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The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street Paperback – February 8, 2011


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Product Details

  • Paperback: 416 pages
  • Publisher: HarperBusiness; Reprint edition (February 8, 2011)
  • Language: English
  • ISBN-10: 0060599030
  • ISBN-13: 978-0060599034
  • Product Dimensions: 8 x 5.4 x 1 inches
  • Shipping Weight: 12 ounces (View shipping rates and policies)
  • Average Customer Review: 3.9 out of 5 stars  See all reviews (104 customer reviews)
  • Amazon Best Sellers Rank: #55,020 in Books (See Top 100 in Books)

Editorial Reviews

From Publishers Weekly

Starred Review. At the core of the current financial crisis has been the widely held assumption that markets behave rationally. Fox, Time magazine editor-at-large, isn't the first to bring scrutiny—or censure—to the conceit, but his analysis is singularly compelling, and the rare business history that reads like a thriller. Fox leads us on a chronological journey of modern economic theory, featuring the cast of scholars who constructed the 20th- and 21st-century financial landscape, from Irving Fisher to such post-WWII figures as Milton Friedman, Harry Markowitz, Franco Modigliani and Merton Miller, Jack Treynor and William Sharpe. Fox offers a behind-the-scenes glimpse at academia's finest, complete with amusing anecdotes about the players and their theories, and illustrates how our economic behaviors and markets have been shaped by a gradually refined theory holding that the stock market prices are both random and perfectly rational. A must-read for anyone interested in the markets, our economy or government, this dense but spellbinding work brings modern finance and economics to life. (July)
Copyright © Reed Business Information, a division of Reed Elsevier Inc. All rights reserved. --This text refers to the Hardcover edition.

Review

“Do we really need yet another book about the financial crisis? Yes, we do — because this one is different. Fox’s book is not an idle exercise in intellectual history, which makes it a must-read for anyone who wants to understand the mess we’re in.” (Paul Krugman, New York Times Book Review)

“Justin Fox is a truly insightful fellow who can see things with his own eyes—a rare, very rare attribute.” (Nassim Nicholas Taleb, author of The Black Swan)

“A fascinating historical narrative.” (Roger Lowenstein, The Washington Post)

“This wise and witty book is must reading for anyone who wonders what makes financial markets tick. Even those who have wrestled with this question for years will be glad to have read Fox’s compelling history.” (Peter Bernstein, author of Against the Gods: The Remarkable Story of Risk)

“His analysis is singularly compelling, and the rare business history that reads like a thriller... A must-read for anyone interested in the markets, our economy or government, this dense but spellbinding work brings modern finance and economics to life.” (Publishers Weekly (starred review))

“A lucid, lively and learned account.” (Barron's)

“Fox makes business history thrilling.” (St. Louis Post-Dispatch)

“Impressively broad and richly researched.” (Financial Times)

“...a rich history of the world’s most seductive investing idea...the book chronicles the rise of rational market theory over the decades and captures the sizzle and pop of the intellectual debate ...” (Bloomberg)

“Good wonky fun.” (Barry Ritholz, The Big Picture blog)

“An intellectual tour-de-force...” (The Economist)

“Superbly accurate and readable... Clearly the result of many years of research and reading,... it is a model of what the popularization of social science can be, but too rarely is, and it will continue to be read when the current crisis is many years behind us.” (American Scientist)

“A tough, tasty steak of a book.” (Dan Neil, Los Angeles Times)

“A thoughtful, often fascinating, always illuminating history of the idea of market rationality.” (Cory Doctorow, boingboing.net)

More About the Author

Justin Fox is editorial director of the Harvard Business Review Group. He writes a blog for hbr.org (http://blogs.hbr.org/fox/) and a monthly column for Time magazine. From 2007 through 2009 he was an editor at large at Time, writing a weekly column for the magazine and the Curious Capitalist blog for Time.com. Before that Fox spent more than a decade at Fortune magazine, where he covered a wide variety of topics related to economics, finance, and international business. In 2000 and 2001, he was the magazine's Europe editor, based in London.

Prior to joining Fortune, Fox worked at several newspapers, including American Banker and The Birmingham (Alabama) News. He has a degree in international affairs from Princeton University, studied political science at the University of Leiden in the Netherlands, and speaks Dutch and German. Fox is married and has a son. He lives in Manhattan.

His first book, 'The Myth of the Rational Market,' is a history of the rise and fall of the efficient market hypothesis -- the influential academic theory that financial markets are nearly perfectly rational and correct. It was the Amazon.com editors' choice as the Best Business Book of 2009 and was a New York Times Notable Book of 2009.

Customer Reviews

The book is very readable and more than informative.
Charles S. Fisher
Justin Fox does a good job of explaining some of the "holes" in the efficient market theory.
L. Dobbins
The problem is that there is no central point contrary to the book's title.
Houman Tamaddon

Most Helpful Customer Reviews

121 of 128 people found the following review helpful By Herbert Gintis on July 16, 2009
Format: Hardcover Verified Purchase
A few years ago business and economics journalist Justin Fox went to the University of Chicago to talk to Efficient Markets guru Eugene Fama and behavioral economist Richard Thaler. He then went back to New York and wrote an article entitled "Is the Market Rational?" The headline for the article read "No, say the experts. But neither are you---so don't go thinking you can outsmart it." Out of this encounter came this pretty mammoth, extremely informative, and lively written narrative of modern financial economics. If you read this book and take its arguments seriously, you can avoid the major pitfalls that doom some investors to penury. On the other hand, if you think you can beat the market through personal testosterone and shrewdness, don't bother buying the book. Save your money. You'll be on the bread line soon enough.

Saying that people are irrational and the market is irrational is of course now all the rage. But, if you think you can romp your way to financial security by taming your animal spirits and feeding off the market's irrationality, I assure you, and Justin Fox assures you, that such is not the case. "While behaviorists and other critics have poked a lot of holes in the edifice of rational market finance, they haven't been willing to abandon that edifice." (p. 301). The reason is that the edifice is usually correct, although it can experience spectacular failures. The problem is that we don't know when it will experience these failures. We do know, or at least I strongly believe, that the failures are due to herd behavior of investors, which undermines the applicability of the normal statistical distribution, the mainstay of traditional financial theory.

The theory that financial markets are rational is called the Efficient Markets theory. It has two parts.
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104 of 110 people found the following review helpful By Samuel J. Sharp on June 24, 2009
Format: Hardcover Verified Purchase
Overall, Fox has written a very good book which covers a remarkable amount of material in only 322 pages. The problem is that this book, if properly done, should run around 600+ pages. Granted, Fox is a journalist, not an academic, so his audience might not have an appetite for a book that takes a month to read, but the topic is interesting and important enough to warrant a more detailed discussion.

Fox's book is organized primarily by ideas and then chronologically. This can lead to jarring jumps between time periods within chapters and the reader suspects that important topics are being missed. The twelve-page epilogue for example begins in 1833 and is in the 1960's by the turn of the page.

The mathematics discussed in the book is not terribly complicated but the reader is given no formulas, no graphs, no applications of the quantitative theories. Yes, everyone knows what normal distribution looks like but the power laws discussed deserve a chart. Mandelbrot's fractal theories need a diagram. Fox would also support his argument more strongly if he included the formulas which were eventually altered by the behavioralists. Without these, the reader is forced to blindly trust what Fox is telling him.

Despite these minor criticisms, the book is definitely worth reading. I am guessing that the title attracts many readers who hope financial-economics moves beyond the Chicago School efficient-markets framework. If this is what readers want, I recommend Beinhocker's "The Origin of Wealth." If you want a quick tour of academic financial thought, read Fox.
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109 of 121 people found the following review helpful By Sanford on June 9, 2009
Format: Hardcover
Justin Fox has a great blog and writes for Time magazine, having previously written for Fortune magazine. So it was not a surprise that his book is well written and fast paced. Better yet, he has chosen to cover the most critical topic in all of finance: does the market correctly price stocks, bonds and real estates? In delivering a masterpiece he has either killed himself in thoroughly researching the subject or someone talented has directed him to all the right issues. He correctly dates the emergence of the efficient markets theory to the early twentieth century, then covers the contribution of Paul Samuelson, who is oddly enough always forgotten in any coverage about the efficient markets doctrine. He then goes through the sequence of Markowitz, Miller, Modigliani, Fama and Michael Jensen (an odd insertion indeed, since Jensen sweared by efficient markets theories but made his name emphasizing firm level inefficiencies, ones profitably eliminated by buyout funds, but whose profits would not be so impressive if the market could correctly price their coming contribution). He then introduces Richard Thaler and Robert Shiller, and thus downplays Amos Twersky and Daniel Kahneman, which is a failing of the book.

All in all it is a competent masterful history of financial theory and is a must buy for anyone with interest in investing. What it does not pretend to do is give readers a better idea of how to tackle market decisions. That is fine. What is not fine though, and what should be fixed in any future edition, is the lack of hard evidence on why markets are inefficient. There has to be a chapter on Warren Buffet and Peter Lynch and George Soros too, who made mince meat of efficient markets theories with the money they made. The point cannot be made from quotations of famous people alone.
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