Book Review: The Myth of the Rational Market
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The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street (HarperCollins, 2009) is a history and analysis of the rational market theory which dates back to 1920s economist Irving Fisher which developed with the application of science to traded securities markets. A lot of now famous names made contributions along the way including Harry Markowitz, Franco Modigliani, Merton Miller, Myron Scholes. This academic work moved into the Wall Street mainstream. Much of what is now accepted parts of modern markets—quantitative research, technical analysis, options and derivatives strategies—comes out of the rational and efficient market thesis.
The jury is still out on the rational market, especially after the recent financial crisis. There have been very successful investors who have viewed the markets as irrational, notably Warren Buffet. New counter schools of thought have developed, including behavioral finance and chaos theory.
The Myth of the Rational Market will be the history of what is one of the most important developments in the markets we try to understand and cope with.
–William A. Hayes