The Myth of the Rational Market

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pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

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affirmative action, Albert Einstein, algorithmic trading, Andy Kessler, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, capital asset pricing model, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, financial independence, financial innovation, fixed income, full employment, global reserve currency, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, happiness index / gross national happiness, haute cuisine, high net worth, Hyman Minsky, index fund, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, job automation, Johann Wolfgang von Goethe, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, Kevin Kelly, labour market flexibility, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Martin Wolf, merger arbitrage, Mikhail Gorbachev, Milgram experiment, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Naomi Klein, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, pets.com, Plutocrats, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, Richard Thaler, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, savings glut, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond

Alan Greenspan (2007) The Age of Turbulence: Adventures in a New World, Allen Lane, London: 124. 30. Fox, The Myth of the Rational Market: 41. 31. MacKenzie, An Engine, Not a Camera: 95. 32. Ibid: 8–12. 33. van Overtveldt, The Chicago School: 67. 34. Dan Gardner (2008) Risk—The Science and Politics of Fear, Virgin Books, London: 53. 35. van Overtveldt, The Chicago School: 291. 36. Quoted in Greenspan, The Age of Turbulence: 55. 37. Quoted in van Overtveldt, The Chicago School: 172. 38. Quoted in Fox, The Myth of the Rational Market: 269. 39. Daniel Altman “Managing Globalization: Q & A with Joseph Stiglitz” (11 October 2006) The International Herald Tribune. 40.

Philip Mirowski (2002) Machine Dreams: Economics Becomes a Cyborg Science, Cambridge University Press, Cambridge: 203, 204. 10. Johan van Overtveldt (2007) The Chicago School: How the University of Chicago Assembled the Thinkers Who Revolutionised Economics and Business, Agate Books, Chicago: 9. 11. Ibid: 91. 12. Justin Fox (2009) The Myth of the Rational Market: A History of Risk, Reward and Delusion on Wall Street, Harper Business, New York: 252. 13. van Overtveldt, The Chicago School: 85–7. 14. Pierre Bayard (2007) How to Talk About Books You Haven’t Read, Bloomsbury, London. 15. Yergin and Stanislaw, The Commanding Heights: 89. The quote is derived from John Ranelagh’s book, (1991) Thatcher’s People: an insider’s account of the politics, the power, and the personalities, Harper Collins, London.

Ben S. Bernanke, Remarks at the Conference to Honor Milton Friedman (8 November 2002), University of Chicago, Chicago, Illinois. 32. Frank Knight “What is truth in economics?” (1940) Journal of Political Economy. Chapter 8—False Gods, Fake Prophecies 1. Quoted in Justin Fox (2009) The Myth of the Rational Market: A History of Risk, Reward and Delusion on Wall Street, Harper Business, New York: 79. 2. Donald MacKenzie (2008) An Engine, Not a Camera: How Financial Models Shape Markets, MIT Press, Cambridge, Massachusetts: 5. 3. Ibid: 71. 4. Peter Bernstein (2005) Capital Ideas: The Improbable Origins of Modern Wall Street, John Wiley, New Jersey: 60. 5.


pages: 461 words: 128,421

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

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Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, bank run, Benoit Mandelbrot, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, card file, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, discovery of the americas, diversification, diversified portfolio, Edward Glaeser, endowment effect, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, floating exchange rates, George Akerlof, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, invisible hand, Isaac Newton, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market design, New Journalism, Nikolai Kondratiev, Paul Lévy, pension reform, performance metric, Ponzi scheme, prediction markets, pushing on a string, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, road to serfdom, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, shareholder value, Sharpe ratio, short selling, side project, Silicon Valley, South Sea Bubble, statistical model, The Chicago School, The Myth of the Rational Market, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, Thorstein Veblen, Tobin tax, transaction costs, tulip mania, value at risk, Vanguard fund, volatility smile, Yogi Berra

The Myth of the Rational Market A History of Risk, Reward, and Delusion on Wall Street Justin Fox To Allison Contents Introduction: It had been Working So Exceptionally Well Early Days 1. Irving Fisher Loses his Briefcase, and Then his Fortune The first serious try to impose reason and science upon the market comes in the early decades of the twentieth century. It doesn’t work out so well. 2. A Random Walk from Fred Macaulay to Holbrook Working Statistics and mathematics begin to find their way into the economic mainstream in the 1930s, setting the stage for big changes to come.

In the late 1920s, blinded in part by his own spectacular financial success, he became convinced that America’s masses of speculators and investors (not to mention its central bankers) were in fact following his advice. Nothing, therefore, could go wrong. Irving Fisher had succumbed to the myth of the rational market. It is a myth of great power—one that, much of the time, explains reality pretty well. But it is nonetheless a myth, an oversimplification that, when taken too literally, can lead to all sorts of trouble. Fisher was just the first in a line of distinguished scholars who saw reason and scientific order in the market and made fools of themselves on the basis of this conviction.

Visit www.AuthorTracker.com for exclusive information on your favorite HarperCollins author. Credits Jacket design by Victor Mingovits Jacket illustration: The Stock Exchange by Rougeron-Vignerot, courtesy Bibliotheque des Arts Decoratifs, Paris, France/Archives Charmet/The Bridgeman Art Library Copyright THE MYTH OF THE RATIONAL MARKET. Copyright © 2009 by Justin Fox. All rights reserved under International and Pan-American Copyright Conventions. By payment of the required fees, you have been granted the non-exclusive, non-transferable right to access and read the text of this e-book on-screen. No part of this text may be reproduced, transmitted, down-loaded, decompiled, reverse engineered, or stored in or introduced into any information storage and retrieval system, in any form or by any means, whether electronic or mechanical, now known or hereinafter invented, without the express written permission of HarperCollins e-books.


pages: 662 words: 180,546

Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown by Philip Mirowski

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Andrei Shleifer, asset-backed security, bank run, barriers to entry, Basel III, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Swan, blue-collar work, Bretton Woods, Brownian motion, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, constrained optimization, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, dark matter, David Brooks, David Graeber, debt deflation, deindustrialization, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, facts on the ground, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, full employment, George Akerlof, Goldman Sachs: Vampire Squid, Hernando de Soto, housing crisis, Hyman Minsky, illegal immigration, income inequality, incomplete markets, invisible hand, Jean Tirole, joint-stock company, Kenneth Rogoff, knowledge economy, l'esprit de l'escalier, labor-force participation, liquidity trap, loose coupling, manufacturing employment, market clearing, market design, market fundamentalism, Martin Wolf, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Nash equilibrium, night-watchman state, Northern Rock, Occupy movement, offshore financial centre, oil shock, payday loans, Ponzi scheme, precariat, prediction markets, price mechanism, profit motive, quantitative easing, race to the bottom, random walk, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, school choice, sealed-bid auction, Silicon Valley, South Sea Bubble, Steven Levy, technoutopianism, The Chicago School, The Great Moderation, the map is not the territory, The Myth of the Rational Market, the scientific method, The Wisdom of Crowds, theory of mind, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, War on Poverty, Washington Consensus, We are the 99%, working poor

No one loses face, in this club, for having been wrong.11 Economists were not of a temperament to suffer what they deemed the New Disrespect lying down. Anyhow, it was proving galling to turn the other cheek when reputable news outlets were sneering “What Good Are Economists, Anyway?” (Coy) and “What Went Wrong with Economics?” (Economist), and books from reputable publishers were quick off the mark trumpeting “The Myth of the Rational Market” (Fox) and “A Failure of Capitalism” (Posner). “Is it fair to attack the economics profession? To a large degree, yes.”12 People were of course always welcome to mock at economists in private, which was nothing new, but this seemed to be a different sort of animal. Remonstrants flocked to the talk shows, the newspapers, magazines, and op-ed pages; but beyond that, they also entered the blogosphere in a big way for perhaps the first time.

“The Construction of a Global Profession,” American Journal of Sociology 117 (2006): 145–94. Fourcade, Marion. Economists and Societies (Princeton: Princeton University Press, 2009). Foust, Dean, and Aaron Pressman. “Credit Scores: Not So Magic Numbers,” Business Week, February 7, 2008. Fox, Justin. The Myth of the Rational Market (New York: HarperCollins, 2009). Frank, David, and Jay Gabler. Reconstructing the University (Stanford: Stanford University Press, 2006). Frank, Robert. “Flaw in Free Markets: Humans,” New York Times, September 14, 2009. Frank, Thomas. One Market Under God (New York: Anchor, 2000).

., “Governance, Regulation and Financial Market Instability.” 20 For the specifics see Nik-Khah, “Chicago Neoliberalism and the Genesis of the Milton Friedman Institute.” There are some subsequent indications that this fund drive did not go well. 21 Campbell, “Neoliberalism in Crisis.” 22 See, for instance, Callinicos, Bonfire of Illusions; Cassidy, How Markets Fail; Fox, The Myth of the Rational Market; Westbrook, Out of the Crisis; Yves Smith, Econned; Mason, Meltdown; Kaletsky, Capitalism 4.0; Stiglitz, Freefall. 23 The various approaches to social epistemology within the philosophy literature are fascinating; without endorsing any specific position, one can sample the options in Goldman and Whitcomb, Social Epistemology; Kourany, Philosophy of Science after Feminism; Kusch, Knowledge by Agreement; Longino, The Fate of Knowledge; Solomon, Social Empiricism; Fuller, Social Epistemology; Harding, Can Theories Be Refuted?.


pages: 430 words: 109,064

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown by Simon Johnson, James Kwak

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Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, banking crisis, Bernie Madoff, Bonfire of the Vanities, bonus culture, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Edward Glaeser, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, financial intermediation, financial repression, fixed income, George Akerlof, Gordon Gekko, greed is good, Home mortgage interest deduction, Hyman Minsky, income per capita, interest rate derivative, interest rate swap, Kenneth Rogoff, laissez-faire capitalism, late fees, Long Term Capital Management, market bubble, market fundamentalism, Martin Wolf, moral hazard, mortgage tax deduction, Ponzi scheme, price stability, profit maximization, race to the bottom, regulatory arbitrage, rent-seeking, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, sovereign wealth fund, The Myth of the Rational Market, too big to fail, transaction costs, value at risk, yield curve

Inside,” The New York Times, October 10, 2009, available at http://www.nytimes.com/2009/10/11/business/11hohlt.html. 38. Pub. L. 96-221. Interest ceilings on deposit accounts were phased out in Title II. State usury laws were preempted in Title V. 39. Geisst, Wall Street, supra note 33, at 327. 40. On academic finance, see Justin Fox, The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street (New York: Harper Business, 2009); John Cassidy, How Markets Fail: The Logic of Economic Calamities (New York: Farrar, Straus & Giroux, 2009), chapter 7; Peter Bernstein, Capital Ideas: The Improbable Origins of Modern Wall Street (New York: Free Press, 1992); and Peter Bernstein, Capital Ideas Evolving (Hoboken, NJ: Wiley, 2007). 41.

The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History. New York: Broadway Business, 2009. Academic Economics and the Financial Crisis Cassidy, John. How Markets Fail: The Logic of Economic Calamities. New York: Farrar, Straus & Giroux, 2009. Fox, Justin. The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street. New York: Harper Business, 2009. Economic and Policy Analyses Goodman, Peter S. Past Due: The End of Easy Money and the Renewal of the American Economy. New York: Henry Holt, 2009. Hacker, Jacob S., and Paul Pierson. Winner-Take-All Politics: How Washington Made the Rich Richer—And Turned Its Back on the Middle Class.


pages: 385 words: 101,761

Creative Intelligence: Harnessing the Power to Create, Connect, and Inspire by Bruce Nussbaum

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3D printing, Airbnb, Albert Einstein, Berlin Wall, Black Swan, clean water, collapse of Lehman Brothers, Credit Default Swap, crony capitalism, crowdsourcing, Danny Hillis, declining real wages, demographic dividend, Elon Musk, en.wikipedia.org, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, follow your passion, game design, housing crisis, Hyman Minsky, industrial robot, invisible hand, James Dyson, Jane Jacobs, Jeff Bezos, jimmy wales, John Gruber, Joseph Schumpeter, Kickstarter, lone genius, manufacturing employment, Mark Zuckerberg, Martin Wolf, new economy, Paul Graham, Peter Thiel, race to the bottom, reshoring, Richard Florida, Ronald Reagan, shareholder value, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, six sigma, Skype, Steve Ballmer, Steve Jobs, Steve Wozniak, supply-chain management, Tesla Model S, The Chicago School, The Design of Experiments, the High Line, The Myth of the Rational Market, thinkpad, Tim Cook: Apple, too big to fail, tulip mania, We are the 99%, Y Combinator, young professional, Zipcar

This distinction forms a major theme in the course we co-teach at Parsons. Ray Ball, “The Global Financial Crisis and the Efficient Market Hypothesis: What Have We Learned?” University of Chicago, Journal of Applied Corporate Finance, vol. 21, no. 4, 2009; Siegel, “Efficient Market Theory and the Crisis”; Roger Lowenstein, “Book Review: The Myth of the Rational Market by Justin Fox,” Washington Post, June 7, 2009, accessed September 13, 2012, http://www.washingtonpost.com/wp-dyn/ content/article/2009/06/05/AR2009060502053.html. 228 “black swans”: Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable (New York: Random House, 2007). 228 By excluding uncertainty: Frank H.

id=5835269. 232 In a 2010 interview with Martin Wolf: Wolf and Giles, “Transcript: Larry Summers Interview.” 232 Summers was, after all: Stephen Labaton, “Congress Passes Wide-Ranging Bill Easing Bank Laws,” New York Times, November 5, 1999, accessed September 14, 2012, http://www.nytimes.com/1999/11/05/business/ congress-passes-wide-ranging-bill-easing-bank-laws.html; Charles Ferguson, “Larry Summers and the Subversion of Economics,” Chronicle of Higher Economics, October 3, 2010, accessed September 14, 2012, http://chronicle.com/article/Larry-Summersthe/124790/; Rana Foroohar, “Larry Summers: No Regrets on Deregulation,” Time Business, April 12, 2011, accessed September 14, 2012, http://business.time.com/2011/04/12/ larry-summers-no-regrets-on-deregulation/. 232 In 1999, Summers, along with: Cyrus Sanati, “10 Years Later, Looking at Repeal of Glass-Steagall,” DealBook, November 12, 2009, accessed September 14, 2012, http://dealbook.nytimes.com/2009/11/12/10 -years-later-looking-at-repeal-of-glass-steagall/. 232 the Depression-era regulation: Labaton, “Congress Passes Wide-Ranging Bill Easing Bank Laws.” 232 calling the repeal “historic”: Sanati, “10 Years Later.” 232 Perhaps no one believed: Justin Fox, “The Myth of the Rational Market,” Time, June 22, 2009, accessed September 14, 2012, http://www.time.com/time/magazine/ article/0,9171,1904153,00.html. 232 But in October 2008, Greenspan: Edmund L. Andrews, “Greenspan Concedes Error on Regulation,” New York Times, October 23, 2008, accessed September 14, 2012, http://www.nytimes.com/2008/10/24/ business/economy/24panel.html. 232 “Those of us who have looked: Kara Scannell and Sudeep Reddy, “Greenspan Admits Errors to Hostile House Panel,” Wall Street Journal, October 24, 2008, accessed September 14, 2012, http://online.wsj.com/article/ SB122476545437862295.html. 232 Greenspan was criticized: Andrews, “Greenspan Concedes Error on Regulation.” 233 Back in the mid-nineties: Katrina Brooker, “Citi’s Creator, Alone with His Regrets,” New York Times, January 2, 2012, accessed September 13, 2012, http://www.nytimes.com/2010/01/03/ business/economy/03weill.html. 233 On July 25, 2012: “Wall Street Legend Sandy Weill: Break Up the Big Banks,” CNBC Report, July 25, 2012, http://www.cnbc.com/id/48315170, accessed September 13, 2012. 233 from 1977 to 2008: Roger Martin, “The Age of Customer Capitalism,” Harvard Business Review, January 2010, http://hbr.org/2010/01/ the-age-of-customer-capitalism/ar/1. 233 Compare that with: Ibid. 234 In 2009, Michael Mandel: I’ve known and respected Mike Mandel for all the years we worked together at BusinessWeek and the years thereafter.


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Zero-Sum Future: American Power in an Age of Anxiety by Gideon Rachman

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Asian financial crisis, bank run, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, Bonfire of the Vanities, borderless world, Bretton Woods, BRICs, capital controls, centre right, clean water, collapse of Lehman Brothers, colonial rule, currency manipulation / currency intervention, deindustrialization, Deng Xiaoping, Doha Development Round, energy security, failed state, Fall of the Berlin Wall, financial deregulation, Francis Fukuyama: the end of history, full employment, global reserve currency, greed is good, Hernando de Soto, illegal immigration, income inequality, invisible hand, Jeff Bezos, laissez-faire capitalism, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, moral hazard, mutually assured destruction, Naomi Klein, offshore financial centre, open borders, open economy, Peace of Westphalia, peak oil, pension reform, Plutocrats, plutocrats, price stability, RAND corporation, reserve currency, rising living standards, road to serfdom, Ronald Reagan, shareholder value, Sinatra Doctrine, sovereign wealth fund, special economic zone, Steve Jobs, Stewart Brand, The Chicago School, The Great Moderation, The Myth of the Rational Market, Thomas Malthus, trickle-down economics, Washington Consensus, Winter of Discontent

Bob Woodward, Maestro (New York: Simon & Schuster, 2000). 2. Alan Greenspan, The Age of Turbulence: Adventures in a New World (London: Penguin, 2007), 97. Greenspan tells this story against himself in his autobiography. 3. Ibid., 40. 4. Ibid., 41. 5. Ibid., 52. 6. Ibid., 15. 7. Ibid., 179. 8. Justin Fox, The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street (New York: HarperCollins, 2009), xii. 9. Greenspan, Age of Turbulence, 370. 10. Ibid., 199. 11. Fox, Myth of the Rational Market, xii. 12. Quoted in Gillian Tett, Fool’s Gold (London: Little, Brown, 2009), 36. 13. Greenspan, Age of Turbulence, 372. 14.

The best thing to read on Alan Greenspan is Greenspan’s own surprisingly compulsive memoir, The Age of Turbulence: Adventures in a New World (Penguin, 2007). There have now been a great many books on the origins of the crash of 2008 and its economic lessons. Two of my favorites are Gillian Tett’s Fool’s Gold (Little, Brown, 2006) and Justin Fox’s The Myth of the Rational Market (HarperCollins, 2009). The defining text capturing the optimism generated by the interplay between the technological revolution and globalization is Thomas Friedman’s The World Is Flat (Penguin, 2005). The optimism about the rise of Asia during this period is caught both by Kishore Mahbubani’s The New Asian Hemisphere: The Irresistible Shift of Global Power to the East (PublicAffairs, 2008) and Martin Jacques’s When China Rules the World: The Rise of the Middle Kingdom and the End of the Western World (Penguin, 2009).


pages: 478 words: 126,416

Other People's Money: Masters of the Universe or Servants of the People? by John Kay

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Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, corporate governance, Credit Default Swap, cross-subsidies, dematerialisation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial innovation, financial intermediation, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, income inequality, index fund, inflation targeting, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, London Whale, Long Term Capital Management, loose coupling, low cost carrier, M-Pesa, market design, millennium bug, mittelstand, moral hazard, mortgage debt, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, regulatory arbitrage, Renaissance Technologies, rent control, Richard Feynman, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, Schrödinger's Cat, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, Washington Consensus, We are the 99%, Yom Kippur War

., 1926, ‘Truth and Probability’, in Ramsey, F.P., 1931, The Foundations of Mathematics and Other Logical Essays, ed. Braithwaite, R.B., London, Kegan, Paul, Trench, Trubner & Co. 27. Buffett, W., 1988, Chairman’s Letter to the Shareholders of Berkshire Hathaway Inc. 28. Fox, J., 2009, The Myth of the Rational Market, New York, Harper Business, pp. 86–8. 29. Isaacson, W., 2013, Steve Jobs: The Exclusive Biography, New York, Little Brown. 30. Hair, P.E.H., 1971, ‘Deaths from Violence in Britain: A Tentative Survey’, Population Studies, 25 (1), pp. 5–24. 31. Adams, J., 1995, Risk: The Policy Implications of Risk Compensation and Plural Rationalities, London, Routledge. 32.

House of Commons Treasury Committee, Independent Commission on Banking. Financial Times, 2009, ‘Government’s Response Like That of a Rowdy Drinker in a Bar Brawl’, 5 July. Fitzgerald, F.S., 1925, The Great Gatsby, New York, Charles Scribner’s Sons. Flyvberg, B., 2003, Megaprojects and Risk, Cambridge, Cambridge University Press. Fox, J., 2009, The Myth of the Rational Market, New York, Harper Business. Francis, J., 1850, ‘Chronicles and Characters of the Stock Exchange’, The Church of England Quarterly Review, 27 (6), pp. 128–55. Friedman, M., and Friedman, R.D., 1980, Free to Choose, San Diego, CA, Harcourt. Galbraith, J.K., 1954, The Great Crash, Boston, MA, Houghton Mifflin.


pages: 261 words: 64,977

Pity the Billionaire: The Unexpected Resurgence of the American Right by Thomas Frank

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Affordable Care Act / Obamacare, bank run, big-box store, bonus culture, collateralized debt obligation, collective bargaining, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Deng Xiaoping, financial innovation, housing crisis, invisible hand, Naomi Klein, obamacare, payday loans, profit maximization, profit motive, road to serfdom, Ronald Reagan, shareholder value, strikebreaker, The Chicago School, The Myth of the Rational Market, Thorstein Veblen, too big to fail, union organizing, Washington Consensus, white flight, Works Progress Administration

Just as readers of the thirties snapped up books trashing the great capitalists and picking apart classical economics, so did the book-buying public of our own time seem ready to read about the folly of orthodoxy. In 2009, a Time magazine columnist named Justin Fox scored an unlikely hit with The Myth of the Rational Market, a careful takedown of academic economics. Michael Lewis, who had once made heroes of tycoons, now walked readers through the descending levels of the Wall Street ripoff in The Big Short. And there was a sudden mania for Great Depression comparisons: Paul Krugman reissued his 1999 work, The Return of Depression Economics—this time they had truly returned—and a book about the blundering central bankers of the twenties actually made the bestseller list.


pages: 263 words: 75,455

Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors by Wesley R. Gray, Tobias E. Carlisle

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Albert Einstein, Andrei Shleifer, asset allocation, Atul Gawande, backtesting, Black Swan, capital asset pricing model, Checklist Manifesto, cognitive bias, compound rate of return, corporate governance, correlation coefficient, credit crunch, Daniel Kahneman / Amos Tversky, discounted cash flows, Eugene Fama: efficient market hypothesis, forensic accounting, hindsight bias, Louis Bachelier, p-value, passive investing, performance metric, quantitative hedge fund, random walk, Richard Thaler, risk-adjusted returns, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, short selling, statistical model, systematic trading, The Myth of the Rational Market, time value of money, transaction costs

Available at www7.gsb.columbia.edu/alumni/news/hermes/print-archive/superinvestors. 17. Benjamin Graham, “Should Rich but Losing Corporations Be Liquidated?” Reprinted on Forbes.com, December 27, 1999. Available at http://www.forbes.com/forbes/1999/1227/6415410a.html. 18. Justin Fox, The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street (New York: HarperBusiness, 2009). 19. Ibid. 20. Benjamin Graham, The Intelligent Investor: A Book of Practical Counsel, 4th ed. (New York: Harper & Row, 1986). 21. Warren Buffett, “Shareholder Letter,” Berkshire Hathaway, Inc.


pages: 381 words: 101,559

Currency Wars: The Making of the Next Gobal Crisis by James Rickards

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Asian financial crisis, bank run, Benoit Mandelbrot, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, borderless world, Bretton Woods, BRICs, British Empire, business climate, capital controls, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, Deng Xiaoping, diversification, diversified portfolio, Fall of the Berlin Wall, family office, financial innovation, floating exchange rates, full employment, game design, German hyperinflation, Gini coefficient, global rebalancing, global reserve currency, high net worth, income inequality, interest rate derivative, Kenneth Rogoff, labour mobility, laissez-faire capitalism, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, money: store of value / unit of account / medium of exchange, Network effects, New Journalism, Nixon shock, offshore financial centre, oil shock, open economy, paradox of thrift, price mechanism, price stability, private sector deleveraging, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, Ronald Reagan, sovereign wealth fund, special drawing rights, special economic zone, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, time value of money, too big to fail, value at risk, War on Poverty, Washington Consensus

The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States. New York: Public Affairs, 2011. Findlay, Ronald, and Kevin H. O’Rourke. Power and Plenty: Trade, War, and the World Economy in the Second Millennium. Princeton: Princeton University Press, 2007. Fox, Justin. The Myth of the Rational Market. New York: HarperCollins, 2009. Friedman, Milton, and Anna Jacobson Schwartz. A Monetary History of the United States, 1867–1960. Princeton: Princeton University Press, 1963. Frydman, Roman, and Michael D. Goldberg. Imperfect Knowledge Economics: Exchange Rates and Risks. Princeton: Princeton University Press, 2007.


pages: 523 words: 111,615

The Economics of Enough: How to Run the Economy as if the Future Matters by Diane Coyle

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accounting loophole / creative accounting, affirmative action, bank run, banking crisis, Berlin Wall, bonus culture, Branko Milanovic, BRICs, call centre, Cass Sunstein, central bank independence, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation does not imply causation, Credit Default Swap, deindustrialization, demographic transition, Diane Coyle, disintermediation, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Financial Instability Hypothesis, Francis Fukuyama: the end of history, George Akerlof, Gini coefficient, global supply chain, Gordon Gekko, greed is good, happiness index / gross national happiness, Hyman Minsky, If something cannot go on forever, it will stop, illegal immigration, income inequality, income per capita, invisible hand, Jane Jacobs, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour market flexibility, low skilled workers, market bubble, market design, market fundamentalism, megacity, Network effects, new economy, night-watchman state, Northern Rock, oil shock, principal–agent problem, profit motive, purchasing power parity, railway mania, rising living standards, Ronald Reagan, Silicon Valley, South Sea Bubble, Steven Pinker, The Design of Experiments, The Fortune at the Bottom of the Pyramid, The Market for Lemons, The Myth of the Rational Market, The Spirit Level, transaction costs, transfer pricing, tulip mania, ultimatum game, University of East Anglia, web application, web of trust, winner-take-all economy, World Values Survey

“You Don’t Need to Sell a Million to Make a Mint.” Sunday Times (London), 8 November. Ehrlich, Paul. 1968. The Population Bomb. New York: Ballantine. Financial Times. 2009. “India Opts for Voluntary Cuts on Emissions.” Fitzgerald, F. Scott. 1925. The Great Gatsby. New York, Scribner’s. Fox, Justin. 2010. The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street. New York: HarperCollins. Frank, Robert. 1999. Luxury Fever: Money and Happiness in an Era of Excess. New York: Free Press. Frank, Robert. 2007. “Why Not Shift the Burden to Big Spenders?” New York Times, 7 October. Frank, Robert, and Philip Cook. 1995.


pages: 576 words: 105,655

Austerity: The History of a Dangerous Idea by Mark Blyth

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accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, Black Swan, Bretton Woods, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, deindustrialization, disintermediation, diversification, en.wikipedia.org, ending welfare as we know it, Eugene Fama: efficient market hypothesis, eurozone crisis, financial repression, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, Gini coefficient, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, interest rate swap, invisible hand, Irish property bubble, Joseph Schumpeter, Kenneth Rogoff, liquidationism / Banker’s doctrine / the Treasury view, Long Term Capital Management, market bubble, market clearing, Martin Wolf, moral hazard, mortgage debt, mortgage tax deduction, Occupy movement, offshore financial centre, paradox of thrift, price stability, quantitative easing, rent-seeking, reserve currency, road to serfdom, savings glut, short selling, structural adjustment programs, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, unorthodox policies, value at risk, Washington Consensus

Andrew Haldane, “Why Banks Failed the Stress Test,” (speech at the Marcus-Evans Conference on Stress-Testing, London, February 9–10, 2009). 28. Three recent books have done a great job of showing us how the ideas that constitute modern finance, its theoretical structure, were a huge part of what went wrong. Justin Fox’s The Myth of the Rational Market (2009), John Cassidy’s How Markets Fail (2009), and John Quiggin’s Zombie Economics (2010) lay out in great detail how the economic theory of the past thirty years was constructed, what it presumed about the world, and why those ideas failed in the 2007–2008 crisis. In what follows, I draw on their work and on my own prior work on the subject.


pages: 338 words: 106,936

The Physics of Wall Street: A Brief History of Predicting the Unpredictable by James Owen Weatherall

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Albert Einstein, algorithmic trading, Antoine Gombaud: Chevalier de Méré, Asian financial crisis, bank run, Benoit Mandelbrot, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, Brownian motion, butterfly effect, capital asset pricing model, Carmen Reinhart, Claude Shannon: information theory, collateralized debt obligation, collective bargaining, dark matter, Edward Lorenz: Chaos theory, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial innovation, George Akerlof, Gerolamo Cardano, Henri Poincaré, invisible hand, Isaac Newton, iterative process, John Nash: game theory, Kenneth Rogoff, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, martingale, new economy, Paul Lévy, prediction markets, probability theory / Blaise Pascal / Pierre de Fermat, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, statistical arbitrage, statistical model, stochastic process, The Chicago School, The Myth of the Rational Market, tulip mania, V2 rocket, volatility smile

Hoboken, NJ: John Wiley and Sons. Forbes magazine. 2011. “The World’s Billionaires 2011.” Available at http://www.forbes.com/lists/2011/10/billionaires_2011.html. Forfar, David O. 2007. “Fischer Black.” Available at http://www.history.mcs.standrews.ac.uk/Biographies/Black_Fischer.html. Fox, Justin. 2009. The Myth of the Rational Market. New York: Harper Business. French, Craig W. 2003. “The Treynor Capital Asset Pricing Model.” Journal of Investment Management 1 (2): 60–72. Galison, Peter. 1997. Image and Logic: A Material Culture of Microphysics. Chicago: University of Chicago Press. — — — . 2003. Einstein’s Clocks, Poincaré’s Maps: Empires of Time.


pages: 416 words: 118,592

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing by Burton G. Malkiel

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accounting loophole / creative accounting, Albert Einstein, asset allocation, asset-backed security, backtesting, Bernie Madoff, BRICs, capital asset pricing model, compound rate of return, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Elliott wave, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial innovation, fixed income, framing effect, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Long Term Capital Management, loss aversion, margin call, market bubble, mortgage tax deduction, new economy, Own Your Own Home, passive investing, pets.com, Ponzi scheme, price stability, profit maximization, publish or perish, purchasing power parity, RAND corporation, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, The Myth of the Rational Market, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond

Critics believe that such events stretch the credibility of the efficient-market theory beyond the breaking point. The financial press has been unambiguous in its judgment. The Wall Street Journal opined that the efficient-market theory was a “remarkable error.” BusinessWeek described the theory as a “failure.” Justin Fox of Time, author of The Myth of the Rational Market, claimed that the efficient-market hypothesis (EMH) has deluded investors and played a major role in the worldwide credit crisis of 2008–09. Certainly the behavioral theorists, whose work was described in chapter 10, are highly skeptical that markets are efficient. The behavioralists chide their efficient-market brethren for blindly accepting that the stock market behaves rationally.


pages: 483 words: 141,836

Red-Blooded Risk: The Secret History of Wall Street by Aaron Brown, Eric Kim

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Albert Einstein, algorithmic trading, Asian financial crisis, Atul Gawande, backtesting, Basel III, Benoit Mandelbrot, Bernie Madoff, Black Swan, capital asset pricing model, central bank independence, Checklist Manifesto, corporate governance, credit crunch, Credit Default Swap, disintermediation, distributed generation, diversification, diversified portfolio, Emanuel Derman, Eugene Fama: efficient market hypothesis, experimental subject, financial innovation, illegal immigration, implied volatility, index fund, Long Term Capital Management, loss aversion, margin call, market clearing, market fundamentalism, market microstructure, money: store of value / unit of account / medium of exchange, moral hazard, natural language processing, open economy, pre–internet, quantitative trading / quantitative finance, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, special drawing rights, statistical arbitrage, stochastic volatility, The Myth of the Rational Market, too big to fail, transaction costs, value at risk, yield curve

For the twentieth and twenty-first centuries we have The New Lombard Street: How the Fed Became the Dealer of Last Resort by Perry Mehrling, Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System by Barry Eichengreen, Capital Ideas: The Improbable Origins of Modern Wall Street by Peter Bernstein, The Death of the Banker: The Decline and Fall of the Great Financial Dynasties and the Triumph of the Small Investor by Ron Chernow, The Greed Merchants: How the Investment Banks Played the Free Market Game by Philip Augar, and The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox. The bible of advantage gamblers is James Grosjean’s Beyond Counting: Exploiting Casino Games from Blackjack to Video Poker. Peter Griffin was one of the best mathematician/gamblers. He wrote The Theory of Blackjack: The Compleat Card Counter’s Guide to the Casino Game of 21.


pages: 543 words: 147,357

Them And Us: Politics, Greed And Inequality - Why We Need A Fair Society by Will Hutton

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Andrei Shleifer, asset-backed security, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, capital controls, carbon footprint, Carmen Reinhart, Cass Sunstein, centre right, choice architecture, cloud computing, collective bargaining, conceptual framework, Corn Laws, corporate governance, credit crunch, Credit Default Swap, debt deflation, decarbonisation, Deng Xiaoping, discovery of DNA, discovery of the americas, discrete time, diversification, double helix, Edward Glaeser, financial deregulation, financial innovation, financial intermediation, first-past-the-post, floating exchange rates, Francis Fukuyama: the end of history, Frank Levy and Richard Murnane: The New Division of Labor, full employment, George Akerlof, Gini coefficient, global supply chain, Growth in a Time of Debt, Hyman Minsky, I think there is a world market for maybe five computers, income inequality, inflation targeting, interest rate swap, invisible hand, Isaac Newton, James Dyson, James Watt: steam engine, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, labour market flexibility, Long Term Capital Management, Louis Pasteur, low-wage service sector, mandelbrot fractal, margin call, market fundamentalism, Martin Wolf, means of production, Mikhail Gorbachev, millennium bug, moral hazard, mortgage debt, new economy, Northern Rock, offshore financial centre, open economy, Plutocrats, plutocrats, price discrimination, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, railway mania, random walk, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, Rory Sutherland, shareholder value, short selling, Silicon Valley, Skype, South Sea Bubble, Steve Jobs, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, unpaid internship, value at risk, Washington Consensus, working poor, éminence grise

Rickards, ‘The Risks of Financial Modeling: VaR and the Economic Meltdown’, testimony before the Subcommittee on Investigations and Oversight Committee on Science and Technology, US House of Representatives, 10 September 2009. 38 Benoit Mandelbrot (2008) The (Mis)Behavior of Markets: A Fractal View of Risk, Ruin and Reward, Profile Books. For another interesting example of cross-fertilisation, see Didier Sornette (2003) Why Stockmarkets Crash: Critical Events in Complex Financial Systems, Princeton University Press. 39 See Justin Fox (2009) The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street, HarperBusiness. 40 The following example is paraphrased from Baseline Scenario: http://baselinescenario.com/2009/10/01/the-economics-of-models/. 41 Gillian Tett (2009) Fool’s Gold: How Unrestrained Greed Corrupted a Dream, Shattered Global Markets and Unleashed a Catastrophe, Little, Brown. 42 Lucien Bebchuk and Jesse Fried (2004) Pay without Performance: The Unfulfilled Promise of Executive Compensation, Harvard University Press. 43 Lucian Bebchuk and Holger Spamann (2009) ‘Regulating Bankers’ Pay’, Harvard Law and Economics Discussion Paper No. 641. 44 Jesse Eisinger, ‘London Banks, Falling Down’, Portfolio, 13 August 2008, at http://www.portfolio.com/views/columns/wall-street/2008/08/13/Problemsin-British-Banking-System/. 45 Philip Augar (2009) Chasing Alpha: How Reckless Growth and Unchecked Ambition Ruined the City’s Golden Decade, The Bodley Head. 46 Albert-Laszlo Baraasi (2002) Linked: The New Science of Networks, Basic Books.


pages: 524 words: 143,993

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

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air freight, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, Bretton Woods, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, forward guidance, Fractional reserve banking, full employment, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen: Great Stagnation, very high income, winner-take-all economy

‘The Debt-Deflation Theory of Great Depressions’, Econometrica, vol. 1, no. 4 (October 1933), pp. 337–57. http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf. Forstater, Matthew. Functional Finance and Full Employment: Lessons from Lerner for Today’, Working Paper No. 272, The Jerome Levy Economics Institute, July 1999. Fox, Justin. The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street (New York: HarperCollins, 2009). Frank, Robert H. and Philip J. Cook. The Winner-Take-All Society: Why the Few at the Top Get So Much More than the Rest of Us (London and New York: Penguin, 1996). Frydman, Roman and Michael D. Goldberg.


pages: 500 words: 145,005

Misbehaving: The Making of Behavioral Economics by Richard H. Thaler

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Albert Einstein, Amazon Mechanical Turk, Andrei Shleifer, Apple's 1984 Super Bowl advert, Atul Gawande, Berlin Wall, Bernie Madoff, Black-Scholes formula, capital asset pricing model, Cass Sunstein, Checklist Manifesto, choice architecture, clean water, cognitive dissonance, conceptual framework, constrained optimization, Daniel Kahneman / Amos Tversky, delayed gratification, diversification, diversified portfolio, Edward Glaeser, endowment effect, equity premium, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, George Akerlof, hindsight bias, Home mortgage interest deduction, impulse control, index fund, invisible hand, Jean Tirole, John Nash: game theory, John von Neumann, late fees, law of one price, libertarian paternalism, Long Term Capital Management, loss aversion, market clearing, Mason jar, mental accounting, meta analysis, meta-analysis, More Guns, Less Crime, mortgage debt, Nash equilibrium, Nate Silver, New Journalism, nudge unit, payday loans, Ponzi scheme, presumed consent, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, random walk, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Silicon Valley, South Sea Bubble, statistical model, Steve Jobs, technology bubble, The Chicago School, The Myth of the Rational Market, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, transaction costs, ultimatum game, Walter Mischel

“Hindsight ≠ Foresight: The Effect of Outcome Knowledge on Judgment Under Uncertainty.” Journal of Experimental Psychology: Human Perception and Performance 1, no. 3: 288. Fisher, Irving. 1930. The Theory of Interest: As Determined by Impatience to Spend Income and Opportunity to Invest It. New York: MacMillan. Fox, Justin. 2009. The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street. New York: HarperCollins. Frank, Robert H., Thomas Gilovich, and Dennis T. Regan. 1993. “Does Studying Economics Inhibit Cooperation?” Journal of Economic Perspectives 7, no. 2: 159–71. Frederick, Shane, George Loewenstein, and Ted O’Donoghue. 2002.


pages: 584 words: 187,436

More Money Than God: Hedge Funds and the Making of a New Elite by Sebastian Mallaby

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Andrei Shleifer, Asian financial crisis, asset-backed security, automated trading system, bank run, barriers to entry, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, Bretton Woods, capital controls, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, currency peg, Elliott wave, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, fixed income, full employment, German hyperinflation, High speed trading, index fund, Kenneth Rogoff, Long Term Capital Management, margin call, market bubble, market clearing, market fundamentalism, merger arbitrage, moral hazard, natural language processing, Network effects, new economy, Nikolai Kondratiev, pattern recognition, pre–internet, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical arbitrage, statistical model, technology bubble, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs

“It’s impossible to disseminate information exactly homogeneously,” Steinhardt says of the regulators’ efforts. Steinhardt interview, September 10, 2007. 48. Anise C. Wallace, “Pullback at Block Trading Desks,” New York Times, December 24, 1987, p. D1. 49. Dan Dorfman, “Sabbatical for a Superstar,” Esquire, August 29, 1978, p. 12. CHAPTER THREE: PAUL SAMUELSON’S SECRET 1. Justin Fox, The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street, (New York: HarperCollins, 2009), p. 124. 2. Peter L. Bernstein, Capital Ideas Evolving (Hoboken, NJ: John Wiley & Sons, 2007), p. 113. 3. Samuelson explains, “Fama’s theory of the random walk and mine are not the same. Mine is that there are no easy pickings….


pages: 580 words: 168,476

The Price of Inequality: How Today's Divided Society Endangers Our Future by Joseph E. Stiglitz

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affirmative action, Affordable Care Act / Obamacare, airline deregulation, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collapse of Lehman Brothers, collective bargaining, colonial rule, corporate governance, Credit Default Swap, Daniel Kahneman / Amos Tversky, Dava Sobel, declining real wages, deskilling, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, framing effect, full employment, George Akerlof, Gini coefficient, income inequality, income per capita, indoor plumbing, inflation targeting, invisible hand, John Harrison: Longitude, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Rogoff, labour market flexibility, London Interbank Offered Rate, lone genius, low skilled workers, Mark Zuckerberg, market bubble, market fundamentalism, medical bankruptcy, microcredit, moral hazard, mortgage tax deduction, obamacare, offshore financial centre, paper trading, patent troll, payday loans, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, Simon Kuznets, spectrum auction, Steve Jobs, technology bubble, The Chicago School, The Fortune at the Bottom of the Pyramid, The Myth of the Rational Market, The Spirit Level, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, ultimatum game, uranium enrichment, very high income, We are the 99%, women in the workforce

Stiglitz, “Information and Competitive Price Systems,” American Economic Review 66, no. 2 (May 1976): 246–53; and Sanford Grossman and J. E. Stiglitz, “On the Impossibility of Informationally Efficient Markets,” American Economic Review 70, no. 3 (June 1980): 393–408. 37. See Justin Fox, The Myth of the Rational Market (New York: Harper Business, 2009). 38. This was equivalent to a loss of more than a trillion dollars. The stocks of eight major companies in the S&P 500 (including Accenture) fell to one cent per share; the prices of other stocks (including Sotheby’s, Apple, and Hewlett-Packard) increased to over $100,000.


pages: 1,088 words: 228,743

Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen

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Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, Bernie Madoff, Black Swan, Bretton Woods, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, central bank independence, collateralized debt obligation, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, George Akerlof, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, interest rate swap, invisible hand, Kenneth Rogoff, laissez-faire capitalism, law of one price, Long Term Capital Management, loss aversion, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, New Journalism, oil shock, p-value, passive investing, performance metric, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, Robert Shiller, savings glut, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, systematic trading, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond

Figelman, Ilya (2007), “Stock return momentum and reversal,” Journal of Portfolio Management 34(1), 51–67. Figelman, Ilya (2008), “Expected return and risk of covered call strategies,” Journal of Portfolio Management 34(4), 81–97. Foresi, Silverio; and Lauren Wu (2005), “CrashOPhobia: A domestic fear or a worldwide concern?” Journal of Derivatives 13(2), 8–21. Fox, Justin (2009), The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street, HarperBusiness. Francis, Jack Clark; and Roger G. Ibbotson (2009), “Contrasting real estate with comparable investments, 1978 to 2008,” Journal of Portfolio Management 36(1), 141–155. Franzoni, Francesco A.; Eric Nowak; and Ludovic Phalippou (2010), “Private equity and liquidity risk,” Swiss Finance Institute working paper.