Adaptive Market Hypothesis
An Adaptive Market Hypothesis is a market theory which attempts to reconcile economic theories based on the efficient market hypothesis (which implies that markets are efficient) with behavioral economics, by applying the principles of evolution to financial interactions: competition, adaptation and natural selection.
- See: Heuristics, Efficient Market Hypothesis, Market (Economics), Market Efficiency, Behavioral Economics, Evolution, Competition, Adaptation, Natural Selection, Asset Allocation, Loss Aversion.
References
2020
- (Wikipedia, 2020) ⇒ https://en.wikipedia.org/wiki/Adaptive_market_hypothesis Retrieved:2020-4-19.
- The adaptive market hypothesis, as proposed by Andrew Lo, Lo, 2004. </ref> is an attempt to reconcile economic theories based on the efficient market hypothesis (which implies that markets are efficient) with behavioral economics, by applying the principles of evolution to financial interactions: competition, adaptation and natural selection.
Under this approach, the traditional models of modern financial economics can coexist with behavioral models. This suggests that investors are capable of an optimal dynamic allocation. Lo argues that much of what behaviorists cite as counterexamples to economic rationality—loss aversion, overconfidence, overreaction, and other behavioral biases — are, in fact, consistent with an evolutionary model of individuals adapting to a changing environment using simple heuristics. Even fear and greed, which are viewed as the usual culprits in the failure of rational thinking by the behaviorists, are driven by evolutionary forces.
- The adaptive market hypothesis, as proposed by Andrew Lo, Lo, 2004. </ref> is an attempt to reconcile economic theories based on the efficient market hypothesis (which implies that markets are efficient) with behavioral economics, by applying the principles of evolution to financial interactions: competition, adaptation and natural selection.