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The Myth of the Rational Market

3.81  ·  Rating details ·  1,635 Ratings  ·  106 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
Nov 04, 2011 rated it liked it  ·  review of another edition
Shelves: economics
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
Sep 14, 2009 rated it really liked it  ·  review of another edition
Recommends it for: Anyone

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
...more
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
...more
Joe
Jun 07, 2017 rated it really liked it  ·  review of another edition
Shelves: nonfiction
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 bein ...more
Mark
Jul 28, 2011 rated it really liked it  ·  review of another edition
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
Patrick
Mar 21, 2013 rated it really liked it  ·  review of another edition
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
...more
Ram Kaushik
Jan 21, 2013 rated it really liked it  ·  review of another edition
Shelves: economics
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
David
Aug 10, 2009 marked it as to-read  ·  review of another edition
Shelves: to-read-econbiz
A recent (free) hour-long podcast interview with author discussing this book available at

http://www.econtalk.org/archives/2009...
YHC
Jul 17, 2017 rated it liked it  ·  review of another edition
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 i
...more
Mark Isaak
May 16, 2017 rated it really liked it  ·  review of another edition
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 defin ...more
Robin
Sep 25, 2017 rated it liked it  ·  review of another edition
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 ...more
Scott Pierce
Sep 28, 2017 rated it liked it  ·  review of another edition
Shelves: finance
Fun to read summary of the development, and transformation through time, of the efficient market theories. Written in 2009, so a great year to write a book disproving the efficient market theories, but I just read it in 2017, so after having the markets "correct" to more expected longer term levels, not sure if the book holds as much punch as in 2009.
Michael
Jan 02, 2015 rated it really liked it  ·  review of another edition
The Myth of the Rational Market provides a critical history of the concept of the efficient market, the theory that over time the stock market price of individual stocks fully reflect all available information, from which the corollary is drawn: for the stock market, the price is always right. This, of course, was a controversial idea at its origin, and years passed before it took hold among economists and finance professors as efficient market theorists battled classical economists and Keynesia ...more
Chi Pham
May 10, 2015 rated it really liked it  ·  review of another edition
Shelves: history, economics
This book traces the remarkable history of the efficient market hypothesis – an idea that, in the language of “Inception”, is contagious, and once implanted in our subconscious, would take hold until we could not determine whether it is real or not. The idea have taken roots at the beginning of the twentieth century with Fischer, but each major milestone of the first half of the twentieth century has nudged the idea towards its prominence and ubiquitous acceptance in the postwar period. Overtime ...more
Nilesh
Jul 29, 2011 rated it it was amazing  ·  review of another edition
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
...more
Andy
Sep 17, 2009 rated it really liked it  ·  review of another edition
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
...more
Bao Nguyen
Jun 12, 2014 rated it really liked it  ·  review of another edition
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
...more
Mark
May 17, 2015 rated it really liked it  ·  review of another edition
The "market" of the title is the financial market (as oppose to a market for actual goods) and the "myth" is a century of research that matured into Efficient Market Hypothesis. If that phrase is unfamiliar, Cosma Shalizi's American Scientist review--which is what got this book on my to-read list--will summarize that (and really the whole book) nicely.

It's quite readable--equation free, written in clear prose, and even funny, with snarky quotes from participants or chapter headings that put the
...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
...more
Jake
Aug 10, 2012 rated it really liked it  ·  review of another edition
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
Mehrsa
Feb 11, 2017 rated it really liked it  ·  review of another edition
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.
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
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
U-ming Lee
May 31, 2011 rated it really liked it  ·  review of another edition
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
...more
Glenn Murphy
Aug 11, 2009 rated it really liked it  ·  review of another edition
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
Eugene Kernes
Aug 02, 2015 rated it really liked it  ·  review of another edition
Shelves: economics
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 t ...more
Marks54
Apr 10, 2011 rated it it was amazing  ·  review of another edition
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
David
Jun 07, 2011 rated it liked it  ·  review of another edition
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
John Hibbs
Jan 08, 2011 rated it it was amazing  ·  review of another edition
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
...more
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Goodreads Librari...: Disambiguate: Justin Fox 3 14 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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More about Justin Fox...