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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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“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)
From the Inside Flap
The financial crisis of 2008 and subsequent Great Recession demolished many cherished beliefs--most significantly, the theory that financial markets always get things right. Justin Fox's The Myth of the Rational Market explains where that idea came from, and where it went wrong. As much an intellectual whodunit as a cultural history of the perils and possibilities of risk, it also brings to life the people and ideas that forged modern finance and investing--from the formative days of Wall Street through the Great Depression and into the financial calamities of today. It's a tale featuring professors who made and lost fortunes, battled fiercely over ideas, beat the house at blackjack, wrote bestselling books, and played major roles on the world stage. It's also a story of free-market capitalism's war with itself.--Barron's
- ASIN : 0060599030
- Publisher : Harper Business; Reprint edition (February 8, 2011)
- Language: : English
- Paperback : 416 pages
- ISBN-10 : 9780060599034
- ISBN-13 : 978-0060599034
- Item Weight : 12.8 ounces
- Dimensions : 5.31 x 0.94 x 8 inches
- Best Sellers Rank: #721,173 in Books (See Top 100 in Books)
- Customer Reviews:
Top reviews from the United States
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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.
My naivete opened the world to a new way of viewing the markets and their behavior.
Author Justin Fox let's it be known that he is a journalist but his humility is just that. The man is truly a brilliant writer and a gifted storyteller.
What do you take away from the book that is largely a 20th century history of the academic minds that fueled our beliefs about the markets?
First is that the struggles that you and I have with just how efficient or not the market is...is something that all the great minds struggle with. Don't worry you won't walk away with the belief that the markets are indeed rational. But you'll sense the arguments that the markets do discount a lot of information is correct. Of course...the there are the exceptions which more than shine in the conclusion that the markets are not rational.
If that analysis isn't crystal it's because the waters are murky even in the minds of those who have studied it and lived it for decades on end.
Second takeaway? Stability breeds instability. Markets that are stable, are trending nicely are preparing the way for a disaster. Now WHEN will that disaster hit? You don't always know that of course but THIS conclusion was a wake up call.
Third? Shiller's study on home prices dating back a century show that adjusted for inflation...housing may not be the great investment waiting to happen again...that you might wish it would be... (My conclusion)
Fourth? Keynes wrote at one point that keeping interest rates artificially low perhaps could keep markets in a perpetual bubble that won't break so why not? (My conclusion to this rather stunning paraphrase? Step out of the way when that explosion occurs...Keynes is wrong.)
There are hundreds of grand nuggets buried within this brilliantly told story of Wall Street being studied and taught at University.
An outstanding book and a great read filled with notes for further study for those of us who got curiouser and curiouser....
The 168 Hour Week: Living Life Your Way 24-7
Top reviews from other countries
The book is however truly magnificent, with a very broad historical sweep, close discussion with leading players, and massive historial research, all by an author who understands his subject and writes with fine, clear style. The only - minor - downside perhaps is that the discussion of the historical byways can at some points become a bit much for the typical(?) reader to absorb: but the author can be forgiven for wanting to retain such hard won copy.
The book will be of special interest to readers who have some, if only superficial familiarity with at least the the biggest names among the eight page "Cast of Characters" that the author helpfully provides.
"Investment advisor" industry that preyed on the unsuspecting masses.
Niels Bohr, Nobel prize winner once said "Making predictions is very difficult, especially when it concerns the future".
Bohr had a grim sense of humour. If you cannot predict the future (and you cannot), then you cannot predict the future with Math. QED.
There is just one omission in this otherwise outstanding book. In the chapter dealing with the 2007-2008 crash, there is no mention of those who did warn about the overheated market and the dangers of a crash. They include Peter Drucker, Anne Pettifor, Steve Keen, Dean Baker, Raghuram Rajan, Peter Schiff and others. One wonders why they were omitted.