Murphy’s Law says that anything which can go wrong, will go wrong. Moore’s Law says that computing power will double every 18 months or so. Technology drives financial innovation and activity. Andrew Lo, a professor at the Massachusetts Institute of Technology has merged these ideas into a map of today’s financial system, a world where the speed of innovation is fast outstripping the ability of regulators to keep pace. As he told an audience of politicians at a New City Agenda event in the Palace of Westminster last month, the speed and complexity of financial markets increases by the day; human understanding does not.
As we draw closer to the 10-year anniversary of the global financial meltdown, a lot of investors seem convinced we won't be revisiting anything remotely resembling that period of extreme wealth destruction any time soon. And who can blame them? The value of their rebuilt portfolios has soared during a sustained stretch of well-below- normal interest rates, strong earnings growth, inflated asset values and record-low volatility. Bullish forecasters predict more of the same for 2018, playing down a host of potential pitfalls.
There are two popular schools of thought when it comes to how markets work. There's the efficient markets hypothesis (EMH) which says that it's basically impossible to beat the market, because all information is completely priced in at all times (more or less). On the other side is an increasingly popular behavioral view which argues that various human emotions and biases are always creating situations that aren't justified by the data. On this week's episode of the Odd Lots podcast, we speak to Andrew Lo, a professor of Finance at the MIT Sloan School of Management about his own theory, which he calls Adaptive Markets. The theory attempts to bridge the behavioral approach with the efficient markets view. He argues that the proper way to view the market is through an ecological lens, examining the players as flora and fauna of a complicated system, to help determine who's thriving, who's dying, and where asset prices will go.
Legendary investor Warren Buffett once described it as a "mirage" to be avoided by any sensible investor. JP Morgan Chase chief executive Jamie Dimon has famously described it as a "fraud" and last month warned that if "you're stupid enough to buy it, you'll pay the price for it one day." Another global bank boss, Credit Suisse's Tidjane Thiam, calls the manic trading that has driven its price into the stratosphere the "very definition of a bubble" that's destined to end badly.
Andrew W. Lo is the Charles E. and Susan T. Harris Professor at the MIT Sloan School of Management and director of the MIT Laboratory for Financial Engineering. His latest book, Adaptive Markets, examines financial stability and crisis to explain how evolution shapes human behavior and the market at large. David Enrich is the Finance Editor of the New York Times. His first book, The Spider Network, unveils the story of how a math genius, a few outrageous accomplices, and a deeply corrupt banking system ignited one of the greatest financial scandals in history. Both shortlisted finalists for the 2017 Financial Times & McKinsey Business Book of the Year Award, David and Andrew recently sat down to discuss the root causes of financial scandals, and how we can nip them in the bud.
A biotech focused on developing drugs to treat genetic diseases just raised $135 million. BridgeBio Pharma, which was founded in 2015, builds out subsidiary companies around different inherited genetic diseases. The series C round was co-led by investment firms Viking Global Investors and KKR, which were joined by Perceptive Advisors, AIG, Aisling Capital, Cormorant Capital, and Janus Funds.
Our latest Freakonomics Radio episode is called “‘How Much Brain Damage Do I Have?’” John Urschel was the only player in the N.F.L. simultaneously getting a math Ph.D. at M.I.T. But after a new study came out linking football to brain damage, he abruptly retired. Here’s the inside story — and a look at how we make decisions in the face of risk versus uncertainty.
Ten years ago, an abrupt meltdown in quantitative equity funds worldwide shook the burgeoning industry, spurring an exodus of investors. Goldman Sachs Group Inc. was among the worst hit, shedding three-quarters of its $165 billion in quant investments by 2012. Gary Chropuvka, one of two partners leading the Quantitative Investment Strategies team at Goldman in New York, sweated those hot August days in 2007 that he says he’ll never forget. Rather than losing faith in quant investing, the group began to rebuild the strategies with less leverage and more diversity.
The phrase “it’s different this time” has a bad reputation in financial circles. It’s often the tag line for bullish investors who dismiss stock-market warning signals to their own detriment. Take the late 1990s, the critics will say. Many believed then that the internet would change the world. It did, sure. But the sector still had just as many losers as winners. Investors dismissed sky-high valuations—it really isdifferent this time, they said—only to see the market crash in 2000. The phrase, however, or at least its context, is misplaced, argues economist and author Andrew Lo. It is indeed different this time, he says—things are likely worse than history would belie.
By almost any measure, U.S. stocks are expensive—but this can remain the case for years to come because of an ever growing appetite for equities by retirement funds, according to economist and author Andrew Lo. Lo is a leading authority on behavioral finance, having provided some of the most definitive explanations for the financial crisis in 2007-08. After the crisis, Lo helped set up the new Office of Financial Research under the U.S. Treasury Department, which aims to provide better data and insights about the industry.