The Myth Of the Rational Market

In 1929, a prominent economist convinced himself that financial markets knew best--and never lived it down. Decades on, scholars, investors and officials repeated the same mistake. The story of why a seductive idea keeps leading us to disaster

By Justin Fox Monday, June 22, 2009
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AP

Stocks fell off what Irving Fisher had called a "permanently high plateau" in October 1929 and didn't return until that level until 1954.

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The issue isn't whether financial markets are useful--they are--or whether the prices of stocks or bonds or collateralized debt obligations convey information--they do. There's also much to be said for the insight at the heart of efficient-market theory: markets are hard to outsmart. But when we give up second-guessing the market, we suspend our judgment. And without participants' exercising judgment--applying research, heeding a broker's opinion--markets stand no chance of ever getting prices right.

Based on Fox's book The Myth of the Rational Market, published this month by HarperBusiness

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