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Title: Capital Ideas and Market Realities: Option Replication, Investor Behavior, and Stock Market Crashes by Bruce I. Jacobs, Harry M. Markowitz ISBN: 0-631-21555-7 Publisher: Blackwell Publishers Pub. Date: 01 June, 1999 Format: Paperback Volumes: 1 List Price(USD): $40.95 |
Average Customer Rating: 2.8 (5 reviews)
Rating: 1
Summary: Misrepresentations
Comment: This book is primarily about the role of portfolio insurance in the market crash of 1987. Despite the Amazon listing, I don't believe that Harry Markowitz is a co-author. Unfortunately, unless a reader is already well informed about the crash, he will not realize that there are many factual misrepresentations, particularly those that have to do with Jacob's critique of the way portfolio insurance was marketed. I was an eyewitness at the time, so I know what actually happened. Jacobs also has a bad habit of using cited quotes or cited paraphasing, which gives the book an air of scholarly authority, that he then improperly interprets out of context. Jacobs clearly has some reason for his own vendeta and crusade against portfolio insurance that causes him to seriously overstate the case against it and even to attempt to unfairly damage the reputations of those involved.
Rating: 5
Summary: A Fascinating Work about Today's Financial Alchemy
Comment: he book provides an extremely enlightening treatment of arcane financial strategies that have derived from Nobel Laureate winning option pricing theory. It is a well-written description of how very smart people are able to "outwit" other supposed very smart people by promising something for nothing. There will always be those who will dream up complicated strategies that purport to promise high return for low risk and thus demand a premium for providing their strategy. The book reminded me of Albert Einstein's work for the Swiss Patent Office at the turn of the century. He would daily receive applications for new and different perpetual motion ideas. Sometimes the ideas were so complicated Einstein could not readily find their flaw. (Finally, he encouraged the patent office to pass a ruling stating that anyone wishing to patent something which broke the second law of thermodynamics had to submit an actual working unit.)
Portfolio insurance was the first large scale application of option pricing theory. Long-Term Capital Management, a highly leveraged hedge fund partnered by the Nobelists, was the second large scale application. Both promised free lunches. It is easy for the disciplined, long-term, individual investor to look at the 1987 crash and the LTCM debacle and conclude that it doesn't matter. The ones who were harmed the most were the purveyors of these supposed perpetual motion machines as well as the investors who "played with this fire". In fact, however, Jacobs' book is a wake-up call that these new financial strategies have become so far reaching, that they can have significant impact not only on the financial markets, but on the global economy as well. The missing element in the book is a way for regulators to rein in an industry that is out of control and return it to its basic purpose: moving money from people that have it (investors) to people that need it and educating the investor on the risk/reward tradeoffs. The industry subrole of shifting risk from people who cannot accept it (e.g. farmers) to those who can (speculators) is also valid, however, it has become so pervasive and sophisticated that it begs for a return to sanity. Absent that, Jacobs' book is an eye-opener, and a must read for anyone hoping to cope with today's complicated markets.
Rating: 2
Summary: Poorly written
Comment: This is a badly written, repetitive and self-serving account, largely, of the foolishness of "portflio insurance." That things which are "just like" something else may not be so in reality, and that magic fixes in the market (which after all fly in the face of the rational-expectations/efficient-market hypotheses which often are built into the view of the market being relied on) I guess needs to be pointed out regularly, since hope of quick, uninformed, and painless fixes seem to reoccur with each new wave of financial charlatans and the greed they feed on. Jacobs does point out such problems for a particular, rather bizarre episode, and suggests, not too coherently, that such "scams" are still prevalent. However, He does this in a horribly repetitive and self-laudatory way that is not really very clearly argued.
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Title: When Genius Failed: The Rise and Fall of Long-Term Capital Management by Roger Lowenstein ISBN: 0375758259 Publisher: Random House Trade Pub. Date: 09 October, 2001 List Price(USD): $14.95 |
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Title: Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life, First Edition by Nassim Taleb, Nassim Nicholas Taleb ISBN: 1587990717 Publisher: Thomson Texere Pub. Date: October, 2001 List Price(USD): $27.95 |
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Title: Origins of the Crash: The Great Bubble and Its Undoing by Roger Lowenstein ISBN: 1594200033 Publisher: The Penguin Press HC Pub. Date: 22 January, 2004 List Price(USD): $24.95 |
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Title: False Prophets: The Gurus Who Created Modern Management and Why Their Ideas Are Bad for Business Today by James Hoopes ISBN: 0738207985 Publisher: Perseus Publishing Pub. Date: 15 April, 2003 List Price(USD): $27.50 |
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Title: Inventing Money : The Story of Long-Term Capital Management and the Legends Behind It by Nicholas Dunbar ISBN: 0471899992 Publisher: John Wiley & Sons Pub. Date: 13 January, 2000 List Price(USD): $29.95 |
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