This is an
important book. The author is a professor of sociology who focuses on the
sociology of economics. He set out to make this a sociological look at financial
markets and the interplay between financial theory and practice. What he ended
up with is more a detailed history of financial theory and its implementation
during the 20th century. He interviewed most living academics who collectively
launched portfolio theory, efficient markets theory or options pricing. He also
sat down with practitioners, both notable and less known.
The book focuses
on the theoretical developments of 1950-1975, so its history parallels Bernstein
(1992), but it represents
independent research and interviews. MacKenzie does more than offer a different
perspective. He details facts, events and relationships Bernstein missed. MacKenzie also focuses on a few other events, notably the emergence of financial
futures in the 1970s, the 1987 stock market crash, and the failure of LTCM.
Future historians of finance will have to read this
book side-by-side with Bernstein. And that is what makes it important.
From a sociological standpoint, I don't think the
book contributes much beyond its raw historical content. But I am not a
sociologist, so discount the following criticisms as appropriate.
The sociological conclusions the author draws about
finance are the sorts of things practitioners would respond to with "yeah, yeah
... whatever ..." They are not deep and are sufficiently provincial as to be
misleading. The primary thesis is that finance theories that emerged during the
20th century did more than describe financial practice; they shaped it as well.
I would say this is pretty obvious. Physics shapes engineering. Chemistry
shapes pharmaceutical research. Financial theory shapes trading and investments.
Many times reading the book, I came to a section
where the author was to express an opinion or draw some conclusion. I would hold
my breath, thinking, I hope he doesn't stick his foot in his mouth. With few
exceptions, he didn't. No doubt benefiting from his extensive interviews, he
generally made appropriate or even insightful observations, but he is still an
outsider. On a details level, he is excellent. On a strategic level, he is
technically mostly correct but largely uninteresting.
Contents
1. Performing theory?
2. Transforming finance
3. Theory and
practice
4. Tests, anomalies, and
monsters
5. Pricing options
6. Pits, bodies, and theorems
7. The
fall
8. Arbitrage
9. Models and markets
A. An example
of Modigliani and Miller's "Arbitrage proof" of the irrelevance
structure to total market value
B.
Levy Distributions
C. Sprenkle's
and Kassouf's equations for warrant prices
D. The Black-Scholes equation for a European option on a
non-dividend-bearing stock
E.
Pricing options in a binomial world
F. Repo, haircuts, and reverse repo
G. A typical swap-spread arbitrage trade
If you want to understand the sociology of
politics, you have to go beyond studying Bill Clinton, George W. Bush and Arnold
Schwarzenegger. If you want to understand the sociology of finance, you have to
go beyond studying Markowitz, Merton and Meriwether. Finance is more than this,
much more.
Take the LTCM meltdown as an example. It was a
unique event that has little to do with the day-to-day sociology of market
practice. Also, it is hopelessly difficult to study. LTCM employees received
large exit bonuses for guaranteeing not to talk. The principals are happy to
talk, but they have massive reputations to repair, which isn't conducive to
candor.
In the author's defense, I doubt subjects of
sociological analyses are ever satisfied with the results. We will always
understand our milieu better than the sociologists, but that is not the point.
The purpose of sociology is to help outsiders understand, and their
understanding will necessarily be less than or own.
Overall, this is an important history that breaks
new ground. I highly recommend it! Whether or not it is good sociology is
something I should leave to sociologists to decide. [December 3, 2007]
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