Inertia - by Yuval Millo & Crawford Spence & James J Valentine

About the Book

"Our understanding of financial markets is shaped overwhelmingly by economics, which tends to view financial market activity from both a numerical and abstract vantage point. Activity on 'the Street', in 'the City' or simply by 'the Market' is understood by reference to the performance of the Dow Jones on any given day or the FTSE 100 over a certain period of time. This dominant conception of financial markets as rational and dynamic is supported by the Efficient Markets Hypothesis (EMH) which suggests that asset prices generally reflect all available information. One consequence of this widely held belief in how markets operate is that it is impossible to 'beat the market' on a consistent basis. However, although flooded by evidence of investor underperformance, we are still left with the puzzle of why there are still so many fund managers operating in financial markets today who are hired for the purpose of 'beating the market', 'outperformance' and 'alpha generation'. In Inertia and Stasis in Financial Markets, Crawford Spence, Yuval Millo, and James Valentine argue that mainstream economics cannot explain why so many finance professionals persist in markets while offering negative returns to clients relative to a passive investment strategy. Economic sociology and behavioral economics can answer this question, however. Social groups, they argue, routinely persist and reproduce through habit, routine, and path dependency. Though there is an assumption on economics of rational, self-directed action, there is no reason to presume that financial markets are immune to social tendencies evident in other domains of life. Spence et al develop and describe the notions of inertia and stasis as key, insufficiently acknowledged features of financial markets. While financial intermediaries espouse dynamism and continuous innovation, they argue that analysis of the behavior of professional in the financial sector reveals behavior that tend towards reproduction and conservatism"-- Provided by publisher.

Book Synopsis

Financial professionals are paid as if they were capable of "beating the market" on a regular basis. In fact, active fund managers routinely underperform low-cost index funds, and financial analysts frequently produce inaccurate stock recommendations--and many receive large fees even when their clients are losing money. Why do financial intermediaries still persist in the investing world despite this track record? Economic theory, obsessed with notions of market efficiency, has no good answer.

This book demonstrates how long-standing social relationships within the investing world contribute to a state of inertia, which prevents substantive change to the status quo. In financial markets--as in many other settings--social groups persist through habit, routine, and path dependency. Financial intermediaries, for their part, use their positions to maintain and reproduce a state of affairs from which they benefit. Although financial professionals portray their world as one of dynamism and continuous innovation, in reality a strategic and purposeful inertia often prevails. An incisive sociological analysis of the communities that constitute financial markets, Inertia offers new insight into the social structures and dynamics that shape economic action.

Review Quotes

A fascinating and often bitingly funny showcase of the cognitive dissonance constantly grappled with by a diminishing class of financial professionals and a study of the odd, social side of finance.-- "Jacobin"

What's so interesting about Inertia is that it focuses not on organisational or behavioural factors, as previous research has done, but on sociological ones. Rather than viewing financial markets as static or purely rational, the book underscores their social construction.-- "The Evidence Based Investor"

This lively, provocative, well-informed book injects a badly needed dose of sociological realism into the analysis of investment management, highlighting the role of habit, routine, personal relationships, and the defense of vested interests.--Donald MacKenzie, coauthor of Chains of Finance: How Investment Management Is Shaped

In this groundbreaking book, Yuval Millo, Crawford Spence, and James J. Valentine challenge the prevailing perception of the financial industry as a bastion of innovation and dynamism. Through an in-depth examination of analysts and fund managers, they reveal a complex web of social networks, entrenched customs, and ingrained habits that foster stability, routine, and resistance to change.--Daniel Beunza, author of Taking the Floor: Models, Morals, and Management in a Wall Street Trading Room

This important book on the little-understood world of financial intermediaries is a much-needed corrective to economically rational explanations of the market. It makes clear the value of exploring how markets actually function, rather than how desiccated economic theory posits they should work.--Chris Carter, University of Edinburgh Business School

This important, provocative, and powerfully written book turns many taken-for-granted wisdoms about financial intermediaries on their head. In an enthralling and accessible manner, it sheds new light on the social structures underpinning inefficiencies in financial markets. Inertia is a must-read for everyone interested in how and why these come about and persist.--Andrea Mennicken, coeditor of The New Politics of Numbers: Utopia, Evidence and Democracy

The academic evidence that most investors should use passive funds is overwhelming. So why do so many financial professionals still recommend active funds? This fascinating book reveals some intriguing explanations, and everyone who cares about investor outcomes should read it.--Robin Powell, editor of The Evidence-Based Investor

About the Author

Yuval Millo is professor of accounting at Warwick Business School, University of Warwick.

Crawford Spence is professor of accounting and codirector of the FinWork Futures Research Centre at King's College London.

James J. Valentine is the founder of AnalystSolutions and previously served as director of the Applied Investment Management program at Marquette University.