Lo, Andrew W.: Adaptive markets: financial evolution at the speed of thought
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The title of the book points directly to its main message: the efficient markets hypothesis (EMH) should be extended (or replaced?) by the adaptive markets hypothesis (AMH). Why adaptive? This is thoroughly explained in the book. In a nutshell: it’s about physics against biology. While the rational decision maker stays in the center of the EMH, the AMH emphasizes the role of evolution (competition, reproduction, adaption). Therefore, market prices from time to time deviate from rational pricing because of strong emotions and constrained intellectual capacity. For instance, fear and greed may distract people from behaving in a rational way. Of course, this perspective also implies that markets tend to return to rational pricing, but it may take a while until that happens. Or to quote the author: “From the adaptive markets perspective, the EMH isn’t wrong – it’s just incomplete”.
The book starts with an interesting overview on how the EMH developed going back to an Italian mathematician...