I was strolling through a bookstore recently and picked up two books that are quite different but equally significant.

The first is “F.I.A.S.C.O. Blood in the Water on Wall Street” by Frank Partnoy. For me, this book filled in all the gaps in coverage of the financial crisis. If you want to understand the financial crisis and at a deeper level, you need to pick up a copy of this book.

Partnoy originally published the book in 1997 and predicted the financial crisis would occur as a result of derivatives trading. I assume that sophisticated readers will find the book overly generalized, but that’s what makes the book accessible to a wide audience: Partnoy aptly describes the “rocket science” of derivatives in lay terms. For me, the book reveals the mechanisms in investment banking that aren’t spelled out in mainstream media. Here’s a quote from the Afterword:

Today, when I am asked if anyone saw this crisis coming … my answer is yes. We invented the products that ultimately blew up the banks. We created the instruments at the center of the subprime mortgage meltdown. We fostered a culture of epic greed, which nearly destroyed the financial system.  (Partnoy, 248)

The second book is “On Being Certain: Believing You Are Right Even When You’re Not” by Robert A Burton, M.D. The title says it all. It’s a topic I’ve broached several times on this blog (for example, here and here). The book is written for a general audience but provides summaries of experiments and cases that show the differences between the feeling of knowing and actually knowing. Here’s an excerpt from the beginning of the book:

Within one day of the space shuttle Challenger explosion, Ulric Neisser a psychologist studying flashbulb memories (the recall of highly dramatic events), asked his class of 106 students to write down exactly how they’d heard about the explosion, where they were, what they’d been doing, and how they felt. Two and a half years later, they were again interviewed. Twenty-five percent of the students’ subsequent accounts were strikingly different than their original journal entries. More than half of the people had lesser degrees of error, and less than ten percent had all the details correct…. What startled me about the Challenger study were the students’ responses when confronted with their conflicting accounts. Many expressed a high level of confidence that their false recollections were correct, despite being confronted with their handwritten journals.  (Burton, 10-11)

For anyone who has read these books, I’d love to hear your thoughts on them!