current behavior must take into account
past behavior, the environment and the
pressures that led to that earlier action.
This sounds like common sense, but Lo is
convinced that it is a start to understand-
ing markets more fully. If we can see mar-
kets as continually evolving, we can adapt
them “…at the speed of thought.”
Taking the Adaptive Markets Hypoth-
esis into the real world, Lo cites hedge
funds as an example of how rapid evo-
lution through feedback and change is
necessary for survival. Looking forward,
we must subject some of the most cher-
ished market theories — risk premiums,
indexing, long-term investing, liquidity,
etc. — to new thinking in light of what he
calls the “Great Modulation.”
His theory, he contends, can be applied
to study market failures, fraud and new
approaches to regulation. The market
should be viewed not as a machine or pro-
cess, but as tightly-connected ecosystems
requiring more nuanced analysis than in
the past.
The book gets technical in places, but Lo
has a light approach to making his argu-
ments. He also has an apparently inexhaust-
ible supply of behavioral studies to support
and illustrate his points. His handling of
Madoff’s treachery is out of place here: no
economic theory is needed to explain a
thief, no matter how spectacular his crime.
These are difficult days for capitalism
and free markets; more pessimistic than
I’ve ever seen. Lo is an optimist, however.
For him markets, if properly understood,
can be engines for good. He paints a hope-
ful picture of how markets — adaptive,
evolving and improving — can help solve
some of our most critical challenges in
health and economic opportunity. Let’s
hope he’s right.
James P. Prout is a lawyer with 30+ years
of capital market experience. He now is
a consultant to some of the world’s big-
gest corporations. He can be reached at
[email protected].
HOW MUCH DO YOU KNOW
ABOUT FINANCIAL HISTORY?
TRIVIA QUIZ
1. In what year did Alexander Hamilton present his
Report on the Public Credit to Congress, in which
he proposed that the new nation take over the debt
of the individual states from the Revolutionary War
in support of a federal government?
2. Whose mission is to promote
economic growth and stabilize
prices in the Unites States?
3. What was the first credit card
in the United States?
4. In what year did the Dow Jones Industrial
Average begin tracking the values of
the top US companies in order to track
the general movement of the stock market?
5. Which financial publication was first published
on July 8, 1889, and sold for two cents?
6. How did the US government pay
France for the Louisiana Purchase?
7. Who will be included on the back
of the redesigned US $10 bill in 2020?
8. What brothers invented the
cash register in 1878?
9. What children’s service organization
was depicted on a US quarter in 2013?
10. Who is known as the “father of
value investing” and mentor
to Warren Buffett?
1. 1790 2. The Federal Reserve System 3. Diner’s Club 4. 1896 5. The Wall Street Journal
6. With US Treasury Bonds 7. Sojourner Truth 8. James and John Ritty 9. The Girl Scouts
of America 10. Benjamin Graham
REVIEW
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