A new, evolutionary explanation of markets and investor behavior
Half of all Americans have money in the stock market, yet economists
can't agree on whether investors and markets are rational and efficient,
as modern financial theory assumes, or irrational and inefficient, as
behavioral economists believe--and as financial bubbles, crashes, and
crises suggest. This is one of the biggest debates in economics and the
value or futility of investment management and financial regulation hang
on the outcome. In this groundbreaking book, Andrew Lo cuts through this
debate with a new framework, the Adaptive Markets Hypothesis, in which
rationality and irrationality coexist.
Drawing on psychology, evolutionary biology, neuroscience, artificial
intelligence, and other fields, Adaptive Markets shows that the theory
of market efficiency isn't wrong but merely incomplete. When markets are
unstable, investors react instinctively, creating inefficiencies for
others to exploit. Lo's new paradigm explains how financial evolution
shapes behavior and markets at the speed of thought--a fact revealed by
swings between stability and crisis, profit and loss, and innovation and
regulation.
A fascinating intellectual journey filled with compelling stories,
Adaptive Markets starts with the origins of market efficiency and its
failures, turns to the foundations of investor behavior, and concludes
with practical implications--including how hedge funds have become the
Galápagos Islands of finance, what really happened in the 2008 meltdown,
and how we might avoid future crises.
An ambitious new answer to fundamental questions in economics, Adaptive
Markets is essential reading for anyone who wants to know how markets
really work.
