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Zvi Bodie, Robert C. Merton (Preface)

posted on 05 September 2001

reviewed by Joe McCauley

First: this book is certainly not worth [the price] ...I read the 1998
softcover 'preliminary edition' by Bodie and Merton, which I ordered and received from in fall, 1999. Samuelson's name was not on the cover and at any rate should
not cause the price of the book to increase... The current price makes the book
unattractive. Now for my review of the softcover version:

This is a relatively well-written undergraduate-level text that can be read/understood
without the need for classroom instruction. It is especially useful for self-study by ordinary
people who know nothing at all about finance theory but are motivated to learn. The reader
will find all of the main topics covered: cash flows, efficient market hypothesis, capital
asset pricing model (CAPM), risk management, hedging, and options pricing at
Black-Scholes (B-S) level of discussion. In the spirit of the simple level of the text, the
B-S equation is applied but not derived (best derivation is still the second one, and the
Black's original method starting from the CAPM, in the famous 1973 Black-Scholes
paper). 'Fat tails' (known and largely ignored since Mandelbrot, 1962) and
non-risk-neutral hedges, the frontiers of modern finance theory, are not discussed.
Throwing the traditional 'financial-engineering' bone in the direction of fat tails, implied
volatility is discussed because in practice fat tails can't any longer be ignored. All in all, the
book is recommendable to physics grad. students who want to learn finance terminology
along with the main (wrong) ideas believed by the finance theory community. As an
example of the book's weaknesses, the authors assume that the vague, undefined notion
of 'fundamental value' makes sense, and that liquid markets are in some vague, undefined
sense 'efficient' although the notion of a relaxation time is never mentioned. Typical finance
theorists' shortcomings aside, this book can profitably be read before (or at least parallel
with) Hull and other harder texts on derivatives. Liars' Poker and Fiasco can also be read
profitably in parallel with this book. No knowledge of neo-classical ('marginal utility') econ
(as is excesively taught in Samuelson's standard text) is required, and is at any rate is
useless for finance theory/practice.

Book Description

With Bodie/Merton FINANCE, the introductory course becomes the gateway to
understanding finance as a scientific discipline based on a set of general principles with a
wide range of application. As symbolized by its cover, the text organizes the principles of
finance into three analytical "pillars" - optimization over time, asset valuation, and risk
management. At the core of each of these pillars are a few basic "laws" and principles that
apply across all financial decision-making--from personal decisions about saving,
investing, borrowing, and insuring to business decisions about capital budgeting and
financing. Moreover, FINANCE adopts a functional orientation to the financial system that
permits a truly global perspective from the outset.

The principles approach taken by FINANCE contributes to the efficiency of the teaching of
finance, both within the introductory course and across the entire program of finance
courses offered by a department. It is also more fun to teach than a traditional corporate
course because students can relate to more of the topics from their direct needs and
because it is easier to relate what they are learning to what they see in the press and
elsewhere everyday. At the heart of the efficiency gain is the structure based on principles
and the three conceptual pillars of finance that allow a single conceptual development and
then its multiple applications to a wide range of otherwise seemingly different financial
problems, in corporate finance, in investments, and in personal finance, and in
understanding the roles of financial institutions and markets. Similarly, the functional
perspective allows an "economy" of knowledge retention for understanding the structure
of the financial system that would otherwise require a much more time-consuming
description and memorizing of the various institutions used in different times and places to
perform these functions. By covering all of this, along with common-to-all-finance
analytical principles derived from the conceptual three pillars, in the first course, costly and
frustrating-to-the-student repetition of that common material can be eliminated across all
subsequent finance courses.
This text refers to the Hardcover edition.

ISBN: 0130151025

Title: Finance

Author: Frank Partnoy

Published: January 15, 2000

Amazon: $87.07