| The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street |  | Author: Justin Fox
Publisher: HarperBusiness
Category: Book
List Price: $27.99
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Rating:  74 reviews
Sales Rank: 17,099
Media: Hardcover
Edition: First Edition - First Printing
Pages: 400
Number Of Items: 1
Shipping Weight (lbs): 1.2
Dimensions (in): 8.9 x 6.4 x 1.4
ISBN: 0060598999
Dewey Decimal Number: 332.6401
EAN: 9780060598990
ASIN: 0060598999
Publication Date: June 1, 2009
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Product Description
Chronicling the rise and fall of the efficient market theory and the century-long making of the modern financial industry, Justin Fox's The Myth of the Rational Market is as much an intellectual whodunit as a cultural history of the perils and possibilities of risk. The book 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 calamity of today. It's a tale that features professors who made and lost fortunes, battled fiercely over ideas, beat the house in blackjack, wrote bestselling books, and played major roles on the world stage. It's also a tale of Wall Street's evolution, the power of the market to generate wealth and wreak havoc, and free market capitalism's war with itself. The efficient market hypothesis—long part of academic folklore but codified in the 1960s at the University of Chicago—has evolved into a powerful myth. It has been the maker and loser of fortunes, the driver of trillions of dollars, the inspiration for index funds and vast new derivatives markets, and the guidepost for thousands of careers. The theory holds that the market is always right, and that the decisions of millions of rational investors, all acting on information to outsmart one another, always provide the best judge of a stock's value. That myth is crumbling. Celebrated journalist and columnist Fox introduces a new wave of economists and scholars who no longer teach that investors are rational or that the markets are always right. Many of them now agree with Yale professor Robert Shiller that the efficient markets theory “represents one of the most remarkable errors in the history of economic thought.” Today the theory has given way to counterintuitive hypotheses about human behavior, psychological models of decision making, and the irrationality of the markets. Investors overreact, underreact, and make irrational decisions based on imperfect data. In his landmark treatment of the history of the world's markets, Fox uncovers the new ideas that may come to drive the market in the century ahead.
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Showing reviews 1-5 of 74
 At Least Some Economists Are Doing The Soul Searching August 18, 2010
Benjamin Reid Lodmell
I really appreciate when one of my colleagues has the guts to get out and challenge conventional wisdom. Fox is doing it. I suspect that the "myth" he deconstructs isn't going away any time soon because nobody wants it to just yet. These last two years clarify that. I'm not a "contrarian" per say. I believe the global economy will muddle through and successfully so, largely because of the resilience of big emerging economies. Unlocked consumers in the emerging/frontier markets (and the companies they buy from) will eventually save the day but I think he makes some valid points. Fox joyfully rubs in our face that the pre financial crisis of 2008 "conventional wisdom" building was built on a house of sand. He explains exactly why and why it is still relevant. Good book.
Very good treatment of a complex topic August 10, 2010
Edward C Gardella
1 out of 1 found this review helpful
A very good book. It puts in an historical context, both the good points and the problems of current economic thought. It shows the shortcomings of trying to reduce a system of human interactions (the Market) into a mathematical model. Having studied a little economics, this book clarified many of the concepts. It was well-written, but I would have appreciated a little more of the mathematical underpinnings of the economics covered - but the book was not aimed at the math geek in me. This book is a definite must-read for those who want to gain an understanding of why economists are always talking about "efficient markets" and why we really don't have any.
A quibble with the Kindle edition- this book is heavily annotated with end-notes (many of which are essential background material), and it would have helped reading to hyperlink the notes for simple flipping from main text to note and back. I have read several Kindle books that have that kind of annotations, and it always helps.
An excellent general overview. August 4, 2010
G. Elston (Toronto, Canada)
Fox's book is a great introductory overview for anyone interested in understanding more about the debates in economics and finance concerning the rationality (or irrationality) of the market. This work is written at a level that is complex enough to provide enough detail for those already familiar with a lot of the material, but not too complex for the general reader looking to understand the area in more detail. It is not written as, nor intended, as an exhaustive or in-depth academic treatise. Fox is a journalist and not an academic, so anyone expecting a jargon, graph and equation filled work will be disappointed. In my opinion he succeeds brilliantly in distilling what could be a multi-volume heavy overview into a 382 page work that draws the reader in and holds their attention on a fascinating journey through the development of financial theory and the thought leaders involved in it. At the end the reader is left wanting to know and understand more.
For those wanting more, the book provides enough resources in the notes section to provide anyone seeking greater depth, or wanting to look up the seminal papers mentioned, with a wide-ranging list of excellent materials.
The book reads well and I found the flow to be excellent, for those interested in finance and economics it is an enjoyable page turner and I highly recommend it. It stands comfortably with other great general finance works by Roger Lowenstein, Richard Bookstaber and the late great Peter Bernstein.
Seriously Wounds the Efficient Market Hypothesis, But Doesn't Kill It April 26, 2010
AdamSmythe (Colorado)
The first 95% of this book represents one of the best summaries of leading intellectual thought concerning the efficiency (or rationality) of financial markets. My guess is that if you have an interest in the concept of market efficiency, you will enjoy this well-researched summary. Author Justin Fox covers a lot of ground and does a good job at it. However, it's my opinion that for some lay readers, this isn't going to seem like a page-turner.
The list of economists, statisticians, investors, etc. covered in this book reads like a who's who of the important figures in the history of investment theory. Importantly, the reader gets to see the intellectual connections (and in some cases the interpersonal connections) between the likes of Louis Bachelier, Henri Poincare, Irving Fisher, Roger Babson, John Maynard Keynes, John Burr Williams, Alfred Cowles, Paul Samuelson, Harry Markowitz, Franco Modiglianni, Merton Miller, Gene Fama, Michael Jensen, Richard Thaler, Robert Schiller, Ed Thorpe and others well known in the field of financial market theory.
While "modern" portfolio theory (MPT), which dates back to the 1950s and 60s, became increasingly accepted through perhaps the late 1970s (thanks in good part to the pioneering efforts of some of the economists mentioned above), in more recent times behavioral finance--which looks more at what people actually do, as opposed to what a rational person would do--has held increasing sway. Before the efforts of the behavioral scientists, MPT seemed very much to be accepted science. However, markets can become rational only through sufficient interactions of rational (even though imperfect) participants. Real world experiences like a 22% drop in stock prices in just one day (in October 1987) without major economic news, combined with a relatively quick bounce back within a year--or the NASDAQ index soaring above 5,000 in 2000 with companies that amounted to little more than a business plan acquiring large market capitalizations--suggest somewhat of a lack of rationality. This book does a good job covering topics like these and the economists who addressed them, and that's the 95% of the book I truly enjoyed.
This brings me to the end of the book. The book's title suggests a debunking of the myth of a rational market; but despite covering evidence of market irrationality (which has been discussed and successfully exploited by the likes of Warren Buffett for years), Justin Fox doesn't finish the job. He doesn't go in for the kill. Rather, he seems to let modern portfolio theory off with what feels like a draw. Although I would heartily recommend this book for its rich history of the concept of rational markets, in the end I was disappointed.
 Something for Non-Specialists (with a Warning) and Specialists April 13, 2010
P. Rothman
We are taught that the aphorism 'Know Yourself' was inscribed in the Temple of Apollo at Delphi. Justin Fox would have done well to heed that message, since in many parts of 'The Myth of the Rational Market' he shows that he is quite out of his league.
Consider, for example, Footnote 26 from Chapter 15 (FN26-15), which purports to explain the positive relationship between the value of an option and the variance of the rate of return distribution of the underlying stock. The reason why such a relationship exists is that: (1) higher variance implies 'lower downside' and 'higher upside'; (2) but 'lower downside' does not affect the expected payoff from holding the option; while (3) 'higher upside' increases the expected payoff. FN26-15, however, not only fails to demonstrate this, it also erroneously implies that, in order for this relationship to hold, one must purchase/receive additional options over time. This is the kind of incorrect reasoning one unfortunately finds insufficiently rarely in the financial press and badly written textbooks.
While he may very well have done otherwise, I have a strong impression that his algorithm for digesting the often technical material he writes about was as follows: read the paper's 'Introduction' and 'Conclusions' but ignore the main body of the paper. Doing so appears to have allowed the apparently math-phobic and statistics/econometrics-phobic Mr. Fox (how many times is it necessary to say that a particular paper is 'equation filled'?) to employ various buzzwords and cliches without understanding the fundamentals at hand.
On the other hand, from his discussions with many of the main players in the field of academic finance, he has come away well supplied with a good number of entertaining and revealing anecdotes and assorted facts. He successfully winds these into an easy-to-read light history of both key Wall Street practitioners and trends over the past 100+ years and those researchers who have tried to model and understand these activities. For the non-specialist, this historical sketch is likely to be helpful, with the proviso that supplementary and more authoritative sources are recommended with respect to some of the more technical topics discussed. For the specialist, I think the interest will be more of the fly-on-wall gossip-type variety; there are lots of stories about people whose papers/books they've studied and/or at least heard about.
Showing reviews 1-5 of 74
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