Book Review: Adaptive Markets by Andrew Lo

Adaptive Markets presents Andrew S. Lo's idea about markets: they're neither rational nor irrational, rather both characteristics live together. The debate between financial theory and behavioural economics, therefore, would be solved. 

Lo's book, published by Princeton University Press, has a subtitle that is revealing about his approach: Financial Evolution at the Speed of Thought. Biology, genetics and other disciplines, in fact, come into play when talking about his economical approach. So much so that a big chunk of the first part of the book is devoted to biology and various episodes in its history.

Lo's way of explaining his approach is very informal, relating not only to episodes regarding the economy but also his personal life, such as the first when he challenged the world of economical academics or a day at the zoo with his son.

Psychology, too, has a very important park in his book. The explanation of how and why crises happen is in fact partly psychological. Evolution has shaped human minds to react in a fight or flight mode, but facing markets this can just be the wrong reaction. 

Lo goes on explaining why the 2008 crisis happened and how another big one could be avoided.


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