Adaptive Markets (financial Evolution At The Speed Of Thought)

By (author) Lo, Andrew W.; By (author) Lo Andrew W.
Description
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 Galapagos 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.
Table of contents
Introduction 1 Financial Fear Factor 1 Don''t Try This At Home 4 The Great Divide 6 "It''s the environment, stupid!" 8 Revenge of the Nerds 10 1 Are We All Homo economicus Now? 12 Tragedy and the Wisdom of Crowds 12 A Random Walk through History 16 The Birth of Efficient Markets 20 Efficient Markets Unpacked 25 What to Expect When You''re Expecting 28 Efficient Markets in Action 38 2 If You''re So Smart, Why Aren''t You Rich? 45 Rejecting the Random Walk 45 Risk versus Uncertainty and the Ellsberg Paradox 51 Losing Hurts More than Winning Feels Good 56 No-Limit Texas Hold ''em, Rogue Traders, and Regulators 59 Probability Matching and March Madness 62 Humans as Prediction Machines 65 It Takes a Theory to Beat a Theory 69 Culture Shock 71 3 If You''re So Rich, Why Aren''t You Smart? 75 Looking under the Hood 75 The Microscope of Neuroscience 76 Fear 78 Pain 85 Pleasure and Greed 87 Wired-Up Traders 92 The Stuff Good Traders Are Made Of 94 Mind over Money via Neural Currency 96 I Want It All, and I Want It Now 98 4 The Power of Narrative 102 A New Meaning of Rationality 102 The Human Fire Alarm and Sprinkler System 104 The Fear Factor and Finance 106 I Know You Know That I Know 108 Homo economicus and the Left Hemisphere 113 The Prefrontal Cortex as CEO 117 The Power of Self-Fulfilling Prophecies 123 Barbara Ficalora, the Best Third Grade Teacher Ever 124 Narrative Is Intelligence 128 5 The Evolution Revolution 135 A Day at the Zoo 135 The Evolution Revolution 136 Just-So Stories or Scientific Fact? 138 The Power of Selection 141 Variety Is the Spice of Life 144 "It''s the environment, stupid!" 146 The Emergence of Homo sapiens 150 Enter Homo economicus 152 An Evolutionary Pecking Order 156 Swedish Twins and Savings 158 Evolution at the Speed of Thought 162 Sociobiology and Evolutionary Psychology 168 Survival of the Richest? 175 6 The Adaptive Markets Hypothesis 176 It Takes a Theory to Beat a Theory 176 Simon Says Satisfice 177 The Superman Jacket 182 The Adaptive Markets Hypothesis 185 Probability Matching Explained 189 Nature Abhors an Undiversified Be