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. The debate is one of the biggest in economics, and the value or futility of investment management and financial regulation hangs on the answer. In this groundbreaking book, Andrew Lo transforms the debate with a powerful new framework in which rationality and irrationality coexist―the Adaptive Markets Hypothesis. Drawing on psychology, evolutionary biology, neuroscience, artificial intelligence, and other fields, Adaptive Markets shows that the theory of market efficiency is 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. An ambitious new answer to fundamental questions about economics and investing, Adaptive Markets is essential reading for anyone who wants to understand how markets really work.

Table of Contents

Chapter 1. Are We All Homo economicus Now?

Chapter 2. If You're So Smart, Why Aren't You Rich?

Chapter 3. If You're So Rich, Why Aren't You Smart?

Chapter 4. The Power of Narrative

Chapter 5. The Evolution Revolution

Chapter 6. The Adaptive Markets Hypothesis

Chapter 7. The Galapagos Islands of Finance

Chapter 8. Adaptive Markets in Action

Chapter 9. Fear, Greed, and Financial Crisis

Chapter 10. Finance Behaving Badly

Chapter 11. Fixing Finance

Chapter 12. To Boldly Go Where No Financier Has Gone Before

About the Author

Andrew W. Lo is the Charles E. and Susan T. Harris Professor at the MIT Sloan School of Management and director of the MIT Laboratory for Financial Engineering. He is the author of Hedge Funds and the coauthor of A Non-Random Walk Down Wall Street (both Princeton), among other books.