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.

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.

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.

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.

A longstanding academic theory for describing how markets work has finally died. Its impact on investment theory and practice was enormous, but has also led to some risks. The so-called efficient market hypothesis (EMH), which basically assumes that investors are rational and that it's impossible to beat the market because prices reflect all available information, has been under fire for years. And MIT's Andrew Lo, who Time Magazine named as one of the 100 most influential people in the world in 2012, finally put an end to it in his new book, “Adaptive Markets: Financial Evolution at the Speed of Thought.”

Ever since I was a graduate student in economics, I’ve been struggling with the uncomfortable observation that economic theories often don’t seem to work in practice. That goes for that most influential economic theory, the Efficient Markets Hypothesis, which holds that investors are rational decision makers and market prices fully reflect all available information, that is, the “wisdom of crowds.”

Build a better mousetrap, the saying goes, and the world will beat a path to your door. Find a way to beat the stockmarket and they will construct a high-speed railway. As investors try to achieve this goal, they draw on the work of academics. But in doing so, they are both changing the markets and the way academics understand them.

Es besteht eine große Kluft zwischen Daytrading/technischer Analyse und der akademischen Welt. Dies läßt sich auf die effiziente Markthypothese reduzieren, über die Sie hier mehr erfahren können. Für viele Akademiker sind Daytrader Krach machende Trader, und die technische Analyse ist bestenfalls Voodoo. Demzufolge gibt es zwischen diesen beiden Fronten keinen Austausch. Daytrader sind auf Ihre Tradingcharts fixiert. Professoren der Finanzwissenschaft labern vor Ihren Studenten, während sie versuchen, Ihre Forschungen in renommierten Fachzeitschriften unterzubringen. Der Ideenaustausch ist jedenfalls gering.

Andrew 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. In his research, he straps sensors to traders and watches how their pulses and body temperatures change when markets dive or trades go bad. The technology could be used elsewhere in a bank to potentially address problems before they escalate.

If it sometimes feels like your boss or management are watching you like Big Brother, you may not be far wrong. Technology is increasingly allowing companies of all types to more closely monitor what their staff are doing. Tesco, for example, uses electronic armbands to track the movements of stock pickers in its warehouses in Ireland.

From her office overlooking the sprawling trading floor of a major bank, a risk manager sits before a bank of computer monitors. Suddenly a buzzer sounds and a red message flashes on a screen: Biometric alert, trader # 37. With a few mouse clicks, she’s looking at the data. Blood pressure – elevated. Heart rate – elevated. Adrenaline – elevated. Cortisol – elevated. When she ponders this information, she notes that none of the dozens of other traders on the floor are showing elevated readings. Leaving her office, she walks quickly down a long row of desks, traders and flashing screens until she arrives at station # 37. There, a man in his early thirties, tie loosened at his neck, his foot tapping, sits staring intensely at the screen in front of him.

A Cowlar for every employee: Have you heard about the Cowlar? It’s a smart collar that dairy farmers can strap around the necks of cows to monitor their herds. It promises improved milk production, early disease detection, heat detection, and real-time monitoring and alerts. How would you feel about wearing one? I ask because it seems like it’s a question that more and more employers are asking their employees.

An employee ID badge that can track workers’ movements and listen in to their conversations is in the works to be available for companies to use starting very soon, according to a Washington Post article published on September 7. Critics of the new device are calling it “Orwellian” in nature, meaning it sounds like something that would take place in the book 1984 by George Orwell, which depicts an extreme totalitarian society where the government always has its eye on you, and freedom is nowhere to be found for the average citizen. In the book, the government is referred to by its citizens as “Big Brother,” and there are signs everywhere repeatedly reminding people that “Big Brother is watching you.”

Do you hog office conversations? Or not talk enough? Does your voice squeal? Do you sit very still at your desk all day? Or do you fidget under stress? Where do you go in the office? How much time do you spend there? To whom do you talk? An employee badge can now measure all this and more, all with the goal of giving employers better information to evaluate performance. Think of it as biometrics meets the boss.