The Myth of the Rational Market audiobook

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.

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.

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.

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.

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.

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!

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.

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."

One of the most difficult book to finish but when i did, i emerged more knowledgeable! In what appears to be a academic domain, Justin Fox managed to appeal to lay readers like me in connecting the dots to the much debated efficient market hypothesis. True to the title, the author veers towards behavioral aspects of markets and presents both sides of the story (rational vs. irrational) very well.

I found this book extremely interesting. It goes through pretty much the entire history of the stock market, most of the fundamental economic theory / key players and details every major event / era. I liked it. It wasn't overly technical and primarily got the key points and stories across in a very engaging and page turning manner. Really enjoyed this one.

I'm bad with names and this book is understandably chocked full of them. Fox did a great job making this an enjoyable read and not a sprawling epic. Thankful humans are rational. $GME to the moon.

A magisterial tour of the history and territory behind the quant's smoke-curtain of stats.