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The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street Hardcover – January 18, 2010
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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. --This text refers to an out of print or unavailable edition of this title.
Praise for the US edition: "In this book, Justin Fox, the economics columnist for Time magazine, provides a lucid, lively and learned account of the rise and fall of the theory." - Barrons, US "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." - Publisher's Weekly, US "Justin Fox's new book, - is - an engaging history of what might be called the rise and fall of the efficient market hypothesis." - The New York Times, US "Fox - covers ground that ranges from the notion of market efficiency - to the panoply of models for measuring risk and pricing derivatives that came with it. This book - is impressively broad and richly researched." - Financial Times, US "With "The Myth of the Rational Market" Mr. Fox has produced a valuable and highly readable history of risk and reward." - The Wall Street Journal, US "Justin Fox's description of how the idea evolved and conquered is fascinating and entertainingly told. Mr Fox has written a worthy successor to "Capital Ideas", the late Peter Bernstein's 1990s classic on the emergence of the rational-market myth: bang up-to-date; alas, without the happy ending" - The Economist, US "...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, US "Fox...weaves a fascinating historical narrative" - The Washington Post, US "Do we really need yet another book about the financial crisis? Yes, we do - because this one is different ...a must-read" - New York Times
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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.
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'.
With that said, I started reading this book without any expectations - I simply thought of it as a reading assignment for my class. My first impression of the book was fairly pleasant; it wasn't too boring, in fact at times it was somewhat entertaining, and it didn't seem to require an extensive understanding of economic theories; but I will say that a better explanation of some of the theories would have been nice. A short paragraph explaining an application of each theory would have helped me out a lot, then again this was pretty much the first time I've seen most of those theories.
The book gave a broad history of all the notable scholars of economics starting in the late 1800s with the great Irving Fisher and continuing through 2007 with Alan Greenspan. It was somewhat in chronological order, but tended to jump around a lot. I think this was mostly due to overlap of time periods between scholars. I found the book to be long at times, especially with some of the terminology and theories that are talked about. However, I really enjoyed reading about the different economic "experts".
I found that the "Cast of Characters" section was extremely useful while reading. It lists all the economic scholars that Fox covered over the course of the book. I constantly found myself referencing this section over the course of the semester when I couldn't remember the accomplishments of one "character" while reading about another. The extensive index was also very helpful when trying to find specific theories and people.
To those with experienced economic or financial backgrounds:
You'll probably get much more out of this book than I did. Even though I don't think the reader requires a vast economic background, it would probably help. Fox analyzes the theories from different economic "experts" and points out the pros and cons. Half of the time it was difficult for me (with no economic or finance background) to follow because I wasn't familiar with the terminology and applications of theories. If you are interested in a particular theory, you'll be able to quickly find and reference it via the index.
To those with little or no economic or financial background (like me):
This is still a great book to get familiar with the scholars who altered the way the stock market is viewed. It certainly gave me an appreciation for statistics; in fact, before I read this book I had no idea just how much statistics were used to develop market theories. I also think this book will help with your future MBA classes because you'll know why and who developed the economic theories that are still widely used today. Again, with Fox's review of each theory, he outlines the strengths and weaknesses and, for the most part, allows you to draw your own conclusion. Either way, it gives you something to debate about during classroom lecture.
I gave the book 4 stars instead of 5 only because I think it could have explained the applications of theories a little more. A simple picture probably would have sufficed for me - but don't forget that I have no economic background (only an engineering degree). Other than that, I think this book is definitely worth reading if you're thinking about getting an MBA or another economic or finance degree.