My Amazon Review of Andrew Lo's "Adaptive Markets: Financial Evolution at the Speed of Thought"

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

My Amazon Review of Jonathan Haidt's, "The Righteous Mind: Why Good People are Divided by Politics and Religion"

As I write this there are 422 reviews posted on Amazon. Why another? It is because Jonathan Haidt has written a very important book. Using insights from psychology and evolutionary biology offers us some very clear-eyed thinking into the process of making moral judgements. For me Haidt clarified the way I actually think in a very organized manner and he explains, at least to me, why I have so many political differences with my liberal friends.

Haidt builds on the works of David Hume and Emile Durkheim among others along with the works of modern evolutionary biologists to argue that moral judgments are built on intuition and emotion as opposed to reason. In fact the smarter the person the better the person is in making after the fact rationalizations of their hard-wired emotional judgement according Haidt we all have our inner lawyer or press agent.

According to Haidt we have six primary moral matrices: care/harm, liberty/oppression,fairness/cheating, loyalty/betrayal,authority/subversion and sanctity/degradation. Libertarians largely make moral judgement on the basis of liberty/oppression and liberals uses the first three with special emphasis on care/harm. On the other hand classical conservatives and social conservatives utilize all six. To them institutions really matter. Haidt analogizes this type of thinking to taste buds. Do we have only one in our mouth, three or perhaps six.

He also notes that liberals and conservatives are both for "fairness." However liberals view fairness as equality of result while conservatives view fairness as reward for effort or as the the Bible suggests the right to enjoy the fruits of your labor. That is why smart liberals who promote increasing the minimum wage argue that rewards the work efforts of hard working people at the bottom of the wage scale rather than arguing they should be paid more because wage differentials are too wide.

On a personal note Haidt recounts his own evolution from being a card carrying secular liberal to being somewhat of a conservative. Note he will not fess up to being a Republican. His journey is similar to what I encountered in the late 1970s to the mid-1980s.

Finally I thought so much of this book that I bought copies for my three children as holiday presents!

The Amazon URL is: http://www.amazon.com/review/R4LEVLU8NA3N4?ref_=pe_620760_65501210