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The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

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Chapter 8: Fischer Black Chooses to Focus on the Probable

Finance scholars figure out some ways to measure and control risk. More important, they figure out how to get paid for doing so.

In London in 1952, statistics professor Maurice Kendall saw the “graceful head” of the bell curve rising up “amid the uproar of the Chicago wheat pit.” A few years after that, economist Paul Samuelson and physicist M. F. M. Osborne separately proposed that stock price changes followed a wandering, unpredictable path that nonetheless fit under the bell curve of the normal distribution. That is, you’d have lots and lots of small price changes—constituting the middle of the bell—a few slightly larger ones, and no huge ones. This was the random walk, with the ...

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