While evolution within our biological environment certainly has shaped our human behaviour, insufficient time has elapsed to ensure that we have similarly evolved to survive these financial markets. The legacy of our preconditioning for a different complex system leads to bizarre consequences and inefficiencies that render our ability to be ‘rational’ investors at all times circumspect to say the least. Andrew Lo writes an enthralling account of what he terms ‘the Adaptive Markets Hypothesis’ based on the notion that investors and financial markets behave more like biology than physics, comprising a population of living organisms simply competing to survive.
His magnificent hypothesis certainly lends a respectful ear to the Efficient Markets Hypothesis recognizing that when markets are behaving with the wisdom of crowds, then yes, market efficiency rules, however Andrew suggests that this is an incomplete picture which does not pay due heed to the occasional ‘madness of crowds’ which is shaped by the behaviours that have been instilled in all of us within a different complex system. His book is packed full of insightful examples that provides a narrative to explain why the financial markets oscillate between periods of efficiency and inefficiency to provide a more complete framework to understanding these markets.
An incredibly interesting read and very balanced viewpoint for those seeking to get a handle on these non-linear adaptive markets.