Andrew Lo's adaptive markets and the Slow EMH
Andrew Lo, writing in the FT , says: ...human behaviour is hardly rational, but is driven by "animal spirits" that generate market bubbles and busts, and regulation is essential for reining in misbehaviour. Regular readers won't be surprised to see me agreeing with this, and indeed I have a proposal for how that regulation could work. However I am suspicious about any theory which does not make testable predictions, and I fear that Lo's "adaptive markets hypothesis" may fall into this category. This "Adaptive Markets Hypothesis" (AMH) - essentially an evolutionary biologist's view of market dynamics - is at odds with economic orthodoxy, which has been heavily influenced by mathematics and physics...The formality of mathematics and physics, in which mainstream economics is routinely dressed, can give outsiders a false sense of precision. ...fixed rules that ignore changing environments will almost always have unintended consequences...The only ...