Those interested in the intellectual history of modern finance theory will find Justin Fox’s The Myth of the Rational Market riveting. It is familiar territory to anyone who has written on the subect; Fox, a writer at Time, uses the pop style of financial journalism. Even so, many useful insights appear and the arrangement suggests relationships among ideas worth exploring.
Notably, this book, which Fox began writing in 2002, is not about the current financial crisis. But of the dozen about the current crisis I’ve read so far (several reviewed on this blog) it is far more illuminating in relation to it. Fox demonstrates how the ideas hatched by academic financial economists during the past 45 years, and adopted with alacrity by nearly everyone else, from bankers to law professors to regulators, contributed significantly, though unwittingly, to prevailing woes.
Fox’s story, using lucid and engaging prose, based on well-documented research and interviews, concentrates on how academic finance departments reshaped our world, not always for the better. Beyond the book’s scope is a parallel story, yet to be written, about how law professors, applying the finance work, wrought similar change. Read More