Adaptive Markets by Andrew Lo
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Andrew Lo is a professor of Finance at the MIT Sloan School of Management. Through his new concept of Adaptive Markets Hypothesis he looks at the market evolution as an anthropologist, arguing that similarly various animal species adapt to the changing environment, so too the participants of the financial industry adapt to the changing markets. The ones who are not fast to adapt are forced out of business.
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Andrew argues that the financial fear factor and risk of being eliminated from the "game" leads us to making "irrational" decisions. However when taken through the perspective of evolution these decisions are in fact very rational and lead to our long term survival.
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One of the most important conclusions of this book is that through financial evolution the market participants adapt to the changing environment. And this process of adaptation leads to a constant change in the market. Therefore he argues that a perfect equilibrium does not exist.
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Unfortunate consequence of such evolution is that there is an increasing gap between market participants who have the knowledge and are able to adapt and the ones who don't. He argues that proper financial education and regulation should step in to provide fairness and purpose for finance.
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