Of course, any ‘discourse’ on this issue and a topic broader than what its name conveys, must necessarily start-off with a brief definition of it. So, as one of our popular teachers puts it, let me get over with the ritual for ‘sake of completeness’.

‘Financial inclusion may be defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost.’

The financial services include the entire gamut – savings, loans, insurance, credit, payments etc. The financial system has to provide its function of transferring resources from surplus to deficit units but both deficit and surplus units are those with low incomes, poor background etc. By providing these services, the aim is to help them come out of poverty.

The concept as first initiated in the 11th Plan Document (for the term 2007-12), envisages a banking environment with the services being transformed into common goods rather than being confined to the well-to-do. With the special target group of ‘excluded and marginalised’, this scheme seeks to lift swathes of people out of poverty – primarily arising out of inadequacy of accessible banking options.

Now, many experts and professionals point out that the abysmal state of banking among the aforesaid target group is the rudimentary level of technology. It is indeed ironical that while the IT sector fuels and propels the Indian economy to the scintillating heights, the pace of induction of cutting-edge technology in Indian banking scenario has been dismal. A shocking example is that of non-adoption of core banking system in the Post Office Savings Accounts, although the government plans to upgrade Post Offices to banks!!

This article focuses on a case study of a futuristic proposition of an expert committee set up to report on harnessing the potential of post offices India in order to implement financial inclusion.

The committee suggests that India Posts embark upon a mission to integrate and incorporate the ubiquity of mobile technology in India with the banking services it is contemplating offering. The committee proposes that after the full-scale functioning of Unique Identification Card, every card-holder who automatically gets a bank account opened, be facilitated to use his mobile phone for payments. The report submitted in this regard details how the committee expects these transactions to be of as low value as Rs10.

The committee goes on to suggest that the mobile technology be used as a conduit for delivering cheap, instant and emergency credit. The card-holder (who essentially will be every Indian citizen) must be enabled to use the mobile device as an instrument to make requisition for credit and use it simultaneously to transfer the credit to the party he requires to pay.

Taking a trip to the rural background, where the post offices have the firmest foothold, let us analyse why this is significant. Against a backdrop of decelerating agricultural growth in India post 1991 reforms, sufficient and timely supply of institutional credit to agriculture has assumed critical importance. The policy of supplying the above is guided mainly by considerations of ensuring adequate and timely availability of credit at reasonable rates through expansion of institutional framework. Indeed, thanks to RBI monitoring and regulations; spectacular improvement has been seen in the scale and outreach of institutional framework for agricultural credit. Despite this, the quantum of flow of credit continues to be inadequate, being constrained; inter alia a host of factors, the low credit-worthiness, high operational costs, high man power requirements. Moreover, 50% of total SHG credit linkages in the country are concentrated in the southern states, underscoring the skewed distribution of institutional credit in India.

Here is where the Post Offices can make a dent. As trends suggest, small and marginal farmers, for whom credit is not that easily available as for large farmers, go for short-term, low-cost and cheap(well, this is basic human instinct!!) credit. And, given that post offices are already manned by people who have extensive knowledge of this target group, the strategy described earlier seems perfect, and in fact seems imperative to implement.

The committee’s proposals are now gathering dust (well, almost!!) in Dak Bhawan. Partly because the Posts are too busy with the implementation of Project Arrow, the revolutionary project that changed the face and interiors of the rusty Post Offices in the country. The Posts, albeit having developed several softwares for in-house utility, are yet to diversify into the wide-canvass of mobile communications (not to forget that an evolution in this very sector ejected them out of a profitable business venture!!) Moreover, the Posts haven’t been able to computerise post offices all across the length and breadth of the nation, and therefore haven’t been able to incorporate Core Banking Services in their transactions. Put simply, the propositions of the Committee are a bit too beyond the horizon of India Posts.

However, as Posts is contemplating, roping in the expertise and experience of private players in this field of linking central servers and customer cell phones may prove to be of some workable, practical value.

On the ending note, the success of financial inclusion can be attained only by empowering the millions in India who lack access to financial services, through innovations in technology. Public-Private Partnership being the order of the day, and as outlined by our Prime Minister, the backbone of our 12th Plan, is a viable pathway to achieving a coveted level of materialization of this achievable dream of ‘financial inclusion’.

Have you ever wondered why almost all economic models have the basic assumption of consumers being rational?

Do you REALLY think it is always true in the actual world?

Are consumption patterns always driven by just utility?

If you also face these questions, then welcome to the theories and ideas of THORSTEIN VEBLEN, a 19th century economist.

IN his book, ‘The theory of leisure class’, Veblen argues that economic life is driven not by notions of utility, but by social vestiges from pre-historic times.

Whereas neoclassical economists define humans as ‘rational’ i.e. utility seeking beings who try to maximize their satisfaction, Veblen re-cast them as irrational creatures that pursue social status with little regard to their own happiness. He said that people ‘emulate’ the more respected members of their group in order to gain more status. Certain educational degrees are more desirable than others; Certain job options seem more fancy than others;  Certain brands and stores are considered belonging to a ‘high class’, and people may buy them when they cannot afford to do so, despite the availability of cheaper goods with equal utility. Another economist, George Balgobin argues that ‘intellectual’ pursuits such as higher education and classical music are pursued as acts of social status rather than for rational or economic reasons.

For example, a student may like a NOKIA phone much better than an APPLE I-Phone, and may derive higher utility out of the Nokia phone. However, due to I-Phone being the flavor of the season, he might decide to buy it. He ends up paying more, and at the same time he lowers his utility , just to “emulate” the ‘ IN thing’. Thus here he is not acting rationally.

Veblen, in his book, also coined the terms ‘CONSPICUOUS CONSUMPTION ‘and ‘CONSPICUOUS LEISURE’. He defines the former as the waste of money/resources by people to display a ‘higher status’ in the society. For example, the use of silver utensils at meals, even though utensils made of cheaper material worked just as well or better, for that matter.

He defined ‘conspicuous leisure’ as time given certain pursuits in return for the very same cause: ‘higher statuses’. For instance, he noted that to be a gentleman, a man must study such things as philosophy and the fine arts, which have little economic value in themselves.

This also gives rise to the concept  of POSITIONAL GOODS, that is, the utility conferred by many, perhaps even most goods depends not only on the amount like the individual consumes, but also the amount which others in the society consume.

For example, Mr. Andre is very happy and satisfied to own a 250 acre bungalow. He is content to such an extent that he often boasts about it among his group of friends. However, when Mr. Butler, another member of his group goes out and buys a 500 acre bungalow, his happiness and satisfaction is reduced considerably. This is a classic example of positional goods, which shows that, inspite of a person consuming/ possessing the same amount of a commodity as before, their utility gets diminished just because others possess more than him.

An interesting fact to note here is that all goods are not equally positional in nature to consumers. If status concerns affect all items in the utility function equally, the positional effect would operate like a lump-sum tax, reducing well-being without changing the allocation of time or money. However, if positional concerns are stronger for some things than for the others, then in order to understand how people can become better off in well-being and not just rich, it’s essential to know which goods are more positional than others. This kind of understanding of behavior is helpful in policy formulation also.

In the year 2007, Sara Solnick, Professor of Economics at the University of Vermont with David Hemenway, Harvard School of Public Health conducted a detailed survey with questions of the following format :

(a)    Your home has 7 rooms, other people’s homes have 10 rooms

(b)   Your home has 5 rooms, other people’s homes have 3 rooms

If the respondent chooses option (b), then house would be more positional for him, when he chooses (a)

The results of the survey gives throws light on very interesting facts about every-day consumer behavior :

• Income was positional for between 48 percent of respondents.

By contrast leisure was positional for only 16 percent of the respondents.

Therefore, your neighbors won’t be envious by you if you worked less and enjoyed leisure more than them. But they surely will go green with envy if you earned more than them

• Economic Goods were more positional than economic bads, that is, people were more willing to accept less of a good thing than they were to accept more of a bad thing in order to be in a superior position. More positional answers were given to all public goods compared to private goods, private goods compared to private bads.
• Moreover, respondents were more likely to make positional choices for public goods than for private.
• In other words, for the goods on the list of the survey, people had a greater desire for their country (or community) to be ahead of others than to be personally ahead of other individuals. They usually wanted more private goods even if it meant having less than the others, but they were less likely to take more public goods if it meant their country would have fewer such goods than the other countries.
• Health and safety issues were among the least positional.

Thus, those goods which are more positional than others (which people would like to own more than the others) are generally the more observable goods in their consumption patterns.

People try to consume more of such observable goods, not only for personal satisfaction, but also to signal their abilities.

Sounds confusing?

Consider a population in which individual’s abilities are known to differ substantially. Even in a loosely competitive labor market, there will be a strong positive correlation between individual ability and incomes. Similarly, there will be positive correlation between income levels and consumption of observables like location and size of one’s home, the clubs to which one belongs etc. When an individual’s ability cannot be directly observed, such observable components of his consumption bundle act as a signal to others about his total income level, and on an average, therefore, about his level of ability.

Following strictly economic definitions, ‘VEBLEN GOODS’ are defined as goods whose desirability increases with their price and scarcity. Thus, they defy the law of demand, and have an upward sloping demand curve. For example, if on a limited edition Monet-painting, the price is increased, it will attract more buyers of the kind who really want to own that rare piece, as a status symbol .

Well, that is how it is!!

‘All economic activity is by definition “high risk”. And defending yesterday–that is, not innovating– is far more risky than making tomorrow – Peter Drucker

As a brand new 2011 is blessed upon us, a factor which affects the mind is the state of the nation, particularly that of the economy.

So before pondering on what the picture of the ‘commodity scenario’ in 2011 would be like, an important aspect is to reflect at the past i.e. the beginning of 2010, and find out how its end differed from that of 2009. On almost all parameters, we are in a better position. The government upped its GDP by 7.75% in 2009-10, while it grew by 8.75% in 2010-11; Food inflation being 18.65% last year, fell to 9.46% on 4^th Dec, 2010; and the benchmark index of the Bombay Stock Exchange, Sensex was at 20,509.09 points on 31^st Dec, 2010, which is 3044.28 points above 31^st Dec, 2009.

So, what lies ahead?

As predictable, India will continue to ‘make it large’—to build more roads, airports, and invest huge sums of money in infrastructure. Indians will consistently buy more cars, houses, property, and other ‘luxuries’. Their desire would be to remain entertained and informed, irrespective of the source. Mobile commerce shall emerge, especially after MNP coming into play (that gives you the IDEA, eh??). Moreover, the urban rich shall continue worrying about the ‘eco-friendliness’ of the products they consume and invest in attractive but complex instruments.

The bet on commodities has always been dependent on what is in the consumer’s pocket, and hence the story shall go on in 2011. As economies expanded in 2010 and the US Fed started pumping in money to buy back bonds, commodity prices went up. The trend is expected to grow in 2011, analysts say.

Oil and metals, in particular shall remain buoyant. The commodities market typically moves in a direction opposite to that of the stock or the debt market, making it a hedge against inflation. Take crude oil, for instance, the demand for which attained a peak, in the early quarter of 2010. Car sales in the emerging market and growth in air traffic predict an increase in supply, at least till June, 2011. India might be insulated due to diesel consumption, but one can guess the price of this fuel would rise too.

Metals, namely aluminum, lead, and copper, would confront an increase in demand. The supply problems, however, will persist and the shortage in mining would thus facilitate ascending costs. Even precious metals, here shall fall in line. While palladium, silver and platinum are expected to surpass the growth of gold, the yellow metal too would become dearer to its owners. Gold lost its identity as a commodity way back. And in 2011, central bankers would be buying it on concerns of long-term currency movement. ‘The gold is a safe haven asset’, will be the argument put forth when the soaring of demand and value of gold in 2011 is questioned.

Sure, there are downside risks to these predicted hypotheses—skyrocketing inflation due to a huge inflow of hot money, tight financial regulations, protectionist policies, to name a few. Still, an 8.4% GDP growth is expected to support commodity prices in the coming year.

A bold prediction is that innovation in 2011 will be less in financial commodities and more in the investors’ ways of buying, accumulating and selling them. It will be about the pace of moving money by the use of technology. Hence, for those seeking to create wealth by investing in commodity funds, a win-win situation is on the cards.

Filed under: Articles ]]> http://theecosoc.wordpress.com/2011/02/14/commodities-in-2011/feed/ 0 theecosoc http://theecosoc.wordpress.com/2010/11/20/the-greater-fool/ http://theecosoc.wordpress.com/2010/11/20/the-greater-fool/#comments Sat, 20 Nov 2010 08:57:58 +0000 Ecosoc http://theecosoc.wordpress.com/?p=105 ]]> (by Vedant Munshi)

“October. This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August and February.”

—Mark Twain, Pudd’nhead Wilson

Most succinctly put with tongue-in-cheek, the overarching message of the above quote is that speculation in securities[1], irrespective of external circumstances, is an inherently risky activity. And the risk is that of forming a bubble that by its very definition will pop sooner or later. An economic bubble is a situation where there is an unprecedented spurt in trading volumes of securities at prices that are considerably at variance with its intrinsic (fundamental) values. The intrinsic value of a security is the net present discounted values taking into account its expected profits and growth prospects. A stock is said to be overvalued or at variance with its fundamental value if the price at which it trades in the market is higher than that of its fundamental value. Bubbles are driven by the greed of the market participants as they propagate and believe that the higher prices are justified by its fundamental values. The prices keep rising till the point there no buyer, which is when they begin to question the valuation of the security. The bubble pops and the prices fall till they reflect their true fundamental value.

It has been observed that people have a tendency to spend more during the period the bubble grows. However once it bursts, those who hold these overvalued assets experience a negative wealth effect with their real wealth declining. This induces them to cut down spending thus exacerbating the economic slowdown. Thus the wealth effect works at aggravating a financial crisis rather than combating it; it builds excessive optimism in spending in the period in which the bubble is formed and creates a very strong sense of pessimism in spending and growth prospects when the bubble bursts.

One of the causes of formation of bubbles is liquidity in the financial system. Liquidity can be created by lowering the interest rates and are perfect for speculation and asset price bubbles, since low interest rates imply low opportunity cost of using funds in buying assets than putting them in your savings account. In such a scenario there is too much money chasing too few assets, causing both good assets and bad assets to appreciate excessively beyond their fundamentals to an unsustainable level.

There are social/psychological factors as well that cause bubbles. One of them is the Greater Fool theory. It says that there exist certain investors who buy assets which are overvalued in the expectation of selling them for a higher price in future. However, as long as these investors (fools) can find other investors (greater fools) who are willing to buy the asset, the prices of the assets keep increasing. Unfortunately for them, this process comes to an end once the greatest fool buys the asset. Now the greatest fool cannot sell the asset and is forced to sell it at a lower price thus pricking the bubble.

This type of behavior is supported by technical analysis and extrapolation, where historical data is projected into the future on the same basis that if prices have risen at a certain rate in the past, they will continue to rise at that rate forever. The argument is that investors tend to extrapolate past extraordinary returns on investment of certain assets into the future, causing them to overbid those risky assets in order to attempt to continue to capture those same rates of return. Overbidding on certain assets will, at some point, result in uneconomic rates of return for investors, thus initiating asset price deflation. When investors feel that they are no longer well compensated for holding those risky assets, they will start to demand higher rates of return on their investments.

Another psychological factor is the mentality of the investors, often termed as herd behavior. When one sees his neighbor make a killing off an investment, one has a natural tendency to join the bandwagon and invest rather than wait by the wayside. Such behavior often is not supported by fundamentals, and people simply follow the crowd. That is they buy when they find others buying, thus driving up the prices of the assets, hence inducing more people to buy and creating a self fulfilling prophecy, the irony being that such behavior is justified by technical analysis.

Part of the blame for fueling bubbles can be put on the distorted structure of incentives which create moral hazards. The success of an investment fund is measured in terms of how much it can out do its peers and as a result the compensation of an investment or mutual fund manager is often tied to his performance. This creates incentives for them to take on the risk of joining a bubble because if they do not do so, then their peers will do better and they lose their clients as well as their large pay packets.

Another factor that creates moral hazard is the role played by the government. If the government is sure to bail out the speculators in event of a crash, then surely they have every incentive to take on the risk. As far as they are concerned, if their investment pays off they gain, and if not then they can declare bankruptcy and walk away while the government will save them with the taxpayers’ money. Heads I win, tails you lose.

Such behavior can be observed since 17^th century, the Tulip mania in Holland, the South Sea Bubble in England, the real estate craze in Florida, the Wall Street Crash of 1929, the dotcom bubble in the 1990s and more recently, the collapse of the real estate market in the US which triggered the Great Recession.

While there is a unanimous consensus on the lack of beneficial effects that bubbles have, issues relating to the harmful effects of its formation and bursting are still debated between two different schools of economic thought. Certain economists believe that it is better to nip the bubble in the initial stages even if it entails intervention in the markets. While another set of economists believe markets should be left alone, i.e. to let the bubble grow and clean up once it bursts. This is reminiscent of Alan Greenspan who preferred to let the dot com bubble grow than to burst it. Once it burst, he slashed the interest rates to just 1%. However this resulted in another bubble, with the housing bubble replacing the earlier one.

It is a widely recognised fact that financial markets are by definition, impossible to predict with 100% precision even in a perfectly competitive world with complete information. It is therefore important for us to take cognizance of the fact that markets can spiral out of control(bubbles can burst) in a very short span of time and without our consciously knowing so. Part of the reason for the unpredictable nature of markets has to do with the fact that human psychology and emotion is itself inherently unpredictable. Human emotions drive markets and thus it is important for us to not get swayed by emotion at all times. At the same time we are limited by our collective human consciousness that makes it hard for us to go ‘against the norm or against the tide’ or to ‘swim the other way’ when hysteria surrounds us. However, as responsible investors, we should be watchful for hysteria and outright fraud and try at all times to make well informed decisions. Otherwise we would find ourselves in a soup and contribute to the collective loss of everyone else in spurring the bubble of hysteria. So next time you think of investing in an asset, think again!

Afghan farmers are this year sowing wheat instead of poppy – not because they have suddenly been converted to the argument that producing heroin is not in the national interest.

Market forces have been the deciding factor – with wheat prices doubling in the past year, and the street price of heroin falling, it is now more cost effective to grow wheat. – The Telegraph, April 8th, 2008

Across the globe, more than 1 billion people go to bed hungry each night—a number exacerbated by the 2007-08 food price crisis.

The 2007-08 food crisis was caused due to a variety of factors. As Paul Krugman argues in his article ‘Grains Gone Wild,’ these can be broadly classified as- factors which could not  be controlled and factors which were caused due to bad policies. The former included bad weather, high oil prices (which adversely impact energy sensitive modern farming) and the increasing demand for food from fast developing nations. Effects of bad policy were visible in two areas. First, governments and private grain dealers allowed precautionary inventories to shrink, mainly because everyone came to believe that countries suffering crop failures could always import the food they needed. This left the world food balance highly vulnerable to a crisis affecting many countries at once. Second, the promotion of corn ethanol proved to be particularly disastrous, because even on optimistic estimates, producing a gallon of ethanol from corn uses most of the energy the gallon contains.

Even though global grain prices have declined over 2009, domestic food prices have risen sharply in South Asia and in parts of Sub-Saharan Africa. This will become clear from the diagrams that follow.

Recent declines in food and fuel prices in international markets have not yet filtered down to many local markets. Prices are still high and could start rising again – in some of the poorest parts of the world, they already have. The reasons behind these local price spikes include domestic supply disruptions and macro-policy factors.

Average food price volatility for a sample of 26 low income countries has been higher over the past year than it was in 2006/07. Price volatility creates additional risks and is a particular burden for low income producers who are least able to hedge against these fluctuations, as well as for poor consumers.

When prices are high, the poor eat less or switch to lower quality foods, which can increase malnutrition. Between 130m and 155m people fell into poverty in the last 2 years due to high prices. 21 of 36 countries in a food security crisis are in Sub-Saharan Africa, according to FAO. The region imports 45% of its wheat and 84% of its rice. South Asian countries are also deeply affected. A 2 kg bag of rice now costs half the daily income of a poor family in Bangladesh. In Indonesia, a 10% rise in rice prices means 2 million more people will be plunged into poverty, according to a recent assessment.

The poorest and most vulnerable people in the developing world are most exposed to fluctuations in prices as many of them spend 60 percent or more of their income on food. A ramping up of social safety nets such as school-feeding activities or nutritional support programmes, which aim to stop the poor from sinking into the hunger trap, provide immediate solutions to those affected by high prices. In the longer term, investment in agricultural development in food insecure countries is essential.

What we call “the lessons of history” are actually statistical averages. ~ Alan S. Blinder

“The stunning events of 2007-2009 both shook the world and piqued interest in economics. In the 30-plus years that I have been teaching macro principles, I have never seen the level of interest in students as high as what I observed last year—rapt attention and no sleepers! Interest in economics has grown, and our students will want, expect, and deserve explanations of these events for years to come.”

In his position, Dr. Alan Stuart Blinder is well placed to understand events from the points of views of students, academicians as well as policy makers – This, for him, is a welcome change in his belief of Professor Solow’s words that ‘serious discussion of fiscal policy has almost disappeared’ (2002). When Dr. Blinder was a freshman at Princeton, fiscal policy was the rage, and monetary policy was considered secondary in tackling economic problems. However, with changing times, it is monetary policy that has occupied the centre stage, and dominates every contemporary discussion of stabilization policy by economists – be it abstract or concrete, theoretical or practical.

Dr. Blinder is the Professor of Economics and Public Affairs at the Princeton University and works for the United States government, in the capacity of the Vice-Chairman of the Federal Reserve Board. He graduated summa cum laude in Economics, from Princeton University in 1967 and went on to pursue M. Sc. (Economics) from the London School of Economics. He did his Ph. D. in 1971 from the Massachusetts Institute of Technology.

Dr. Blinder is also the co-director of Princeton’s Centre for Economic Policy Studies, which he founded in 1990 to support economic-policy related research. He also writes extensively about economic affairs for various newspapers and magazines. In his book, ‘Hard Heads, Soft Hearts: Tough – Minded Economics for a Just Society’, he argues that a refurbished Keynesian economics – driving for low levels of unemployment, opposing protectionism, fighting subsidies and oligopolies- could give us a truly healthy economy, not the precarious prosperity that exists today with enormous trade and budget deficits. He also explains what he calls Murphy’s Law of Economics, “a systematic tendency for good economics to make bad politics and vice-versa.”

In his work on monetary policy, he explores critical questions related to the institutional design, operating principles and the transmission mechanism for monetary policy. During his tenure as the Vice Chairman of the central bank, Dr. Blinder lobbied hard to ‘Open the Fed’s Doors from Inside’, and work in a more transparent and communicative framework.

Offshoring is another area of his work, where he estimates that the rank correlation between education and offshorability is +0.8 (His estimates of the number of US jobs that are potentially “offshorable” created quite a stir). He makes a novel distinction between Impersonal jobs (X Rays reader, Telemarketer) and Personal jobs (Open Heart Surgeon, Retail Salesperson). He analysed two trends – advance in computer and telecommunications technology, and new skilled Chinese and Indian labour – that are likely to shift the demand for US based labour strongly away from ‘impersonal’, towards ‘personal’ services.

He has also worked on ‘Supply Shocks and Stagflation’, which has become topical again as markets fret over the possibility of “re-living” the 1970s. However, Dr. Blinder explains that the rolling 2002-2008 oil shock was driven by a strong global demand for industrial output, rather than supply or demand shocks specific to the oil market.

Dr. Blinder was one of the proponents of “Cash for Clunkers” program, which was implemented in 2009 where by the US Government buys old and polluting vehicles and scraps them. He noted the advantages of such a program, asserting that it would benefit the environment, reduce income inequality and at the same time, stimulate the economy.

In his view, the right mix of fiscal policies to deal with Recovery and the Federal Budget Deficit would combine more stimuli in the short run with more budgetary restraint for the long run. He adds that others don’t see it that way – and ‘that is why we have policy debates – and elections’. He believes that public opinion is presumptively an ‘input to policy formation in a democracy’ because politicians respond to it or at least are believed to respond [to it].

‘Unfortunately, selling that message politically is like convincing people that the best way to travel south is to start off walking north. So we get what we have – an unenlightened public debate. As I said, it’s too bad.’

- Robert J.Shiller

As a novice in the field of economics, I ventured out into the library to find something interesting and yet not complex at the same time. With a very bright cover and an even more interesting title:”Irrational Exuberance”, this was the first book to catch my attention.

So what is “Irrational exuberance”?

“Irrational exuberance” is a phrase used by the then Federal Reserve Board Chairman, Alan Greenspan, in a speech given at the American Enterprise Institute, during the 1990s when the Dot com bubble was building up. The phrase was a warning that the market might be overvalued.

According to Shiller investing in capital markets of any kind in today’s economy is inherently unstable, because it is subject to the human influences captured in ‘irrational exuberance’.

Drawing on a wide range of published research and historical evidence, of the enormous stock market boom that started around 1982 and picked up incredible speed after 1995, it also made concrete suggestions regarding policy changes that should be initiated in response to this stock market boom and other such booms. The book argues that the boom represents a speculative bubble, not grounded in sensible economic fundamentals.

It is a serious attempt to explain how speculative bubbles come about and how they sustain themselves and tries to comprehend the change in the thought processes of the people whose actions drive the markets.

It also mentions how even the smartest people make errors of human judgment – in both the real estate sectors and the stock market due to overconfidence, ignorance of details and too much trust in the judgments of others.

An update of the celebrated bestseller of the same name, the book also considers the speculation in real estate in addition to the stock market and was among the first to warn of the global financial crisis that began with the subprime mortgage debacle in 2007.

Mr. Shiller’s book offers a dose of realism, presents a message investors would be wise to heed and must be read by anyone interested in economics or the stock markets.

(A review by Sarah George)