A Cast of Thousands

There are fifty people in the "Cast of Characters" at the end of The Myth of the Rational Market.  I get the feeling, though, that perhaps this was the publisher's limit.  "Thousands" is an exaggeration, but there are dozens if not hundreds of folks running through this book.   I read the "Cast" before digging in, and I have to confess to some skepticism that these people would all be brought to life in a vibrant yet manageable way.  But I think the book pulls it off.

Explaining finance theory through people is a brilliant but well-nigh impossible approach.  The Scylla and Charybdis of this enterprise are simplifying things into banality, on the one side, or swirling down too deep into the complexity on the other.  The book treads closer to the complexity, which -- as an academic -- is where you want the error to be.  But I think both experts and interested non-experts will be able to engage with this tome on its own terms.  

Myth is focused on the characters.  From the colorful Irving Fisher and the overlooked Holbrook Working, up through the indefatigable Eugene Fama and the chastened Michael Jensen, Myth brings the people behind the theories into vivid display.  Like Lynn, I might have liked to see the book take on another academic or two.  Jensen's work was incredibly influential on the law of business and finance, and Henry Manne's article on the market for corporate control gets its appropriate due.  But the real "translators" for the finance literature in law were Frank Easterbrook and Daniel Fischel.  Fischel's book on Milken is mentioned in passing, but The Economic Structure of Corporate Law was critical in making finance theory into corporate law maxims.  In addition, it might have been nice to see a digression into Coase, Williamson, and transaction cost economics.  But this really would have been a digression in a book focused more on the stock market than the firms that make up that market.

 Fox's editors are probably rolling their eyes right now, as "more academics" is probably not what they were looking for.  Indeed, it is remarkable how well the book caters to the interests of an academic crowd while at the same time remaining readable and engaging.  With one or two exceptions, we learn almost nothing about the character's personal lives, but their intellectual lives are brought into striking relief.  We learn enough personal details to remember them without losing the focus on the theories that are the true subject of inquiry.  I loved Myth's engagement with ideas -- it is fascinated by the details of CAPM, the Black-Scholes(-Merton) pricing model, and behavioral economics, to name a few.  Despite its subtitle, it is more interested in theory than in practice, and it does just about as good a job at explaining the intellectual history of the efficient capital markets hypothesis as I think could be done.   But it does so by discussing the people involved, and how their careers were shaped by theory.

In a follow-up post, I want to discuss what the book concludes in terms of theory, and push a little bit on the book's ultimate message.  But I would strongly encourage those who know the models, or want to know the models, to get the better understanding that Myth provides.