- Hardcover: 400 pages
- Publisher: HarperBusiness (June 9, 2009)
- Language: English
- ISBN-10: 0060598999
- ISBN-13: 978-0060598990
- Product Dimensions: 6 x 1.2 x 9 inches
- Shipping Weight: 1.2 pounds (View shipping rates and policies)
- Average Customer Review: 3.9 out of 5 stars See all reviews (118 customer reviews)
- Amazon Best Sellers Rank: #793,826 in Books (See Top 100 in Books)
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The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street Hardcover – June 9, 2009
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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.
“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)
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Top Customer Reviews
Just one technical mistake that I could find: In chapter 13, Fox shows his lack of math training when he explains that 1/10^160 is "a couple billion billion," which made me snort a noseful of cappuchino onto my iPad.
I hope business schools and economics departments will make good use of this book. The world is a complex place. The stock market is not a cause-and-effect machine, any more than people are. A broad perspective helps prevent us from making stupid mistakes.
The book starts out discussing the modern beginning of financial economics with Irving Fisher. It introduces in chronological order people who started using statistics and data mining to examine properties of asset pricing. The first instances of random walk properties of bonds are discussed with Macaulay (from macaulay duration). The book makes a quick transition to Markowitz who introduces portfolio theory as a natural outgrowth of expertise gained from mastering optimization under uncertainty in the second world war. Ideas from CAPM and efficient market theory are discussed in historical context and the momentum of academic belief in the approach. The book then starts to focus on practical reality and the interplay between academics and industry is discussed with analysis of mutual fund returns, the rights of shareholders being a stick to reduce agency problems and in a certain sense it is a discussion of how aggregate behaviour can be seen to enforce the efficient market. As the book follows history in its actual sequence of events, with the 70s being a period in which markets performed abnormally to a certain extent, financial scholars began to question their assumptions and market failure is considered by many top academics. One can sense the growing disagreement in academic finance. The book continues into the modern financial era and discusses the change of belief of many of the efficient markets biggest proponents. Strong evidence is shown to allow for statistical anomolies in financial prices over time that dispute the efficient market convincingly. At the same time, mistakes of the past are rarely the mistakes of the future and so mispricings are not persistent. In addition examples of where mispricings lasted for longer than holders could hold are examined, in particular LTCM is discussed.
The Myth of the Rational Market is a nice historical account of academic thought on financial economics and the assumptions of academics about financial markets. Through historical account the reader sees the evolution of thought and the reasoning behind both the formation and subsequent changes in beliefs. It is both readable and informative and through the account the author basically argues that today people belief that markets might not be efficient, but there is no arbitrage. I recommend it as a colorful history of modern financial economics.
These questions and many more are examined in this urbane, candid history of men and money. Fox navigates the troubled waters of the Street and the Academy with skill, giving credit where it is due but not hesitating to point out the Emperor's knickers around his royal ankles. The only disappointment to me was the discovery that there is no method of stock valuation for the side of the argument which maintains the irregularity of the market; there is no Black&Scholes for the unbeliever. But maybe that fact is indicative of the truth that, in the end, you really do have to choose between precise ambiguity and vague truth.
And this book whispers an unsettling memento mori into the ear of the aspiring business leader: it doesn't matter which lens you choose, because in the end the view is the same through both of them...
Great read, drills down relentlessly into the annals of time and pressure and personalities and opportunities and Other People's Money, to come up with timeless observations about finance and philosophy.
The problem is that Justin Fox goes into far too much detail; the theories that were put forward and the names of the people involved in them. I thought of abandoning the book several times (usual for me), but I'm glad I didn't. The Epilogue is well worth reading for an overview of what these people (the economists), who thing they are scientists on a par with chemists and physicists, have done, and continue to do, to the detriment of the famous 'man in the street'.