator/prey relationships, and then turn to population dynamics in the context of the changing environment. Ultimately, such a process would lead to a much deeper understanding of the entire ecosystem, allowing ecologists to determine the best way to ensure the long-term health and sustainability of that island. Imagine doing the same thing with the financial industry. We would begin by cataloguing the different types of financial institutions and investors, measuring their financial biomass, and identifying key species—banks, hedge funds, pension funds, retail investors, regulators, etc.—and their behaviors. Then we would determine the various types of business relationships and interdependencies among these species, which are critical for mapping the population dynamics of this financial ecosystem. This approach seems sensible enough, but it’s not yet being done today (except by my collaborators and me!).

How do you continue to evolve your own thinking? What do you do?

AL: Someone very wise once said that the beginning of wisdom is humility, and I’m convinced that this is how we make progress as a civilization. Once we’re convinced that we have all the answers, we stop asking new questions and learning. So I’m continually looking for new ways to understand financial market behavior, and constantly humbled by how little I know compared to how much we have yet to discover. In this respect, I guess I’m an intellectual opportunist—I don’t care where an idea comes from or what academic discipline it belongs to; if it gives me new insight into an existing problem, I’ll use it and build on it. I’m currently working on several applications of the Adaptive Markets Hypothesis to investments, risk management, and financial regulation, and also hoping to test the theory in the context of individual and institutional investment decisions. The initial results are quite promising and show that financial industry participants adapt much more quickly than we thought. These results point to several important unintended consequences that have clear implications for how we should regulate the industry so as to reduce the chances of another financial crisis.

Andrew W. Lo is the Charles E. and Susan T. Harris Professor at the MIT Sloan School of LoManagement and director of the MIT Laboratory for Financial Engineering. He is the author of Hedge Funds and Adaptive Markets: Financial Evolution at the Speed of Thought. He is also the founder of AlphaSimplex Group, a quantitative investment management company based in Cambridge, Massachusetts.

Edward Balleisen on the long history of fraud in America

BalleisenDuplicitous business dealings and scandal may seem like manifestations of contemporary America gone awry, but fraud has been a key feature of American business since its beginnings. The United States has always proved an inviting home for boosters, sharp dealers, and outright swindlers. Worship of entrepreneurial freedom has complicated the task of distinguishing aggressive salesmanship from unacceptable deceit, especially on the frontiers of innovation. At the same time, competitive pressures have often nudged respectable firms to embrace deception. In Fraud: An American History from Barnum to Madoff, Edward Balleisen traces the history of fraud in America—and the evolving efforts to combat it. Recently, he took the time to answer some questions about his book.

Can you explain what brought you to write this book?

EB: For more than two decades, I have been fascinated by the role of trust in modern American capitalism and the challenges posed by businesses that break their promises. My first book, Navigating Failure: Bankruptcy and Commercial Society in Antebellum America, addressed this question by examining institutional responses to insolvency in the mid-nineteenth-century. This book widens my angle of vision, considering the problem of intentional deceit in the United States across a full two centuries.

In part, my research was motivated by the dramatic American fraud scandals of the late 1990s and early 2000s, which demonstrated how badly duplicitous business practices could hurt investors, consumers, and general confidence in capitalism. I wanted to understand how American society had developed strategies to constrain such behavior, and why they had increasingly proved unequal to the task since the 1970s.

In part, I was gripped by all the compelling stories suggested by historical episodes of fraud, which often involve charismatic business-owners, and often raise complex questions about how to distinguish enthusiastic exaggeration from unscrupulous misrepresentation.

In part, I wanted to tackle the challenges of reconstructing a history over the longer term. Many of the best historians during the last generation have turned to microhistory – detailed studies of specific events or moments. But there is also an important place for macro-history that traces continuity and change over several generations.

In addition, my research was shaped by increasingly heated debates about the costs and benefits of governmental regulation, the extent to which the social legitimacy of market economies rest on regulatory foundations, and the best ways to structure regulatory policy. The history of American anti-fraud policy offers compelling evidence about these issues, and shows that smart government can achieve important policy goals.

What are the basic types of fraud?

EB: One important distinction involves the targets of intentional economic deceit. Sometimes individual consumers defraud businesses, as when they lie on applications for credit or life insurance. Sometimes taxpayers defraud governments, by hiding income. Sometimes employees defraud employers, by misappropriating funds, which sociologists call “occupational fraud.” I focus mostly on deceit committed by firms against their counterparties (other businesses, consumers, investors, the government), or “organizational fraud.”

Then there are the major techniques of deception by businesses. Within the realm of consumer fraud, most misrepresentations take the form of a bait and switch – making big promises about goods or services, but then delivering something of lesser or even no quality.

Investment fraud can take this form as well. But it also may depend on market manipulations – spreading rumors, engaging in sham trades, or falsifying corporate financial reports in order to influence price movements, and so the willingness of investors to buy or sell; or taking advantage of inside information to trade ahead of market reactions to that news.

One crucial type of corporate fraud involves managerial looting. That is, executives engage in self-dealing. They give themselves outsized compensation despite financial difficulties, direct corporate resources to outside firms that they control in order to skim off profits, or even drive their firms into bankruptcy, and then take advantage of inside information to buy up assets on the cheap.

Why does business fraud occur?

EB: Modern economic life presents consumers, investors, and businesses with never-ending challenges of assessing information. What is the quality of goods and services on offer, some of which may depend on newfangled technologies or complex financial arrangements? How should we distinguish good investment opportunities from poor ones?

In many situations, sellers and buyers do not possess the same access to evidence about such issues. Economists refer to this state of affairs as “information asymmetry.” Then there is the problem of information overload, which leads many economic actors to rely on mental short-cuts – rules of thumb about the sorts of businesses or offers that they can trust. Almost all deceptive firms seek to look and sound like successful enterprises, taking advantage of the tendency of consumers and investors to rely on such rules of thumb. Some of the most sophisticated financial scams even try to build confidence by warning investors about other frauds.

A number of common psychological tendencies leave most people susceptible to economic misrepresentations at least some of the time. Often we can be taken in by strategies of “framing” – the promise of a big discount from an inflated base price may entice us to get out our wallets, even though the actual price is not much of a bargain. Or a high-pressure stock promoter may convince us to invest by convincing us that we have to avoid the regret that will dog us if we hold back and then lose out on massive gains.

How has government policy toward business fraud changed since the early nineteenth century?

EB: In the nineteenth century, Anglo-American law tended to err on the side of leniency toward self-promotion by businesses. In most situations, the key legal standard was caveat emptor, or let the buyer beware. For the judges and legislators who embraced this way of thinking, markets worked best when consumers and investors knew that they had to look out for themselves. As a result, they adopted legal rules that often made it difficult for economic actors to substantiate allegations of illegal deceit.

For more than a century after the American Civil War, however, there was a strong trend to make anti-fraud policies less forgiving of companies that shade the truth in their business dealings. As industrialization and the emergence of complex national markets produced wider information asymmetries, economic deceit became a bigger problem. The private sector responded through new types of businesses (accounting services, credit reporting) and self-regulatory bodies to certify trustworthiness. But from the late nineteenth century into the 1970s, policy-makers periodically enacted anti-fraud regulations that required truthful disclosures from businesses, and that made it easier for investors and consumers to receive relief when they were taken for a ride.

More recently, the conservative turn in American politics since the 1970s led to significant policy reversals. Convinced that markets would police fraudulent businesses by damaging their reputations, elected officials cut back on budgets for anti-fraud enforcement, and rejected the extension of anti-fraud regulations to new financial markets like debt securitization.

Since the Global Financial Crisis of 2007-08, which was triggered in part by widespread duplicity in the mortgage markets, Americans have again seen economic deceit as a worrisome threat to confidence in capitalist institutions. That concern has prompted the adoption of some important anti-fraud policies, like the creation of the Consumer Financial Protection Bureau. But it remains unclear whether we have an entered a new era of greater faith in government to be able to constrain the most harmful forms of business fraud.

Many journalists and pundits have characterized the last several decades as generating epidemics of business fraud. What if anything is distinctive about the incidence of business fraud since the 1970s?

EB: Fraud episodes have occurred in every era of American history. During the nineteenth century, railroad contracting frauds abounded, as did duplicity related to land companies and patent medicine advertising. Deception in the marketing of mining stocks became so common that a prevalent joke defined “mine” as “a hole in the ground with a liar at the top.” From the 1850s through the 1920s, Wall Street was notorious for the ruthless manner in which dodgy operators fleeced unsuspecting investors.

Business frauds hardly disappeared in mid-twentieth-century America. Indeed, bait and switch marketing existed in every urban retailing sector, and especially in poor urban neighborhoods. Within the world of investing, scams continued to target new-fangled industries, such as uranium mines and electronics. As Americans moved to the suburbs, fraudulent pitchmen followed right behind, with duplicitous franchising schemes and shoddy home improvement projects.

The last forty years have also produced a regular stream of major fraud scandals, including the Savings & Loan frauds of the 1980s and early 1990s, contracting frauds in military procurement and healthcare reimbursement during the 1980s and 1990s, corporate accounting scandals in the late 1990s and early 2000s, and frauds associated with the collapse of the mortgage market in 2007-2008.

Unlike in the period from the 1930s through the 1970s, however, business fraud during the more recent four decades have attained a different scale and scope. The costs of the worst episodes have reached into the billions of dollars (an order of magnitude greater than their counterparts in the mid-twentieth century, taking account of inflation and the overall growth in the economy), and have far more frequently involved leading corporations.

Why is business fraud so hard to stamp out through government policy?

EB: One big challenge is presented by the task of defining fraud in legal terms. In ordinary language, people often refer to any rip-off as a “fraud.” But how should the law distinguish between enthusiastic exaggerations, so common among entrepreneurs who just know that their business is offering the best thing ever, and unacceptable lies? Drawing that line has never been easy, especially if one wants to give some leeway to new firms seeking to gain a hearing through initial promotions.

Then there are several enduring obstacles to enforcement of American anti-fraud regulations. Often specific instances of business fraud impose relatively small harms on individuals, even if overall losses may be great. That fact, along with embarrassment at having been duped, has historically led many American victims of fraud to remain “silent suckers.” Proving that misrepresentations were intentional is often difficult; as is explaining the nature of deception to juries in complex cases of financial fraud.

The most effective modes of anti-fraud regulation often have been administrative in character. They either require truthful disclosure of crucial information to consumers and investors, at the right time and incomprehensible language, or they cut off access to the marketplace to fraudulent businesses. Postal fraud orders constitute one example of the latter sort of policy. When the post office determines that a business has engaged in fraudulent practices, it can deny it the use of the mails, a very effective means of policing mail-order firms. Such draconian steps, however, have always raised questions about fairness and often lead to the adoption of procedural safeguards that can blunt their impact.

How does this book help us better understand on contemporary frauds, such as the Madoff pyramid scheme or the Volkswagen emissions scandal?  

EB: One key insight is that so long as economic transactions depend on trust, and so long as there are asymmetries of information between economic counterparties, there will be significant incentives to cheat. Some economists and legal thinkers argue that the best counter to these incentives are reputational counterweights. Established firms, on this view, will not take actions that threaten their goodwill; newer enterprises will focus on earning the trust of creditors, suppliers, and customers. And heavy-handed efforts to police deceptive practices remove the incentive for economic actors to exercise due diligence, while raising barriers to entry, and so limiting the scope for new commercial ideas. This way of thinking shares much in common with the philosophy of caveat emptor that structured most American markets in the nineteenth-century.

But as instances like the Madoff investment frauds and Volkswagen’s reliance on deceptive emissions overrides suggest, reputational considerations have significant limits. Even firms with sterling reputations are susceptible to fraud. This is especially the case when regulatory supports, and wider social norms against commercial dishonesty, are weak.

The title of this book is Fraud: An American History from Barnum to Madoff. What do you see as uniquely American about this history of fraud?  

EB: The basic psychological patterns of economic deception have not changed much in the United States. Indeed, these patterns mirror experimental findings regarding vulnerabilities that appear to be common across societies. Thus I would be skeptical that the tactics of an investment “pump and dump” or marketing “bait and switch” would look very different in 1920s France or the Japan of the early 21st century than in the U.S. at those times.

That said, dimensions of American culture have created welcome ground for fraudulent schemes and schemers. American policy-makers have tended to accord great respect to entrepreneurs, which helps to explain the adoption of a legal baseline of caveat emptor in the nineteenth century, and the partial return to that baseline in the last quarter of the twentieth-century.

The growth of the antifraud state, however, likely narrowed the differences between American policies and those in other industrialized countries. One hope of mine for this book is that it prompts more historical analysis of antifraud regulation elsewhere – in continental Europe, Latin America, Africa, and Asia. We need more detailed histories in other societies before we can draw firmer comparative conclusions.

What do you see as the most important implications of this book for policy-makers charged with furthering consumer or investor protection?

EB: Business fraud is a truly complex regulatory problem. No modern society can hope to eliminate it without adopting such restrictive rules as to strangle economic activity. But if governments rely too heavily on the market forces associated with reputation, business fraud can become sufficiently common and sufficiently costly to threaten public confidence in capitalist institutions. As a result, policy-makers would do well to focus on strategies of fraud containment.

That approach calls for:

• well-designed campaigns of public education for consumers and investors;
• empowering consumers and investors through contractual defaults, like cooling off periods that allow consumers to back out of purchases;
• cultivating social norms that stigmatize businesses that take the deceptive road;
• building regulatory networks to share information across agencies and levels of government, and between government bodies and the large number of antifraud NGOs; and
• a determination to shut down the most unscrupulous firms, not only to curb their activities, but also to persuade everyone that the state is serious about combating fraud.

Edward Balleisen talks about his new book:

Edward J. Balleisen is associate professor of history and public policy and vice provost for Interdisciplinary Studies at Duke University. He is the author of Navigating Failure: Bankruptcy and Commercial Society in Antebellum America and Fraud: An American History from Barnum to Madoff. He lives in Durham, North Carolina.

Game of Loans: 10 facts about student debt in the United States

LoansThere is considerable concern about the student loan crisis in the United States, where stories in the media have frequently emphasized the increasing cost of college, and the inability of many students to shoulder their debt. In Game of Loans, Beth Akers and Matthew Chingos argue that the problem is much more nuanced than has previously been thought—in fact, they claim, there is not one student loan crisis so much as a series of smaller issues that all require their own solutions. Akers and Chingos flesh out the imperfections in the student borrowing system and make recommendations for change. We’ve put together 10 points from the book that shed some light on the state of student debt in the U.S.


1. The prevailing public narrative surrounding student loan debt, that is a crisis that needs to be addressed immediately, is not new. A 1986 report commissioned by the Joint Economic Committee of the U.S. Congress reported increasing alarm over the increasing rate of student debt and its implications for the national economy.

2. In the mid-1980s, student debt was at about $22 billion in today’s dollars, or $4,200 per student. Today, the amount is closer to $100 billion, or $7,000 per student.

3. Public attention paid to student debt has surged in recent years. In the New York Times, coverage of this topic reached an all-time high in 2014.

4. A 2014 analysis of 100 recent news stories about student debt found that the borrowers profiled had an average debt in excess of $85,000, nearly three times the average borrowing of college graduates with debt.

5. The key feature of federal student loans is that, unlike loans made in the private sector, they are made to anyone regardless of their anticipated ability to repay.

6. The best places to find facts and figures on student debt in the United States is the U.S. Department of Education’s National Postsecondary Student Aid Study (NPSAS), the only publicly available source of detailed information on borrowing at the student level, and the Federal Reserve Board’s Survey of Consumer Finances (SCF), the only dataset that links information on outstanding debt and income and is administered on a regular basis.

7. On average, independent, undergraduate student graduates owe about $22,000 in federal debt, compared to $13,000 for dependent students.

8. Over the last 20 years, the share of Americans in their late twenties who had attended college increased from 53% to 63%; the share with at least a bachelor’s degree increased from 24% to 34%. Over the same period, the share of undergraduate students taking out loans more than doubled, from 19% to 43%. Increased enrollment explains only part of the picture as far as the rising amount of money owed for student loans. Other factors include increased net price to attend college.

9. By the time Lyndon B. Johnson graduated from Southwest Texas State Teachers’ College in 1930, he owed $220 to the college’s loan fund, or about $3,100 in today’s dollars. As president, he created the Guaranteed Student Loan (GSL) program, later renamed the Stafford program.

10. States vary widely in how large of a subsidy they provide to public colleges. The state with the highest list price (New Hampshire) has the lowest funding level, and the state with the lowest list price (Wyoming) has one of the highest funding levels.

Hopefully these facts lend some clarity to and inspire deeper thinking about the issues surrounding student debt in the United States. For a fuller picture, and for the authors’ recommendations for ways to address the problems related to student debt, pick up a copy of Game of Loans by Beth Akers and Matthew Chingos.

Beth Akers & Matthew Chingos: Does the public narrative about student debt reflect reality?

Are we headed for a major student loan crisis with borrowers defaulting in unprecedented numbers? In Game of LoansBeth Akers and Matthew Chingos draw on new evidence to explain why such fears are misplaced—and how the popular myth distracts from what they say are the real problems facing student lending in America. The authors recently took the time to answer some questions about the book.

In Game of Loans you argue that the public narrative about student debt has become disconnected from the reality. How do you suppose this has happened?

It’s tough to say precisely, but it’s clear that the media coverage of this issue has played a role. The typical borrower we hear about in news stories about student loan debt tends to have an enormous balance, is unemployed or working a low-paying job, and lives with his or her parents to save money on living expenses. These struggling borrowers are real, and their problems are troubling, but they are outliers in the broader picture of student borrowing in the United States. A 2014 analysis of 100 recent news stories about student debt found that the borrowers profiled had an average debt in excess of $85,000, nearly three times the average borrowing of college graduates with debt. Given the prevailing media coverage, it’s unsurprising that many people are confused.

The public narrative about this issue commonly refers to the state of student lending as a crisis. You argue that this is a mischaracterization of the issue. Why is that?

There is no evidence of a widespread, systemic student loan crisis, in which the typical borrower is buried in debt for a college education that did not pay off. The crisis that permeates public discussion is a manufactured narrative based largely on anecdotes, speculation, shoddy research, and inappropriate framing of the issue. The reality is that large debt balances are exceedingly rare; typical borrowers face modest monthly payments (4 percent of monthly income at the median); the government provides a system of safety nets; and borrowers with the largest balances are typically the best-off because of high earnings.

There is not a single student loan crisis, but there are many crises, ranging from the fact that most students have no more than a vague idea of how much they’ve borrowed, to the hundreds of thousands of borrowers needlessly defaulting on their student loans, to the pockets of students who are making decisions that lead to predictably bad completion and repayment outcomes.

Critics of your argument might suggest that you’re doing more harm than good by dismissing the notion of a crisis. Even if the language used to describe the situation in student lending is exaggerated, isn’t a good thing if it draws public attention to an issue in need of policy reform?

The problem with allowing an inaccurate narrative to persist is that it prompts policy solutions that solve the fictional problems and do little or nothing to help borrowers who really are in need of assistance. A good example of this is the prominent efforts to reduce the interest rates on existing loans under the guise of “refinancing.” The idea has been vigorously promoted by Senator Elizabeth Warren and endorsed by Hillary Clinton. But reducing interest rates on existing loans would provide a big handout to affluent borrowers and do close to nothing for truly struggling borrowers, who tend to have small balances.

It seems that the crux of your argument is that the notion of a macro level crisis in student lending obscures the real problems. So, what are the real problems?

The real problems can be seen in the stories of borrowers struggling to pay back their loans or suffering the consequences of default. Generally, crises occur when students are “underwater” on their educational investment. They’ve paid the price, aren’t seeing the benefit they’ve anticipated, and are stuck with the bill.

One reason students get into this position is because historically we’ve had a dearth of information available on college cost and quality for students to use when shopping for college. This has gotten better recently, but we’ve still got a ways to go in helping students make savvy choices regarding college.

But even with perfect information and rigorous decision making, some students will inevitably find themselves with difficulty repaying their debt. In the existing system, the government offers a pretty robust system of repayment safety nets that exist to ensure that borrowers will never have to face an unaffordable loan payment. Unfortunately, the system of safety nets is incredibly complex for consumers to navigate. And it’s very likely that this complexity has meant that many borrowers in need of assistance did not receive it. In the book, we propose simplifying the system of both borrowing for and repayment of federal loans to alleviate this problem.

LoansBeth Akers is a senior fellow at the Manhattan Institute. Matthew M. Chingos is a senior fellow at the Urban Institute and the coauthor of Crossing the Finish Line: Completing College at America’s Public Universities (Princeton). Together, they are the authors of Game of Loans: The Rhetoric and Reality of Student Debt.

Kenneth Rogoff: James S. Henry’s early approach to the big bills problem

Presenting the next post in a series by Kenneth Rogoff, author of The Curse of Cash. You can read the other posts in the series here, here, here, and here.

RogoffMy new book, The Curse of Cash, calls for moving to a “less cash” society by very gradually phasing out big notes. I must mention, however, a closely-related idea by James S. Henry. In a prescient 1980 Washington Monthly article, Henry put forth a plan for rapidly swapping out $100s and $50s. While The Curse of Cash highlights his emphasis on the use of cash in crime, it should have noted his snap exchange plan early on (as it will in future printings).

Rather than gradually eliminate big bills as I suggest in the book and in my earlier 1998 article, Henry argues for having the government declare that large denomination bills are to expire and must be exchanged for new bills at short notice:

A surprise currency recall, similar to those that had been conducted by governments in post-World War II Europe, and Latin America, and by our own military in Vietnam. On any given Sunday, the Federal Reserve would announce that existing “big bills”—$50s and $100s—would no longer be accepted as legal tender, and would have to be exchanged at banks for new bills within a short period. When the tax cheats, Mafiosi, and other pillars of the criminal community rushed to their banks to exchange their precious notes, the IRS would be there to ask those with the most peculiar bundles some embarrassing questions. (Henry, “The Cash Connection: How to Make the Mob Miserable,” The Washington Monthly issue 4, p. 54).

This is certainly an interesting idea and, indeed, the U.S. is something of an outlier in allowing old bills to be valid forever, albeit most countries rotate from old to new bills very slowly, not at short notice.

Henry’s swap plan absolutely merits serious discussion, but there might be significant problems even if the government only handed out small bills for the old big bills. First, there are formidable logistical problems to doing anything quickly, since at least 40% of U.S. currency is held overseas. Moreover, there is a fine line between a snap currency exchange and a debt default, especially for a highly developed economy in peacetime. Foreign dollar holders especially would feel this way. Finally, any exchange at short notice would be extremely unfair to people who acquired their big bills completely legally but might not keep tabs on the news.

In general, a slow gradual currency swap would be far less disruptive in an advanced economy, and would leave room for dealing with unanticipated and unintended consequences. One idea, detailed in The Curse of Cash, is to allow people to exchange their expiring large bills relatively conveniently for the first few years (still subject to standard anti-money-laundering reporting requirements), then over time make it more inconvenient by accepting the big notes at ever fewer locations and with ever stronger reporting requirements. True, a more prolonged period would give criminals and tax evaders lots of time to launder their mass holdings of big bills into smaller ones or into other assets, and at relatively minimal cost. This appears to have been the case, for example, with exchange of legacy European currency (such as German deutschemarks and French francs) for new euro currency. Of course, in most past exchanges (such as the birth of the euro), governments were concerned with maintaining future demand for their “product.” If, instead, governments recognize that meeting massive cash demand by the underground economy is penny wise and pound foolish, they would be prepared to be more aggressive in seeking documentation in the exchange.

Lastly, just to reiterate a recurrent theme from earlier blogs, the aim should be a less-cash society—not a cashless one. There will likely always be a need for some physical currency, even a century from now.

RogoffKenneth S. Rogoff, the Thomas D. Cabot Professor of Public Policy at Harvard University and former chief economist of the International Monetary Fund, is the coauthor of the New York Times bestseller This Time Is Different: Eight Centuries of Financial Folly (Princeton). He appears frequently in the national media and writes a monthly newspaper column that is syndicated in more than fifty countries. He lives in Cambridge, Massachusetts. His latest book is The Curse of Cash.