Too Smart for Our Own Good: Ingenious Investment Strategies, Illusions of Safety, and Market Crashes

How investment strategies designed to reduce risk can increase risk for everyone―and can crash markets and economies

Financial crises are often blamed on unforeseeable events, the unforgiving nature of capital markets, or just plain bad luck. Too Smart for Our Own Good argues that these crises are caused by certain alluring investment strategies that promise both high returns and safety of capital. In other words, the severe and widespread crises we have suffered in recent decades were not perfect storms. Instead, they were made by us. By understanding how and why this is so, we may be able to avoid or ameliorate future crises―and maybe even anticipate them.

One of today’s leading financial thinkers, Bruce I. Jacobs, examines recent financial crises―including the 1987 stock market crash, the 1998 collapse of the hedge fund Long-Term Capital Management, the 2007–2008 credit crisis, and the European debt crisis―and reveals the common threads that explain these market disruptions. In each case, investors in search of safety were drawn to novel strategies that were intended to reduce risk but actually magnified it―and blew up markets. Too Smart for Our Own Good takes a behind-the-curtain look at:

• The inseparable nature of investment risk and reward and the often counterproductive effects of some popular approaches for reducing risk
• A trading strategy known as portfolio insurance and the key role it played in the 1987 stock market crash
• How option-related trading disrupted markets in the decade following the 1987 crash
• Why the demise of Long-Term Capital Management in 1998 wreaked havoc on US stock and bond markets
• How mortgage-backed financial products, by shifting risk from one party to another, created the credit crisis of 2007–2008 and contributed to the subsequent European debt crisis

This broad, detailed investigation of financial crises is the most penetrating and objective look at the subject to date. In addition, Jacobs, an industry insider, offers invaluable insights into the nature of investment risk and reward, and how to manage risk.

Risk is unavoidable―especially in investing―and financial markets connect us all. Until we accept these facts and manage risk in responsible ways, major crises will always be just around the bend. Too Smart for Our Own Good is a big step toward smarter investing―and a better financial future for everyone.

About the Author

Bruce I. Jacobs is co-founder, co-chief investment officer, and co-director of research at Jacobs Levy Equity Management. Jacobs Levy has managed quantitative equity strategies for sophisticated institutional investors for 30 years. Dr. Jacobs was on the finance faculty of the Wharton School from which he received his Ph.D. in Finance. His research has received several awards from financial journals. He serves on the Advisory Boards of the Journal of Portfolio Management and the Journal of Financial Data Science, has served on the Financial Analysts Journal Advisory Council, and was an Associate Editor of the Journal of Trading. He is Chair of the Advisory Board of the Jacobs Levy Equity Management Center for Quantitative Financial Research at the Wharton School.

Dr. Jacobs is author of Too Smart for Our Own Good: Ingenious Investment Strategies, Illusions of Safety, and Market Crashes and Capital Ideas and Market Realities: Option Replication, Investor Behavior, and Stock Market Crashes, and is co-author with Ken Levy of Equity Management: Quantitative Analysis for Stock Selection, and Equity Management: The Art and Science of Modern Quantitative Investing, 2nd ed., and co-editor with Ken Levy of Market Neutral Strategies. He is also co-editor of The Bernstein Fabozzi/Jacobs Levy Awards: Five Years of Award-Winning Articles from the Journal of Portfolio Management, Volumes One through Three, and was a featured contributor to How I Became a Quant: Insights from 25 of Wall Street’s Elite.