What truly drives the world’s financial markets?

“There is so much more to heaven and earth than is dreamt of in numbers and decimal points,” says Professor Russell Napier, Keeper of the Library of Mistakes. “And you can’t gain a true understanding of how finance, money and markets work without understanding human behaviour and history.

For all its importance, mathematics is very often used as a crutch in the world of finance. But, what the world needs now, are people who can throw away that crutch, think under pressure and make good decisions in times of great uncertainty.”

The Library of Mistakes was established by Russell in Edinburgh in March 2014, inspired by his observations at how little society had learnt from the lessons of the global banking crisis. Funded largely by philanthropic donations, the Library then moved to new purpose-built premises in Edinburgh’s west end in 2022, and is proving an increasingly influential hub of research, intellectual curiosity and conviviality.

Its mission is to encourage us all to learn from the oft-repeated mistakes of the past – mistakes that invariably stem from human behaviour rather than faulty data, equations or maths.

A beautiful space

The library is a beautifully designed physical space that anyone who can get to Edinburgh can visit, and browse the collection of 4,000+ books (access is free – you simply have to register as a ‘reader’ at www.libraryofmistakes.com and book your visits).

There is a strong focus on finance and business, but the range of books is diverse, covering just about every aspect of human life. The artwork on the walls (from a Bear Stearns baseball cap to a Charles Ponzi poster) is also fascinating and there’s even a games section. It’s a charming and comfortable refuge for pausing, reading and thinking.

And there’s more. The library also hosts lectures from prominent speakers, receives around 4,000 downloads for each episode of its podcast series, and has 5,000+ Twitter followers – a decent following for a finance forum to clock up in a short period of time. Small wonder that the word is spreading – there are now also Library of Mistakes franchises in India (Pune) and Switzerland (Lausanne) with several more in the pipeline.

The Library of Mistakes Course

But for those who want to take a deeper dive into the profound factors that shape the world of finance, the Library of Mistakes also offers Advanced Valuation in Financial Markets – a course that can be attended over two and a half days in London, or through a series of online modules.

Aimed primarily at investment professionals or those with a particularly keen interest in what drives markets, the course is unlike anything else currently available. I was fortunate to attend some of the London sessions recently in the company, predominantly, of young fund managers who were evidently gripped by the insights they gained from a series of outstanding speakers:

• Following an introduction from Russell Napier, the scene was set by Derry Pickford (Principal, Aon) and Stephen Wright (Professor of Economics, Birkbeck, University of London), who spent the first day exploring stock market value and expected returns through a series of transformational historic prisms.
• Then in the evening, Peter Warburton (applied economist and author of Debt and Delusion) covered the highly topical issue of inflation and what can be learnt from historical events such as the Great Depression and the Great German Weimar Inflation of 1918-1923.
• The second day began with John Greenwood (senior economist and former advisor to the Hong Kong Government) exploring the monetary theory of asset prices, and what happens to money and credit in bubbles and busts.
• That was followed by a fascinating session from Herman Brodie (consultant and co-author of The Trust Mandate) discussing behavioural finance, and why the decisions that shape financial markets are often driven by anything but logic.
• In the evening, Russell Napier reappeared to explain the importance of the mean reversion of equity valuation.
• And on the shorter third day, Russell discussed inflation and financial repression, Jamie Dannhauser (economist at asset manager Ruffer) explained the demise of the deflation machine, and celebrated author and journalist Edward Chancellor rounded off events with a session on capital returns.

The enthusiastic delegates departed much the wiser, provided with a thick dossier of course notes and complimentary access to the online version of the course.

If you too are interested in gaining a truly rounded perspective on how our financial markets work, particularly in these uncertain times, I heartily recommend the course. Full details are available at www.libraryofmistakes.com/course

What will I learn?

Students completing the course should find themselves able to:

1. Critically evaluate different methods of valuing stock markets and identify faults in the valuation methods.
2. Explain the idea of mean reversion in financial markets and identify valuation techniques that follow mean reversion using data from the last 100 years to demonstrate this.
3. Understand the impact inflationary or deflationary forces have on the returns to different classes of financial assets.
4. Understand the impact liquidity and the supply of money has on stock market returns over time.
5. Understand the impact of psychological biases on returns in the stock market and the role that they can play in major stock market events.
6. Critically evaluate the lessons from the history of the financial markets over the past 200 years or more.