Capital Ideas Evolving | 
 enlarge | Author: Peter L. Bernstein
Publisher: Wiley
Category: Book
List Price: $29.95
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Avg. Customer Rating:  10 reviews
Sales Rank: 23302
Media: Hardcover
Edition: 2nd
Number Of Items: 1
Pages: 304
Shipping Weight (lbs): 1
Dimensions (in): 9.1 x 6.1 x 1.1
ISBN: 0471731730
Dewey Decimal Number: 658.15
EAN: 9780471731733
ASIN: 0471731730
Publication Date: May 4, 2007
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Product Description
"A lot has happened in the financial markets since 1992, when Peter Bernstein wrote his seminal Capital Ideas. Happily, Peter has taken up his facile pen again to describe these changes, a virtual revolution in the practice of investing that relies heavily on complex mathematics, derivatives, hedging, and hyperactive trading. This fine and eminently readable book is unlikely to be surpassed as the definitive chronicle of a truly historic era."
- John C. Bogle, founder of The Vanguard Group and author, The Little Book of Common Sense Investing
"Just as Dante could not have understood or survived the perils of the Inferno without Virgil to guide him, investors today need Peter Bernstein to help find their way across dark and shifting ground. No one alive understands Wall Street's intellectual history better, and that makes Bernstein our best and wisest guide to the future. He is the only person who could have written this book; thank goodness he did."
- Jason Zweig, Investing Columnist, Money magazine
"Another must-read from Peter Bernstein! This well-written and thought-provoking book provides valuable insights on how key finance theories have evolved from their ivory tower formulation to profitable application by portfolio managers. This book will certainly be read with keen interest by, and undoubtedly influence, a wide range of participants in international finance."
- Dr. Mohamed A. El-Erian, President and CEO of Harvard Management Company, Deputy Treasurer of Harvard University, and member of the faculty of the Harvard Business School
"Reading Capital Ideas Evolving is an experience not to be missed. Peter Bernstein's knowledge of the principal characters-the giants in the development of investment theory and practice-brings this subject to life."
- Linda B. Strumpf, Vice President and Chief Investment Officer, The Ford Foundation
"With great clarity, Peter Bernstein introduces us to the insights of investment giants, and explains how they transformed financial theory into portfolio practice. This is not just a tale of money and models; it is a fascinating and contemporary story about people and the power of their ideas."
- Elroy Dimson, BGI Professor of Investment Management, London Business School
"Capital Ideas Evolving provides us with a unique appreciation for the pervasive impact that the theory of modern finance has had on the development of our capital markets. Peter Bernstein once again has produced a masterpiece that is must reading for practitioners, educators and students of finance."
- Andre F. Perold, Professor of Finance, Harvard Business School
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| Customer Reviews: Read 5 more reviews...
 The World Is Going Quant November 15, 2008
2 out of 2 found this review helpful
I have a lot of respect for finance professors. To quote a felicitous expression, they perform "mathematics in flesh and blood". They are the surgeons of the modern economy, cutting through inefficiencies and making sure the blood of capital flows into the arteries of corporate accounts or personal savings. And like surgeons, society gratifies them with generous pay and social prestige: the time is over when finance specialists were snubbed by their economist colleagues and kept on the margins of the discipline. Some may even get a Nobel prize in economics, while many may complement their academic salary with management consulting or hands-on investment.
All these pursuits are perfectly legitimate, and finance professors are usually nice individuals endowed with a sharp mind. But Bernstein overemphasizes their worth and gets way too far in praising their accomplishments. The chronicler turns into a sycophant when he writes that "the vigor, the freshness, and the extraordinary clarity of Samuelson's mind would be stunning to encounter in a man of any age". Or that Robert Shiller's "ingenious and restless mind seems never to come to sleep".
But leaving excessive praise aside, the book makes several strong claims that I found worth considering. The first is that the era of financial theory is over. Finance as an academic discipline is based on theories--the Capital Ideas of the title, described in the prequel volume-- that were developed from 1954 to 1972, starting from Markowitz's essay on portfolio selection ("Markowitz came along, and there was light"). The consequence is that most finance academics have now left theory behind, either to launch attacks on neoclassical assumptions based on behavioral observations, or to adopt an institutional perspective on how markets work in order to design better rules and instruments for managing risk. Others have left academia altogether and have moved to the dark side of portfolio investing, where they have created structures surprisingly close to the university setting: "we conduct research; we discuss it and improve it; and we build models and empirically test them. And in some sense we publish them and verify them when we test them in the market", says Myron Scholes, a Nobel prize laureate turned investor.
The concentration of discoveries in a short time span and among a small group of innovators is by no means unique in the history of science. But past experience also shows us that well-established paradigms can be radically challenged and overcome by new ideas coming from the fringe of the discipline that put past theories into oblivion. Nothing stands still. The Capital Ideas are nor written in stone. And a new theory of finance may very well emerge that will match Markowitz's approach to portfolio selection, Modigliani and Miller's insights into corporate finance, the Efficient Market Hypothesis, the Capital Asset Pricing Model, and options pricing theory.
The second claim made by the author is that the Capital Ideas are not vulnerable to empirical challenge. Behavioral Finance has pointed out many situations in which the axioms of neoclassical theory do not apply, but as Andrew Lo notes, these findings are only "a collection of anomalies, not a real theory. You need a theory to beat a theory". The same applies to statistical tests, which have repeatedly failed to confirm the validity of theoretical models. For Fisher Black, another Nobel prize laureate, you should put your trust only in logic and theory, and forget about statistical empirical results.
But aren't the financial models designed by theorists repeatedly proven wrong by market crashes and financial crisis, at the cost of staggering financial loss and dire economic consequences? What worth is a theory that fails to foresee those crises, or worse seems to contribute to their occurence through unfettered innovation and mismanagement of risk? Bernstein responds that the creators of modern finance were not taken by surprise by difficulties in the implementation of their models. The academics knew as well as anyone that the real world was different from what they were defining, and that the models were an approximation to reality and a guide to strategy rather than a precise replication of the world. Perhaps, but the technicians of finance went way beyond their academic masters and really believed in their models, without the necessary dose of skepticism that only a familiarity with academic research can cultivate.
The third idea that I would like to comment upon is what social scientists call the performativity of economics: the idea that reality looks increasingly like the theory, that "powerful forces are constantly at work in the markets to bring the resemblance between theory and reality closer with the passage of time." The real world itself is on a path toward an increasing resemblance to the theoretical world described in Capital Ideas. Even research that focusses on the distance between theory and reality actually contribute to the convergence between the two. Behavioral Finance, Bernstein notes, is by nature self-disfulfilling, and it has become the driving force toward the Efficient Market Hypothesis that it so vigorously attacks. The CAPM may be outdated as a theoretical model, but its influence has never been so great, as it has been transformed into a powerful real-world tool for managing money and for calibrating investors' performance. Theory creates a world of our own making.
But here we should stop and ask ourselves whether we really want a world shaped by financial theory. A world that has gone quant is a world unintelligible to most mortals, a world without moral compass and where things regularly get out of control. Bernstein was right in pointing toward the world-making quality of financial theory; but he fails to consider the moral and political implications of this basic intuition.
Capital Ideas Evolving September 19, 2007
10 out of 13 found this review helpful
This was not an easy read, but it was worth it. I received my MBA in 1976. Much of this book was an explanation of the effects of the Capital Asset Pricing Model (CAPM) on current investment practices. He assumes that the reader is well versed with the intricacies of CAPM. I had to go back to other sources to review CAPM, but once I did, the book was a great explanation of how CAPM and other academic innovations have had a practical effect on portfolio management. When I finished the book, I had to admit that I was not able to apply much to my personal portfolio management, but I have a much better understanding of what my pension plan administrator is thinking about as well as what certain mutual funds managers are doing. The book is more beneficial for the professional investor than the individual investor.
 Ludicrous August 21, 2007
7 out of 16 found this review helpful
Maybe this is a great intro to classic theory, but then there is something wrong with classical thinking.
My one-star rating is for his "forgiveness" of the Long Term Capital Management gang, since no one could have predicted what actually happened.
LTCM managers (inducing Merton and Sholes, subjects of chapters) had excessive confidence in models based on theories that have not been even come close to being validated.
It is ironic that Amazon pairs this book with "The Black Swan" in their "Buy Two" promotion since Bernstein has clearly been "fooled by randomness".
 Accessible explanation of the foundations of finance August 2, 2007
10 out of 13 found this review helpful
In the early 1950s, graduate student Harry Markowitz presented his Ph.D. dissertation to the University of Chicago economics department. The response was less than encouraging. "This isn't a dissertation in economics," Milton Friedman told Markowitz. "It's not math, it's not economics, it's not even business administration." Whatever it was, Markowitz's heterodox theory of portfolio selection changed finance forever and earned a Nobel Prize. Financial historian and investment manager Peter L. Bernstein humanizes his saga of great shifts in financial theory by organizing it around eminent thinkers (Markowitz, Myron Scholes, Franco Modigliani, Robert Merton, Bill Sharpe and others, if you ever want to look up a finance guru). Deepening his analysis with insights from "behavioral finance," Bernstein describes how these innovators generated and extended the now-orthodox "capital ideas" of portfolio selection, capital structure, the Capital Asset Pricing Model, the efficient market hypothesis and the Black-Scholes-Merton theory of option pricing. Bernstein's erudition is dazzling, his explanations pellucid and his narrative filled with scintillating characters. getAbstract doesn't need to hedge: you'll find this overview of current finance theory and practice brilliant, even if you don't know your alpha from alfalfa.
Unique and sunsurpassed. July 28, 2007
2 out of 6 found this review helpful
I have recommended this and his previous book for finance graduate students at the University of Maryland.
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