Illuminating!

Don't be fooled by the shocking pink cover. This ain’t chick lit!

John Kay is one of Britain's leading economists and thinks extremely well. He also writes extremely well--check out his regular column in the Financial Times too. The Long and the Short of It is subtitled “A Guide to Finance and Investment for Normally Intelligent People Who Aren't in the Industry” and it is exactly that. If you are interested in personal investment, and if you want to draw a pension you should be, this is a great introduction written in a clear and engaging style. He is excellent in helping the reader to distinguish the financial salesman (whose sole interest is enlarging his/her personal wealth, with little regard for yours) from the genuine advisor.

I particularly recommend chapter 6 on “Risk and Reward”, which explains how one ought to think about quantifiable risks and how they are priced. Modern economic theory (SEU = subjective expected utility, and the CAPM = capital asset pricing model) is highly illuminating. You should behave as if it were true, but recognise that it is not. That is, you can take advantage of the fact that most people think irrationally about risk.

Chapter 7 on “A World of Unknowns” extends his analysis to include unknown unknowns, again highly illuminating. If every banker had read it we might not be in the mess we are in today.

Of course the book is about personal investment, but the ideas in it should also be at the core of business investment decisions.