MIT Sloan School of Management professor Andrew Lo has revealed his newest book, which uses principles from evolutionary biology to illustrate how financial markets behave like living organisms.
Entitled “Adaptive Markets: Financial Evolution at the Speed of Thought,” the MIT professor explores how “financial markets are like complex ecosystems, with different species that are competing, evolving, innovating and adapting,” as opposed to the dominant idea among economists that markets are static, efficient, and rational.
The tricky part, to put it mildly, is that using a biological framework to understand market behavior requires a “change [in] the way we do research. You can’t just write a math formula and run a bunch of regressions to test it; you need to study the flora and fauna of the entire ecosystem.”
Lo explains that financial markets are an adaptation that humans have “developed to improve its chances for survival. It is, by definition an adaption, so of course the principles of evolution should apply.”
He elaborates: “We’ve adapted supremely well to many other circumstances—our bodies regulate our temperature according to weather and physical activity, and we’ve adapted in many other ways to our environment—but money simply hasn’t been around long enough. We don’t know how to manage our money instinctively.”