What is the best books about understanding

You chose these books because they help the layman to understand economics and finance.

Yes—there is a kind of ‘two cultures’ issue between the general literate public and the world of economics. It’s possible, for example, to be a functioning competent, literate, well-educated adult and not know what a bond is. If you listen to people very casually saying, ‘Well, the thing about the interest rate is …’, just those two words – ‘interest rate’ – imply a set of quite complicated linked ideas about the impact on business, the impact on the cost of borrowing, economic growth, employment, house prices, and exchange rates. No one is born knowing that.

I think the standard of writing in the world of economics and money is high, but pretty much everything is addressed at people who already ‘speak’ money. It’s very unlike, say, popular science where the books do walk you through the basics, until the point that you cease being unable to understand, for example, quantum mechanics in the comfort and safety of your own home. There’s a level of discourse about money that’s really interesting, but it does assume that you have that competence, and it’s quite striking how few books there are that properly address the general reader.

The Money Game

by 'Adam Smith'

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Tell me about The Money Game by Adam Smith.

Adam Smith is a pseudonym – he was an extremely successful professional investor called George Goodman, who also wrote a newspaper column. This is a real insider’s account of the way that the money markets and trading works. And the most helpful way of understanding it is as a sort of a game – taken dead seriously, but contentless, in the way that games are. He talks about Keynes’s idea of how investment is intolerably boring to anyone who lacks a gambling trait in their character. It’s very funny, very fluent, very well-written and also a real pro’s view. I don’t know why it isn’t famous any more.

“It’s possible…to be a functioning competent, literate, well-educated adult and not know what a bond is”

The first section is called “You: Identity, Anxiety, Money,” and it’s very good on the way that money touches on things about anxiety. In a way, it’s a reassuring book, because it tells you that the ways that the professionals are conflicted and confused actually pretty much exactly mirrors the way that the rest of us are. The professionals have more tools, but they have the same underlying complexities and ambiguities and ambivalences. George Goodman also wrote a very interesting book about counterculture, about transcendental meditation and yoga and so on. He has an unusually wide-ranging mind and set of interests.

Why did he write this book?

I think he also felt what I was talking about: That there was this sort of gap, that there wasn’t this kind of writing directed at the lay reader and that there should be. It’s so important that people should understand. It’s very obvious now after the blow-up, but this thing goes very deep in terms of how modern society works. There’s also a larger point, I think, which is that democracy implies an informed electorate.

Liar’s Poker

by Michael Lewis

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Shall we talk about Liar’s Poker?

The great thing about it is, it’s still a wonderfully entertaining book: An absolutely hilarious, very, very dark, vivid account of how Michael Lewis came out of Princeton and, with basically no qualifications, got a job in the bond trading department of Salomon Brothers. This was in the early 1980s, just at the point at which the bond market really started to take off in terms of its size. They had complete free rein to invent all these new financial products and the Financial Products Division, where Lewis worked, wrote all the CDS, the credit default swaps insurance that ended up taking the system over the edge of a cliff. There really is a direct line in the narrative between them and the great crash, so there’s a real historic interest in the book, as well as anything else.

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But the big thing about Liar’s Poker is that it’s still one of the very few books that actually describes the psychology of that world from the inside. Lewis actually was one of these guys, and I wouldn’t shy away from using the words genuinely important – it’s genuinely important to hear what they’re thinking and how they’re reacting. Lewis says that it was meant to be a book that completely put people off working in the world of money and made them want to be marine biologists, whereas in fact, as he says now, people just read it as a how-to book.

Didn’t he realise that it might have that effect?

Well, I think a lot of people who disapprove, or feel they’ve seen through the world of money are very slightly in love with it. There’s something exhilarating about baddies always, and about people who insist on the world as it is rather than on the world as it might be or should be. And the people in these worlds are really like that. There’s something very thrilling about the amorality of it. But, for all that, I think Lewis was also disgusted and had had enough. No doubt he’d always wanted to tell stories, which I think he does superbly well and it got him away from it all.

Against the Gods

by Peter L Bernstein

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What is Against the Gods about? 

The package description of it is that it’s a ‘history of risk’ which makes it sound dry, but it’s an absolutely fascinating, for-the-layman account of how humanity mastered risk (in the mathematical sense) and came to understand probability.

Bernstein makes the point that, particularly in the Middle Ages, betting on dice was seen as a grievous sin by the church: Because God decided everything and chose whether it would come up six or one, so it was a form of blasphemy to do something so frivolous as to play with what God wanted. But what happened was that gamblers got interested in the fact that certain sorts of numbers came up more often, and you had this extraordinary thing of gambling and mathematics walking hand in hand, as people like Fermat and Pascal got interested in how probabilities were created. Effectively, the invention of probability came out of studying dice.

“Bernstein makes the point that, particularly in the Middle Ages, betting on dice was seen as a grievous sin by the church”