Most Helpful Customer Reviews
70 of 86 people found the following review helpful:
3.0 out of 5 stars
Interesting even if cheerleading, May 26, 2000
"Poets are the unacknowledged legislators of the world....Let those who will, write the nation's laws, if I can write it's textbooks." (P. Samuelson, quoted by Berstein) Bernstein has written a fascinating pre-LTCM (pre 8/98) book on the history of econometrics and finance, beginning with the origins of the Cowles foundation as the consequence of Cowles' personal interest in the question: Are stock prices predictable? This book is all about heroes and heroic ideas, and Bernstein's heroes are Adam Smith, Batchelier, Cowles, Markowitz (and Roy), Sharpe, Arrow and Debreu, Samuelson, Fama, Tobin, Samuelson, Markowitz, Miller and Modigliani, Treynor, Samuelson, Osborne, Wells-Fargo Bank (McQuown, Vertin, Fouse and the origin of index funds), Ross, Black, Scholes, and Merton. The final heroes (see ch. 14, The Ultimate Invention) are the inventors of (synthetic) portfolio insurance (replication/synthetic options). This book consists largely of a pre-LTCM (pre-10/98) cheerleading for option-pricing mathematics based on lognormality, and corresponding synthetic portfolio insurance. Osborne and Mandelbrot are mentioned. The book is not error-free: e.g., Mandelbrot's ideas on stock prices are stated as being the origin of chaos theory (!), and Mandelbrot (of random fractals fame) is misportrayed as an `articulate proponent' of chaos theory! Another error (page 182): "..persistent forces are constantly driving the market toward (Modigliani-Miller) equilibrium." The evidence for the EMH is supposed to constitute the `proof' for this nonsense. So much for `proofs' in economics. So ingrained is the false, misleading and inapplicable notion of "equilibrium" in the minds of economists that it is hopeless to expect to educate them out of their own morass. Even Black, who was educated as a physicist as an undergrad, did no better: "When people are seeking profits, equilibrium will prevail." (F. Black, quoted by Bernstein) Among the interesting and entertaining stories that are told are: the displacement of Graham and Dodd's `value theory' by the EMH, the revolutionary role played by Wells Fargo Bank in using the `new finance math', and in creating index funds. The importance of the Miller-Modigliani `theorem, which `proved' that the (not-uniquely-defined) `value' of a corporation is independent of it's debt. Then, there is the wild-haired idea of `portfolio insurance', how to eat your cake and have it too (a free lunch, derived from the assumption that free lunches don't exist). No portfolio can be insured against extreme deviations, especially those that occurred in 10/87 and wiped out confidence in LOR (Leland-O'Brien-Rubinstein Associates). But this failure of finance theory produces no crisis for Bernstein, whose book is the history of heroes, not villains. His last chapter, which can be ignored by the reader without loss, is states his ideology: free market ueber Alles. Or: equilibrium will prevail, even without restoring forces ( I like to put it this way: there are no "springs" in the market). I did get something important from this book: the origin of America's spend-spend-spend ideology in the Modigliani-Miller `theorem'. If the optimal portfolio is not risky enough, borrow to finance it's purchase. (Wells Fargo's application of Tobin's idea, quoted by Bernstein) (This is a shorter version of a longer review that appeared in fall(...).
Help other customers find the most helpful reviews
Was this review helpful to you? Yes
No
17 of 21 people found the following review helpful:
4.0 out of 5 stars
Addicted to the N(0,1);Bernstein has to have his fix, November 19, 2004
This book,published in 1992, is an earlier version of Bernstein's "Against the Gods-The Remarkable Story of Risk",published in 1996.Both books cover much of the same ground.Bernstein traces the origins of the post WW2 portfolio analysis-risk management models ,such as the mean variance(standard deviation)model,CAPM( capital asset pricing model )and the Black Scholes options pricing model ,back to the work done at the turn of the century by the French mathematician Louis Bachelier .Basically,this approach analyzes ALL markets,not just financial markets, on the assumptions that price movements are 1)all independent of each other,2)are all small and homogeneous,so that each price movement or change over time can be viewed as if it were a small gas particle interacting with other billions of identically small gas particles in a series of collisions that all are self cancelling in the long run and 3)the law of large numbers and the central limit theorem holds so that the normal probability distribution can be used .The question that then needs to be asked and answered is "What is the degree of empirical evidence supporting the overwhelming use of the normal probability distribution in financial and economic analysis?"The answer,which can be easily obtained by any reader of this review who picks up a copy of Benoit Mandelbrot's latest book(2004),titled "The (Mis)Behavior of Markets",with Richard Hudson,is that there is little,if any,evidence that supports the use of the Normal probability distribution as a general modeling approach.Mandelbrot's extensive research ,duplicated by a number of other researchers in a number of different countries over the last 25 years,has been available since the mid 1950's.How does Bernstein react to this mass of empirical and scientific evidence?Bernstein reacts in a ,to say the least,nonscientific way:"...Mandelbrot remains on the periphery of financial theory,both because of the inconvenience to analysts of accepting his arguments and because of the natural human desire to hope that fluctuations will remain within familiar bounds"(Bernstein,1992,p.132).It is also strange to find the very favorable,well deserved, comments showered upon John Maynard Keynes throughout the book because Keynes would agree with Mandelbrot,not Bernstein.Keynes made it very clear in chapters 28-30 of his A Treatise on Probability(1921;TP) that the exacting assumptions necessary for the general application of the normal probability distribution,excepting physics and biology,were generally not satisfied unless homogeneity and stability held over time for the material being examined.The objections Keynes made ,in the Keynes-Tinbergen debate in the Economic Journal of 1939-40 over Tinbergen's use of a normal probability distribution ,to the claim that econometricians could test and predict business cycles over time,are clearly in the spirit of Mandelbrot's much,much more empirically supported conclusions.Nonetheless,I would still recommenmd that either this book or the 1996 book be bought,but not both.
Help other customers find the most helpful reviews
Was this review helpful to you? Yes
No
9 of 12 people found the following review helpful:
4.0 out of 5 stars
Good introduction to difficult topic, August 23, 1999
Capital Ideas can be a nice introduction to a difficult topic and one should read it before starting to get involved in the more profound literature of financing scholar books. The only two blames I have to make is 1. that the personal side of the stories is expanded too far - it would be enough to state that some teacher is considered a workaholic, the description of his calling at sunday night gets you out of the more important context of what he rally prooved and claimed for the new theory of fi- nancing. and 2. that the differences in the beta and CAPM theories is not so clearly described - although it is a major topic in the book - that the book alone leaves you with a precise idea of the differences. So this must be left for other books. The book is nonetheless highly recommendable, since it has the advantage that sine ira et studio all theories find their way into the book, so you will not run into the danger that you loose one financial problem just because the scholarly author of a financing manual forgets to tellabout it, which is often the case. So get this book soon, it is easy to read, and a friend of mine - a Dr of Medicine who would for the first time read about this topic - was much impressed by it and liked it immediately; and I can add, he even understood it. Dr. Rudolf C. King CEO, princeandprince.com
Help other customers find the most helpful reviews
Was this review helpful to you? Yes
No
|
|
Most Recent Customer Reviews
|
