New Book: The Myth of the Rational Market

The Myth of the Rational Market: A history of Risk, Reward, and Delusion on Wall Street by Justin Fox (he of the recent Time Magazine piece on Stocks and bonds. .

The following excerpts are from TheBigMoney.

Spinning Math Into Gold: How academic debate transformed into Wall Street wealth. | The Big Money: "

"In the 1970s, the war between random walkers—theorists who believed that stock prices ultimately fit into the predictable pattern of a bell curve distribution—and professional investors began to settle into an uneasy but profitable truce. Hostilities still flared up from time to time, as on a mid-decade summer morning at Stanford Business School. On the first day of a weeklong seminar for money managers, a young accounting professor just arrived from Chicago kicked things off with a ferocious attack on the idea that anybody could beat the market."

Then an interesting insight on some of what led to corporate pension plans--regulations on pay:

"Stock holdings had begun to migrate in the 1950s from individual portfolios to institutionally managed ones....in the 1970s...another group of institutions came to the fore. These were pension funds, first used as a way to circumvent postwar wage and price controls by giving workers benefits that weren't counted as wages, and soon to become part of the social contract between large corporations and their workers. With General Motors leading the way, America's big companies began setting aside money and investing it to pay for future pension benefits. Together with foundations and university endowments, the pension funds had come to constitute a huge new pool of institutional money by the late 1960s."

And from a later Excerpt entitled "The Birth of Quants"

"Because of his bond job, Ibbotson was interested in possessing the sort of historical data on bond returns that his Chicago professors James Lorie and Lawrence Fisher had compiled for stocks. Sinquefield was in the midst of starting a stock index fund ... wanted updated stock market data....so Ibbotson and Sinquefield took on the job themselves. Then Fischer Black, who had recently joined the Chicago faculty as a finance professor...After getting a Ph.D. in applied mathematics (a.k.a. computer science) from Harvard in 1965, Black had gone to work at the Cambridge-based consulting firm Arthur D. Little. There Jack Treynor introduced him to the capital asset pricing model and its simple linkage of market risk and reward. Black soon sought out the other two creators of the theory, paying regular visits to John Lintner at Harvard and getting his employer to fly Bill Sharpe to Chicago for a meeting in a hotel near O'Hare Airport (Michael Jensen was there as well) to discuss CAPM's implications for performance measurement."

Interesting stuff. Both from a history perspective as well as a market efficiency point of view.

Lest we think I have totally given up on rationality, I still do believe markets are VERY tough (exceedingly tough) to beat. But that said, do they act rationally all the time? NO. So if nothing else to learn when these behavioral biases and irrationality problems are most present, the book definitely is next on my "Must Read" list.

And yes I JUST ordered one now.