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Capital Ideas: Option Replication, Investor Behavior, and Stock Market Crashes

Bruce I. Jacobs, Harry M. Markowitz
Blackwell Publ. (6/99)

posted on 15 May 2000

reviewed by Joe McCauley

After reading (and largely enjoying) Bernstein?s Capital Ideas, a cheerleading book for lognormal finance theory with all the known names(plus a few more) presented as heroes, I had high expectations for the criticism of that limited viewpoint promised by Jacobs? preface. His argument is right: portfolio insurance was a bad idea, maybe not for an academic paper, but within the market place. It failed the experiment. However, that seems the sole message of the book, repeated far too often, as far as I read. I didn?t finish the book because the chapters were too repetitive and were written as if they?ed been cut and pasted from different badly written review-like articles. Worse, even thought the book is post-LTCM, published after 10/98, most of the book is taken by with attacking the dead dog of LOR?s old idea (pre-1987) of portfolio insurance, while the far more fascinating and more recent case of LTCM and the near collapse of the global finance system is given short-schrift. If other readers respond differerenly to this book I wouldn?t mind hearing why. Among the errors: Mandelbroit is the father of chaos theory.

PAPER: PostScript only.