The Market Myth

For initiates, as Fox shows, the idea of the rational market seems to have arrived with the force of revelation:  “After about ten minutes it just hit me, this has got to be true.  The idea for me was so powerful; I said to myself, ‘This is order in the universe.’” (105) (quoting Rex Sinquefield, MBA student at the University of Chicago circa 1970 and former Catholic seminarian).

To the extent that the idea of the rational market is not just an ordinary factual proposition but a framework for ordering experience—something that “has got to be true”—then it becomes difficult to evaluate.  Perhaps this is why Fox’s title describes the rational market as a “myth.”  The word choice suggests that the rational market is more than a false belief.  When faced with a myth, we are more likely to ask whether it is useful than whether it is literally true.  A myth is a way of explaining a natural or social phenomenon that makes it part of a broader world view, investing it with symbolic value that can legitimate and reinforce norms of behavior.  The interpretation of myth, therefore, cannot be separated from the human context in which it arises.

Fox appears to take this approach.  He observes that the straightforward problem with the theory of the rational market is that it was clear all along “that price movements also sometimes reflected false information, incorrect interpretation, and plain old mood swings.” (102)  Yet, rather than dismissing the rational market idea as utopian economics, Fox maintains that the “unwillingness to give up on theories even when their underpinnings had been largely demolished was, like so many things about rational market finance, not entirely crazy.” (235)  As Fox recounts, economists have made important advances using the rational market as a guide, even if their fundamental assumptions were shaky at best.

In the end, Fox concludes mildly that the rational market can help shape individual judgment but should not “substitute” for it.  There is more to say about the relationship of myth, financial theory, and markets, and it is a sign of the quality of Fox’s book that it rewards the reader’s attention and invites further inquiry.  Given space limitations, I will simply close with a question:  does the rationality of the market depend upon who is asking?  Finance scholars, investors, government regulators, bankers, and taxpayers may have different perspectives.  After all, a theory that usefully motivates academic research can still prove destructive if let loose in the world.