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Capital Ideas: The Improbable Origins of Modern Wall Street Paperback – March 29, 1993

4.1 out of 5 stars 28 customer reviews

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Editorial Reviews

From Library Journal

In a thorough, well-written work on the modern financial marketplace, Bernstein traces the merging of academic research with the curbstone techniques of Wall Street. Previously considered impractical pursuits, the concepts developed in "ivory towers" by various scholars and economists forced the marketplace to rethink its methods in light of events of this century. From early attempts at predicting market behavior and developing the concept of risk and portfolio management theories, these thinkers contributed a theoretical basis to capital markets, bridging the gap in understanding between insiders and outsiders. The text presupposes a knowledge of market and economic theory, but a well-informed reader will find this an interesting summary of the development of modern finance.
- Kenneth J. Cook, Melbourne, Fla.
Copyright 1991 Reed Business Information, Inc.

From Kirkus Reviews

A savvy appreciation of how a small band of disinterested academics has revolutionized the way Wall Street and its offshore counterparts manage the world's investment wealth. A securities-industry veteran and founding editor of The Journal of Portfolio Management, Bernstein provides a lively, lucid history of the scholarship that has helped advance institutional investing beyond the more-art-than-science stage. For openers, he focuses on an obscure French polymath whose turn-of-the-century doctoral thesis on the unpredictability of stock prices anticipated Einstein's work on relativity. Over the years, this Gallic ground- breaker was followed by other pioneers, including an English statistician who put paid to any notion that securities analysts can pick undervalued issues with any consistency, and an American astronomer whose main claim to financial fame was his discovery that stock prices move in random patterns. Eventually, a host of Nobel laureates in Economics (Harry Markowitz, Franco Modigliani, Paul Samuelson, James Tobin, etc.) contributed as well. As Bernstein makes clear, however, professional investors at bank trust departments, foundations, insurance companies, mutual funds, and elsewhere long resisted unconventional wisdom--in particular, that originating with ivory-tower theoreticians. Once the bear market of 1973-74 had wreaked its havoc, though, many of the recalcitrants conceded there just might be something in the idea of systematically controlling risk in the competition for above- average investment returns. At any rate, less than two decades later (with a big assist from powerful numbers-crunching computers), asset allocation, diversification, hedging, performance measurement, portfolio insurance, and allied techniques are norms, not novelties, in the management of large pools of money. While his text may prove a bit difficult for market tyros, Bernstein makes a fine job of tracing the town/gown links that are restructuring big-time investment strategy and practice. -- Copyright ©1991, Kirkus Associates, LP. All rights reserved.

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Product Details

  • Paperback: 352 pages
  • Publisher: Free Press; 8th edition (March 29, 1993)
  • Language: English
  • ISBN-10: 0029030129
  • ISBN-13: 978-0029030127
  • Product Dimensions: 9.2 x 6.2 x 0.9 inches
  • Shipping Weight: 1.1 pounds
  • Average Customer Review: 4.1 out of 5 stars  See all reviews (28 customer reviews)
  • Amazon Best Sellers Rank: #2,339,715 in Books (See Top 100 in Books)

Customer Reviews

Top Customer Reviews

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"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.
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Format: Paperback
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?Read more ›
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Format: Paperback
The popular literature about the world of investment in the 1980s carries titles that reflect those events: Bonfire of the Vanities, Barbarians at the Gates, The Predators' Ball, and Liars' Poker. The main characters are arrogant, greedy, cynical, and shady. The movie Wall Street summed it all up: "greed is good", the address by corporate raider Gordon Gekko to a crowd of investors, is the claim that came to epitomize the zeitgeist.

But what if the real heroes of the stock market frenzy were not those pathetic figures that generations of MBA students tried to emulate? What if the unsung heroes of the times were instead the professors and ivory tower academics who wrote those students' textbooks? Finance professors are usually not held in very high esteem: their economics colleagues won't share office space with them, their practically-minded students deride them for not practicing what they are teaching, and the general public considers any accident on the stock market as proof of the flaws in their theories.

Peter Bernstein's book pays due respect to their profession. It focusses on a small group of innovators who created finance as an academic discipline, and transformed Wall Street and the world along the way. Published in 1992, Capital Ideas starts and ends with two turning points in the history of modern finance: the crisis of October 1974, which saw the culmination of the worst bear market in common stocks since the Great Crash of 1929, and the stock market crash of October 1987, in which hundreds of billions of dollars were wiped out in a few hours.

Financial innovation was blamed on those two occasions, and finance specialists were castigated as sorcerer's apprentices.
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