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The Myth of the Rational Market
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The Myth of the Rational Market

3.79 of 5 stars 3.79  ·  rating details  ·  1,043 ratings  ·  79 reviews
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 da ...more
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Published February 9th 2010 by HarperAudio (first published September 1st 2008)
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Ilya
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 ...more
Mike

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 ar
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Jacob
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
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Megatherium
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
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Ram Kaushik
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 ...more
Joseph Stieb
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 grea ...more
Bao Nguyen
The book offers a very interesting explanation about the financial crisis. It was not the Fed's fault, nor the derivatives but the false assumption of a perfectly efficient/rational market that created the crisis.

The author identifies that many of us fell victim to the notion of an efficient market, however without available alternatives we cannot replace the existing dominant economic paradigm. Obsolete mathematical tool is also one other potential cause for the crisis. The book also offered in
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Andy
In the short-term, at least, financial markets are not always efficient. Investors are slow to react to new information, and then they tend to overreact, sending prices wildly off-course. The history of finance is littered with examples of extended periods of irrationality. Recent instances include the late 90’s Dot-Com Bubble and, of course, the Subprime Mortgage Crisis and subsequent world economic meltdown.

The Efficient Market Hypothesis, which states that asset prices respond instantly and c
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Nilesh
The book is much less about why the rational market theories are wrong and more about their development history. It is superb in its description of how the theories developed, the personalities that defined them, the theories' somewhat accidental popularization despite most of the proponents having doubts from the start and most importantly, the linkages between most major developers (teacher-student, peers, family relations, rivalries etc).



As good as the book is, it fails to sufficiently descri
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Mark
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 sometime ...more
Willowwind
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 importa ...more
Don O'goodreader
The Myth of the Rational Market by Justin Fox is just what it claims to be: a history. However, since this is the (checkered) history of an idea that has never been fully accepted or rejected, don't expect any narrative arc, climax or resolution.

The concept of a rational market at various times has meant that markets are correct, will soon be correct, or might be correct eventually. It might also imply that no one can beat the market, or those that beat the market were just lucky, or to beat the
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Jake
Accessible to the common man yet deep enough to capture the aficionados of the financial crisis of 2008, Fox's book is a fascinating history of finance. While starting at its lowly beginnings in random walk studies towards progressing into the high minded modern risk equations that are central to the field's modern existence, Fox provides a lively narrative on how academics, government officials, stock brokers, investors, authors and money managers brought into fruition today's financial world. ...more
U-ming Lee
Having studied many of the theories mentioned in this book in business school in isolation, I thought this book was excellent as there was a clear narrative that told the story of how an idea developed into the next as well as gave some insight into the people behind the theories. In short, this book gave life to what seemed to be dry theories at the time that I really feel like going back to read the original papers again just to see if I can see the "personalities" behind them!

I found this boo
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Marks54
This book is a review of the history of the "Chicago School" of finance, in particular the fundamental work on the rationality of financial markets -- whether and how markets reflect all the relevant information necessary to evaluate the worth of some company or financial instrument and the likelihood that individuals can make sustained earnings by arbitraging information. It is a wonderful book that is admiring but ultimately critical of the efficient markets approach and its practitioners. The ...more
Glenn Murphy
This is a very well-written history of the rise of mathematical modeling in the study of finance and economics. The "Rational Market" to me is just overly simplistic mathematical models. Trying to approximate what happens in the real world where decisions are often made based on emotions or hunches would be much more complex and messy than assuming that everyone always acts rationally. I think one of the most important parts of the book is towards the end where Fox goes through some examples of ...more
David
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 ne ...more
Ralph Orr
To be appreciated most by financial planners, economists, stock market analysts and all others involved with investment theory and managing other people's money. Discusses the rise of the Capital Asset Pricing Model, Modern Portfolio Theory and its companion the Efficient Market Hypothesis which influenced portfolio management for decades, and how academic research and events have overthrown those belief systems. Other issues discussed include the rise of portfolio insurance, options and derivat ...more
Andrew
The Myth of the Rational Market is a very detailed history of the Rational Market Hypothesis and other major economic theories and movements. I found it ironic that the author points out multiple times that many (if not all) in the field of economics pay little to no attention to new ideas brought about in book form (instead of through a journal article of an economic journal) yet that is the medium he chooses to present his arguments in. I enjoyed the book but must admit there were so many name ...more
John Hibbs
Excellent overview of the intellectual underpinnings of modern finance, how it led to the marketization of risk, and thus the meltdown that occurred in 2009. While the book has a heavy focus on the academics that defined this landscape, the reader shouldn't underestimate the impact of academia on modern business; especially with the proliferation of MBAs from prestigous universities running modern business.

John Maynard Keynes put it best: "The ideas of economists and political philosophers, bot
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Uwe Hook
First, this is not a book for finance novices. You have to have a good background in economics theory to appreciate this book.

Second, Fox' discussion about the Chicago school conquering are worth the price of admission.

Third, I don't think it's appropriate to dismiss the idea of efficient markets altogether. I would have loved to see an integration of behavioral economics into this pamphlet.

Fourth, his writing is not precise. No data is shared, no statistics. The lack of it just doesn't let the
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Betty Craipo
I wanted to be made more aware of market history and a solid take on how rational the market has been over time. This book covered the market's history quite well but I only gave it four stars due to how little it delved into the history of our country and the world. For instance, there was so little written about how forces outside the United States and outside of economic/mathematical/behavioral thought that the problem of overwhelming foreign investment alongside the great recession was only ...more
B
There are two things holding this book back. First, it moves too quickly through too many names and much information. Second, it is not quite as organized as it thinks it is. This is primarily a result of the first. People keep popping up on both sides of what appears to be the key question in the book: Is the market efficient?

The author seems to strongly believe that it is not, per the title. But he winds up being excessively evenhanded so it is really hard to tell. We're left with a sort of mu
...more
James
This book is a 100 year history of the evalution of the idea of a rational stock market, meaning that the price of something is "always" right. He presents ideas for and against this theory, showing its shortcomings and its usefulness. Also, this book is about the broad cast of characters who build economics and finance into a so called (I am still not convinced) "hard," statistical based finance.

A good read if you want to understand some of the underpinnings of Alan Greenspan etc view of the wo
...more
John
Fairly good history of the rise and influence of the efficient markets, Chicago School of economists. It argues that the intellectual grounding to the movement was collapsing well before the current crisis. The crisis itself is an afterthought in the book, which was clearly conceived some years ago, so it doesn't do a fantastic job of integrating the last two years of history into the overall picture. But this is only a minor flaw. I would have like to see a bit more detailed discussion of the e ...more
Mark Williams
A book that is marketed to the mass market and written for the academics . . .kind of. The book provides a wandering history of economic theory. Subjects are not maintained and focus is lost quickly and often. The cast of characters is somewhat randomly introduced and used.



The subtitle is incorrect in stating: "A history of risk, reward, and delusion on wall street." Very rarely does Wall Street come into discussion when talking about the men who came up with financial theories in academia.



All
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Justin Farooq
This is a great read for making sense of why the efficient market hypothesis (EMH)--the idea that the market is rational and prices reflect all available information--still lives on, even in these times of economic turmoil and decidedly irrational markets. While EMH is indeed an myth, there are few alternative theories with its explanatory power because so many financial models (i.e. pricing options) are built upon it. The depth of detail that Fox delves into can be overwhelming at times, but st ...more
Monte Lamb
This is a book of the academic history of the rational market theory. It is a very good book which goes into the development of the theory and how it was used in the market by money managers as well as the academics. It continues on to the present where the theory has lost its acceptance by much of the economic and finance community. You don't have to be a mathematician to understand this book and it does a very good job of telling how the theory developed and its impact on the stock market.
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Goodreads Librari...: Disambiguate: Justin Fox 3 13 Sep 20, 2014 02:45PM  
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Librarian 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 cre
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