Adaptive Markets Buchzusammenfassung - das Wichtigste aus Adaptive Markets

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Zusammenfassung von Adaptive Markets

Name: Adaptive Markets
Rating: 4.1 (70 reviews)
Author: Andrew W. Lo

Andrew W. Lo

Financial Evolution at the Speed of Thought

4.1 (70 Bewertungen)

20 Min.

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Wirtschaftstheorie

Inhaltsübersicht

Adaptive Markets
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Kernaussage 1 von 8

What’s in it for me? Gain a better understanding of financial markets and how they need to be fixed.

Even if you’ve never invested a dime in stocks or bonds, your life is still affected by the market. If you were looking for a job in the wake of the 2008 financial crisis, you know exactly how reliant banks and everyday businesses are on a healthy economy. So it makes sense to have at least a basic understanding of how things work – and that’s exactly what these blinks provide.

You’ll learn about the prevailing ideas regarding the stock market and the new ideas the author has put forward as to how things can improve. There’s no reason something as powerful as today’s financial system has to be stuck in an old way of doing things; it’s time we started thinking big and putting the system to work for the betterment of the whole world!

In these blinks, you’ll find out

how mortgage debt caused a worldwide crisis;
how gambling addiction can teach us about the dangers of investing; and
that the market could be used to help cure cancer.

The Efficient Market Hypothesis is the most widely accepted theory for how the market works.

If you’ve taken an Economics 101 course, you’ve probably heard about the predominant theory about how the markets work: the Efficient Market Hypothesis, or EMH for short.

In a nutshell, EMH theory suggests that the price of stocks, bonds and similar investment assets will always provide an accurate reflection of the health, profitability and general value of a company.

In recent years, it’s become widely accepted that the EMH isn’t perfect, but academics and leading experts in the investment sector still regard it as the best theory out there.

To see the EMH in action, let’s look at the company Morton Thiokol, which helped make rockets for NASA in the 1980s, including the faulty piece of equipment that was found to cause the Challenger Space Shuttle explosion in 1986. It made perfect sense that the value of Morton Thiokol shares plummeted in the minutes following the Challenger disaster because the company had just encountered a serious setback.

The EMH works because it takes into account the collective wisdom of all the investors who are constantly analyzing the market and reflecting their best assessments of how well businesses will do in the price they’re willing to buy and sell their assets at. It’s generally agreed that by putting together all these active financial minds, you’ll get a fairly accurate reflection of a company’s value.

Now, given this high regard for the EMH’s accuracy, it is also considered highly unlikely that anyone can “beat the market,” which would involve spotting something that everyone else has missed. And since you can’t beat the market, the standard advice is to “join the market” by investing in long-term, low-risk index funds, or mutual funds, which comprise a collection of stocks that will remain more or less untouched over time.

By sticking with index funds for a long period, a patient investor can expect to take advantage of the stock market’s gradual increase in value over time. It was these standard principles of EMH that led John Bogle to create the Vanguard Index Trust, the first mutual fund, in 1976.

Since then, the index and mutual fund businesses have become a multi-trillion-dollar staple of the finance industry.

The Adaptive Market Hypothesis takes into account the human element of finance.

You might be thinking, if the Efficient Market Hypothesis is so accurate and simple, why do huge financial crises where assets are grossly misvalued, like the one in 2008, keep happening?

The answer to this question has to do with human nature and the fact that those in control of the market are prone to making decisions based on irrational emotions. So, even if a company is by all accounts healthy, if the price of its stock takes a momentary dip, this can trigger a panicked response among traders worried about losing too much money and, in turn, will cause them to sell. This is known as behavioral economics.

Humans are reliably irrational in dealing with money.

One of the limitations of the Efficient Market Hypothesis is that it assumes the rational investors will outweigh the impact of irrational investors. Even if we all agree that humans are bound to make mistakes and use poor judgment, the question remains: how adversely can these behaviors affect the market?

First of all, it helps to understand just how irrational humans are when it comes to taking risks, determining probability and making financial decisions.

Human behavior is shaped by our emotions and instincts.

So, what is it exactly that makes us so prone to reckless and irrational decisions when dealing with money?

Neuroscience suggests that the answer lies in how inextricably linked our decision making is to the emotional part of our brain.

Survival of the richest is the ultimate force behind competition, innovation and adaptation.

You’ve heard the phrase, “survival of the fittest,” right? It’s a simplification of Darwin’s theory of natural selection, which states that only those with optimal traits will survive within certain species and environments, and over time, we will see these traits become more dominant.

As the Adaptive Market Hypothesis shows us, economies function in much the same way, and it’s the regulators, investors, insurance companies and hedge funds that are trying to survive.

The Adaptive Market Hypothesis can be used to make better financial decisions.

As we saw in the previous blinks, when the efficient market is working properly, all stock prices accurately reflect their true value. This is known as a state of equilibrium.

According to the Efficient Market Hypothesis, prices tend to fluctuate from time to time, but the market will eventually return to equilibrium. And this is why long-term investments make sense, as they allow you to wait out the fluctuations, safe in the knowledge that it’s just a matter of time before your investments attain their true worth.

Financial crises are the result of markets evolving without proper oversight.

Following the 2008 financial crisis, when investors were faced with the tough decision of how to react, many of them started casting blame and looking for explanations. So what happened?

Most financial crises are an example of what happens when a market changes faster than investors can adapt.

The Adaptive Market Hypothesis can cure more than just our financial system.

If the Adaptive Market Hypothesis can help us see what went wrong in 2008, can it perhaps also point us to a better way forward, with more reliable markets?

What history tells us is that we need better legislation to help prevent greed and fear-based decisions from ruining and damaging our economy.

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Worum geht es in Adaptive Markets?

Adaptive Markets (2017) is about a new economic theory that helps us better understand the human element behind financial markets. Andrew W. Lo expertly illustrates the shortcomings of current prevailing economic theories, showing us how finance is less like physics or math and more like a responsive and evolving organism – not unlike ourselves.

Bestes Zitat aus Adaptive Markets

Fear is the hardwired fire alarm of the brain, metaphorically setting off the sprinkler systems and calling the fire department, sometimes even faster than we know or can follow.

—Andrew W. Lo

Wer Adaptive Markets lesen sollte

Investors interested in finance and how the market works
Readers interested in the science of money
Students of economics

Über den Autor

Andrew W. Lo is the director of the Laboratory for Financial Engineering at MIT and a professor at the MIT Sloan School of Management. He is also the chairman and strategist for the investment management company AlphaSimplex Group. Some of his writing on economics and investments can be found in his book Hedge Funds, as well as other books he has coauthored, including A Non-Random Walk Down Wall Street and The Economics of Financial Markets.

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