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.
