Name: The Myth of the Rational Market
ISBN: 9780857193698

The Myth of the Rational Market

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 best-selling 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.

What Hacker News says

DrNosferatuFeb 2025

There are several books with the word “Zombie” on the title that can specifically teach you exactly about that!

Some of them actually authored by Economics Nobel Prize winners ;)

Here:

"Arguing with Zombies: Economics, Politics, and the Fight for a Better Future" by Paul Krugman (2020)

"Zombie Economics: How Dead Ideas Still Walk Among Us" by John Quiggin (2010)

Bonus:

"Predictably Irrational" by Dan Ariely - 2008

"The Myth of the Rational Market" by Justin Fox - 2009

"The Black Swan" by Nassim Nicholas Taleb - 2007

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_fourzerofourNov 2020

Just going to plug a book here that was an awesome read in my undergrad on that topic, and the history of quant finance over the 20th / early 21st centuries: https://byjustinfox.com/myth-of-the-rational-market/

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rando444Aug 2019

I'd like to recommend the book:

The Myth of the Rational Market by Justin Fox

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giardiniSep 2011

Well, honestly, I've toned my feelings down a bit in my post. My first thoughts were of mass Wall Street hangings, burnings at the stake and branding surviving executives/technocrats/economists on their foreheads with the letter "E" ("Its the Economy, Stupid!").

There are potentially at least 3 problems with employees involved: negligence, crookedness, and competence. I want to expand on the last of these, "competence", since, unlike the other 2 problems, I do not believe that it can be corrected.

The financial industry has failed to absorb the lessons of the last 100 years concerning financial instruments. Taleb's "Black Swan" addresses this failure as does Fox's "The Myth of the Rational Market". Those executives/economists/technocrats unfamiliar with the ideas in those works should be removed forever from the industry. That means most of them. Why? Because they are ineducable - their entire training is based on defunct financial models. The finance industry must be rebuilt from the bottom up with more robust models.

But I don't expect such real reform (of either sort: the burnings or the education). Instead I expect the same damn thing, another financial meltdown, to happen yet again within the next decade. Perhaps then some crazed financial Savanarola will be able to arouse the crowds to a passionate frenzy over the trillions lost. Maybe then heads will fall and true change will take place.

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neilkOct 2009

The author's theory depends on the notion that markets are extremely efficient at disseminating information. Even information that traders would like to conceal. But this theory is under increasing scrutiny. You yourself might have noticed a few mispricings in the stock market lately.

Even Eugene Fama, the guy who coined the phrase "efficient market", now believes that it won't work in exactly the case the author describes. A few arbitrageurs in a very misinformed crowd won't correct the price.

Anyway, I know all this because I just finished the book The Myth of the Rational Market, by Justin Fox. It's the biography of the idea, from a tentative observation to dogma to just one tendency of the market among many.

At least the way Justin Fox tells the story, the stronger versions of the efficient market hypothesis just don't have a lot of evidentiary support anymore. Yes, markets try to get it right. But they can be persistently wrong in ways that efficient-market theorists think should only happen once in hundreds of thousands of years. This has happened multiple times just in the last 20 years.

Perhaps that information hasn't been efficiently disseminated to the WSJ yet.

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