Science gives rise to a distinct cycle of publications. First come the journal articles, full of equations and accessible only to a few. They are the stuff discoveries are made of, although most of the time a published paper offers only a marginal contribution, a small footnote to an already established edifice. Publications are valued only with respect to a body of literature. They never stand in isolation. Bibliographies map the field with invisible threads of references and quotations. It takes a while to determine which entries add the most to a body of knowledge or, when the article departs from established wisdom, whether it constitutes a breakthrough or a dead-end. Journal articles are mostly all what graduate students get as reading material, with the injunction to improve upon that stock of knowledge.
Then come the textbooks, written with a different public in mind and for a different purpose. Ideas that had once been too complex to tackle for anyone but a select few are now presented in quintessential form. Everything looks simple once you have been taught it. Almost inconceivable mysteries are transformed into mere formulations and rules. Students are not motivated by the thrill of discovery; they are after the easy answer, the practical solution to a set of well-defined problems. These techniques will be put to use in various contexts, and they will shape the automatisms and rules of thumb that are all that remains once the content of a college education has been forgotten.
The next stage belongs to the science book, the journalistic essay aimed at the general public. The best science books try to recreate the thrill of discovery, and to put the magic back into the field. They do so by collecting the lore and legends that arise whenever great minds are concentrated. They make public what had once been transmitted as private jokes and anecdotes communicated on the margin of serious teaching. Because most scientific content remains beyond the reach of literary description, they have to find a new angle, and make research into seemingly arcane subjects sound relevant for the public at large. They tend to emphasize science's applications, its ability to shape a world of our own making.
The study of finance has now reached the stage where bestseller books by magazine columnists are written about the discipline. The Myth of the Rational Market, by Justin Fox from Time magazine, offers a fine account of the evolution of financial economics, from its origins on the eve of the Great Depression to contemporary developments in the wake of the subprime crisis. At first I was worried by the proximity of this book to Peter Berstein's series of books on the same topic. But I was reassured by the generous endorsement from the author of Capital Ideas on the back cover of this book, and I came to see the complementarities rather than the repetitions between the two projects. Peter Berstein is a practitioner turned chronicler, and he uses his in-depth knowledge of market actors to replace financial economics in its broad intellectual context. Justin Fox is a journalist, and he has done his journalistic work right. He is even able to teach Robert Shiller a lesson or two about Irving Fisher, the Yale professor with whom he begins his narrative, who in 1929 got his predictions spectacularly wrong but who otherwise pioneered many future developments in the field of finance.
Justin Fox's strength is that he got his equestrian's tips straight from the horse's mouth. He has interviewed almost all the pioneers of the field who are still living, sometimes several times and over an extended period of time. Although the endnotes don't refer to particular interviews, this is because all remarks and life episodes not otherwise attributed were collected by the author. Especially worthwhile were the interviews with Milton Friedman, the Pope of the rational economic man, whose teachings at Chicago inspired generations of students. Friedman is described as a charming, friendly, ever-tempered little man saying outrageous things. This is how Friedman dismissed behavioral finance before it even took off: going around asking people about their economic decisions is "about on par with testing theories of longevity by asking octogenarians how they account for their long life." Or how he recalls Jimmy Savage's saying: "the role of statistics is not to discover truth. The role of statistics is to resolve disagreements among people." On speculation: "People who argue that speculation is generally destabilizing seldom realize that this is largely equivalent to saying that speculators lose money."
There are also valuable quotes from other pioneers in the field. This is how Merton Miller explained the significance of the series of paper on corporate finance he wrote with Franco Modigliani: "The pizza delivery man comes to Yogi Berra after the game and says, Yogi, how do you want this pizza cut, into quarters or eighths? Yogi says, cut it into eight pieces. I'm feeling hungry tonight." Or Paul Samuelson on mutual fund performance: "There is only one place to make money in the mutual fund business--as there is only one place for a temperate man to be in a saloon, behind the bar and not in front of the bar." But perhaps the best piece of humor comes from Larry Summers' speech at the annual meeting of the American Finance Association, when he compared the entire discipline of finance to economists devoting their whole career studying ketchup. The "ketchup economics" speech ranks along with Paul Krugman's theory of interstellar trade among the most hilarious writings in the so-called dismal science.
If economists are often in disagreement among themselves, financial economists disagree enormously. In 1978, Michael Jensen declared: "I believe there is no other proposition in economics which has more solid evidence supporting it than the Efficient Market Hypothesis." In 1987 Robert Shiller, based on available evidence, could conclude that "the efficient market hypothesis is the most remarkable error in the history of economic theory." The reason why economists clung to their model even if it was proven wrong is to be found in the practical implications it offers for financial management. Says Miller: "There is only one theory of efficient markets. There are hundreds of theories of inefficient markets." Or Fama: "I don't know what asset pricing would look like in a world that really took behavioral science seriously."
What struck me upon reading this book was how much financial economics is an American science. There is barely any mention of research done outside the US. The production of new ideas and new theories was concentrated around a few campuses and institutions, most notably the university of Chicago, where the economics department, the business school, and the law school benefited from a pro-market environment. The next stage in the development of the discipline may well be the globalization of financial economics. Contacts with other research traditions (think about mathematical psychology in Israel, or industrial economics in Toulouse) may lead to new convergences and new departures.
Loading your book clubs
There was a problem loading your book clubs. Please try again.
Not in a club? Learn more
Join or create book clubs
Choose books together
Track your books
Bring your club to Amazon Book Clubs, start a new book club and invite your friends to join, or find a club that’s right for you for free.
Download the free Kindle app and start reading Kindle books instantly on your smartphone, tablet, or computer - no Kindle device required. Learn more
Read instantly on your browser with Kindle for Web.
Using your mobile phone camera - scan the code below and download the Kindle app.
Flip to back Flip to front
Follow the Author
Something went wrong. Please try your request again later.
| Price | New from | Used from |
|
Audible Audiobook, Unabridged
"Please retry" |
$0.00
| $7.95 with discounted Audible membership | |
- Read with Our Free App
-
Audiobook
$0.00 - 52 Used from $1.69 9 New from $7.99 2 Collectible from $12.99
- 1 New from $19.62
Book recommendations, author interviews, editors' picks, and more. Read it now
Customers who viewed this item also viewed
Page 1 of 1 Start overPage 1 of 1
About the author
Follow authors to get new release updates, plus improved recommendations.
Top reviews from other countries
Joe Blow
Devastation deconstruction of the so-called "Rational" market
Reviewed in Canada 🇨🇦 on October 20, 2020
Jules Alexandre Théophraste de Corvée de Ch...., dit "Dupond"
Amusant et instructif sur la dynamique de l'aveuglement
Reviewed in France 🇫🇷 on November 7, 2009
Dr. Chrilly Donninger
Gut schriebene Geschichte der Mainstream-Ökonomie
Reviewed in Germany 🇩🇪 on February 10, 2013
