Revisiting the ‘Capital Ideas’ That Took Wall Street By Storm

Discussing the building blocks of modern finance.

Barry Ritholtz

08 Jul 2019, 08:54 AM IST

Revisiting the ‘Capital Ideas’ That Took Wall Street By Storm

Pedestrian walk along Wall Street across from the New York Stock Exchange (NYSE) in New York, U.S. (Photographer: Michael Nagle/Bloomberg)

(Bloomberg Opinion) -- Does world finance rest on faulty foundations? Models developed in academia in the 1950s and 1960s have come to dominate the way that bankers and investors do their work, and many blame them for the crash of 2008. But were the models really to blame?

In this Masters in Business interview, Bloomberg’s John Authers and Christine Harper discuss the classic book that introduced the academic ideas that took Wall Street by storm: “Capital Ideas” by the late Peter Bernstein. It was the first selection in Bloomberg’s new experimental book club, Authers’ Notes, and it produced a torrent of feedback from readers who spent a month reading along with us.

You can find a piece collating some of the main contributions here, while a transcript of an online discussion involving Christine, John, and Jason Zweig of the Wall Street Journal, a great investment columnist who was a friend of Bernstein’s, can be found on the terminal here. All the building blocks of modern finance, from the Efficient Markets Hypothesis through Modern Portfolio Theory to the Black-Scholes Theorem for pricing options were up for discussion.

By far the most contentious issue in the models Bernstein covered turned out to be their treatment of risk. The models assume that risk can be summed up as volatility. Many now think that this was a dangerous over-simplification; but it is still terribly difficult to come up with anything better. More books will follow each month as Bloomberg continues its experiment: All thoughts are welcome.

You can stream/download the full conversation, including the podcast extras on Apple iTunes, Bloomberg, Overcast and Stitcher. All of our earlier podcasts on your favorite host sites can be found here.

Next week we speak with Scott Kupor, managing partner of Andreessen Horowitz.

To contact the editor responsible for this story: Mike Nizza at mnizza3@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Barry Ritholtz is a Bloomberg Opinion columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He is the author of “Bailout Nation.”