Bernstein starts by strongly defending all those who crafted the efficient market hypothesis (EMH), capital asset pricing model (CAPM) and modern portfolio theory (MPT), which have fetched several Nobel prizes for Markowitz, Scholes and others but which have been ridiculed by many successful practitioners as ivory tower finance. These theories were found to be too neat in the hurly-burly of the markets, based as they are on the assumption that all market players are rational and all prices incorporate all available information. Then came behavioural finance, pioneered by Daniel Kahneman, Amos Tversky, Richard Thaler and others, which underlined the crucial role of the individual investor’s psychology and the collective behaviour of the crowd which goes mad in bull markets, thereby significantly influencing investment outcome. This exposed the shortcomings of MPT, EMH and CAPM. They were branded as peddling ‘ivory tower finance’.

Since then, the two camps have been at loggerheads. Bernstein adds new light to the whole issue by narrating how the insights developed by the academics in the ‘ivory tower finance’ mould have been taken forward in the real world by Barclays Global Investors and Goldman Sachs Asset Management to develop winning strategies. This book is not as gripping as the earlier one. It is dry (the subject is) and the characters Bernstein describes are not colourful. But it is probably the only book so far which documents the recent history of applied financial innovation drawing from modern financial theory. It is a must for all serious students of finance, who must know that the whole topic is still evolving, as the title suggests. – D.B