The Myth of the Rational Market, by Justin Fox ★★★★

[mithriltabby]

In The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street, Time Magazine’s Curious Capitalist takes a look at the history of the efficient-market hypothesis— the notion that market prices reflect aggregate wisdom— in the past century. He livens up the discussion of economics by highlighting the characters involved, bringing much-needed color to discussion of the dismal science. The history shows how the idea developed in academia and found expression in finance, until burgeoning contradictions from the real world began to undermine the notion that we can just leave unregulated free markets to solve all our problems, and points the way to new developments in behavioral economics that help to explain the past and may help us to guide the future. He closes with a moderate perspective:

Where does this leave us? It leaves us with a need to find ways to temper speculative excess while acknowledging that we won’t necessarily be able to distinguish speculative excess from an entirely sustainable boom. Financial regulation will be part of that. A rediscovery of ethics and integrity ... will play a role, too, one hopes. So will memory...

If the events of recent years haven’t already convinced you that rational markets belong to the same domain of idealized tools as frictionless surfaces, massless pulleys, and perfect blackbodies, this will provide you with plenty of food for thought. If you already thought that, it’s a good history of a major current in the economic and financial thinking of the past century.