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The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street
“Do we really need yet another book about the financial crisis? Yes, we do—because this one is different….A must-read for anyone who wants to understand the mess we’re in.”—Paul Krugman, New York Times Book Review “Fox makes business history thrilling.”—St. Louis Post-Dispatch A lively history of ideas, The Myth of the Rational Market by former Time Magazine economics columnist Justin Fox, describes with insight and wit the rise and fall of the world’s most influential investing the efficient markets theory. Both a New York Times bestseller and Notable Book of the Year—longlisted for the Financial Times Business Book of the Year Award and named one of Library Journal Best Business Books of the Year—The Myth of the Rational Market carries readers from the earliest days of Wall Street to the current financial crisis, debunking the long-held myth that the stock market is always right in the process while intelligently exploring the replacement theory of behavioral economics.
400 pages, Hardcover
First published January 1, 2009
228 people are currently reading
4717 people want to read
About the author
Justin Fox
3 books21 followersLibrarian Note: There is more than one author by this name in the Goodreads data base.
Justin Fox is Executive Editor, New York, of the Harvard Business Review and writes frequently for HBR and HBR.org. He is the author of the 2009 bestseller The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street. Before joining HBR in 2010, he wrote a weekly column for Time and created the Curious Capitalist blog for Time.com. Previously, Fox spent more than a decade as a writer and editor at Fortune magazine. He has been a senior fellow at the Harvard Kennedy School and a Young Global Leader of the World Economic Forum.
Justin Fox is Executive Editor, New York, of the Harvard Business Review and writes frequently for HBR and HBR.org. He is the author of the 2009 bestseller The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street. Before joining HBR in 2010, he wrote a weekly column for Time and created the Curious Capitalist blog for Time.com. Previously, Fox spent more than a decade as a writer and editor at Fortune magazine. He has been a senior fellow at the Harvard Kennedy School and a Young Global Leader of the World Economic Forum.
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October 25, 2013
Stock exchanges appeared at about the same time as joint stock companies, in the early 17th century. Mathematical analysis of the stock market had to wait until the early 20th century; it was done independently by a French and an American economist. They found that stock prices move more or less randomly; in a few years Albert Einstein used similar mathematics to analyze Brownian motion. This means that an investor no more has a way to predict the movements of a stock than a physicist has a way to predict the movement of a particle bombarded by molecules. In the 1930s through the 1960s economists have formulated a mathematically rational approach to investing, and asked themselves, what would happen if all the investors followed this approach? The answer associated with the University of Chicago was that stock prices would already reflect all publicly known information, so an investor who does not possess insider information cannot beat the stock market. After this answer, known as the efficient market hypothesis, became well known in the 1970s, it made fortunes for the inventors of the index fund, which simply invested money in the top 500 (say) companies by market capitalization instead of actively picking stocks; it did no worse than ordinary mutual funds, and did not have to pay the analysts' salaries. Other economists derived a formula for the cost of a stock option given the assumption of the hypothesis; it now became possible to insure one's stock portfolio.
Another school of economists associated with MIT pointed out problems with the efficient market hypothesis: if stock prices reflect all publicly known information, then an investor has no incentive to spend money acquiring this information, since he won't gain any new knowledge, but if he won't do it, how can stock prices reflect the information no one has bothered acquiring? Computer simulations showed that a market full of irrational investors will have prices that are nearly as unpredictable as one with rational investors, so the fact that the market is unpredictable does not imply that it is rational. Other studies showed that crowd psychology has a bearing on the markets: people tend to panic together, and become manic together. However, like in a Greek tragedy, no one heeded these warnings, and a huge building of modern finance was built on the shaky foundation of the hypothesis.
In the 1980s, the concept of shareholder value became popular in corporate governance, which meant increasing the stock price of the company above all, and compensating the chief officers of the company with stock options. This made some CEOs insanely rich and gave them the wrong incentive of pumping up the company's stock at the expense of its long-term prospects. The late 1990s saw a huge stock market bubble, which popped in 2000, but not before Cisco, the maker of network equipment with then 40,000 employees, briefly became the most valuable company in the world, with market capitalization over half a trillion dollars. Surely, this price was not efficient! The mid-2000s saw a real estate bubble, the popping of which unleashed a worldwide financial crisis. When Alan Greenspan testified before Congress in 2008, a Congressman asked him whether "you found that your view of the world, your ideology, was not right, it was not working"; Greenspan answered, "Absolutely, precisely." On the one hand, the efficient market hypothesis is clearly wrong; on the other, there is no grand theory to replace it, and as it is built into so much of modern finance, replacing it with anything will be difficult.
Another school of economists associated with MIT pointed out problems with the efficient market hypothesis: if stock prices reflect all publicly known information, then an investor has no incentive to spend money acquiring this information, since he won't gain any new knowledge, but if he won't do it, how can stock prices reflect the information no one has bothered acquiring? Computer simulations showed that a market full of irrational investors will have prices that are nearly as unpredictable as one with rational investors, so the fact that the market is unpredictable does not imply that it is rational. Other studies showed that crowd psychology has a bearing on the markets: people tend to panic together, and become manic together. However, like in a Greek tragedy, no one heeded these warnings, and a huge building of modern finance was built on the shaky foundation of the hypothesis.
In the 1980s, the concept of shareholder value became popular in corporate governance, which meant increasing the stock price of the company above all, and compensating the chief officers of the company with stock options. This made some CEOs insanely rich and gave them the wrong incentive of pumping up the company's stock at the expense of its long-term prospects. The late 1990s saw a huge stock market bubble, which popped in 2000, but not before Cisco, the maker of network equipment with then 40,000 employees, briefly became the most valuable company in the world, with market capitalization over half a trillion dollars. Surely, this price was not efficient! The mid-2000s saw a real estate bubble, the popping of which unleashed a worldwide financial crisis. When Alan Greenspan testified before Congress in 2008, a Congressman asked him whether "you found that your view of the world, your ideology, was not right, it was not working"; Greenspan answered, "Absolutely, precisely." On the one hand, the efficient market hypothesis is clearly wrong; on the other, there is no grand theory to replace it, and as it is built into so much of modern finance, replacing it with anything will be difficult.
November 7, 2013
I had a lot of thoughts about what to say as I was reading this book, but I’ve let a couple of weeks go by and am straining to recall the points and themes I wanted to include. This isn’t the book’s fault: I found it engaging, informative and highly readable. No, I just let other events that life creates bump it off my priority list.
This book (The Myth Of The Rational Market: A History of Risk, Reward, and Delusion on Wall Street) primarily deals with two things: people and an idea.
The people are thinkers, students, doctors of economics, mathematics, physics, finance, and business, and professors of those same disciplines. Many began as academics, but consulted for think-tanks or businesses, or created companies to exploit their own theories and work product.
The idea, at is most basic, is that the “market” (e.g. bond market, stock market, commodities market) is efficient. “Efficient” means that in some semi-autonomous way the price that an object (bond, share of stock, option on soybeans) commands is an accurate reflection of its true underlying value and risks. (Don’t sue me on the explanation.) “Efficient” also means that if an objects price is pushed away from its “correct” price, market participants will correct that price and make money doing so. (Not quite the “invisible hand” of Adam Smith, but you get the gist.)
Over the years I had read a number of books on financial institutions, markets, trading systems, history, and finance itself. Many were good or average; one (on how to value companies/socks) was the driest book going, but I slogged through it. This book was excellently written and a pleasure to read. I’ll cut to the chase for those who don’t want any further details: Four and one-half (4.5) Stars.
Now back to the book.
Mr. Fox writes cleanly, lucidly, and with humor and sensitivity. He is also a very, very good researcher. As he says in his introduction, this is not a book of biographies. It is a book that is full of people, but insofar as they add to the over-arching development of the idea. (He does give sufficient background for many of the people so those unfamiliar with the individuals can understand their perspectives and motivations better.) And as Captain Renault says in Casablanca, Mr. Fox has rounded up all the usual suspects.
For those who did not have any particular interest in “the dismal science” until the collapse and Great Recession, the author also establishes who fits where and what schools of thought developed economics during the last 100+ years. So, if you never knew what “The Chicago School” meant (other than perhaps Milton Freidman was part of it), you will now. It may not be genius, but the way in which the author ties the various players and their schools, publications, and businesses together makes the story sensible to everyman.
In only 320 pages, this book covers more than a century and fifty of the most important and influential (often years or decade after their writings and/or deaths) “economists”, including many winners of the Nobel Prize in Economics. As I was reading, I kept a few page references as reminders.
As I wrote before, this is chock full of characters. Some are household names and some are not. Some are commonplace for their success and awards, others for great service and positions of power, and others because of notoriety both in and out of finance. Charles Dow, Milton Friedman, John Bogle, Larry Summers, Paul Samuleson, Fredrick Hayek, and even Jon von Neumann will be found in these pages. Also, one will read about Warren Buffet and Robert Schiller (he of the Case-Schiller price index that I have been reading about and following for 25 years – congrats on his getting the Nobel this year) two of my personal favorites.
And one will also get to know Alan Greenspan, former chairman of the Federal Reserve a little better. Alan (I never met an asset class bubble I didn’t like) Greenspan who three years after stepping down and watching the financial crisis and its aftermath admitted to Congress and the world that he had put too much faith in the self-correcting power of free markets. Well, that’s not entirely true.
Did Greenspan do a good or bad job? It depends on how you look at things. It is true that he was the man that allowed and often encouraged serial asset class bubbles, but he did so in order to “soften” the collapse of the previous one. And he kept that game going for a fairly long time. He danced through the Asian Financial crisis (’97), the Y2K “crisis” (mostly by putting liquidity into the system which helped prolong the dot-coms), the Internet/Dot-com collapse, and so on. While he helped keep easy money available and used housing to keep the US economy going, Congress, banks, and other financial institutions used that latitude to grow our financial sector to monstrous proportions which eventually collapsed when the first few failures were leveraged into the entire system.
That’s not covered in this book, nor is there blame assigned. But what is covered will make you a wiser, smarter, and less trusting person when it comes to “experts”. The realization that innovations in investing methods and theories changed the very markets they were exploiting (or trying to) make seem like only hindsight, but really? Once a phenomenon that you were measuring disappears (and this happened several times during the 500-odd years at the heart of this book) doesn’t it give you a clue that you’ve changed the system? Harry Markowitz saw it (at least with respect to LTCM) why didn’t the rest of them?
One reason that the book supplies (suggests) is that as concepts went from paper or thesis to wider circulation and acceptance the caveats (or conditions) that the original author(s) included were left behind with only the unqualified theory being adopted. This process may be how all science is done, but with the economic theorists it happened very quickly (the adoption) and it was very polarized. In the end, it was the caveats that were shown to matter the most.
Read the book. It’s good, you’ll learn a lot and it has zero equations or charts. (Oh, I forgot to mention how egregious stock option awards and pay came out of financial theories – Read the book!)
January 5, 2016
This is a decent history of economic thought as it regards markets, targeted towards the very curious layperson (someone who really wants to understand how people think markets work but not enough to make it a career themselves). To that extent, it's very useful for giving you a good idea of what you don't know, but if you want to go deeper and actually learn the things you don't know you'll have to go elsewhere. It is, however, a good jumping off point to do that.
The title of this book is a bit misleading, because it's not strictly about how people think the market is rational but that it actually isn't. As I stated, this is more of a history about what those involved in the stock and related markets have thought about how it works and how to make money. And it's not a great book for someone with an engineer mindset, who wants to know more about how existing financial models fail and under what circumstances it happens. Although the author gently makes the point that the trouble is we don't know those things, I suspect we know them more than the author claims, simply from the evidence in his book.
However, the author's point is weakly valid: market's aren't rational and events are interrelated instead of randomly independent, so much so that our thoughts about how the markets work strongly affect how the markets work - just not in the way we want and often to our detriment.
Well, this is where I jump off...
The title of this book is a bit misleading, because it's not strictly about how people think the market is rational but that it actually isn't. As I stated, this is more of a history about what those involved in the stock and related markets have thought about how it works and how to make money. And it's not a great book for someone with an engineer mindset, who wants to know more about how existing financial models fail and under what circumstances it happens. Although the author gently makes the point that the trouble is we don't know those things, I suspect we know them more than the author claims, simply from the evidence in his book.
However, the author's point is weakly valid: market's aren't rational and events are interrelated instead of randomly independent, so much so that our thoughts about how the markets work strongly affect how the markets work - just not in the way we want and often to our detriment.
Well, this is where I jump off...
July 7, 2017
While I think John Cassidy's How Markets Fail: The Logic of Economic Calamities is more accessible, this book definitely covers more ground. I think anyone planning on reading this book, though, might do better to start with The Undoing Project: A Friendship That Changed Our Minds by Michael Lewis, because an understanding of Prospect Theory and Behavioral Economics would go a long way to understanding why the Efficient Market Hypothesis is based on false premises (the biggest false premise being the belief in rational actors). While the Efficient Market Hypothesis is an important and usable model for equities, and this book does make sure to emphasize that, it is a limited model that is not always correct. In fact, when it is wrong, it is very wrong. In the end, attempts to beat the market will always fail. More importantly: efforts to beat the market by creating new derivatives or other financial products will always lead to financial disaster.
August 3, 2011
Not having a financial background, I came to this book looking for an introductory text. This is definitely not it! Although some who reviewed this book say it is too simple, for me, the opposite was sometimes true. First, I was frequently confused by the comings and goings of different characters in the story (this in spite of a “Cast of Characters” section at the end, which I only belatedly noticed halfway into the book). Secondly, the background knowledge of finance and economics was sometimes a little deep for me to follow.
Nevertheless, I heartily recommend this book! The story is well-told and after a while you can catch the ebb and flow of the story. Even if you have to force yourself to keep on reading and, like me, do not always follow everything, you will walk away with a clearer understanding of how people have danced back and forth between the so-called “efficient market” and “irrational exuberance”/ behaviorism issues. There’s a page or two of good practical advice at the end of the last chapter, as well as a well-written epilogue dealing with the housing mortgage crisis as well.
Nevertheless, I heartily recommend this book! The story is well-told and after a while you can catch the ebb and flow of the story. Even if you have to force yourself to keep on reading and, like me, do not always follow everything, you will walk away with a clearer understanding of how people have danced back and forth between the so-called “efficient market” and “irrational exuberance”/ behaviorism issues. There’s a page or two of good practical advice at the end of the last chapter, as well as a well-written epilogue dealing with the housing mortgage crisis as well.
September 12, 2014
Books about financial or economic history only work for me if the author takes the time to explain difficult concepts for the laypeople. This is where Fox's book falls short. I understand the idea of the rational market (efficient market hypothesis) and the behavioral economics critique of the rational market. There is plenty of interesting stuff in here, including a great chapter on behavioral economics and interesting profiles of crazy economists and financiers. There are also a number of great economics jokes and other funny stories. Unfortunately, loads of the book are boring and unintelligible to non-experts like myself. Books like Ferguson's The Ascent of Money and Freakonomics are much better because they get you up to speed on the basics and then launch into fascinating historical or analytical arguments.
Fox's book suffers from an identity crisis, as seen in its multiple subtitles. It is somewhere between an intellectual history and a history of intellectuals, but it needed more intervention from Fox and less skipping from economist to economist without clarification of their ideas. Not a bad read, but I don't recommend it too highly.
Fox's book suffers from an identity crisis, as seen in its multiple subtitles. It is somewhere between an intellectual history and a history of intellectuals, but it needed more intervention from Fox and less skipping from economist to economist without clarification of their ideas. Not a bad read, but I don't recommend it too highly.
May 6, 2025
عقلانية السوق والتحديات التي تواجهها
تقوم فكرة "عقلانية السوق" على افتراض أساسي مفاده أن الأسواق، كوحدات كلية، تتصرف بطريقة عقلانية، حتى وإن لم يكن جميع الأفراد المشاركين فيها يتسمون بالعقلانية المطلقة. يستند هذا الافتراض إلى أن الأسواق تعتمد بشكل جوهري على المعلومات المتاحة، وأن الأسعار تتكيف وتتحدد بناءً على مدى كفاءة وفعالية هذه المعلومات. ويُفترض أيضًا أن الأفراد والمؤسسات يتخذون قرارات استثمارية تهدف إلى تعظيم المنفعة، مما يعني أن مجموع هذه القرارات العقلانية الفردية يُفترض أن يؤدي إلى سوق كلي يتسم بالعقلانية. ومع ذلك، من المهم الإشارة إلى أن الاعتراف بوجود تحديات ومعضلات جوهرية في مفهوم عقلانية السوق لا ينفي بالضرورة فائدة هذا الإطار النظري، خاصةً في ظل غياب بديل عملي مُثبت له حتى الآن.
وفي سياق فهم آليات السوق، يبرز التساؤل الاقتصادي والفلسفي حول العوامل التي تحدد قيمة منتج ما. تتعدد النظريات المفسرة لذلك، منها نظرية السوق (العرض والطلب)، ونظرية المنفعة، ونظرية قيمة العمل (الوقت والجهد المستغرق)، والرمزية الثقافية. تقدم كل من هذه النظريات مبررات منطقية لتحديد قيمة المنتج، وقد تكون القيمة الفعلية نتاجًا لمجموع هذه النظريات مجتمعة، ويتوقف ذلك على السياق الاجتماعي والاقتصادي والسياسي لمجتمع معين.
في محاولة لفهم التوازنات الاقتصادية الكلية، قدم الاقتصادي إيرفينغ فيشر معادلته الشهيرة لكمية النقود (MV = PT)، التي تشير إلى أنه إذا زادت كمية النقود المتداولة (M) أو سرعة دورانها (V) دون زيادة مماثلة في الناتج الحقيقي (T)، فإن ذلك سيؤدي حتمًا إلى ارتفاع المستوى العام للأسعار (P). ورغم أهمية هذه المعادلة في تفسير بعض الظواهر التضخمية، إلا أنها قد لا تقدم تفسيرًا شاملًا للأسباب العميقة للتضخم، مثل تأثير السياسات المالية المتبعة أو الصدمات الاقتصادية الخارجية.
تسعى العديد من النظريات والنماذج الرياضية والإحصائية التي وضعها خبراء الاقتصاد إلى وضع تنبؤات دقيقة لحركة الأسعار في السوق بناءً على المعلومات المتوفرة. ومع ذلك، تواجه هذه المحاولات تحديات كبيرة، فالمعلومات نفسها قد تكون غير كاملة أو غير قابلة للضبط الدقيق، كما أن حركة الأصول كالأسهم والعملات غالبًا ما تتسم بدرجة من العشوائية التي يصعب التنبؤ بها على المدى الطويل. وبالتالي، فإن محاولات التفوق المستمر على السوق من خلال التنبؤ "الرياضي والإحصائي" غالبًا ما تبوء بالفشل، وذلك لعوامل متعددة منها تأثير "سلوك القطيع"، ونقص المعلومات، والانحيازات العاطفية للمستثمرين.
من رحم هذه التحديات، وبشكل خاص من دراسة "سلوك القطيع" وتأثيره، برز "التمويل السلوكي" (Behavioral Finance) كأحد أبرز الانتقادات الموجهة لنظرية كفاءة السوق التقليدية. يجمع التمويل السلوكي بين مبادئ علم النفس والتحليل المالي، ليؤسس لفكرة أن الأسواق قد لا تكون عقلانية بالكامل، وذلك لأن القرارات الفردية والمؤسسية تتأثر بشكل كبير بالانحيازات المعرفية والعاطفية. فمثلًا، يمكن للإفراط في التفاؤل أن يؤدي إلى تضخم الأسعار بشكل لا يعكس القيمة الحقيقية للأصول، أو ما يعرف بـ "الفقاعات السعرية". وهنا يكمن التمييز الدقيق: فبينما قد تكون المعلومات المتاحة في السوق عقلانية وموضوعية في حد ذاتها، فإن طريقة تفاعل المستثمرين مع هذه المعلومات وتفسيرهم لها هي التي قد تضفي طابعًا غير عقلاني على سلوك السوق وقرارات التسعير.
تقوم فكرة "عقلانية السوق" على افتراض أساسي مفاده أن الأسواق، كوحدات كلية، تتصرف بطريقة عقلانية، حتى وإن لم يكن جميع الأفراد المشاركين فيها يتسمون بالعقلانية المطلقة. يستند هذا الافتراض إلى أن الأسواق تعتمد بشكل جوهري على المعلومات المتاحة، وأن الأسعار تتكيف وتتحدد بناءً على مدى كفاءة وفعالية هذه المعلومات. ويُفترض أيضًا أن الأفراد والمؤسسات يتخذون قرارات استثمارية تهدف إلى تعظيم المنفعة، مما يعني أن مجموع هذه القرارات العقلانية الفردية يُفترض أن يؤدي إلى سوق كلي يتسم بالعقلانية. ومع ذلك، من المهم الإشارة إلى أن الاعتراف بوجود تحديات ومعضلات جوهرية في مفهوم عقلانية السوق لا ينفي بالضرورة فائدة هذا الإطار النظري، خاصةً في ظل غياب بديل عملي مُثبت له حتى الآن.
وفي سياق فهم آليات السوق، يبرز التساؤل الاقتصادي والفلسفي حول العوامل التي تحدد قيمة منتج ما. تتعدد النظريات المفسرة لذلك، منها نظرية السوق (العرض والطلب)، ونظرية المنفعة، ونظرية قيمة العمل (الوقت والجهد المستغرق)، والرمزية الثقافية. تقدم كل من هذه النظريات مبررات منطقية لتحديد قيمة المنتج، وقد تكون القيمة الفعلية نتاجًا لمجموع هذه النظريات مجتمعة، ويتوقف ذلك على السياق الاجتماعي والاقتصادي والسياسي لمجتمع معين.
في محاولة لفهم التوازنات الاقتصادية الكلية، قدم الاقتصادي إيرفينغ فيشر معادلته الشهيرة لكمية النقود (MV = PT)، التي تشير إلى أنه إذا زادت كمية النقود المتداولة (M) أو سرعة دورانها (V) دون زيادة مماثلة في الناتج الحقيقي (T)، فإن ذلك سيؤدي حتمًا إلى ارتفاع المستوى العام للأسعار (P). ورغم أهمية هذه المعادلة في تفسير بعض الظواهر التضخمية، إلا أنها قد لا تقدم تفسيرًا شاملًا للأسباب العميقة للتضخم، مثل تأثير السياسات المالية المتبعة أو الصدمات الاقتصادية الخارجية.
تسعى العديد من النظريات والنماذج الرياضية والإحصائية التي وضعها خبراء الاقتصاد إلى وضع تنبؤات دقيقة لحركة الأسعار في السوق بناءً على المعلومات المتوفرة. ومع ذلك، تواجه هذه المحاولات تحديات كبيرة، فالمعلومات نفسها قد تكون غير كاملة أو غير قابلة للضبط الدقيق، كما أن حركة الأصول كالأسهم والعملات غالبًا ما تتسم بدرجة من العشوائية التي يصعب التنبؤ بها على المدى الطويل. وبالتالي، فإن محاولات التفوق المستمر على السوق من خلال التنبؤ "الرياضي والإحصائي" غالبًا ما تبوء بالفشل، وذلك لعوامل متعددة منها تأثير "سلوك القطيع"، ونقص المعلومات، والانحيازات العاطفية للمستثمرين.
من رحم هذه التحديات، وبشكل خاص من دراسة "سلوك القطيع" وتأثيره، برز "التمويل السلوكي" (Behavioral Finance) كأحد أبرز الانتقادات الموجهة لنظرية كفاءة السوق التقليدية. يجمع التمويل السلوكي بين مبادئ علم النفس والتحليل المالي، ليؤسس لفكرة أن الأسواق قد لا تكون عقلانية بالكامل، وذلك لأن القرارات الفردية والمؤسسية تتأثر بشكل كبير بالانحيازات المعرفية والعاطفية. فمثلًا، يمكن للإفراط في التفاؤل أن يؤدي إلى تضخم الأسعار بشكل لا يعكس القيمة الحقيقية للأصول، أو ما يعرف بـ "الفقاعات السعرية". وهنا يكمن التمييز الدقيق: فبينما قد تكون المعلومات المتاحة في السوق عقلانية وموضوعية في حد ذاتها، فإن طريقة تفاعل المستثمرين مع هذه المعلومات وتفسيرهم لها هي التي قد تضفي طابعًا غير عقلاني على سلوك السوق وقرارات التسعير.
March 21, 2013
Two brief comments, more for my own recollection than anything else:
(1) I do wish Fox had gotten a bit more into discussing the attempts by economists to try and make their discipline more of a "hard" science and less of a "social" science. It seems to me that that is ultimately what is behind the attempt to create an edifice like the EMH, as well as things like "homo economicus," the "rational expectations" theory and so forth. The discussion of Thomas Kuhn's book was fascinating but I do wish there was more of it.
(2) I wonder where I can go to get a refund of that part of my undergraduate tuition that was spent being forcefed the EMH in the mid-'80s? :) I was surprised to find out that the whole theory was under attack even then. Trust me, you'd never have known that in the classes I took.
I wish I felt comfortable saying more. But while I found the book intriguing, I've been away from so much of it for so long I'd doubtless commit many errors.
(1) I do wish Fox had gotten a bit more into discussing the attempts by economists to try and make their discipline more of a "hard" science and less of a "social" science. It seems to me that that is ultimately what is behind the attempt to create an edifice like the EMH, as well as things like "homo economicus," the "rational expectations" theory and so forth. The discussion of Thomas Kuhn's book was fascinating but I do wish there was more of it.
(2) I wonder where I can go to get a refund of that part of my undergraduate tuition that was spent being forcefed the EMH in the mid-'80s? :) I was surprised to find out that the whole theory was under attack even then. Trust me, you'd never have known that in the classes I took.
I wish I felt comfortable saying more. But while I found the book intriguing, I've been away from so much of it for so long I'd doubtless commit many errors.
August 3, 2015
The book is very valuable to read. The explanation of how some theories help institutions and at other times hinder them is a helpful way to understand how not to be overly reliant on any specific set of ideas. The drawbacks of this book is the lack of consistency. The author's transitions from topic to topic are not very smooth to the point where it is difficult to grasp where one topic ends and another begins. There where many times in the book where the author gave very good descriptions of the theory behind a certain paper or person, but many times were the author wants to the readers to be credulous to theory without a proper explanation. In the 1st part of the book, it seems that some descriptions were of Bayesian Theory yet there was no mention of him. The best part about this book is to see the interconnections between various people who helped progress the field of economics. There are many insights in this book.
June 7, 2011
This is a tour de force on the history of efficient market theory, from birth to death. Fox did yeoman’s work researching this, citing the influence of over 50 economists. But it was a little bit too much of a linear chronology that got tedious at times and I found myself rushing to get through some parts, while other parts held my attention firmly. His style was lively and it wasn’t just academic. To make a turgid subject lighter, he threw in a lot of fun trivia, such as Larry Summers is the nephew of both Paul Samuelson and Kenneth Arrow, and that Alan Greenspan came up with the “irrational exuberance” catchphrase in the bathtub. On the more serious side, he was fair and balanced in defining the various aspects, strengths and weaknesses of the theory, and I learned a lot, and not just about EMT. There is a lot of subtlety in EMT and in its rejection.
September 26, 2017
This book gives a somewhat disorganized history of how people have invested in and thought of financial markets in the USA. The author goes through history dropping lots of names and their associations with theories, schools and firms. Unfortunately there are no diagrams or equations to elucidate the theories or demonstrate their effectiveness and generating profits or losses. There are interested anecdotes and stories, but no clear theory of the market is presented, just a series of ideas that worked for a short period of time.
Want to read
August 10, 2009A recent (free) hour-long podcast interview with author discussing this book available at
http://www.econtalk.org/archives/2009...
http://www.econtalk.org/archives/2009...
March 3, 2010
I couldn't see the whole title when I bought the audio book so the focus was not what I thought it would be i.e. I thought the interpretation would be broader than trying to beat Wall Street. The myth of the all knowing free market has done a great deal of damage to the average person worldwide. This was a tightly focused work and not really aimed at the general public. I want to avoid saying boring but it was very dry and dense. Still, I persisted because I felt that the information was important. And indeed, this is a place where theorizing has had an enormous influence on behaviors and policy even when the theory turns out to be quite wrong but is clung to with ideological fervor. The author's conclusion is that the market is not guided by a 'knowing' force that values things correctly but is subject to all the irrational swings of the humans that participate in it, sometimes with very disatrous consequences for the public at large. This is important to know even if it is a bit difficult to ingest. It also suggest that certain individuals come to have disporporationate influence in their advocacy of ideas that have no basis in reality - but that is true of many fields.
January 21, 2013
A very readable narrative of economic history through the last 120 years or so. The author clearly enjoys the intellectual battle of economic ideas between the quantitative efficient marketers of the Chicago school and the behaviorists who are more skeptical of any dubious claims of "the market is always right" crowd. Great spirited debate between the great finance intellectuals and Nobel laureates described here. I was left with the sneaking suspicion that a lot of brainpower has been wasted in Finance rather than in genuine wealth-creating and society-improving activities! Finance should perhaps be the (overhead) grease that oils society rather than an end in itself? Anyway, great book with exhaustive research - read it.
May 15, 2015
Great book, goes very well with the Ascent of Money and Debt. I'll be reading a few more books written by the characters in this book.... the characters in the book are all those that created theories for and against rational markets. I've read Mandelbrot, but many of the others weren't on my radar.
If you want an understanding of why the financial infrastructure is keenly based on the principles of a rational market you should read this book. It explains rationally why we as a society made the decisions we made and why those decisions can be both good and bad. Really insightful for those with a true interest in the financial economy.
If you want an understanding of why the financial infrastructure is keenly based on the principles of a rational market you should read this book. It explains rationally why we as a society made the decisions we made and why those decisions can be both good and bad. Really insightful for those with a true interest in the financial economy.
December 15, 2016
This book is all about the people who were responsible for creating the rational market hypothesis and their constant effort of predicting how the market will behave in the near future. This book is a beautiful compilation of the century long history of current financial market.
This book is a treat to read if you know few things about finance and market behaviour. However if you are a person who is completely unaware of the financial concepts then you might find this book difficult to understand.
To know more about the book, visit: http://the-empty-pages.blogspot.in/20...
This book is a treat to read if you know few things about finance and market behaviour. However if you are a person who is completely unaware of the financial concepts then you might find this book difficult to understand.
To know more about the book, visit: http://the-empty-pages.blogspot.in/20...
December 15, 2017
This book is a very compelling history of the theories of rational markets. I wish the focus of the book had been less on the men that cycled through Chicago and their interactions to eachother and more on the ideas and the debunking of them, but there is plenty of the latter to keep it very interesting.
January 19, 2011
Wildly boring history lesson with an endless stream of names for the first half. Got much more interesting after the half-way point.
May 30, 2012
Couldn't get into it. No solutions just criticism in my opinion. Though I agree the market is not rational.
October 29, 2016
Stultifyingly boring. Abandoned.
April 13, 2021
This is a very well-written and engaging book that is surprisingly readable, given its topic of finance theory and its effects on public policy and the stock market. The author breaks down complex ideas or simply skips over them (“a lot of equations led to the conclusion that...” kind of thing) so that readers like me with only the most basic knowledge of the topic could get through it. I suspect that an equally effective book could have been written for readers at my level of interest that was 100 pages shorter. The plethora of names eventually became hard to keep track of, until I remembered that there is a glossary of names at the end. That was valuable—and necessary. Anyway, I have to say that the book was a relative page-turner, given the dry topic. Not at the level of Michael Lewis page-turning, but still pretty good. The theoretical aspects are leavened by personal stories of the people involved and gossip about the competition of business schools and economics departments in hiring or rejecting the people involved.
The main issue is whether the stock market accurately evaluates stocks, given the limited information that everyone has about them. The efficient (rational) market hypothesis says that stock prices are as accurate as they possibly can be. The collective effect of everyone’s opinion results in the stock’s price including all the knowledge and opinions that people have. If they didn’t, then someone would take advantage of the wrong price, thereby driving the price to its correct level. The upshot of this idea is that individual investors and advisers are not going to beat the market consistently, a consequence that gave rise to mutual funds and in particular index funds, which buy an entire sector of the market, rather than try to pick winners and losers.
This hypothesis has served for government policy for decades and created a slew of investment models. The cracks in the theory have always been there, but they did not bring the edifice down. Clearly non-rational events like bubbles and crashes are often relatively short-term and limited. Furthermore, after a crash, wise investors like Warren Buffett start buying up stocks again, driving their price back to the “correct” level. However, eventually research on price variability and the vast errors in human judgment began to erode the theory’s hegemony, such that now there is really no well-accepted theory to take its place. Which may be good.
One of the most interesting ideas in the book is how people who wrote investing algorithms to take advantage of the rational market theory ended up having the effect of undermining the theory. For example, if everyone invests in index funds, which buy stocks in the entire market, then the rational market hypothesis will fail, because no one is deciding the actual value of the stocks in the index. Other, more complex strategies worked for a while, especially for hedge funds that developed them, until too many people used that strategy, causing a boom and bust that had no connection to the underlying value of the companies putting out the stocks involved. The financial crash of 2008-9 served as the final nail in the coffin of rational markets, as it was generated by terrible financial instruments that were grossly mis-priced, and that eventually crashed, leading to a worldwide recession. That does not sound like a rational market.
With a little background in the stock market, most interested readers would learn much from this book.
The main issue is whether the stock market accurately evaluates stocks, given the limited information that everyone has about them. The efficient (rational) market hypothesis says that stock prices are as accurate as they possibly can be. The collective effect of everyone’s opinion results in the stock’s price including all the knowledge and opinions that people have. If they didn’t, then someone would take advantage of the wrong price, thereby driving the price to its correct level. The upshot of this idea is that individual investors and advisers are not going to beat the market consistently, a consequence that gave rise to mutual funds and in particular index funds, which buy an entire sector of the market, rather than try to pick winners and losers.
This hypothesis has served for government policy for decades and created a slew of investment models. The cracks in the theory have always been there, but they did not bring the edifice down. Clearly non-rational events like bubbles and crashes are often relatively short-term and limited. Furthermore, after a crash, wise investors like Warren Buffett start buying up stocks again, driving their price back to the “correct” level. However, eventually research on price variability and the vast errors in human judgment began to erode the theory’s hegemony, such that now there is really no well-accepted theory to take its place. Which may be good.
One of the most interesting ideas in the book is how people who wrote investing algorithms to take advantage of the rational market theory ended up having the effect of undermining the theory. For example, if everyone invests in index funds, which buy stocks in the entire market, then the rational market hypothesis will fail, because no one is deciding the actual value of the stocks in the index. Other, more complex strategies worked for a while, especially for hedge funds that developed them, until too many people used that strategy, causing a boom and bust that had no connection to the underlying value of the companies putting out the stocks involved. The financial crash of 2008-9 served as the final nail in the coffin of rational markets, as it was generated by terrible financial instruments that were grossly mis-priced, and that eventually crashed, leading to a worldwide recession. That does not sound like a rational market.
With a little background in the stock market, most interested readers would learn much from this book.
May 27, 2020
I have read several good books about market history and also about the development of Modern Portfolio Theory (MPT). This one is a must for anyone who wants to understand the evolution of the "science" behind market factors and investing systems.
Fox's book was brought to my attention from reading Getting Back to Business: Why Modern Portfolio Theory Fails Investors and How You Can Bring Common Sense to Your Portfolio by Daniel Peris, which I also enjoyed. Peris writes about his own strategy and lays out an argument based upon market evolution.
Fox's goal does not hinge on anything other than there are theories and generally accepted "truths", such as the MPT and the "Efficient Market Hypothesis", but also lends credibility to other strategies such as behaviorism and frankly, luck. It is impeccably researched and well written. Further, he has "no skin in the game" as he is a business journalist, so he makes no hard conclusions or tries to sell you an idea. He just presents the arguments and allows the reader to decide for themselves.
In my 25+ year career in financial services, I have known of all of the competing, and at times conflicting, theories and he does well in his descriptions and portrayal in how their effectiveness has waxed and waned. I can give some additional thoughts, but don't want it to be construed as "advice", so I will keep my opinions to myself. I will say, as most professionals do, "It depends".
If you are looking for a comprehensive (AND READABLE) mapping of the history of market and investing philosophies and beliefs, this is the book I would recommend.
Fox's book was brought to my attention from reading Getting Back to Business: Why Modern Portfolio Theory Fails Investors and How You Can Bring Common Sense to Your Portfolio by Daniel Peris, which I also enjoyed. Peris writes about his own strategy and lays out an argument based upon market evolution.
Fox's goal does not hinge on anything other than there are theories and generally accepted "truths", such as the MPT and the "Efficient Market Hypothesis", but also lends credibility to other strategies such as behaviorism and frankly, luck. It is impeccably researched and well written. Further, he has "no skin in the game" as he is a business journalist, so he makes no hard conclusions or tries to sell you an idea. He just presents the arguments and allows the reader to decide for themselves.
In my 25+ year career in financial services, I have known of all of the competing, and at times conflicting, theories and he does well in his descriptions and portrayal in how their effectiveness has waxed and waned. I can give some additional thoughts, but don't want it to be construed as "advice", so I will keep my opinions to myself. I will say, as most professionals do, "It depends".
If you are looking for a comprehensive (AND READABLE) mapping of the history of market and investing philosophies and beliefs, this is the book I would recommend.
December 30, 2017
Is the financial market truly efficient, or is it simply behavioral? When stocks that seem overpriced stay that way is the judgment of the pit to be trusted? When a CEO makes a killing while his company's stocks take a battering should investors be concerned? And given our industry's ill-fated success at handily transforming poisonous personal loans with the use of tranches into triple-A CDOs, have we really learned anything at all since the collapse of the Dutch tulip bubble in the 1630s?
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.
JV
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.
JV
July 18, 2017
This is not an easy book for me, so many people in this book and the information is pretty scattering, plus i am not good in finance. But reading it as a history book of our stock market going uncontrollable in a lighter way ( not light) is easier to finish.
Fun to see so many physicists and mathematicians actually stepped into the finance by using they equation the designed to influence the trading patterns or result. Are there really patterns or just pure probabilities?
My thought is If most investors behave in group like sheep, then it's rather easy to predict their following action, since they just copy each other, but then how come we still can not guess the direction of "wisdom of crowds"(ironic). We are after all humans, not machines, investors are on the same swing, we want steady prosperity, but some wants risky big bonus. Wildness in our blood to gain short fast profit. Therefore some wants to swing higher even we run the risk the fall.
With the help of deregulation on trading by government (such as free-wheeling capitalism: the Gramm-Leach-Bliley Act), the whole stock market is like an unstoppable high speed train in full power heading to nowhere until it crashed.
Poincare gave the best definition in this book in the end : Crowds don't make decision according to the probability, they are no longer independently thinking but influential one another, but one thing won't change is they would behave like sheep.
Fun to see so many physicists and mathematicians actually stepped into the finance by using they equation the designed to influence the trading patterns or result. Are there really patterns or just pure probabilities?
My thought is If most investors behave in group like sheep, then it's rather easy to predict their following action, since they just copy each other, but then how come we still can not guess the direction of "wisdom of crowds"(ironic). We are after all humans, not machines, investors are on the same swing, we want steady prosperity, but some wants risky big bonus. Wildness in our blood to gain short fast profit. Therefore some wants to swing higher even we run the risk the fall.
With the help of deregulation on trading by government (such as free-wheeling capitalism: the Gramm-Leach-Bliley Act), the whole stock market is like an unstoppable high speed train in full power heading to nowhere until it crashed.
Poincare gave the best definition in this book in the end : Crowds don't make decision according to the probability, they are no longer independently thinking but influential one another, but one thing won't change is they would behave like sheep.
April 28, 2018
I started this book a number of years ago and left it with a few chapters left due to work pressures. Finally finished it and I must say it remains an engaging read. Most of this is not going to be new for people following economics over the last few years but it is a concise summary of how financial markets have considered risk. As a ex-finance perspective I can say this the sckeptism often noted by professionals regarding the theoretical models was ignored a little except near the end. I clearly remember talking to the captain market / security desks whose general reactions to all these pricing models was one of resignation not unthinking belief.
Not sure if the casual reader will enjoy this book since there is a huge cast of characters who do get muddled if one is not familiar with finance and economist history. This is not as much of an introductory text that I was expecting. However it is still worth reading for people who want to understand how the markets have been structured recently. For me - I liked going back and reading around some of the texts he mentioned. It took forever to finish he book but the journey was a lot of fun!
Not sure if the casual reader will enjoy this book since there is a huge cast of characters who do get muddled if one is not familiar with finance and economist history. This is not as much of an introductory text that I was expecting. However it is still worth reading for people who want to understand how the markets have been structured recently. For me - I liked going back and reading around some of the texts he mentioned. It took forever to finish he book but the journey was a lot of fun!
August 31, 2020
The book is good in itself and the author knows how to write very well. However, I would only recommend the book to someone who wants a good outline of the history of the rational market hypothesis and maybe pick up from there.
I think it gave me a superb introduction to the history of finance in academia and it is quite nice when you recognize some of the names later on because you read the book.
However, there are some downsides to the book, as well. For starters, sometimes the book felt like a list of names to remember and I felt like, especially in the first half, it was quite superficial and a lot of the text was more of a filler text rather than useful information. The second remark I have is that the theories would not be discussed nor explained in detail, which might leave some of the readers confused. Sometimes it ruins the reading flow altogether.
To summarize, I think the book in itself is good for someone who would like to know more about how finance as a discipline in academia developed but it's only a starting point, it tells you quite well where to start looking.
I think it gave me a superb introduction to the history of finance in academia and it is quite nice when you recognize some of the names later on because you read the book.
However, there are some downsides to the book, as well. For starters, sometimes the book felt like a list of names to remember and I felt like, especially in the first half, it was quite superficial and a lot of the text was more of a filler text rather than useful information. The second remark I have is that the theories would not be discussed nor explained in detail, which might leave some of the readers confused. Sometimes it ruins the reading flow altogether.
To summarize, I think the book in itself is good for someone who would like to know more about how finance as a discipline in academia developed but it's only a starting point, it tells you quite well where to start looking.
April 21, 2025
A good book, providing a detailed history of the efficient market thesis. The author, financial journalist Justin Fox, introduces the academics and practitioners who developed, promoted, and eventually discarded this mainstay of 20th-century financial strategy. The book is constructed around the individual contributors to the debate, explaining their work and influence, resulting in some jumping around as significant figures are reintroduced in the latter stages of their careers. This structure reflects the evolving nature of the efficient market concept, illustrating how financial theories change in response to real-world events and technological developments. Fox traces the shifting perspectives within financial academia, offering insights into the interplay between economic theory and market behavior. Highly recommended for anyone interested in the academic foundations of financial markets and the evolution of economic thought. A great book for understanding the theoretical debates that shaped modern financial strategy.
May 16, 2017
For anyone interested in how modern economics and finance came to be the way it is, I highly recommend this book. It far exceeded my expectations for both readability and entertainment. Granted, my expectation for economics books starts pretty low, and it is not as entertaining or readable as Harry Potter, but it covers complicated issues with surprising ease. It is not quite ideal in that regard; Fox has an appendix summarizing the major historical players, but a one- or two-page glossary defining major policies would help readers like me keep track of the issues better. Justin Fox covers 90 years of economic history and the major players in it as though he was an eyewitness (for some of it, he was), and his coverage seems, to me at least, to stay objective throughout.
February 27, 2018
Very good summary of the main developments in the rational thinking of how markets work. Justin is a journalist and the book take that catch, however without leaving several notes and technical explanations of the important concepts.
The author focuses on the important ideas that surrounded the developments of market instruments, technicalities, strategies and wealth.
There are good stories on the sell and buy side, specially the money management industry, and its relationship with nobel-prized scholars.
Last but not least, good introduction on how behavior economics took the attention and left the old giants of finance theory in trouble to sustain old concepts as stated in the 70's or 80's.
The author focuses on the important ideas that surrounded the developments of market instruments, technicalities, strategies and wealth.
There are good stories on the sell and buy side, specially the money management industry, and its relationship with nobel-prized scholars.
Last but not least, good introduction on how behavior economics took the attention and left the old giants of finance theory in trouble to sustain old concepts as stated in the 70's or 80's.
January 7, 2022
Entertaining for a book about finance (though I did skim fairly quickly at the end)! It was a nice companion to some of the finance topics we covered in class this year and interesting to see how a major academic idea was both developed and then pushed back against.
I also appreciated how the author was careful to explain the difference between efficient financial markets and efficient markets in general, this quote summarizes:
"The prices prevailing on [financial] markets give signals about the future, which are nice things to have, even if they turn out to be wrong much of the time. The price of eggs in a free market, though, is never "wrong." It simply is what it is. Financial instrument prices are different. They're bets."
I also appreciated how the author was careful to explain the difference between efficient financial markets and efficient markets in general, this quote summarizes:
"The prices prevailing on [financial] markets give signals about the future, which are nice things to have, even if they turn out to be wrong much of the time. The price of eggs in a free market, though, is never "wrong." It simply is what it is. Financial instrument prices are different. They're bets."
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