Adaptive markets: It’s efficiency and failures

Andrew Lo, a professor at MIT, in his latest book, gives graphic evolutionary explanation of markets and investor behaviour. Half of Americans throw their dice in the stock market, yet economists can’t agree on if investors and markets are rational and efficient, as modern theory assumes , irrational and inefficient and as financial bubbles, crashes and crises suggest.

The value of futility of investment management and financial regulation, are debated in this ground breaking book which everyone must read. Drawing psychology, evolutionary biology, neuroscience, artificial intelligence and other fields are dealt adequately by Adaptive Markets.

Economist who have been obsessed with constructing precise mathematical models instead of studying the real, messy world, are proved time and again wrong, as they have been looking at the wrong science,instead of focusing on biology. This ideas comes from “behavioural economics,” which basically observes that humans let emotions and urges get in the way of rational calculation. So the markets are not always efficient – accurately pricing all the available information.

 When markets are unstable, investors react instinctively, creating inefficiencies for others to exploit.

 Adaptive Markets also reveals an insight into the origins of market efficiency and its failures, and investigates into the foundations of investor behaviour and concludes with practical implications. He also throws light into the hedge funds which have become the Galapagos Islands of finance, what really happened in the 2008 meltdown, and how we might be able deal and avoid future crises.

 Adaptive Markets: Financial Evolution at the Speed of Thought by Andrew Lo, Princeton University Press £27.95, 535 pages.

• ISBN: 9780691135144