By Review by Sarah L. M. Christiansen
This book is a simply written explanation of where finance professionals, financial planners, (and actuaries) are led to incorrect conclusions. The author, a consulting actuary, bases his examples and explanations on real U.S. equity data from IBBOTSON with data from 1926 through 2007.
He has also published three professional papers on the concepts that form the basis of this book.
The material covered in the book is presented from the point of view of a young couple interested in investing. The myths that he “busts” basically are ones used as underlying assumptions in finance. The implications of the information that he presents in a simplified manner range from under-estimating the assets required for retirement, to problems with the Black Scholes assumptions (and results) which could pose problems for insurance companies.
Many investors will take issue with his comparing investment with gambling (or horse racing) as they (and he) realize that company fundamentals and markets drive the stock price. His use of “rotating bins” as representing investment results—actually is a way of busting the myth that equity returns are determined by random selection from independent identically distributed events. He points to the use of the log normal as a model for stock prices as one of the six myths.
This book would make a good text for a course for non-math majors (excluding the appendices) or a supplement for independent study for more advanced students (including the appendices).
Sarah L. M. Christiansen, FSA, MAAA, is president of SMC Actuarial Consultants Inc.