The Myth of the Rational Market

A History of Risk, Reward, and Delusion on Wall Street

By: Justin Fox

Narrated by: Alan Sklar

Length: 13 hrs and 38 mins

Publisher's summary

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 capitalism¹s 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.

©2009 Justin Fox (P)2010 HarperCollins Publishers

Takes patience, but pays off

This is not from the Michael Lewis "fascinating personal quirks carry the story" school. But having exhausted most of the 2008 popular books, this is at a different, scholarly level. I might have edited it a bit shorter, but I enjoyed it.

Enthralling storytelling style unfolding history of market analysis

It all makes sense now! During my MBA at the University of Chicago (where many of these market economists earned their Nobel prizes) I fought w Fama about the Random Walk theory. Now I understand why he could not have thought anything else, given his background.
The author skillfully reveals the evolution of opinion about the market forces. The reader will see the logic of each step and, If he thinks it through, will take away a greater death of understanding from each step.

Excellent unbiased overview of irrational markets

Loved the unbiased chronology of the irrationality of well known academics as well as amateur investors and professional investors alike.

Probably most interesting to economists

I liked this book, but I am, in fact, an economist. To a (young) economist, there's a lot to be interested in here. Ideas you've been exposed to and never really understood the context for are explained pretty well. But for non-economists, I strongly suspect this would come off as pretty dry.

The better book on the history of economic thought, I would say, is The Grand Pursuit. To some degree, this book picks up where that one leaves off (in the mid-twentieth century, though TGP does talk somewhat as Amartya Sen). Anyway, if you're interested in the history of economic thought and haven't read that one, I'd start there and then consider this. If you're more interested in how the financial markets work today, there are a few books on this subject (Dark Pools, More Money than God--but I'm actually just starting these, so I can't tell you yet whether they're worth it). If you're more just looking for a good read on recent financial market stuff, one of the Michael Lewis books is probably best, The Big Short or Boomerang.

An Awesome Histoy of Financial Economics

I am a financial economist, and I wholeheartedly endorse this book. It gives a very fair, balanced, complete and scientific account of financial economics, and yet is written in a fun, readable tone that never loses the reader's interest. This book is a must for any non-economist who wants to understand what they read in the news. You will learn a lot, and have fun learning it.