Adaptive Markets

Half of all Americans have money in the stock market, yet economists can't agree on whether investors and markets are rational and efficient, as modern financial theory assumes, or irrational and inefficient, as behavioral economists believe - and as financial bubbles, crashes, and crises suggest. This is one of the biggest debates in economics, and the value or futility of investment management and financial regulation hang on the outcome. In this groundbreaking book, Andrew W. Lo cuts through this debate with a new framework.

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.

In order to be successful both today and in the future, you need to separate yourself from the competition by practicing the breakthrough principle of adaptive innovation. How? By delivering an experience that the competition either cannot or will not attempt to copy. This is literally impossible if you stick to what is already familiar to you because whatever is familiar to you and your customers is likely to be familiar to your competition. You must create a new experience that is unique to you and that fosters a powerful emotional attachment with your target customer.