Description
In this rich and lively history of the ideas that shaped modern finance, Peter Bernstein tells the story of how a small, little-known group of scholars revolutionized the management of the world's wealth. Their ideas were dismissed as recently as the late 1960s by Wall Street veterans as "a lot of baloney" pieced together by a bunch of "academia nuts!" Their discovery, which specified how risk could be controlled through diversification, finally began to take hold after the shattering bear market of 1974. Cocksure money managers gambling on their intuition were replaced by those who recognized that there are no easy pickings in the search for under- valued stocks, that the relationship between risk and return is systematic rather than haphazard, that the value of corporations has more to do with earnings potential than with capital structure, and that old-fashioned methods of fine-tuning portfolios to the needs of each investor are actually harmful to the investor's interests.
As Bernstein tells the story, the men whose thinking laid the foundation for this revolution were unlikely bedfellows for the rough-and tumble world of finance. They include an obscure turn-of-the-century French mathematician whose Ph.D. thesis on the unpredictability of stock prices anticipated Einstein's work on relativity, an amateur statistician who debunked the claim that market analysts could pick winning stocks, and a naval astronomer who proved that stock prices move, like molecules in solution, in a random pattern. Their ideas were galvanized in 1952 in the work of Harry Markowitz, a graduate student whose novel theory of diversification barely qualified him for a Ph.D. in economics - and yet won him a Nobel Prize in that field in 1990. Bernstein tells of how a host of Nobel laureates, including William Sharpe, Franco Modigliani, James Tobin, Paul Samuelson, Merton Miller, and other pioneering economists, also figured significantly in streamlining the world's financial architecture. The sometimes hilarious, sometimes painful, but ultimately triumphant story of Wall Street's earliest applications of the new thinking is recounted here. Bernstein shows how these capital ideas, by adding some science to the art of investing, have enlarged our understanding of how capital markets work, thereby enabling investors to manage risk better than ever before, while revitalizing economies throughout the world.
ISBN:9780029030110
