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The Myth of the Rational Market
Justin Fox
A History of Risk, Reward, and Delusion on Wall Street
Harper
June 2009
On Sale: June 9, 2009
400 pages
ISBN: 0060598999
EAN: 9780060598990
Hardcover
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Non-Fiction
Chronicling the rise and fall of the efficient market
theory and the century-long making of the modern financial
industry, Justin Fox's The Myth of the Rational Market is as
much an intellectual whodunit as a cultural history of the
perils and possibilities of risk. The book brings to life
the people and ideas that forged modern finance and
investing, from the formative days of Wall Street through
the Great Depression and into the financial calamity of
today. It's a tale that features professors who made and
lost fortunes, battled fiercely over ideas, beat the house
in blackjack, wrote bestselling books, and played major
roles on the world stage. It's also a tale of Wall Street's
evolution, the power of the market to generate wealth and
wreak havoc, and free market capitalism's war with itself. The efficient market hypothesis—long part of academic
folklore but codified in the 1960s at the University of
Chicago—has evolved into a powerful myth. It has been the
maker and loser of fortunes, the driver of trillions of
dollars, the inspiration for index funds and vast new
derivatives markets, and the guidepost for thousands of
careers. The theory holds that the market is always right,
and that the decisions of millions of rational investors,
all acting on information to outsmart one another, always
provide the best judge of a stock's value. That myth is
crumbling. Celebrated journalist and columnist Fox introduces a new
wave of economists and scholars who no longer teach that
investors are rational or that the markets are always right.
Many of them now agree with Yale professor Robert Shiller
that the efficient markets theory “represents one of the
most remarkable errors in the history of economic thought.â€
Today the theory has given way to counterintuitive
hypotheses about human behavior, psychological models of
decision making, and the irrationality of the markets.
Investors overreact, underreact, and make irrational
decisions based on imperfect data. In his landmark treatment
of the history of the world's markets, Fox uncovers the new
ideas that may come to drive the market in the century ahead.
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