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The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street |  | Author: Justin Fox
Publisher: HarperBusiness
List Price: $27.99
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as of 11/21/2009 15:53 CST details
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Seller: nyuguy79
Rating:  35 reviews
Sales Rank: 1633
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
Availability: Usually ships in 1-2 business days
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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 hypothesis—long part of academic folklore but codified in the 1960s at the University of Chicago—has 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 35
 A flurry of history November 20, 2009
lantern314 (Stillwater, OK USA)
Reading Justin Fox's The Myth of the Rational Market felt a lot like watching a fast-motion street scene. A huge cast of characters rushed through the book, sometimes appearing for only part of a page before rushing off to be replaced by a new actor. The rational market sits in the background of all of this frenzied activity like a billboard in our scene, constant amidst the flurry, while other theories flash on and off like traffic lights in the foreground. They are simultaneously constant yet changing, and alter the behavior of the people that zip through our scene. This sense is due to the author's rapid fire pace of writing. Unfortunately it often made it hard to keep track of all of the different finance professors and economists mentioned in the book.
The sub-title to the book "A History of Risk, Reward, and Delusion on Wall Street" suggested to me that this would not just be a history of the academic debate over the rational market hypothesis. Instead I expected that it would present the hypothesis and then detail the consequences of actions people took based on their acceptance or rejection of that theory. I was largely mistaken. The body of the book focuses on the development of the rational market theory. It details the academic challenges to the theory and the ways that it has become more and less fashionable. This is woven through with details about the professional development of the men who were involved in the debates surrounding this. (It just occurred to me that I don't recall a single woman being mentioned in the book).
The epilogue includes a brief history of the development of the securitization of the mortgage market that led to the current economic crisis. There is a brief mention of the role that collateralized debt obligations played in the development of the derivative securities market. Disappointingly it stops before fully explaining the way that the CDOs contributed to the interlinking of the banks and other financial institutions involved in the crash. Because of the detail involved in the book I believe that Mr. Fox had begun the book well before the crash and had felt that it would be incomplete if it did not include an explanation of the crash. This portion seems hastily written and lacks the detail that the body of the book contains.
After finishing the book I feel like I have read a Cliff's notes version of a history of American economic theory. I can recognize a lot of new names, but don't feel like I spent enough time with any of them to be comfortable knowing their contributions. I can recognize the names of several theories of pricing models, but don't know the equations or the details behind them. Ultimately this book is a beginning, an introduction to history and finance, providing a starting point to begin deeper investigations into history or finance. Readers who want to read this book and feel like they have a great understanding of how we got in the mess that we are in will likely be disappointed.
Good but a little dry November 11, 2009
L. Burton
Maybe it is hard to spice up this subject. It is comparable to Fortune's Formula and makes a nice companion. This book is comprehensive, but for many readers that will mean covering old ground again. For me, that meant some boredom to get at a few bits that were really interesting. To others the whole book will shed an enormous amount of light on this subject. I don't know they teach in MBA programs now, but for earlier minted MBAs who had been spoon fed a lot of flaky theory, this book will be very useful.
 Thank You for Dispelling the Myth November 5, 2009
Vitaly Veksler (Boston, MA USA)
1 out of 1 found this review helpful
I think it is a very important book for anybody involved in the active money management. I really enjoyed the book because it explains that the rational market theory started as a hypothesis or a scientific model that oversimplified reality. As the model became more popular, many of its nuances and assumptions were lost. The rational market hypothesis became a theory.
One of my biggest philosophical difficulties with the efficient market theory is in the fact that it claims that it is not possible to beat the market over the long term. In the past, I was fortunate to work with several top-notch portfolio managers. These managers were able to beat the market over the long term. What separated them from other managers was that they had clear strategies for analyzing and trading stocks. Specifics of these strategies were not common in the industry. It took these managers years to develop their strategies. After they developed the strategies, these investors did not jump around to other strategies, even when prices of stocks in their portfolios were going down. Their innovation in developing their strategies and focus on using their strategies consistently allowed them to outperform the market dramatically over the long term.
Looking at achieving excellence from a wider perspective, I could not understand why people could excel in other endeavors (business, entertainment, sports, etc.) by applying their unique strategy, superior talent, hard work, or a combination thereof. However, according to the efficient market theory in investing one could beat the market in the long run only by chance. In my opinion, Lance Armstrong did not win Tour de France seven times just by chance; and neither did Warren Buffett put up his investment performance by pure luck. Both of them have relied on their long-term strategies and endurance in the face of difficulties to win in their respective fields.
Like in other areas of human pursuit, in investing it is difficult but not impossible for a person or a firm to reach excellence and beat competitors in the process. In my understanding, three necessary conditions for this include identifying a market niche in which one has very deep knowledge, developing a clear and consistent strategy to dominate the niche, and applying this strategy both in good and bad times.
Justin Fox, thank you for writing a stimulating and thought-provoking book!
A Failed Scientific Revolution October 24, 2009
R. Albin (Ann Arbor, Michigan United States)
This is a good, journalistic account of a failed scientific revolution with substantial public consequences. Fox's goal is not a detailed scholarly history but rather an accessible popular account that gives the general public an idea of how these ideas evolved and why they had such impact. By the late 1960s, a number of economists had accomplished work that seemed to indicate that financial markers were "rational." Specifically, this meant that stock prices reflected the actions of well informed rational agents maximizing utility and that while individuals departed from rationality, the market as a whole was rational and stock prices reflected "fundamental" features of the status of companies. From this conclusion flowed many interesting consequences. The rational market hypothesis allowed the first calculation of the value of options. In turn, this seems to have encouraged the development of financial instruments such as a variety of derivatives based on the idea that properly constructed derivatives would allow management of risk more efficiently than market regulation. The idea that CEO performance should be evaluated by stock price value is also partly a result of the basic hypothesis. Propagated throughout American departments of economics and many business schools, this tool kit of ideas was an important contributor to the deregulation of financial markets and the general enthusiasm for untrammeled markets. In the last couple of years, the failure of these ideas become apparent in a nearly catastrophic fashion.
Fox makes clear, however, that problems with this set of ideas appeared well before the present crisis. A number of important economists demonstrated flaws of different aspects of the models. The influential Joseph Stiglitz disproved the strongest form of the efficient markets idea, and Robert Schiller pointed out both logical flaws and presented data contradicting the model. Eugene Fama, one of the principal architects of the theory himself presented data undermining the model and had to introduce ad hoc modifications that compromised the integrity of the model. Many aspects of these models were based on data assumed to follow normal distributions but this assumption proved to be incorrect. What accounted, then, for the remarkable success of this set of models in the academy, earning some of the originators Nobel prizes and generous consulting fees? Fox's answer is a combination of scientific hubris and institutional defects. He suggests that many of the originators of these ideas were simply intoxicated with their achievements and driven by what they perceived as the logical and mathematical beauty of their concepts. Many also worked within business schools where there was an emphasis on methods for investing and management, which these ideas seemed to produce, and a less rigorous intellectual environment than regular economics departments. These are very good points, though I suspect that Fox underestimates the importance of ideological factors. As he himself points out, many of these ideas emerged from the University of Chicago, where the dominant figure was the brilliant but somewhat nutty libertarian economist Milton Friedman. In a classic vicious cycle, the efficient market idea and its progeny were both driven by and a driver of the general conservative tone of American life in the past 30 years.
While Fox does a reasonably good job of explaining the basic ideas but I think the exposition could have been improved significantly. How many people, for example, really know what constitutes a normal distribution? Fox understandably avoids equations but a few well done figures and simple equations would have enhanced understanding considerably. Fox also doesn't discuss well, I think, one of the major reasons why these ideas had such power. The last 50 years were in many respects a period of relative macroeconomic calm and stability in financial markets (The Great Moderation), at least as compared with the first half of 20th century and late 19th century. Many interpreted this relative calm as a result of success of market self-regulation. As conceded recently by Robert Lucas, himself one of the originators of this set of ideas, the relative calm had a great deal to do with the success of New Deal era regulation and activist central banking.
A useful overview, but there are better alternatives October 4, 2009
Lewis W. (Mexico City)
Whilst an entertaining overview (the author is a journalist) and a useful fly-by of many of the major developments in finance, I was left wanting more. The book will provide you with a good, although high-level, summary of these developments, but it failed to come alive for me. I much preferred Peter L. Berenstein's Capital Ideas, which covers much of the same material.
Showing reviews 1-5 of 35
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