How beliefs shape financial markets and expose the economy to major risks The collapse of Lehman Brothers in September 2008 caught markets and regulators by surprise. Nicola Gennaioli and Andrei Shleifer walk readers through the unraveling of Lehman and the ensuing meltdown of the US financial system, and present new evidence to illustrate the destabilizing role played by the beliefs of home buyers, investors, and regulators. Using the latest research in psychology and behavioral economics, they present a new theory of belief formation that explains why the financial crisis came as such a shock to so many people-and how financial and economic instability persist. A Crisis of Beliefs is a must-read for anyone seeking to navigate today's unpredictable financial waters.

The efficient markets hypothesis has been the central proposition in finance for nearly thirty years. It states that securities prices in financial markets must equal fundamental values, either because all investors are rational or because arbitrage eliminates pricing anomalies. This book describes an alternative approach to the study of financial markets: behavioral finance. This approach starts with an observation that the assumptions of investor rationality and perfect arbitrage are overwhelmingly contradicted by both psychological and institutional evidence. In actual financial markets, less than fully rational investors trade against arbitrageurs whose resources are limited by risk aversion, short horizons, and agency problems. The book presents models of such markets. These models explain the available financial data more accurately than the efficient markets hypothesis, and generate new predictions about security prices. By summarizing and expanding the research in behavioral finance, the book builds a new theoretical and empirical foundation for the economic analysis of real-world markets.

How investor expectations move markets and the economy The collapse of Lehman Brothers in September 2008 caught markets and regulators by surprise. Although the government rushed to rescue other financial institutions from a similar fate after Lehman, it could not prevent the deepest recession in postwar history. A Crisis of Beliefs makes us rethink the financial crisis and the nature of economic risk. In this authoritative and comprehensive book, two of today's most insightful economists reveal how our beliefs shape financial markets, lead to expansions of credit and leverage, and expose the economy to major risks. Nicola Gennaioli and Andrei Shleifer carefully walk readers through the unraveling of Lehman Brothers and the ensuing meltdown of the US financial system, and then present new evidence to illustrate the destabilizing role played by the beliefs of home buyers, investors, and regulators. Using the latest research in psychology and behavioral economics, they present a new theory of belief formation that explains why the financial crisis came as such a shock to so many people-and how financial and economic instability persist. A must-read for anyone seeking insights into financial markets, A Crisis of Beliefs shows how even the smartest market participants and regulators did not fully appreciate the extent of economic risk, and offers a new framework for understanding today's unpredictable financial waters.

The Efficient Markets Hypothesis has been the central proposition of finance for nearly thirty years. This book, by one of the foremost US economists, presents an alternative view of financial markets: behavioral finance. Shleifer demonstrates the oversimplification of EMH both in the common assumption of perfect rationality and the failure of arbitrage to adjust prices correctly. By also detailing the empirical failings of EMH, this books makes a significant contribution to the future direction of financial theory.

A noted economist argues that the ubiquity of regulation can be explained by its greater efficiency when compared to litigation. Government regulation is ubiquitous today in rich and middle-income countries-present in areas that range from workplace conditions to food processing to school curricula-although standard economic theories predict that it should be rather uncommon. In this book, Andrei Shleifer argues that the ubiquity of regulation can be explained not so much by the failure of markets as by the failure of courts to solve contract and tort disputes cheaply, predictably, and impartially. When courts are expensive, unpredictable, and biased, the public will seek alternatives to dispute resolution. The form this alternative has taken throughout the world is regulation. The Failure of Judges and the Rise of Regulators gathers Shleifer's influential writings on regulation and adds to them a substantial introductory essay in which Shleifer critiques the standard theories of economic regulation and proposes "the Enforcement Theory of Regulation," which sees regulation as the more efficient strategy for social control of business. Subsequent chapters present the theoretical and empirical case against the efficiency of courts, make the historical and theoretical case for the comparative efficiency of regulation, and offer two empirical studies suggesting circumstances in which regulation might emerge as an efficient solution to social problems. Shleifer does not offer an unconditional endorsement of regulation and its expansion but rather argues that it is better than its alternatives, particularly litigation. Contributors Nicola Gennaioli, Anthony Niblett, Richard A. Posner, Simeon Djankov, Rafael La Porta, Florencio Lopez-de-Silanes, Edward L. Glaeser, Simon Johnson, Casey B. Mulligan

Russia's historic transition from communism in the 1990s sparked intense, often ideological debates. This book offers a firsthand glimpse into the intellectual challenges that Russia's turbulent transition generated. It deals with many of the most important reforms, from Gorbachev's half-hearted "perestroika," to the mass privatization program, to the efforts to build legal and regulatory institutions of a market economy. The essays in this book attempt to identify the driving forces of Russia's rapidly changing economic and social reality.

To understand Yeltsin's reforms, the book argues, it is essential to grasp their twin goals of destroying the remnants of the communist order and building the institutions of a market economy. Time after time, reforms were shaped to assure that communism, with its overwhelming control of the economy and society, the planning ministries, and pervasive centralization, cannot come back to Russia. Many of the successes, as well as the pathologies, of the Russian economy during the 1990s must be understood from this perspective. Despite many setbacks, Yeltsin succeeded in his life's mission. By the end of the twentieth century, both a market economy and a democracy were developed in Russia. Each was both vulnerable and flawed, but the escape from communism was certain. A decade after communism, Russia became a normal country.

The first book to describe Russia's massive economic transformation for an American audience, Kremlin Capitalism provides a wealth of data and analyses not previously available in this country. The authors articulate the political and economic goals of Russian privatization, examine the current ownership of the largest enterprises in Russia, and chart the serious problem of corporate governance in the new private businesses. Kremlin Capitalism is based on the only continuous study of Russian privatization throughout the Russian Federation from 1992 to the present. The authors tracked down the story of the transition in the cities, towns, and villages of fifty of Russia's eighty-nine provinces, updating their findings after the June 1996 election. The result is an up-to-the-minute report of the largest property transfer in history and an analysis of one of this century's most significant economic transformations. The volume also characterizes the position of workers in terms of unemployment, wages, union power, and their changing role as employee shareholders.What really happened when Russia privatized its economy? The Kremlin brokered the initial struggle among different interest groups eager to claim a portion of Russian property: workers, managers, the Mafia, the old Soviet bureaucracy, regular citizens, entrepreneurs, Russian banks, and foreigners. While competing with one another, all struggled to free themselves from seventy years of Communist economic culture. Four years after the process began, have large companies learned to offer goods and services profitably and pay dividends to shareholders? Individual stories come alive as the book explores problems Russians face in structuring a new economic system, defining the ownership and governance of thousands of corporations one by one. Russian economic practices are being forged in the heat of fierce political struggles between resurgent Communists and nationalists and old Soviet managers, on the one hand, and more liberal elements of its infant democratic system on the other. Whether a few big conglomerates and the powerful banks and holding companies from Soviet days will dominate the new Russian economy to the exclusion of most citizens remains to be seen.Many questions persist. How will billions of dollars of capital be raised to retool, restructure, and reorient the heart and soul of Russia's economy? Will open stock markets stimulate a new economic order or will that new order be imposed through strong state supports and subsidies? What role will be played by shadowy conglomerates that are trying to shape a disorganized economy into something resembling the old Soviet system? The authors note the paradox of a capitalism conceived, designed, implemented, and evaluated by the Kremlin when one aim of reform is to allow market forces to play freely. Kremlin Capitalism asks whether rapid privatization has catalyzed or complicated the transition to a more liberal political and economic system, a question that will reverberate for decades.

In many countries, public sector institutions impose heavy burdens on economic life: heavy and arbitrary taxes retard investment, regulations enrich corrupt bureaucrats, state firms consume national wealth, and the most talented people turn to rent-seeking rather than productive activities. As a consequence of such predatory policies--described in this book as the grabbing hand of the state--entrepreneurship lingers and economies stagnate.

The authors of this collection of essays describe many of these pathologies of a grabbing hand government, and examine their consequences for growth. The essays share a common viewpoint that political control of economic life is central to the many government failures that we observe. Fortunately, a correct diagnosis suggests the cures, including the best strategies of fighting corruption, privatization of state firms, and institutional building in the former socialist economies. Depoliticization of economic life emerges as the crucial theme of the appropriate reforms. The book describes the experiences with the grabbing hand government and its reform in medieval Europe, developing countries, transition economies, as well as today's United States.