FT columnist John Authers has been writing a lot lately about the problems of efficient market theory. And now he's written a review of my book. A sample:
The theory has now completed its journey from “hypothesis” to “fact”
to “myth”, to borrow from the title of Justin Fox’s excellent new
history of the idea. Fox, a respected US financial journalist, covers
ground that ranges from the notion of market efficiency – that market
prices always incorporate all available knowledge about a security,
with the corollaries that stocks will follow a “random walk” and that
it is impossible to beat the market in the long term – to the panoply
of models for measuring risk and pricing derivatives that came with it.
It is a history going back a century of how the idea came into
being, and of the motivations of the economists who developed it. Fox
makes painfully clear that the men who drew up the theory knew from the
start that its assumptions, such as that stock returns follow a
“normal” or bell-curve distribution, were unrealistic.
In a post about Nocera’s NYT column, superblogger Barry Ritholtz writes:
I am about halfway through The Myth of the Rational Market, and so far, its good wonky fun. (Justin, there’s your pull quote: “good wonky fun“).
Barry is a much better man than I. So far I’ve been so obsessed with self-promotion that I haven’t even tried to read his Bailout Nation. But I have looked at some of the charts and stuff (Barry invested a lot of time and money in making the book look good), and they definitely qualify as good, wonky fun.
My former Fortune colleague Joe Nocera had a nice, long column about efficient market theory in today's New York Times. It gave pretty good play to my book. A sample:
I couldn’t help thinking about Mr. Grantham’s screed as I was
reading Justin Fox’s new book, “The Myth of The Rational Market,” an
engaging history of what might be called the rise and fall of the
efficient market hypothesis.
Mr. Fox is a business columnist for Time
magazine (and a former colleague of mine) who has long been interested
in academic finance. His thesis, essentially, is that the efficient
marketeers were originally on to a good idea. But sealed off in their
academic cocoons — and writing papers in their mathematical jargon —
they developed an internal logic quite divorced from market realities.
It took a new group of young economists, the behavioralists, to nudge
the profession back toward reality.
Mr. Fox argues, echoing Mr.
Grantham, that the efficient market hypothesis played an outsize role
in shaping how the country thought and acted in the last 30-plus years.
But Mr. Fox parts company with him by also arguing that the effect
wasn’t necessarily all bad. As for the question of whether an academic
theory hatched in Chicago led to the financial crisis, suffice it to
say that some questions can never be answered definitively. Which isn’t
to say they shouldn’t be asked.
There's more. And it's a really good column. So check it out.
Anyway, the column went up online last night. I knew it was coming, so I checked the NYT Website every half hour or so until it showed up. I also checked my Amazon.com ranking a couple of times. It was in 5,000-6,000 territory.
This morning we checked Amazon again (my wife and son do most of the checking). The book was on the move. It broke 1,000 around midday. Right now it's at 289—and it's not on sale yet. I'd say Joe writes an influential column.
The review that was meant to run in the June issue of Conde Nast Portfolio—which was shut down after the May issue—has found its way to the Sunday Washington Post (and a Friday evening online posting). The gist:
Fox, a business columnist for Time,
spins a fascinating historical narrative, beginning with economist
Irving Fisher's paean to markets in, alas, 1929. Postwar economists
such as Paul Samuelson
noticed that most investment pros do not beat the averages. This led to
the one positive contribution of the efficient-market hypothesis: Jack Bogle's
invention of index funds, which mimic the performance of the stock
market as a whole and keep ordinary people from wasting their money
trying to beat it.
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. He laments (as if it were necessary) the lack
of any alternative "grand new theory" and finds that the debate has
resulted in a "muddle." Fox concludes, "If you do come up with an idea
for beating the market, you need a model that explains why everybody
else isn't already doing the same thing." Not necessarily. Markets
aren't physics. Maybe no one model explains them.
I have it on reasonably good authority that sometime soon a review will appear in another major newspaper from another very prominent student of the market, and he will say that it's a good book and all but I'm too hard on the true believers in the market's efficiency. Sigh.
Repeated attempts to embed the video got me nowhere, so here it is at reuters.com.