This small book is a plea for a long term corporate strategy against the actual short term vision of the business officers, who are hounded by financial analysts only interested by short-term capital gains.
The task force gives some excellent recommendations, although it admits that it will be difficult to change the actual mentality.

The report also contains a very good analysis of the state of the US economy and of the real challenges: sluggish productivity, decline in real wages for four-fifths of American workers, poverty, unequal income distribution, deteriorating savings, poor education.

It reminds us of Pigou's fundamental analysis of the irrationality of the human behavior: 'human society tends to place too high a discount rate on everything, due to an irrational impatience, a foolish desire for pleasure now relative to the future.' (p. 97)

A small but important book and a must read for every economist.

It is a nice book.But for me,I love Shleifer's "Inefficient market" more.This book focus on the Divident-to-price ratio and use it for the analysis of the market volatility.The writer does give us some insight about the market.But I doubt if it could stand for a long... since the market is changing all the time.

Shiller does to the Effecient Market Theory what Columbus did to the flat earth theory. This is one of the finest books on markets I have read, and I have read hundreds.

I am a futures trader/ stock investor/ produce distributor. My constant involvement in markets of one kind or another led me to develop a deep desire to understand volatility. Unfortunately the only books I could find dealt with option volatility. "Market Volatility" has been THE best book dealing with market mechanics that I have ever read. I recommend the book as a "must have" to my friends in the industry.

Schiller's case rests on a rich mix of quantitative and qualitative research and analysis. (By qualitative, I include his surveys of fund managers with small sample sizes). He challenges a great many points of conventional wisdom, showing them to be neither conventional nor wise.

One thing he fails to do, however, is systematically refute the hypothesis that high valuations (especially for tech stocks) are justified. Real option pricing, for instance, does demand an approach completely different to that of traditional discounted cash flows: if an investor wishes to take on the risk of an unproven business model, with its attendant uncertainty but large potential upside, that is not necessarily irrational.

Schiller's answer is that the P/E ratios are so far off the historical norms that it's not worth discussing further. And the option pricing view can't hold for the whole market.

The challenges to efficient market theory, and to Jeremy Siegel's (of the Wharton School at U Penn) views in "Stocks for the long run" are similarly one step short of complete.

That said, this book serves the invaluable function of challenging the complacency that pervades popular opinion and the media. My own favourite manifestation of this is the Economist's observation that when stocks rise, newspapers describe them as "strong"; when they fall, they are "volatile". What's in a name? Market sentiment, which drives prices to unsustainable levels.

This book was written because the author cares. Both as an academic and as an observer of public policy, he rightly fears the effects of a collapse in the markets. He deserves to be read.

Robert J. Shiller's "Irrational Exuberance" is about the most bearish book you could ever read about the stock market. Filled with charts and graphs and footnotes of every description, the book--whose title comes from a quote by Alan Greenspan--attacks Wall Street ideas that have become so accepted that they are household sayings. The principal such idea is that securities have always been the best investments over the long run--beating out bonds, foreign currencies, rare stamps, gold and the like. Shiller points out quite a few examples of how market prices, principally the Dow, have remained pretty flat over some periods of 10, 20, 30 years when corrected for inflation. In some circumstances, you might have done better if you put your spare cash in the bank.

Of course the market has been a great place to stash your cash if you got in at the right time--in 1982, for example, at the very start of the longest-running bull market in history. But put your money there now at your own risk. Seventy-two percent of mutual fund managers believe that we're in a speculative bubble now, with the Dow, at 11,000, reaching for figures that far exceed the historic level which would put the rational figure at 6,000. Shiller would not be surprised if the Dow settled in at, say, 10,000--in the year 2020! And what's more, he'd not be astonished if the Dow sank to 6,000 in the near future.

I was convinced after reading Shiller. He has marshalled his facts in a carefully researched screed against following the sheep-like crowds and I have replaced the tens of millions I had invested in common stocks with far more secure, if less exciting, instruments.

Harvey S. Karten film_critic@compuserve.com

This is a treaty on Behavioral Finance. Shiller makes a strong case that markets are not efficient, but respond to crowd psychology.

Shiller rebuts the Efficient Market Hypothesis. He has analyzed many U.S. stock market crashes. In each case, he did not find information absorbed by institutional and individual investors that justified the market downturns. In all cases, it appears the investors were "aware" of the reasons for the market downturn as explained by the financial press after the downturn occurred. For Shiller, this means that the reasons were false, and that investors do not digest information in such an efficient and immediate way as stated in the Efficient Market Hypothesis.

Shiller believes investors are irrational, and trade based on certain premises such as herd instinct, momentum, belief that stocks always go up. These beliefs are reinforced by the media. The resulting market valuation at the time the book was published (first quarter 2000, the market's peak) was far above its intrinsic value. As they say, the rest is history. Shiller's timing was perfect. We have been in a Bear market ever since.

Summary of opinion.
The risk management concepts developed by Shiller are far fetched. The likelihood of any being ever implemented is low. Thus, this book is not the best use of a reader's time. You are better off reading Shiller two earlier excellent books: Market Volatility, and Irrational Exuberance.

Abstract.
Shiller develops economic concepts to reduce important risks within our society. These include:

1)Livelihood insurance against poor career choices.
2)Home value insurance.
3)Income-linked loans for reducing the risk of hardship and bankruptcy.
4)Inequality insurance. Protecting the distribution of income.
5)Intergenerational Social Security: Sharing risks between Young and Old.
6)International Agreements for Risk Control.

Below I will briefly evaluate these concepts.

Livelihood insurance.
Workers could get coverage against the decline in income that workers in the same field have experienced. The decline in income for the workers in this specific field would be measured whether the worker has remained in this given field or not. Take a cohort of 100 professional violinists. If 50 exit the field, and make their living as bartenders, this cohort of 100 violinists income would really reflect the income of 50 professional violinists and 50 bartenders. By the end, what would this income index really tell you? Shiller underestimates the liquidity of our labor markets. Today, you can find as many astrophysicists in consulting firms, and investment banking. The same is true for engineers. Many engineers end up as consultants in fields often not directly related to engineering, instead of working for engineering firms.

Home value insurance.
Homeowners could buy insurance against the value of their homes. So, if the value of their homes went down, they would receive payments from the insurer. This product runs into two hurdles. First, if priced correctly, this product would be very expensive. Few homeowners would be willing to pay per year the several percentage points on the value of their homes to insure them against a decline in value of their homes for just a 12 month period. It is essentially the price of a Put option on the value of your home. Secondly, the brunt of this risk is not born by homeowners but by creditors. To conclude, this insurance product would be expensive to cover a risk that is mainly born by another party (creditors).

Income linked loans.

Borrowers would repay loans as a fixed percentage of their income. So, if their income goes down, the debt burden goes down, and vice versa. This product will never reach a critical mass because it is unworkable for banks. Banks try to match the cash flows from their assets with the ones from their liabilities. An income linked loan would have such an unpredictable cash flow that it could not be matched by any bank liabilities cash flow. You figure the deposits and bonds issued from banks are not income linked. As a bank depositor or a bondholder, you demand a very predictable cash flow stream, not one dependent on the income of the bank's borrowers. Thus, I don't see income linked loans becoming part of "The New Financial Order."

Inequality insurance, protecting the distribution of income.
Here the tax structure would be automatically adjusted to maintain a predicated distribution of income. This would have horrendous implications for financial planning. You would be uncertain as to your ultimate tax burden at the end of the year when the distribution of income would be recalculated.

Intergenerational Social Security: Sharing risks between Young and Old.
This product would overhaul the structure of Social Security. Now, the Social Security system is structured as a pension system. Currently, social security contributions far exceed the payments. This is to build up the Social Security trust fund for when the large Baby Boomer generation retires, when payments will far exceed contributions. With Shiller, the income earned by active workers would be shared on a prorated basis with retirees. He states that currently retirees represent 11% of the population. So, the workers contribution would be 11% of their wages to support the retirees. But, this percentage will double in just a few decades. So, the 11% contribution will become 22%. This is unfair to the next generation. The current system of prefunding the social security trust to get set for higher social security payments in the future is better. It equalizes the burden of supporting retirees between current workers and their next generation. Shiller concept does the reverse.

International Agreements for Risk Control.
Countries would enter agreements that would hedge against their economies under performing in the future. So, let's say that India's GDP is expected to increase by 4% per year over the next 10 years. India would enter into a contract with a group of countries (U.S., UK, Germany, etc...). The group of countries would make a payment to India anytime India's GDP would grow by less than 4%. But, India would have to make very large payments to the group of countries whenever its GDP rose by more than 4% per year. It is unclear how India would come up with that extra money. Would it have to raise taxes on its citizen? The resulting counterparty risk associated with India making such payments would be unmanageable.

In the last two decades fascinating developments and innovations have occurred in the field of finance. Now called financial engineering, the techniques used therein are dependent on highly sophisticated constructions in mathematics. Risk analysis has been a large part of this drive for innovation in finance, and is the subject of this book. The author proposes some "radical" innovations for risk management, and it is fascinating reading. Those who welcome new ideas and proposals in finance should find the book interesting, but the book is addressed to a non-technical general audience, and so most of the mathematical justification behind the ideas is left out. However, references are given for the author's work and others he has collaborated with for the reader who needs a more quantitative approach. There are some philosophical threads in the book that are somewhat troubling, for those who do not agree with the political and moral philosophy of John Rawls (who the author uses as a "foundation"), but the substance of his ideas can still be accepted even if this philosophy is explicity rejected.

The author proposes six ideas for what he calls a "new financial order": livelihood insurance, macro markets, income-linked loans, inequality insurance, intergenerational social security, and international agreements. He also proposes the development of massive databases, what he calls GRIDS, standing for "global risk information databases", in order to provide the information that allows effective risk management, and "indexed units of account", which is a new "electronic money" that serves to optimize the negotiating of risk.

All of part three of the book is devoted to these six ideas. The author proposes 'income indexes" as a way of hedging livelihoods and compares livelihood insurance with disability insurance. Those readers in the scientific profession will appreciate his ideas on livelihood insurance, due to the extreme risk in entering a specialized scientific field at the present time. Interestingly, the author compares this risk management device with academic tenure, believing that the latter is a good example of what could be done in society as a whole. He does not elaborate though on how universities reduce the "moral risks" in the tenure system, unfortunately. Optimizing productivity in individuals who are guaranteed lifelong employment is extremely difficult, and there are strong arguments against the institution of tenure for this reason.

The author's discussion of "macro markets" is very interesting, especially if read in conjunction with his research papers. Motivating it with a real world example of the Citibank loan to Bulgaria in 1994, the interest rate of which was tied to the growth rate of the Bulgarian economy, he proposes a few ways in which risks can be hedged for everyone, such as 'perpetual futures', and 'macro securities', the latter of which he prefers and discusses at length. These are securities that are automatically issued and redeemed on demand, but only in pairs. Based again on indexes, there is a macro whose price increases when the index increases, the other going down when the index increases.The author gives several examples of the forms which these macro securities might take.

Because of its philosophical orientation, the author's ideas on "inequality insurance" may be somewhat troubling, for it is the government who is to set legislation on the level of income inequality, and prevent inequality from getting worse. But the tax system will be "framed" so as appear to enforce a measure of inequality rather than the specification of tax rates. The author explains how the inequality insurance payments would be calculated using what he calls the "after-tax Lorentz curve", coupled with the "Gini coefficient", which is a measure of how much the Lorentz curve sags. Historical evidence though casts much suspicion on the government's ability to do anything of value in the economic realm. In addition, inequality, as meausured by the author, does not say anything of the history of what led to that inequality. The history must be known before any action should be taken to correct the inequality. Inequality in and of itself does not entail corrective action be taken to dissolve the inequality.

The biggest virtue of the book is the author's awareness, and subsequent discussion, of the role of technological advancement in economic affairs, particularly the role to be played by machine intelligence. However, in my opinion, I think he is wrong when he expresses the belief that low-income workers will be at higher risk for losing their jobs because of the advances in artificial intelligence. On the contrary, these kinds of jobs will probably be the most secure, since it will not be cost effective to have robots do the kinds of tasks involved in these jobs. The highest risk will be for those who are in middle management, for the tasks that must be done in these positions can be done much more effectively by intelligent machines. Indeed, areas such as accounting, information management, financial engineering, and other areas that are information-intensive will be run entirely by machines in the near future. The resulting massive loss of jobs could be dealt with by using financial innovations along the lines of what the author proposes in this book. The enormous wealth generated by intelligent machines could be used to alleviate the financial strain that will be experienced by the people who lose their jobs to these machines. And the machines themselves may have their own unique and clever methods to solve this problem and others that arise in the coming decades.

In this book, Shiller presents, in a concise and simple way, the direction in which risk management should go in the future if it is to serve its purpose. He reviews the history of risk management, with demonstrations of how far it has come and how certain successes were achieved mainly through psychological framing. He then expands these concepts to areas to be tackled in the future, such as home equity insurance, GDP insurance, and livelihood insurance.

My main criticism of the book is the title, which seems overly ambitious. In my opinion, it should have been somehitng like Future Advances in Risk Management, but then again sensationalism does help sell books. Some of the criticism I found of the book is that it is overly simplistic. Like many outstanding ideas, after they are known they seem simple, but it is by no means easy to come up with them. Risk management is an area that requires a lot of development, and insurance/finance professionals are sure to gain much from the ideas in this book. If the particular ideas in the book don't match one's area, I believe it is still an important read as a source of ideas and a way of thinking that can be applied I believe in many different areas.