Tuesday, October 30, 2012

Missing Risk Premium Book Reviews

My book has 8 reviews over on Amazon, including the prolific Aaron Brown and David Merkel.  There's also some guy named Gregory Fodor who gave it 5 stars, the same score he gave to Ilmanen's Expected Returns, and a book on UFOs (I do find Ancient Alien Astronauts very fun).

I've noticed several others across the web. Here are some snippets.

Kirkus reviews:
The author’s conclusion is likely to be controversial in some circles, if not downright inflammatory
 John E. Parsons:
Questioning the theory is a tough challenge, though. As already mentioned, the risk premium is a central premise, and modern finance theory is a ramified structure. If we remove that premise, there is a lot of work to be done to recreate the structure around an alternative. I was surprised to find that Falkenstein understands the burden his questioning entails, and this book is a partial attempt to flesh out an alternative. Falkenstein is a serious fellow, and he has engaged the problem persistently over many years, so it is interesting to listen to his suggestions.

In this book, he provides a lucid history of the academic thinking on risk and return over more than a half century, a careful exposition of what the data say and don’t say, and a thoughtful discussion of competing theoretical frameworks. He writes with the refreshing voice of an outsider, and looks upon academia with a gimlet eye. But he also writes with the qualifications of an insider, completely familiar with the most sophisticated economic theories and statistical tools. He assumes the burden of making his critique and ideas resonant to an open minded intellectual familiar with modern economics. Make no mistake, this is a wonkish book that places serious demands on its readers.
Eddy Elfbein:
One of the most eye-raising aspects of the book is where Falkenstein discusses the many small losses that individual investors suffer between the stock gains they see reported on CNBC, and the returns they get. Investors are constantly dinged by things like bad timing, transactional costs, bid-ask spreads and taxes. Once you throw in variables like survivorship bias, Falkenstein says that the historical databases we have return bare little resemblance to what made its way towards investors’ pockets. This topic alone could serve as a useful book.
The book is mostly technical, but without unnecessary math, and is focused on the main thesis - there is no "investment edge" in simply taking the risk. I would recommend every investor keep this in mind.
Value and Opportunity:
+ the book is a good summary of all the current available studies which contradict the CAPM
+ he makes a good case for investing in low volatility assets, although I didn’t fully understand his theory
- what he misses in my opinion is the fact, that all this is common knowledge among value investors.


Eli said...

Here's another one for your collection:


The reviewer is a PhD in Mathematics.

Mercury said...

Alright, uptick! I just ordered myself a copy even though I'm still waiting for my library to find a copy of the first one for me.

Anonymous said...

Great Book! Very educational. I wonder if you had any thoughts or comments on this supposed "controversy" regarding utility functions in modern finance: http://rick.bookstaber.com/2012/10/a-crack-in-foundation-of-economics-more.html

Dominique said...

Bought the book a few weeks ago. Now reading chapter 4 and it's getting better and better.

Like it so far although I find it not to be an easy read.

I have a master in finance and I can tell you my professors were not critical of the CAPM back in 1999-2000. I would have liked to have this book back then.

Eric Falkenstein said...

Hey, my first female reader!

If you find it confusing you might want to skip chapter 5 on theory except the intro part.