Adaptive Markets: Financial Evolution at the Speed of Thought

"This is a somewhat tougher read, although it’s not technical. Anybody who is interested in finance or has worked in the financial markets will be interested in it. It’s a very ambitious book. It’s trying to bring together what we know about human behaviour and psychology and what we know about some of evolutionary theory and how that might operate in the economy and transferring that to financial markets. As well as being a finance professor, Andrew Lo is somebody who has actually run a fund and been active in the financial markets. So in both ways, he knows what he’s talking about. It’s getting away from the Efficient Market Hypothesis of ill repute, which I think has been broadly discredited now. It’s a much more sophisticated and nuanced approach to thinking about financial markets. I think almost. It’s not quite there as a synthesis, but I like the ambition of saying that what we say about economics needs to be consistent with the other human sciences. So if you’re doing economics you ought to be thinking about whether your theories and evidence are consistent with what we know from cognitive science and psychology and biology. I think that’s really important because it’s about the status of economics. There are critics who would say economics is just like I don’t know—history or literary criticism, where you have different schools of thought. Ultimately, you’re going to be a member of one school or another. I just don’t believe that. I believe economics is much more like one of the historical sciences—like geology, like evolutionary biology. We will never have the same kind of evidence as an experimental science (although we’re doing more experiments) but we need to think about society and the economy as part of that human construct in the natural world. We are part of the natural world and we need to be much more aware of that than typically we have been. So I really liked that ambition. I don’t think it’s quite the grand synthesis, but in the specific context of financial markets, it gets quite a long way. I don’t remember, but I’m sure it’s an allusion to Charles Darwin’s insight that came from visiting the Galapagos, where he saw that the finches had evolved slightly different beaks as soon as they couldn’t travel and were separated by the ocean between the islands. That’s what gave him the insight to come out with the theory of evolution by natural selection."