This week on our Masters in Business radio podcast, we sit down with Professor Andrew Lo of MIT’s Sloan School of Management, where he serves as the director of the MIT Laboratory for Financial Engineering. He is the author of multiple books, including A Non-Random Walk Down Wall Street; his most recent book is Adaptive Markets: Financial Evolution at the Speed of Thought.
He discusses wrestling with “Dyscalculia” — the math version “dyslexic illiteracy,” and it how it affected his interest in abstract mathematical theory.
Lo’s book Adaptive Markets is a travelogue of his intellectual journey through psychology and behavioral finance, neuroscience, evolutionary biology eventually to the ecology of competing species. He explains that “The Efficient Markets Hypothesis isn’t wrong, it’s just incomplete.” The information reflected in stock prices provides an incomplete picture as to what is driving markets. Lo’s thesis is that markets require a better context than mathematical physics, and should include a “biological / organic” aspect — its own ability to learn and adapt from experience. Markets comprised of living organisms themselves begin to behave like a biological (not purely physical) entity.
The professor tells the story of the first time he presented as a young academic at the NBER on the Random Walk hypothesis — his data showed that Random Walk had some problems; markets are not perfectly random, and some aspects of them can be predictable. Its a radical interpretation of Malkiel’s thesis that got Lo called out for his work being wrong — not because the data was wrong, but because if he was right, it would “disrupt existing beliefs.” It turns out that he was right, and the lesson learned was not so much about markets, but about academic institutions.
All of the books Lo discusses can be found here.
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Next week, we speak with Meir Statman, Santa Clara University Professor of Finance, and author of What Investors Really Want: Know What Drives Investor Behavior and his latest book, Finance for Normal People: How Investors and Markets Behave.
