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Ask HN: Book recommendations for understanding financial systems?

527 points by mx24 ↗ HN
With all the craziness this week in the stock market I've become interested in learning about how money works in our society. Fiat currency, the federal reserve, the stock market, etc. Any good book recommendations?

210 comments

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tracer4201
Reading Stress Test by Timothy Geithner taught me quite a bit, although it’s not a primer on the financial system but play by play of the financial crisis.
chrisanthropic
I really enjoyed the graphic novel "Economix: How our economy works (and doesn't work)" by Goodwin & Burr.

I found it informative, clear, concise, and funny at times, all uncommon for educational economic text in my experience.

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igorkraw
Since I'm mainly interested in risk and volatility, this list might be a bit biased but here we go:

A random walk down Wallstreet

Options and volatility pricing, by Natenberg

Why stock markets crash, by Didier sornette

Manias, panics and Crashes by Aliber and Kindleberger

Debt: the first 5000 years

harry8
I studied it, got the cfa designation, worked in the field.

Yet to see a better, more accurate or more succinct treatment than "A Random Walk Down Wall St" by Malkiel. Can't recommend it enough. Readable. Required knowledge.

docdeek
You can't go wrong with 'The Big Short'. I saw the film a few times before I ever bought the book, and it's still enlightening.
0x1221
I would say that The Big Short is more impactful if you already have some general understanding of the markets.
kortilla
Michael Lewis has a habit of... let’s say focusing on convenient facts to emphasize a narrative that doesn’t usually match reality. His books are entertaining (I think I’ve read them all), but they are actually a pretty bad way to learn about how the markets work.
jayflux
The big short is a great book, but not sure it’s a good primer on how the financial system works for someone learning.
allie1
I started "Big Debt Crises" by Ray Dalio a while ago and so far it's proving to be a very good introduction on what you're looking for.
abeaulne
How The Economic Machine Works by Ray Dalio

https://www.youtube.com/watch?v=PHe0bXAIuk0

I don't agree entirely but good signal-to-noise ratio on this content

cinquemb
"Ray Dalio says 'cash is trash' and advises investors hold a global, diversified portfolio" - Jan 21 2020

Had you have listened to him, you would have just been taken out back, shot, and put in one of wuhans finest crematoriums… better off reading "Statistical Consequences of Fat Tails"[0]

[0] https://arxiv.org/abs/2001.10488

nabla9
His advise is still sound if you are an investor and not speculator.

The part of your investment that is in stock should be determined your investment horizon. If you don't need to sell your stock in next 15 years, don't hold cash.

cinquemb
Yeah, would have played out very well for those top ticking n225 in 1989, esp with every global CB's trying to follow in the footsteps of the BOJ, while everyone is crowding into "diversification" and searching for yield…

I consider investors to be the same as speculators, just speculators who think their beliefs will remain valid over long time frames… cause that's the gamble.

nabla9
investor who does

- dollar cost averaging,

- diversification, small cost investing,

- has sufficiently long time-horizon

has never lost money on 15 year timescale, at least past WWII.

cinquemb
Even assuming that's true, one can't say the sort of risk and investor took on 15 year look-backs since WWII has been evenly distributed to get some sort of acceptable return, nor can one say that this will continue hold true for the next 15 years. You may believe it hold true though, and many do… but very few will do their homework on the risks to their "diversification" and their own changing liquidity constraints that will occur over the "sufficiently long time-horizon"
nabla9
> assuming that's true,

Don't assume. You can calculate it in spreadsheet.

> You may believe it hold true though,

In the long run we are all dead. We don't need to believe they hold true. Certainty is not part of this world. Because you never know is just rhetorical argument. Quantifying risk and going on that is good enough.

cinquemb
>Quantifying risk and going on that is good enough.

Because most people who are blindly buying indexes around the world thinking they are diversified and DCA are certainly doing that…

thekyle
So if you don't believe in investing then what are your plans for retirement? Just to save enough money into a bank account?
cinquemb
I didn't say I didn't believe in investing, just that I don't consider it any different from speculating, just the time frame typically involved.
nabla9
That's not bad intro, but it's very rudimentary. It has necessary errors of omission. It really don't teach teach how economy works

Btw. his site https://www.economicprinciples.org/ has good reading if you scroll down below the video.

akga
For understanding how money works, I’d recommend Debt: The First 5000 Years by David Graeber.
[dead] mrpickels
Simple - money is a scam, only value for it is trust of other people. Keynesian economics sucks, globalism is evil.
WalterBright
"Monetary History of the United States" by Milton Friedman.

It's tough sledding, but worth it. And by giving the history, one comes to understand how we got to where we are.

"Capitalism" by Reisman gives a solid theoretical foundation on topics like rent control, inflation, etc. I especially found illuminating its coverage of the 1970's oil crisis and how the root cause of it was price controls.

I'd avoid economics books written by journalists and politicians, as all I've run across are dominated by ignorance, bias, and agendas. Ones by economists often have agendas, too, but they aren't nearly as ignorant. Just imagine a technical book about electronics written by a journalist, and you'll know what I mean.

smarri
Ascent of Money - Niall Ferguson

The Long and Short of It - John Kay

A great place to look is the second hand study books for professional qualifications like the CFA, Chartered Banker and so on

motohagiography
Ascent of Money is indispensable as a foundation for the whys and hows of banking from it's origins and first principles. It's a history book.

Anything technical (mathematical finance) is really not going to provide a foundation without the historical why of the instruments creation and use. One you have that, the most efficient way to understand it after would be with Quantlib (https://www.quantlib.org/docs.shtml)

There is a lot of middle brow commentary (krugman, piketty, reinhard/rogoff, dalio, taleb, etc) that will be entertaining and philosophical, but only that. The guts of economics (Keynes, Galbraith, Mises/Hayek) are very dense, and provide a very narrow, depth first plunge into something you won't be able to apply well without a more complete education.

Functional grasp of (re)insurance, securitization, liquidity, and the bond/debt markets is the best royal road, I"d say.

eruditely
I disagree that Taleb is "middle-brow", check out his new technical incerto book, from what I've heard its rather rigorous.
talolard
I liked Trading and Exchanges by Larry Harris
haileris
Seconding this. It's a fantastic book, a little outdated but easy to fill in the gaps.

I think the best route is to read this, skip all of the books marketed to retail traders. Read the things the professionals read like the CFA study materials.

Mark Meldrum also has a comprehensive coverage of the CFA body of knowledge on YouTube.

FabHK
That book is about securities trading and market microstructure; it has very little to do with what OP asked for.
gargarplex
Why would you ever read a book on financial systems by someone who isn’t absurdly rich
regularfry
Some of the books being mentioned here are by people who got absurdly rich.
gargarplex
Which ones?
regularfry
Just on a quick scan we've got Graham, Buffett, Soros, Taleb... those are before I need to go and look up personal net worth for some of the other names. I'd bet on Burton Malkiel having done alright for himself, too.
gargarplex
Graham, Buffett, Soros – sure, ok, although I doubt they're giving away the keys to the kingdom in their books. Buffet himself is notorious for saying that great ideas are proprietary and not to be shared. In the investment world, in stark contrast to the tech community, ideas are as valuable as execution. Even in VC proprietary dealflow is considered to be valuable.

There is actually some controversy as to how much money Taleb made from trading and portfolio management as opposed to writing.

regularfry
Right, so your argument is what? That no valuable idea is ever written down? Or that no written down idea is valuable? Why would either of these be true?
gargarplex
I see a common fantasy among developers; they want to apply their sophisticated intellect and technical knowledge towards exploiting financial markets. So, my argument is that if this is what one is up to, one is not going to find many valuable ideas spelled out and spoon fed in a book.
regularfry
But that's a non sequitur. There's no connection between the intent of the reader and the value of the content. Whether the reader is in the right mental state to learn from it is another matter entirely...
gargarplex
Ok. I acknowledge your points and am glad we had this discussion.
kortilla
Why would you ever read a book on aeronautical engineering from someone who isn’t a million miler?
gargarplex
Inappropriate metaphor
kortilla
I know one of the people who literally wrote a chunk of the matching engine on one of the larger exchanges. He’s not absurdly rich but a book from him on high performance order book management at scale would absolutely worth a read.

The metaphor is appropriate because quite frequently people who use things to the greatest effect know very little about the implementation or how it actually works.

gargarplex
That's a reasonable argument then, and now I appreciate the metaphor.

If one is interested in the technical details of implementation for technical reasons, I would agree that a brilliant and interesting engineer wouldn't necessarily be in line to profit from their value creation although would be available to discuss mechanics of implementation.

yalooze
For a slightly different take, Fooled By Randomness and The Black Swan by Nassim Taleb. I would read some of the more direct recommendations here and then read Taleb to remind you that not everything is predictable or easily explainable.
evjan
The entire Incerto book series by Taleb (which includes Fooled by Randomness and The Black Swan) are awesome and they are talking about big catastrophic events like the current one. This pandemic is a classic Black Swan event: it's a surprise, it has a major impact and lots of experts will try to say that it was easily foreseeable in hindsight.
pergadad
It's not a black swan, a pandemic was long on the horizon (think SATS, MERS, Ebola, ...).

Just to add: I found taleb pretty opionated and had trouble distinguishing his own opinions from facts/theories.. I'd not recommend his books.

cinquemb
> It's not a black swan, a pandemic was long on the horizon (think SATS, MERS, Ebola, ...).

I agree with this statement

> Just to add: I found taleb pretty opionated and had trouble distinguishing his own opinions from facts/theories.. I'd not recommend his books.

Everyone has an opinion… but very few will step through the mathematical models (and where/how they break down) behind how they are gauging/backtesting the risk of ones assumptions (and go about figuring out how to adopt it to your own circumstances), like taleb does.

katzgrau
"a surprise for the turkey is not a surprise from the butcher."

Whether it's a black swan event depends on the perspective you're taking.

Grustaf
I strongly recommend reading the (relatively few) one-star reviews of his books on Amazon. Very entertaining stuff, with more substance than his books...
samtechie
I think it is. Not because there were other potential Pandemics but because of the timing of the Virus. Its comes at a time when social media is in widespread use which means misinformation spreads rapidly which also leads to panic. Generally, social media amplifies everything good and bad. A combination of these factors makes it a Black Swan event.
cambalache
Instead of the expected pandemic when people were not going to use social media because...?
FabHK
Agreed on both counts.

Experts had been warning about this. See for example Bryan Walsh’s article in TIME in 2017, very explicitly titled The World Is Not Ready for the Next Pandemic [1]. That’s not really a black swan. It was just a question of when. Note also that some countries (eg Singapore, Taiwan) are reasonably well prepared.

Next, Taleb is smart, but overrated (most of all by himself). His books can be summarised in a few paragraphs. IIRC, someone said to Murray Gell-Mann once that “nobody is as smart as you think you are” - that applies to Taleb.

[1] https://time.com/magazine/us/4766607/may-15th-2017-vol-189-n...

nell
Disagree on Taleb. He has been a major influence in how I see the world. Here are a few things he brings up often

- Value of grandmother's wisdom

- lindy effect - Most new tech will replace the tech that came before it and rarely centuries-old tech.

- Being skeptical of what we read in newspapers

- Recognize that domain experts could be idiots in other domains

anthony_doan
This isn't black swan. Taleb is really condescending when he try to make his point.

He really tweet fight over other statisticians about the concept of black swan when it's in the statistic. I can understand if he wants more emphasis on it but he makes it as if statistic does not take this into account.

Black swan is something that is never seen. Seeing how there were many similar viruses coming out of China and one in the middle east already means this is not a unseen or will blind side.

regularfry
I've been having an interesting time working through Security Analysis by Graham and Dodd. It's ancient, but it really gets to the heart of what bonds and stocks actually are, and gives you an insight into how everything worked before it all got accelerated to the Nth degree. The historical perspective of the 1928 crash being recent memory is really interesting too.
redis_mlc
The short answer is this.

Wall Street exists to profit by skimming money off society, like a predator waiting for gazelle to approach a watering hole.

The Chinese government produced an excellent short film on this that was shown on airlines about 5 years ago. At the end was a warning to the USA not to devalue the dollar (to wipe out Chinese holdings.) :)

Silicon Valley VC's also do that, by skimming 2/20 (or more) from institutional investors with no downside risk to the VC.

The long answer - it will take you decades to study and learn. Do some reading and watch NBR.

AlphaGeekZulu
Unfortunately only in German language:

Bernard A. Lietaer: Das Geld der Zukunft

Bernard A. Lietaer: Mysterium Geld

totalZero
Oil 101 by Morgan Downey is one of the worst-edited books I've ever read, yet the amount of knowledge contained in that book is astonishing. The petroleum markets are vital to the financial system, as we saw on Monday when oil over-supply catalyzed a downward move in global equity markets.
SiqingYu
The Economist Guide to Financial Markets by Marc Levinson
rootsudo
Actually - any college level book. There are tons, they're cheap on ebay, look for pearson or mcgraw hill. If you're creative, you can probably find a epub/pdf.

But even the DK Eye Witness have a good idea - how business works, how money works.

Financial system, economics, monetary policy become very simple with pictures, and even easier on an spreadsheet. Even more so is how many people don't know how much the government does in collecting statistics to analyze and examine the health of the economy - The BLS https://www.bls.gov/ is a great resource and once you have a basic understanding (or know healthy or "safe" numbers) you can explore other country economic numbers and see if they make sense (or not!) e.g. https://psa.gov.ph/ for Philippine Statistics.

Contemporary Financial Management is great -

Accounting Princicpals are also great (can you read a PL sheet? Do you know GAAP? How about Compliance regulations?)

Just "money" is one piece of the puzzle - money is a tool and that tool has been transformed into different pieces that fit what we do finance in life -

A basic book would be rich dad, poor dad - it's quite cliche but it's a good introduction to "wealth" and assets vs liability == net worth.

---

tl;dr I ranted, I can go on - the DK Eyewitness books are a good starting point and then you can dig deep - but mostly it really runs quite simple for most things and then gatekeeped by interesting vocabulary.

How Money Works: The Facts Visually Explained (How Things Work) Hardcover – March 14, 2017 by DK (Author) . How Business Works: A Graphic Guide to Business Success Hardcover – 2015 by Dk (Author)

The Economics Book: Big Ideas Simply Explained Paperback – February 6, 2018

The Business Book: Big Ideas Simply Explained Paperback – November 20, 2018

How Business Works: The Facts Visually Explained (How Things Work) Hardcover – April 14, 2015

DK Eyewitness Books: Money: Discover the Fascinating Story of Money from Silver Ingots to Smart Cards Paperback – June 14, 2016

scirocco
This is a good start, "Money as debt". Saw it in university and since then you will never take financial markets seriously. And all the "stimulus" we see is just pushing the can forward. You will start to see through a lot of lies.

https://www.youtube.com/watch?v=2nBPN-MKefA

misrab
This is an online course, not a book, but it changed my understanding of finance. I studied Economics (initially) at university, and never found anything close to as useful as this class:

https://www.coursera.org/learn/money-banking

irln
Completely agree, most texts concentrate on teaching outdated fractional reserve based monetary systems. Fractional reserves are no longer the major constraint on an expanding/contracting money supply. This course builds up an understanding of the push/pull factors of modern finance and banking.
Merrill
Great course. It deals with the actual financial plumbing and how it has evolved from simple beginnings to the current complexity.
samvher
Started this course based on your recommendation, and agree that it's very good. A lot of mysterious stuff (repo, LIBOR, fractional reserve banking) is making a lot more sense to me now.