Book review: Theories matter in finance, here's how

Even the academics knew the real world was different from what they were defining. However, they were on the quest of unearthing the workings of the market, the interactions of investors and the role of risk in the investment process.

Peter Bernstein's Capital Ideas Evolving illustrates how financial theories now mold the structure of market behavior and portfolio management and inspire novel insights into risk, valuation, investment returns and return trade-off.

This book picks up where the first book, Capital Ideas: The Improbable Origins of Modern Wall Street left off. That book concentrated on theories while Capital Ideas Evolving shows how these theories have become fundamental structure in the investment business.

Based on interviews with academics and practitioners who have taken part in the development and use of finance theories, it tells the success story of the group of investors who have developed their strategies based on these principles. As it makes frequent reference to its predecessor, it would be useful to have the first Capital Ideas on hand.

Critics have argued that these theories were simplifying assumptions and subject to psychological biases. The opening of the book sees Bernstein confronting these attacks while following chapters showcase well-known academics, including four Nobel Prize winners, who are involved in developing practical applications for their core ideas of finance theory.

The last section looks into the astounding successes of some institutional investors who have also developed strategies based on capital ideas.

Bernstein's propensity to simplify complex investment theory makes this book accessible to any interested layman.

Author: Peter L. Bernstein

Publisher: John Wiley & Sons (Asia) Pte Ltd

ISBN: 978-0-471-73173-3

Hardcover, 504 pages

Wiley list price: $29.95

(China Daily 10/12/2007 page15)