Clarendon Lectures in Finance

“The Adaptive Markets Hypothesis (AMH)” presents a formal and systematic exposition of a new narrative about financial markets that reconciles rational investor behavior with periods of temporary financial insanity. In this narrative, intelligent but fallible investors learn from and adapt to randomly shifting environments. Financial markets may not always be efficient, but they are highly competitive, innovative, and adaptive, varying in their degree of efficiency as investor populations and the financial landscape change over time. Andrew Lo and Ruixun Zhang develop the mathematical foundations of the AMH, a simple yet surprisingly powerful set of evolutionary models of behavior, and then apply these foundations to show how the most fundamental economic behaviors that we take for granted can arise solely through natural selection. Drawing on recent advances in cognitive neuroscience and artificial intelligence, the book also explores how our brain affects economic and financial decision-making. This volume is a must-listen for anyone who has ever been puzzled and concerned by the behavior of financial markets and the implications for their personal wealth and seeks to learn how best to respond to such behavior.