'The Myth of the Rational Market' by Justin Fox
[Cross posting latest book summary I added to LinkedIn.]
I found The Myth of the Rational Market (http://www.amzn.com/0060598999) to be a very informative survey on the evolution of Finance - and its touch points with Economics - throughout the 20th century and into our own. Justin Fox is a journalist by profession and he strikes a good balance between not trivializing a complex subject while not making it too dense for a reader outside the disciplines covered.
The narrative is roughly in chronological order and the author focuses each chapter on an important contributor or two in this evolution. However, the linking theme and narrative arc to the story is the gradual rise to pre-eminence of the rational/efficient theory of markets, the impact of this theory on the actual conduct of business in securities markets (including the conceptualization and utilization of new financial instruments like index funds and derivatives) and the eventual backlash of concerns about the limitations of the theory in practice as well as flaws in its intellectual underpinnings, particularly from contributors in the field of behavioral economics.
The book was effectively completed before the most recent financial crisis, though the author does conclude with an epilogue which addresses the crisis in the context of his themes and how these events clearly underscored the concerns and limitations with the rationality of markets and its participants. However, he does not offer any prescriptive guidance as to where to go next.
There are a *lot* of players to this story and I found the 'Cast of Characters' summary very helpful over the course of my reading. Also, Justin Fox was a guest on EconTalk shortly after the book was published (http://www.econtalk.org/archives/2009/07/justin_fox_on_t.html) and the discussion is helpful in both complementing and amplifying his thinking. In fact, this conversation was the reason I bought the book in the first place.
