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.
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