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A review by rick2
Adaptive Markets: Financial Evolution at the Speed of Thought by Andrew W. Lo
5.0
Lo puts into words so many things I have been trying to piece together. Reading the first chapter felt like finding your car keys after a desperate, brain wracking search. Finally someone taking a robust multidisciplinary approach to finance. Lo combines a variety of sources from psychology, neuroscience, evolutionary theory, organizational theory, finance, history and biology to create his theory of Adaptive Markets. Until this, I had all but given up on economists as stodgy old coots trying to chart nonsensical metrics. Or as statisticians who won't leave their ivory towers for fear that it may ruin their "perfect" models. While I don't believe the Adaptive Markets hypothesis Lo proposes is the ultimate answer to the EMH, it is the best contender I have read to date.
However, if we are going to ascribe biological traits to markets, market participants seem more akin to simple single celled organisms. For all of the technological horsepower at hedge funds and quant shops, they still operate more like ravenous microorganisms, not the high level predators and herbivores Lo imagines. Lo appears to miss the filter produced through the difficulty in codifying and producing an investment strategy. And sadly, despite his use of complex graphs and plots, technology is not a topic he fundamentally seems to incorporate into this hypothesis beyond its applications as a magic bullet. (See references to Moore’s law) In this book technology’s impact seems more like an afterthought. As are the regulatory suggestions he offers. Note that none of this negates Lo’s core ideas, but are merely issues I think have not yet been fully thought out.
Overall, reading this book gives me hope that there are still those in economics who are using their brains instead of just their spreadsheets.
However, if we are going to ascribe biological traits to markets, market participants seem more akin to simple single celled organisms. For all of the technological horsepower at hedge funds and quant shops, they still operate more like ravenous microorganisms, not the high level predators and herbivores Lo imagines. Lo appears to miss the filter produced through the difficulty in codifying and producing an investment strategy. And sadly, despite his use of complex graphs and plots, technology is not a topic he fundamentally seems to incorporate into this hypothesis beyond its applications as a magic bullet. (See references to Moore’s law) In this book technology’s impact seems more like an afterthought. As are the regulatory suggestions he offers. Note that none of this negates Lo’s core ideas, but are merely issues I think have not yet been fully thought out.
Overall, reading this book gives me hope that there are still those in economics who are using their brains instead of just their spreadsheets.