Video (and audio)

Loosening CEO purse-strings, Nightly Business Report commentary, Dec. 16, 2010.

Big government and big anger, Nightly Business Report commentary, Oct. 26, 2010.

Seeing the opportunity in uncertainty, Marketplace radio commentary, Sept. 20, 2010.

Techonomy Conference, August 5, 2010, parts one, two and three of a panel discussion on reinventing markets.

The Today Programme, BBC Radio 4, March 20, 2010.

Tea with the Economist, March 19, 2010.

Corporations are for profit, not politics, Marketplace radio commentary, Jan. 28, 2010.

Matrix/Housing Helix podcast, Oct. 12, 2009.

Leonard Lopate Show, WNYC Radio, Oct. 8, 2009.

Midmorning, Minnesota Public Radio, Sept. 25, 2009.

FinReg21 interview, Sept. 23, 2009.

Brooklyn Book Festival panel on the Great Recession with Naomi Klein et. al. (on C-SPAN BookTV), Sept. 13, 2009.

The Tom Keene Show (mp3 file), Bloomberg Radio, Sept. 9, 2009.

The Big Think, Aug. 28, 2009.

Authors@Google, Aug. 12, 2009.

World Affairs Council of San Francisco (on C-SPAN BookTV), Aug. 12, 2009.

NPR’s Planet Money, July 22, 2009.

The Diane Rehm Show, July 16, 2009.

Interview with Russ Roberts for Econtalk, July 13, 2009.

Robert Lenzner’s Street Talk at

On The Daily Show with John Stewart, July 1, 2009.

On CNBC’s Squawk on the Street, with Arthur Laffer, June 25, 2009.

Interview with Dan Gross for Slate’s Every Day I Read the Book, June 18, 2009.

Interview with Carol Off for CBC Radio’s As It Happens (my segment starts about halfway through), June 17, 2009.

Discussing the book on MSNBC’s Morning Joe, June 17, 2009.

Interview with Kai Ryssdal for public radio’s Marketplace, June 16, 2009.

Interview with Doug Henwood for WBAI and KPFA (my segment starts about halfway through), June 11, 2009.

Talking about the book and about green shoots with Felix Salmon on, June 5, 2009.

An interview on the publishing blog Galleycat, posted May 26, 2009.

Talking bank stress tests (and getting in a brief mention of the book) on the Canadian Broadcasting Corporation’s As It Happens, May 7, 2009.

Speech at the Hertz Foundation 2009 Symposium, March 20, 2009.

The Myth of the Rational Market

Financial markets were supposed to know better. They were supposed to
be near-perfect processors of information and assessors of risk. They
were supposed to be steering us toward a more prosperous, less
economically volatile future. Then they failed, spectacularly. Justin
Fox’s The Myth of the Rational Market tells the story of how
we came to believe that financial markets knew best, and how that
belief steered us wrong. Chronicling the rise and fall of efficient
market theory and its century-long role in the making of the modern
financial industry, the book is both history and intellectual whodunit.
It brings to life the people and ideas that forged modern finance and
investing, from the Great Depression and into the financial calamity of
today. It’s a tale largely about professors, but 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
recurrent war with itself.

MythoftheRationalMarket hc c 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 driver of
trillions of investing dollars, the inspiration for index funds and
vast new derivatives markets. In its strongest form, the theory holds
that the decisions of millions of investors, all digging for
information and striving for an edge, inevitably add up to rational,
perfect markets. That belief has crumbled.

The Myth of the Rational Market introduces a new wave of scholars who no longer teach that
investors are rational or that markets are always right. Many now agree
with Yale professor Robert Shiller that efficient market theory
“represents one of the most remarkable errors in the history of
economic thought.” Today the theory is giving way to new hypotheses of
market behavior growing out of psychology, physics, evolutionary
biology—and even  traditional economics. In his landmark intellectual
history, Fox uncovers the new ideas that may drive markets in the
century ahead.

A Myth of the Rational Market Q&A

1.    What is the myth of the rational market?

Most simply, it’s the belief that financial markets can be relied upon
to get things right. In the context of my book, it refers to the
academic theory most commonly known as the efficient market
hypothesis—although I often refer to it as rational market theory
because that’s shorter and, for those of us who aren’t finance
professors, clearer.

2.    What is main takeaway of your book?

That financial markets possess many wonderful traits, but that
rationality is not always among them. And that relying on markets to be
right all the time can be a very dangerous thing to do.

3.    Does your book explain the current financial crisis or any aspect of it?

Yes. Financial decision-making and financial regulation had been
restructured over the past couple of decades around the notion that
market prices are correct. If market prices and formulas built around
market prices said one thing, the thinking went, then who was a Federal
Reserve chairman or investment bank CEO to say they were wrong? It was
a suspension of judgment on a mass scale, and it turned out really

4.    How is The Myth of Rational Market any different from other books on economic history?  What is its unique appeal?

I don’t know of any other book that tells the story of the rise and
fall of the idea that financial markets are always right. So that’s
unique. Beyond that, I’ve tried really hard to make the book exhaustive
without being exhausting. It’s written for the lay reader, but also
meant to withstand the scrutiny (I hope) of the academic reader.

5.    What are some of the practical lessons of the book and do they have any application to economic recovery?

The most important practical lesson of the book in the context of the
current economic situation is that financial markets don’t know
everything. They know a lot, and the signals they send shouldn’t be
completely ignored. But when the market decrees that a collateralized
debt obligation is worth a certain amount, or that a trader at Lehman
Brothers should be paid a certain amount, or that a speech by the
Treasury Secretary is no good, it often gets things entirely backwards.
Our society (and our financial markets) cannot survive and thrive if
all decisions are left to the market.

Oh, and one another practical lesson: Stocks are a much better long-run
investment when they’re cheap by historical standards (as measured by
price-to-earnings or price-to-book ratio) than when they’re expensive.

6.    Although rational market theory was at first controversial, why did it become so widely accepted as standard practice?

First of all, because the facts seemed to back it up. For example:
Finance scholars argued in the mid-1960s that the superstar mutual fund
managers of the day were beating the market only by taking crazy risks
that would eventually backfire. Within a couple of years, most of those
stars had flamed out. More broadly, rational market theory offered
straightforward answers—some of them correct—to a lot of questions that
had long plagued investors, corporate managers and regulators.

7.    In recent decades, you note the theory traveled beyond the stock
market to apply to other securities and especially to what came to be
known as derivatives. Do you think this played a major role in the
current economic crisis?

Yes it did. Although it’s not perfectly rational all the time, the
stock market does process information quickly and handles even really
bad news in a mostly orderly fashion. The same can usually be said for
the organized exchanges in derivatives such as stock options and
commodity futures. The off-exchange markets for mortgage securities and
over-the-counter derivatives never developed the rules and contingency
plans characteristic of well-established exchanges, yet were still
expected to perform the same functions. When hit by adversity in the
summer of 2007, many of these markets stopped functioning entirely.
That, as much as anything else, was what turned a financial problem
into a crisis.

8.    What can today’s investors learn from studying rational market theory?

The market isn’t rational, but neither am I. Over the course of
researching and writing this book, I actually moved more and more of my
investment portfolio into index funds. It wasn’t because I think nobody
can beat the indexes, or that currently prevailing market prices are by
definition right. But index funds charge the lowest fees, and I’ve
become increasingly  dubious that in my spare time I can pick stocks or
investment managers that will beat the market after fees.

For those with more time and perseverance than I possess, the big
lesson from the fall of rational market theory is that value investing
works—but it works in large part because it’s very hard to stick to.

9.    What do you see as the future of Wall Street?

We’ll have a long period of rethinking and relative sobriety, and then
make all the same mistakes (or at least similar ones) again in 50 years
or so.

10.     How did you come upon the idea of writing this book? And, how did you conduct the research?

The particular thing that got me started was encountering a book
in 2002 by a finance professor, Peter Bossaerts of Caltech, that said
the efficient market hypothesis had outlived its usefulness. What
interested me was that Bossaerts sounded almost wistful about it—he
wasn’t an efficient-market critic, just a realist. I knew there was a
debate about the efficient market. This was the first hint I got that
it was more or less over.

It led to a 2002 Fortune article titled “Is the Market Rational? No, say the experts. But neither are you, so don’t go thinking you can outsmart it.”
Which in turn led to a book contract, six months spent reading through
old academic journals at the New York Public Library and Columbia
Business School Library and interviewing economists and finance
scholars across the country, then years of thinking, writing, and much
more reading and interviewing. Oh, and lots of staring blankly at a
computer screen.

Reviews etc.


Twilight of the Efficient Markets, Cosmo Shalizi, American Scientist, November-December 2009. “Fox’s explanations of technical material are superbly accurate and
readable … Clearly the result
of many years of research and reading, the book is—its epilogue on the
ongoing financial crisis notwithstanding—in no sense a rush job.
Rather, it is a model of what the popularization of social science can
be, but too rarely is, and it will continue to be read when the current
crisis is many years behind us.”

“The Myth of the Rational Market” (no link available), Harvard Business Review, October 2009. An “insightful book.” Fox’s “smart journalistic eye and fine prose keep the theoretical discussion lively.”

School for Scoundrels, Paul Krugman, New York Times Book Review, Aug. 9, 2009. “Do we really need yet another book about the financial crisis? Yes, we
do — because this one is different. … Fox’s book is not an idle exercise in intellectual history,
which makes it a must-read for anyone who wants to understand the mess
we’re in.”

Myth of the Rational Market: the rise and fall of the idea of market rationality, Cory Doctorow, boingboing, July 15, 2009. “[W]hat Fox has put together is a thoughtful, often fascinating, always
illuminating history of the idea of market rationality, and the
fortunes of the economists, bankers, regulators, philosophers and
psychologists who’ve sought to explain the stormy seas of the market
(and to get rich while doing it, of course).”

‘Myth of the Rational Market’ says you can’t predict stock market, Richard Eisenberg, USA Today, June 29, 2009. “Fox spends more than 300 yawn-inducing pages
slogging through the rise and eventual fall of the rational-market
theory (his 2002 Fortune article inspiring the book was far more interesting).”

Rational Man, Buttonwood’s notebook, “An intellectual tour-de-force … one of the two financial books I have
enjoyed most this year.”

Slaves to Some Defunct Economist, The Economist, June 11, 2009. “Fascinating and entertainingly told. … Mr Fox has written a worthy successor to Capital Ideas, the late
Peter Bernstein’s 1990s classic on the emergence of the rational-market
myth: bang up-to-date; alas, without the happy ending.”

The Price is (Usually) Right, Burton G. Malkiel, The Wall Street Journal, June 10, 2009. “Mr. Fox’s book is really a lively chapter in the history of ideas … Among much else, Mr. Fox presents lucid explanations of Portfolio
Theory, the Capital Asset Pricing Model and Option Pricing Theory
without the use of a single equation. And he brings the major players
in his drama to life with an appealingly breezy style. … With The Myth of the Rational Market Mr. Fox has produced a valuable
and highly readable history of risk and reward. He has not, however,
been able to bury the hypothesis that our securities markets are
usually remarkably efficient.”

Yale Oddball, Math Whiz Drove Efficient Market to Ruin, James Pressley, Bloomberg, June 9, 2009. “A rich history world’s most seductive investing
idea, the efficient markets theory.
The jacket copy is right to call this ‘an intellectual

An Economic Model Turned to Myth, John Authers, Financial Times, June 8, 2009. An “excellent new history … impressively broad and richly researched.”

On Wall Street, the Price Isn’t Right, Roger Lowenstein, The Washington Post, June 7, 2009. “Fox … spins a fascinating historical narrative. … Fox recognizes that true believers in the market’s efficiency suffered
from a ‘blinkered’ mindset and ‘tunnel vision.’ Yet I think he lets
them off too easily.”

A Most Inefficient Theory, Glenn C. Altschuler, Barron’s, June 1, 2009. A “lucid, lively and learned account.”

The Myth of the Rational Market, Robert J. Hughes, SmartMoney, May 22, 2009. “What makes Fox’s book so rewarding and so readable is his way with the telling anecdote.”

The Myth of the Rational Market, Rob Horning, Popmatters, May 21, 2009. “The slurry of names sometimes muddles what is otherwise a lucid
synthesis of the ideas that went into what Fox calls the rational market.”

The Myth of the Rational Market, Publishers Weekly, May 18, 2009 (ninth item down), starred review. “[T]he rare business history that reads like a thriller. … A must-read for anyone interested in the markets, our economy or government, this dense but spellbinding work brings modern finance and
economics to life.”

The Myth of the Rational Market, Library Journal, May 15, 2009 (seventh review down), “Fox argues convincingly …
The style here is journalistic, with personal stories that make the
book entertaining, but ultimately this is a history of academic
thought …”

Two Books, April 24, 2009. Menzie Chinn of the University of Wisconsin and Econbrowser discusses The Myth of the Rational Market and George Akerlof and Robert Shiller’s Animal Spirits: “They are both important books. Well worth reading.”

Other coverage

The price is not always right and markets can be wrong, Richard Thaler, Financial Times, Aug. 5, 2009. Economist Thaler praises Myth in an essay differentiated the “no free lunch” and “the price is right” versions of the efficient market hypothesis.

Poking Holes in a Theory of Markets, Joe Nocera, The New York Times, June 6, 2009. In his weekly column, Nocera calls Myth “an engaging history of what might be called the rise and fall of the efficient market hypothesis.”

De mythe van de rationele markt, April 14, 2009. Katrijn de Ronde of Dutch financial website z24 runs through the main arguments of the book. In Dutch.


Author photo

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Justin Fox is Executive Editor, New York, of the Harvard Business Review Group and senior fellow at the Mossavar-Rahmani Center for Business and Government at Harvard Kennedy School. He is the author of The Myth of the Rational Market: A History of
Risk, Reward, and Delusion on Wall Street
and writes a blog for Before joining HBR Group in 2010, he wrote a weekly column for Time and created the Curious
blog for Previously, Fox spent more than a decade working as a
writer and editor at Fortune magazine, where he covered economics, finance, and
international business.

The Myth of the Rational Market tells the story of the
rise and fall of the efficient market hypothesis, the influential but flawed academic
theory that financial market prices are rational and correct. The book has been
a New York Times and Wall Street Journal bestseller, and a New York Times Notable Book of 2009. It was named the best business book of 2009 by the editors of In the New York Times Book
, Paul Krugman called it “a must-read for anyone who wants to understand
the mess we’re in,” while in the Wall Street Journal Burton Malkiel described
as “a valuable and highly readable history of risk and reward.”

Fox has been a frequent commentator on the Nightly Business
on PBS, public radio’s Marketplace, Dutch radio’s Met het oog op morgen, and all the U.S. cable news and business networks. Most important, he’s been a guest on
Comedy Central’s The Daily Show With Jon Stewart.

Before joining Fortune, Fox worked at several newspapers,
including American Banker and the Birmingham (Ala.) News. He was a Young Global
Leader of the World Economic Forum, before he got too old, and is a graduate of Princeton University. He
lives in Manhattan with his wife and son.