Andrew W. Lo, director of the MIT Laboratory for Financial Engineering and the Charles E. and Susan T. Harris Professor at MIT, describes his research on artificial intelligence and financial markets at the launch event for the MIT Intelligence Quest, an Institute-wide initiative on human and machine intelligence research, its applications, and its bearing on society.
How do you drive investors to spend money on cutting-edge cancer treatments? One idea, according to economist Andrew Lo, is to sell securities in a megafund of research projects. Economics correspondent Paul Solman explores how financial engineering could be the starting point for curing cancer.
On this episode of the HBO documentary series, Andrew Lo discusses an idea he and colleagues developed with regard to the FDA approval process. They've developed a model that incorporates patient preferences into the design of clinical trials in order to set appropriate thresholds for FDA approval.
We are making breakthroughs almost weekly in our understanding of cancer and other deadly diseases, both in how to treat and – in some cases – how to cure them. So why is funding for early stage biomedical research and development declining just when we need it most? One answer is that the financial risk of drug development has increased, and investors don’t like risk. What if we could reduce the risk and increase the reward through financial engineering? By applying tools like portfolio theory, securitization, and derivative securities to construct “megafunds” that invest in many biomedical projects, we can tap into the power of global financial markets to raise billions of dollars. If structured properly, investors can earn attractive returns with tolerable levels of risk, and many more patients can get the drugs they desperately need. Finance doesn’t have to be a zero-sum game; we can do well by doing good if we have sufficient scale.
When trying to understand how the market is working, we should think not only of bulls and bears, but also of dodos. Our aversion to risk comes from the deep biological imperatives that have allowed humans to avoid extinction. Any theory of markets must take account of this.
That, at least, is the radical prognosis of Andrew Lo, of the MIT Sloan school of business, who has for years worked on an ambitious project to apply biology to finance. His latest paper, published with several colleagues, provides mathematical equations to show how risk-averse behaviour is necessary for survival. That means that investors in markets will take risk-averse actions rather than the purely rational decisions that economists have classically assumed.
The financial system has gotten much more complex, but many financial regulations are from the 1930's and 40's, notes Andrew Lo, professor at the MIT Sloan School of Management. Lo helped come up with the idea for the U.S. Office of Financial Regulation, which was created by the 2010 Dodd Frank Act. Nonetheless, much of Dodd Frank is way too long and difficult for anyone to understand, Lo contends. 'That wasn't so much an update as it was a piling on of new regulations,' Lo says of Dodd Frank.
Why do investors make stupid mistakes? Why do individuals consistently underperform the very funds they invest in? Are there strategies investors can follow to avoid self-destructive behavior? Those are some of the weighty questions Financial Thought Leader Andrew Lo is trying to answer from two vantage points, one as a professor of Finance at MIT and Director of its Laboratory for Financial Engineering, the other as strategist and fund manager at his firm AlphaSimplex Group. This conversation will start with his most recent research project at MIT, titled "Artificial Stupidity"!
Financial engineering failed dramatically in the financial crisis, but maybe it could be used to help persuade institutions to invest in cancer research. Professor Andrew Lo of MIT's Sloan School of Management explains how to Long View columnist John Authers.