| The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street |  | Author: Justin Fox
Publisher: HarperBusiness
Category: Book
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Rating:  66 reviews
Sales Rank: 3,013
Media: Hardcover
Edition: First Edition - First Printing
Pages: 400
Number Of Items: 1
Shipping Weight (lbs): 1.2
Dimensions (in): 8.9 x 6.4 x 1.4
ISBN: 0060598999
Dewey Decimal Number: 332.6401
EAN: 9780060598990
ASIN: 0060598999
Publication Date: June 1, 2009
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| • | ISBN13: 9780060598990 | | • | Condition: NEW | | • | Notes: Brand New from Publisher. No Remainder Mark. |
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Product Description
Chronicling the rise and fall of the efficient market theory and the century-long making of the modern financial industry, Justin Fox's The Myth of the Rational Market is as much an intellectual whodunit as a cultural history of the perils and possibilities of risk. The book brings to life the people and ideas that forged modern finance and investing, from the formative days of Wall Street through the Great Depression and into the financial calamity of today. It's a tale that features professors who made and lost fortunes, battled fiercely over ideas, beat the house in blackjack, wrote bestselling books, and played major roles on the world stage. It's also a tale of Wall Street's evolution, the power of the market to generate wealth and wreak havoc, and free market capitalism's war with itself. The efficient market hypothesisâlong part of academic folklore but codified in the 1960s at the University of Chicagoâhas evolved into a powerful myth. It has been the maker and loser of fortunes, the driver of trillions of dollars, the inspiration for index funds and vast new derivatives markets, and the guidepost for thousands of careers. The theory holds that the market is always right, and that the decisions of millions of rational investors, all acting on information to outsmart one another, always provide the best judge of a stock's value. That myth is crumbling. Celebrated journalist and columnist Fox introduces a new wave of economists and scholars who no longer teach that investors are rational or that the markets are always right. Many of them now agree with Yale professor Robert Shiller that the efficient markets theory “represents one of the most remarkable errors in the history of economic thought.” Today the theory has given way to counterintuitive hypotheses about human behavior, psychological models of decision making, and the irrationality of the markets. Investors overreact, underreact, and make irrational decisions based on imperfect data. In his landmark treatment of the history of the world's markets, Fox uncovers the new ideas that may come to drive the market in the century ahead.
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Showing reviews 1-5 of 66
 A must read for all raised on 'A Random Walk Down Wall Street' March 10, 2010
drbink (Washington, DC)
This book is outstanding!
My father was financial VP for a large firm. I am a physicist. As I grew into an age to be interested in the market, my father gave me the book 'A Random Walk Down Wall Street'. This was in the 1970s, just as index funds were coming into being. It made sense and shaped my understanding of the market over most of the past 40 years. But, looking back, I find that I have been fighting the concept most every step of the way - through the early 1980s, 1987, early 1990s, 1998, 2000, 2003 and most recently 2008-2009. These were not 'random' times.
'The Myth of the Rational Market' is an eye opener for all those with a similar, 'average investor' history. It provides an outstanding historical perspective and presentation of how the 'science' of economics developed over the past (less than) 100 years - the over simplifications, links to the ideas of classical physics (Brownian motion and the like), touching on the ideas of complexity, trying to develop mathematical theories of the market, but never achieving an understanding. Perhaps it is all a bit too complex for those who simply want to make money in the market.
That's my take away. Underlying the market is some relation between stock price and value of a company. Certainly, as a company grows and becomes more profitable, its stock price will rise. Warren Buffet's 'buy the cigar butts' theory of value investing works. But, along the way there will be wide excursions in stock price resulting entirely from irrational human sentiment. I expect there is a way to mathematically understand these chaotic swings and develop macro models that work to predict such phenomena, or at least see them developing, but I also know now that such models will not be simplistic random excursions around a mean.
Still don't believe? Read 'Lords of Finance: The Bankers Who Broke the World'.
"The Most Remarkable Error in the History of Economic Theory" March 6, 2010
Etienne ROLLAND-PIEGUE (Tokyo, Japan)
0 out of 1 found this review helpful
Science gives rise to a distinct cycle of publications. First come the journal articles, full of equations and accessible only to a few. They are the stuff discoveries are made of, although most of the time a published paper offers only a marginal contribution, a small footnote to an already established edifice. Publications are valued only with respect to a body of literature. They never stand in isolation. Bibliographies map the field with invisible threads of references and quotations. It takes a while to determine which entries add the most to a body of knowledge or, when the article departs from established wisdom, whether it constitutes a breakthrough or a dead-end. Journal articles are mostly all what graduate students get as reading material, with the injunction to improve upon that stock of knowledge.
Then come the textbooks, written with a different public in mind and for a different purpose. Ideas that had once been too complex to tackle for anyone but a select few are now presented in quintessential form. Everything looks simple once you have been taught it. Almost inconceivable mysteries are transformed into mere formulations and rules. Students are not motivated by the thrill of discovery; they are after the easy answer, the practical solution to a set of well-defined problems. These techniques will be put to use in various contexts, and they will shape the automatisms and rules of thumb that are all that remains once the content of a college education has been forgotten.
The next stage belongs to the science book, the journalistic essay aimed at the general public. The best science books try to recreate the thrill of discovery, and to put the magic back into the field. They do so by collecting the lore and legends that arise whenever great minds are concentrated. They make public what had once been transmitted as private jokes and anecdotes communicated on the margin of serious teaching. Because most scientific content remains beyond the reach of literary description, they have to find a new angle, and make research into seemingly arcane subjects sound relevant for the public at large. They tend to emphasize science's applications, its ability to shape a world of our own making.
The study of finance has now reached the stage where bestseller books by magazine columnists are written about the discipline. The Myth of the Rational Market, by Justin Fox from Time magazine, offers a fine account of the evolution of financial economics, from its origins on the eve of the Great Depression to contemporary developments in the wake of the subprime crisis. At first I was worried by the proximity of this book to Peter Berstein's series of books on the same topic. But I was reassured by the generous endorsement from the author of Capital Ideas on the back cover of this book, and I came to see the complementarities rather than the repetitions between the two projects. Peter Berstein is a practitioner turned chronicler, and he uses his in-depth knowledge of market actors to replace financial economics in its broad intellectual context. Justin Fox is a journalist, and he has done his journalistic work right. He is even able to teach Robert Shiller a lesson or two about Irving Fisher, the Yale professor with whom he begins his narrative, who in 1929 got his predictions spectacularly wrong but who otherwise pioneered many future developments in the field of finance.
Justin Fox's strength is that he got his equestrian's tips straight from the horse's mouth. He has interviewed almost all the pioneers of the field who are still living, sometimes several times and over an extended period of time. Although the endnotes don't refer to particular interviews, this is because all remarks and life episodes not otherwise attributed were collected by the author. Especially worthwhile were the interviews with Milton Friedman, the Pope of the rational economic man, whose teachings at Chicago inspired generations of students. Friedman is described as a charming, friendly, ever-tempered little man saying outrageous things. This is how Friedman dismissed behavioral finance before it even took off: going around asking people about their economic decisions is "about on par with testing theories of longevity by asking octogenarians how they account for their long life." Or how he recalls Jimmy Savage's saying: "the role of statistics is not to discover truth. The role of statistics is to resolve disagreements among people." On speculation: "People who argue that speculation is generally destabilizing seldom realize that this is largely equivalent to saying that speculators lose money."
There are also valuable quotes from other pioneers in the field. This is how Merton Miller explained the significance of the series of paper on corporate finance he wrote with Franco Modigliani: "The pizza delivery man comes to Yogi Berra after the game and says, Yogi, how do you want this pizza cut, into quarters or eighths? Yogi says, cut it into eight pieces. I'm feeling hungry tonight." Or Paul Samuelson on mutual fund performance: "There is only one place to make money in the mutual fund business--as there is only one place for a temperate man to be in a saloon, behind the bar and not in front of the bar." But perhaps the best piece of humor comes from Larry Summers' speech at the annual meeting of the American Finance Association, when he compared the entire discipline of finance to economists devoting their whole career studying ketchup. The "ketchup economics" speech ranks along with Paul Krugman's theory of interstellar trade among the most hilarious writings in the so-called dismal science.
If economists are often in disagreement among themselves, financial economists disagree enormously. In 1978, Michael Jensen declared: "I believe there is no other proposition in economics which has more solid evidence supporting it than the Efficient Market Hypothesis." In 1987 Robert Shiller, based on available evidence, could conclude that "the efficient market hypothesis is the most remarkable error in the history of economic theory." The reason why economists clung to their model even if it was proven wrong is to be found in the practical implications it offers for financial management. Says Miller: "There is only one theory of efficient markets. There are hundreds of theories of inefficient markets." Or Fama: "I don't know what asset pricing would look like in a world that really took behavioral science seriously."
What struck me upon reading this book was how much financial economics is an American science. There is barely any mention of research done outside the US. The production of new ideas and new theories was concentrated around a few campuses and institutions, most notably the university of Chicago, where the economics department, the business school, and the law school benefited from a pro-market environment. The next stage in the development of the discipline may well be the globalization of financial economics. Contacts with other research traditions (think about mathematical psychology in Israel, or industrial economics in Toulouse) may lead to new convergences and new departures.
 A messy overview March 5, 2010
Øystein Sjølie (Oslo, Norway)
1 out of 3 found this review helpful
Fox' treat on the rise (and fall?) of the efficient market hypothesis (EMH) has certainly qualities. The best bits are where Fox explains how the theories developed at Chicago conquers Wall Street in the 60s and 70s. Jack Bogle started the world's first and largest index fund - Vanguard, as a direct result of the research at Chicago University. Similarly, I found the stories regarding CAPM, Michael Jensen's cost of capital and the Black/Scholes option pricing formula very interesting. And some of the portraits, of men like Ed Thorp and Paul Samuelson are very good.
Still, the book has three big drawbacks to me. First, Fox is on a mission. He thinks the efficient marketers are stupid, dogmatic and ideological whims, in love with their elegant mathematical models, completely out of touch with reality, including the very financial world they claim to study. This campaigning comes out quite clear far too often. Despite his campaigning style, Fox offers no alternative to the EMH.
Second, the book is quite imprecise. It offers no graphs, no equations (not even in the notes or appendix), no tables. That is rather disturbing regarding Fox' issue: quantitative finance. If he really has read the sources he lists, his own work would be more solid if he had included some quantitative illustrations to the text.
Third, important parts of the book are rather messy. Especially in the first four chapters it is are hard to follow the chronology of events and theories evolving. To be fair; this improves in the course of reading, but still is a major shortcoming. Fox should have given more time to the starting chapters.
All in all, though, the book points to several good reading tips. I learned a lot, but I could have learned it more efficient.
Short but sweet February 20, 2010
Herbert Beigel (Tucson, AZ)
0 out of 1 found this review helpful
The "short but sweet" is hopefully my review, not the book,
A dizzying array of economists and theorists only servs to prove a simple axion, one previously applied to Hollywood, but might as well apply to everything. "No one knows anything." The one thing this book makes clear is that we are at the same point we were before the theorists and the chartists took over. The future is anyone's guess. I admit I did not understand one thing in this book, but having found my lack of understanding, I found the one thing that really works. Keep trying and hope you get lucky. Soros and Buffet may have just well have won the lottery. People love to find the reason that everything happens, but they always find the reason after it has happened, which is of course no reason at all. It's just human nature. Looking for explanations for what has already happened to predict the future. Guess what, the future is unknowable. Get over it.
 Too many people, too few concepts February 1, 2010
R. Meermeier (Boston, MA)
1 out of 6 found this review helpful
I ordered the book in the hope of learning about the evolution and underpinnings of the idea of the rational market. Yes, that information is somewhere in there; but it is buried between myriad names of people and their often rather insignificant relation to each other.
I should mention that I did not finish the book. After the first quarter I gave up because of the aforementioned, and then skimmed the rest of the book to see whether it deviated from the style of the first quarter. Which it didn't from the looks of it.
Showing reviews 1-5 of 66
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