Since investors have broadly accepted the theory that financial markets are efficient, that is investors are making optimal decisions based on all the information available, Wall Street has been anxious to hire financial engineers (“rocket scientists”) to manage equity portfolios. In the Sunday August 9, 2009 New York Times Book Review section, Paul Krugman states in his review of Justin Fox’s The Myth of the Rational Market that “the myth of the rational market -- a myth that is beautiful, comforting and above all lucrative--isn’t going away anytime soon.”
While the nation’s largest banks continue to argue that to hire the most talented executives and analysts they have to provide billions in bonuses, studies show little correlation between the compensation of analysts and performance on Wall Street. Meanwhile, USA Today reports that Goldman Sachs, JP Morgan Chase and Morgan Stanley have set aside $35 billion in the first six months of this year for compensation, expenses and benefits. If Fox’s writing can help us understand the runaway compensation system on Wall Street, then it would, indeed, be a worthwhile read.