Capital Ideas and Market Realities

Bruce Jacobs sifts through the history of modern finance, from the efficient market hypothesis to behavioral psychology and chaos theory, to determine the cause of recent market crashes. Includes a Foreword from Nobel Laureate Harry M. Markowitz. Showcases the expertise of an author who identified and predicted the causes of 1987, 1997 and 1998 crashes. Explains the risks of little-understood option replication. Offers chapter summaries, appendices and a glossary.

"Wall Street's equivalent of the movie Nightmare on Elm Street - Part 10. Portfolio insurance / dynamic hedging, the Freddy Krueger of the 1987 stock market crash, is back again with the recent growth of options and swaps. Jacobs builds the case for how portfolio insurance and dynamic hedging exacerbated the 1987 crash and points out that dynamic hedging has played a similar role in recent periods of market volatility." Robert Glauber, Executive Director, Brady Commission and former Under Secretary of the Treasury "Bruce Jacobs, an investment manager who predicted before the 1987 crash that portfolio insurance would trigger chain-reaction selling, recently forecast that option-strategies ('the sons of portfolio insurance') would play a similar, though more muted, role in a future debacle. Monday [October 27, 1997] provided damning evidence." The Wall Street Journal "Every fiduciary should read this book. Investors have too often been taken in by promotions appealing to their basic human instincts of fear and greed. Bruce Jacobs shows how supposedly low-risk, seemingly infallible, investment strategies can backfire. His views on portfolio insurance helped steer our profit-sharing fund away from that craze in 1987. Today, especially in light of the long-term Capital Management fiasco, investors should know what Bruce has to say about derivatives trading strategies and market crashes." John E. Stettler, Vice President - Benefit Investments, Georgia-Pacific Corporation "Bruce Jacobs demonstrates effectively that trend-following strategies like portfolio insurance are fair-weather techniques that may add to, rather than minimize, troubles when a major crash occurs." Charles P. Kindleberger, author of Manias, Panics, and Crashes: A History of Financial Crisis "Bruce Jacobs has created an instant classic. Capital Ideas and Market Realities demonstrates how products that appeal to investors' fears of short-term losses often ignore prudence and long-term value. This book is a must read for every investor." The Journal of Investing

Bruce I. Jacobs is co-founder, co-chief investment officer, and co-director of research at Jacobs Levy Equity Management. He holds a Ph.D. in finance from the Wharton School of the University of Pennsylvania. For 35 years, he has been a major voice for financial transparency. Jacobs has written journal articles and books on equity management and financial crises, including Too Smart for Our Own Good: Ingenious Investment Strategies, Illusions of Safety, and Market Crashes (2018). He has spoken at prestigious forums, including those held by University of California, Berkeley, the Wharton School, Institute for Quantitative Research in Finance, CFA Institute, Society of Quantitative Analysts, and New York Society of Security Analysts.