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The Myth of the Rational Market [Kindle Edition]

Justin Fox
3.9 out of 5 stars  See all reviews (104 customer reviews)

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Book Description

“Do we really need yet another book about the financial crisis? Yes, we do—because this one is different….A must-read for anyone who wants to understand the mess we’re in.”
—Paul Krugman, New York Times Book Review

 

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

 

A lively history of ideas, The Myth of the Rational Market by former Time Magazine economics columnist Justin Fox, describes with insight and wit the rise and fall of the world’s most influential investing idea: the efficient markets theory. Both a New York Times bestseller and Notable Book of the Year—longlisted for the Financial Times Business Book of the Year Award and named one of Library Journal Best Business Books of the Year—The Myth of the Rational Market carries readers from the earliest days of Wall Street to the current financial crisis, debunking the long-held myth that the stock market is always right in the process while intelligently exploring the replacement theory of behavioral economics.



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.

Review

“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.”

Product Details

  • File Size: 770 KB
  • Print Length: 404 pages
  • Page Numbers Source ISBN: 0060598999
  • Publisher: HarperCollins e-books; Reprint edition (June 9, 2009)
  • Sold by: HarperCollins Publishers
  • Language: English
  • ASIN: B001NLL7LQ
  • Text-to-Speech: Enabled
  • X-Ray:
  • Lending: Not Enabled
  • Amazon Best Sellers Rank: #237,281 Paid in Kindle Store (See Top 100 Paid in Kindle Store)
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Customer Reviews

Most Helpful Customer Reviews
120 of 127 people found the following review helpful
5.0 out of 5 stars Don't believe the title, but read the book 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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103 of 109 people found the following review helpful
4.0 out of 5 stars Too Short 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
5.0 out of 5 stars COMPREHENSIVE, COMPLETE AND CLEVER June 9, 2009
By Sanford
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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Most Recent Customer Reviews
1.0 out of 5 stars The same old cry by ignorant people
Frankly, I did not read the book. What I have read was the interview with Mr Justin Fox on the Marketplace web site. Read more
Published 2 months ago by Pessakh Eugene Mayburd
5.0 out of 5 stars Worth your investment of time
Excellent exposition that draws together some otherwise disconnected concepts that you were probably taught in Eco 101 at university. Recommended.
Published 4 months ago by Shane Delphine
4.0 out of 5 stars Fascinating and Deep
Clearly, this author did his homework and presents a fascinating background/history of Wall Street. At times, it was a little hard to keep all of the players/dates in order but, at... Read more
Published 4 months ago by S. Kercheval
5.0 out of 5 stars An Excellent Review of the History of Modern Finance
The book should be required reading for all investors (and certainly MBA students). Easy to read and comprehensive. I highly recommend it.
Published 12 months ago by Lawrence A. Weiss
4.0 out of 5 stars Its okay
The story is accurate as far as it goes. There are newer better books on emerging economic theory such as Dan Ariely,'s Predictably Irrational and Pete Lunn's Basic Instincts. Read more
Published 12 months ago by Kenneth Davidson
5.0 out of 5 stars Required reading for any serious investor
Fox's book contains an engaging survey of the last 100 years or so of financial and economic theory. Read more
Published 13 months ago by Kevin Kroskey, CFP, MBA
5.0 out of 5 stars Thought provoking
This is a great book. The mystery of the stock market is gone. By providing a history and results of study after study, you can see what is really behind claims to "beat the... Read more
Published 15 months ago by Gene Christie
4.0 out of 5 stars Historical Overview
This book is about the Efficient Market Hypothesis and its authors - and the negative consequences of blindly believing that capital markets are perfect. Read more
Published 17 months ago by Ratatosk
4.0 out of 5 stars Good
Delivered on time at good price - - - - - - - - - - - - - -
Published 17 months ago by Blford
5.0 out of 5 stars Excellent
There are already many good lengthy reviews of this book, so I'll keep my review short.

Fox presents an intellectual history of thinking about financial markets over the... Read more
Published 18 months ago by Irfan A. Alvi
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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.

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