“Andrew Lo’s powerful new book brings together insights from many fields to advance our understanding of markets and investor behavior. In doing so, he provides one of the most compelling accompaniments to the theory of market efficiency.”
Featured in Bloomberg’s Best Books of 2017.
Everyone has at least dabbled in the stock market, and many invest their money on a regular basis. Despite this, the debate over the rationality and efficiency of the markets continues unabated. Modern financial theory believes that markets are efficient and rational but behavioral economists disagree and the series of crises, crashes and financial bubbles seem to bear them out. The outcome of the debate itself is crucial since it will help decide whether financial regulations and investment management are valuable or futile. Andrew Lo steps into the middle of this debate with Adaptive Markets Theory which proposes a brilliant and radical new notion: that irrationality and rationality can coexist.
He draws from diverse fields such as evolutionary biology, psychology, artificial intelligence and neuroscience among others to showcase the fact that market efficiency theory is incomplete, not wrong. Investors react impulsively when markets are unstable. The reactions allow others to capitalize on the resultant inefficiencies. Lo’s new model points out that evolving finance shapes markets and behavior in the blink of an eye which can be seen clearly in the swing between crisis and stability, regulation and innovation and loss and profit.
Adaptive Markets will take you on a journey through the tale of the markets, beginning with their failures and efficiencies, moving on to the groundwork behind how investors behave and concluding with what the practical implications are including the 2008 financial crisis and how to avoid similar crises going forward. If you want to know how markets function, this book is a must-read for you.