I really enjoyed the latest Talks at Google, featuring Andrew Lo. His presentation gives some great examples, and warnings, to investors:
He mentions his new book, Adaptive Markets: Financial Evolution at the Speed of Thought
What are Adaptive Markets?
Andrew Lo is a finance professor at MIT. I first heard of him when I watched his class on iTunes U which would have been great on its own since Lo is an amazing teacher and lecturer. But it is even more fascinating as it is happening in the middle of the 2008 financial crisis. Lo’s insight during the crisis is amazing, I wish I was watching him instead of CNBC at the time! The financial crisis lead Lo down a path to develop the theory of “adaptive markets” instead of the commonly accepted “efficient markets”. In the talk, Lo talks about trying to bridge the gap between the efficient market theory and the behavioral finance theories being created now.
His talk and book give investors a new framework or mental model to view the markets through, which I think will be incredibly valuable.
His talk at google gives examples on how technology has changed everything from fish markets in India, our shopping experience on Amazon and trading on Wall Street. His chart of historical performance of various assets is a lesson for every investor.
I don’t order many new books, but Lo’s is one I’ll make an exception for. Review coming as soon as I can finish it!
Here’s the teaser for his new book:
“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.”
