Biological Finance
I am a sucker for kids from middle-class
Queens who become great successes. (I am one, without the success part.) Andrew
Lo, a M.I.T. finance professor and hedge fund manager is one of the more
notable ones. Aside from being a finance super-star, Andrew Lo is a great story
teller. I wish I could take his class. However at times he tells too much and
as result his 504 page book in the print edition is too long.
Lo’s thesis, building on the work of
Kahneman, Tversky, Thaler and Haidt argues rather convincingly that the home
economicus model that modern day financial economics relies on is a special
case and shouldn’t be generalized for all markets in all seasons. Thus the
physics math that finance uses, while it creates reasonably good heuristics, is
not complete. Simply put the efficient market hypothesis works most of the
time, but not all of time.
Lo is an expert on modern finance and he
presents a well-documented history as to how it came into being starting with an
obscure mathematics dissertation written in French by Louis Bachelier which
ultimately became the foundation for options pricing models. He makes one
mistake here by noting that Paul Samuelson received his Ph.D. in 1947. It was
1941 while his Ph.D. was formally published in 1947.
Be that as it may Lo brings to the table
of modern finance neuroscience, evolutionary biology and behavioral economics.
When doing this much of the rigor of physics math goes away but it makes his adaptive
markets far more relevant to the real world. After all, despite the rise of the
machines, markets are made by human beings who have a multitude of motives many
of which are not “rational” and many of which are unconscious. Instead of
thinking about the day-to-day chaos that appears on the stock exchanges, think
of traders fighting for survival on the African Savannah. This would certainly
put the concept of seeking alpha in a different light.
Professor Lo also comes up with a neat
idea for mass funding of cancer research through the creation of a $30 billion
biotech fund that is following the science rather than the near term dictates
of the venture capital market place.
In sum, Andrew Lo has written an
important book and it should be part of the curriculum in all serious finance
departments.
The full Amazon URL appears at: https://www.amazon.com/review/R195W82T8ICM10/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv
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