• Sound Investing Advice in a Macro Textbook (Cowen/Tabarrok)

    I’ve been reading a preliminary edition of the new macroeconomics textbook by Tyler Cowen and Alex Tabarrok (Modern Principles: Macroeconomics). It was sent to me for free, courtesy of the publisher. The textbook is now out and two more in their Modern Principles series are expected this fall. Cowen and Tabarrok also post on the very popular Marginal Revolution blog.

    I have enjoyed their macro book. It presents undergraduate level material in a clear, accessible, and updated style, incorporating recent events and standard theory in a seamless way. The figures are beautiful and are used in novel ways (as far as I know) to illuminate central concepts (e.g. supply/demand, welfare calculations). All in all, it is a treatment of macro far superior to the one I received as an undergraduate or in more recent readings of other macro texts.

    Among the other impressive characteristics of the book is the manner in which the authors motivate the material with and relate it to actual world events, policy, and institutions. Many texts try to do this but it ends up seeming like an afterthought to the drier theoretical and conceptual content. Often in other textbooks the applications are set aside in boxes apart from the main text, as if to suggest it is secondary. Not so with Modern Principles. It isn’t easy to achieve such a tight integration of concepts and application but Cowen/Tabarrok make it all flow. Bravo!

    More relevant to one of the themes of this blog is that the Cowen/Tabarrok Modern Principles macro text has a chapter with Boglehead style investing advice (of course they don’t identify it as such, nor would I expect them to). Chapter 9 of Part 2 titled “Stock Markets and Personal Finance” makes the following points:

    • Passive beats active investing in the vast majority of cases.
    • For all practical purposes, for the personal investor, the stock market is efficient. It is not possible to systematically outperform the market over time.
    • A sound personal investment plan is based on the concepts of diversification, minimization of fees, and a long-term commitment.
    • There is no greater return without greater risk (no free lunch).
    • Bubbles are part of market dynamics and are not a reason to avoid market participation. On the other hand, do not expect to spot and profit from a bubble.

    It is uncommon (unheard of?) for an undergraduate macro text to provide such explicit, practical, and sensible advice on personal investing. Yet it is critical education that everyone should receive. I applaud Cowen and Tabarrok for including it in their macro book and look forward to reading the other books in their Modern Principles series. To learn more about the Modern Principles series and read sample chapters, visit the Modern Principles website.

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