Capital Ideas Evolving
by Peter L. Bernstein
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Book Summary Information
Author: Peter L. BernsteinEdition: Paperback
Audio: English (Unknown); English (Original Language); English (Published)
Published: 2009-05-04
ISBN: 0470452498
Number of pages: 312
Publisher: Wiley
Book Reviews of Capital Ideas Evolving
Book Review: Comment on comment: mean-variance optimization is not the problem.
Summary: 5 Stars
The book is great, very well written and is an enlightening discussion about the evolution of modern finance. I usually recommend the book to my students, so they can put all what I am teaching in a historical perspective, as well as grasp the core intuition on the subjects. The book is perfect for that.
But what motivated my comment was another comment by Michael Emmett Brady. I think it is important to point out the mean-variance problem, but I beg to fundamentally differ from Mr. Brady. Mean-variance IS NOT, AT ALL, a foundation of neoclassical finance. Rationality is. Markowitz himself recognized that he was doing a simplification, because the math gets messy in a more general case (i.e. when you take into account higher moments as asymmetry and kurtosis). There is a well established body of literature, and neoclassical literature, that discusses modern portfolio theory when the distributions of asset returns are not jointly elliptical (they do not need to be multivariate normal for mean-variance to hold, they need to be jointly elliptical). The problem is that this literature has not made into most colleges' benches yet. As an example, you may refer to "Multi-moment Asset Allocation and Pricing Models (The Wiley Finance Series)", by Emmanuel Jurczenko (Editor), Bertrand Maillet (Editor), Mark Rubinstein (Foreword). In the first chapters it is possible to see how complicated things get by considering higher moments. But the Capital Ideas (as Bernstein like to call neoclassical finance) are all there.
Bernstein went to the core of the question when he chose to discuss rationality, bounded rationality and behavioral finance. Higher moments portfolio optimization may be well embedded in neoclassical finance, and the inclusion of the discussion about mean-variance approach limitations is a fair suggestion in its own right, but it does not diminishes the value of Bernstein's discussion in any way.
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