John Authers recently spent four days in DisneyWorld, where he interviewed a series of economists and financial market professionals on topics ranging from the wisdom of crowds to efficient markets theory.
Some of the videos have yet to be posted to the FT website (look out for CLSA’s Russell Napier who makes an extremely bearish call on the S&P), but the latest stars MIT’s Andrew Lo.
Lo talks to Authers about his adaptive markets hypothesis, which considers market efficiency from an evolutionary perspective. Or, as Lo put it, the theory attempts to reconcile efficient markets with behavioural finance:
Based on evolutionary principles, the Adaptive Markets Hypothesis implies that the degree of market efficiency is related to environmental factors characterizing market ecology such as the number of competitors in the market, the magnitude of profit opportunities available, and the adaptability of the market participants. Many of the examples that behavioralists cite as violations of rationality that are inconsistent with market efficiency – loss aversion, overconfidence, overreaction, mental accounting, and other behavioral biases – are, in fact, consistent with an evolutionary model of individuals adapting to a changing environment via simple heuristics.
All that and more, condensed into a six minute video (click the image to view):
