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Book cover: "The Myth of the Rational Market" by Justin Fox - 


Bill Radke: Tonight, the PBS science program NOVA explores how human psychology affects financial markets. One of the people who's in the show is Justin Fox, author of the book "The Myth of the Rational Market." He joins us live now from Boston. Good morning, Justin.

Justin Fox: Good morning.

Radke: So first, is the premise of your book that individual people are irrational, or that collectively we're irrational?

Fox: The book is really more about our collective irrationality, because I think there were arguments for years that obviously lots of individuals behave irrationally, but there was this theory that you bring 'em all together and you throw in a bunch of smart hedge fund managers, and markets come up with pretty, financial markets come up with pretty rational results. And my book is saying no, actually they don't.

Radke: Yes, yes, so then I mentioned Congress is considering financial regulation right now. If markets are irrational, where does that mean you stand on this financial regulation debate?

Fox: Well yeah, on the one level that's clearly that's an argument for regulation, that markets overshoot, overdo it, have booms and busts. But if markets are irrational, government regulators presumably are, too. And so any sort of regulation is going to have flaws, and kind of the more judgement it gives tot he regulators, you'd think, the more problematic it would be.

Radke: Well so give us an example of regulation that's being considered in Congress now that you think is especially wise or flawed.

Fox: Well I just have a . . . I sort of favor the simpler regulation. So if you just say, OK, these all over-the-counter derivatives have to move on to the exchanges, or we need restrictions on how much leverage, how much banks can borrow, those seem simpler. Whereas expecting this systemic risk council of regulators to do a really great job of sussing out the next financial crisis, I don't really think that's going to work so well.

Radke: Just so we have about 30 seconds -- you seem to be part of this wave of behavioral economics and cognitive psychology; we've learned so much about rationality, but really have we learned anything that's helpful?

Fox: And I think that we've learned a lot that's helpful, I don't think it's going to stop us from making the same or slightly different mistakes in the future. We do, ever since we've had financial markets, they've gone in this wave of euphoria and pessimism. And I don't think, I mean we've been able to sort of stall those for periods of time, and people have gotten to think, oh we're really smart about monetary policy or regulation or whatever else. But I do think we are fated to go through these kind of things every couple of decades.

Radke: Justin Fox, author of, "The Myth of the Rational Market," is part of tonight's NOVA on PBS, the episode called "Mind over Money." Thank you, Justin.

Fox: Thank you.