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Neoclassical Finance (Princeton Lectures in Finance)

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Why is the market capitalization of an exchange-traded fund so often less than the same fund's net asset value? Isn't this proof that markets aren't rational or efficient? that a more psychological (or "behavioral," in the fashionable term) approach to understanding finance makes more sense that the efficient capital markets hypothesis and its offshoots?

Ross was instrumental in the creation of the ECMH in its current form in the mid 1970s, with his development of the no-arbitrage theory of asset pricing and his formulation, with John Cox, of the idea of risk-neutral pricing. He comes to the defense of that structure of ideas against the behaviorists, and against their use of the valuation issued of closed-end funds in particular as a "poster child."

There aren't many laugh-out-loud moments in books on these subjects, but I for one laughed when I reached a footnote on page 70, which describes one aspect of this controversy as "an interesting example for scientific sociology." I won't explain further, that would be unfair.

"Neo-classical finance" is an impossibility. Money/liquidity cannot be built into neo-classical economic theory. Radner noted this over thirty years ago. He speculated that money/liquidity arises from uncertainty and/or from computational limitations (correctly stated, from lack of computability of neo-classical equilbria, which Lewis later studied). Why would anyone with empirical background write a book that has no application whatsoever to empirical data: the neo-classical model has been completely falsified, it does not describe any real market, much less financial markets. As I have explained in writings and in economics colloquia and conferences, neo-classical economics is not science, neo-classical economics is mathematized ideology.