Efficiency May Be Special Case of Adaptation
|Apr 24th, 2012 | Filed under: Alpha Strategies, Behavioral finance, Hedge Fund Strategies, Today's Post | By: cfaille||
Andrew Lo says, in a new paper refining a hypothesis he first presented eight years ago, that the hedge fund industry is the “Galapagos islands” of the financial globe. It is the place where the underlying evolutionary dynamic becomes most obvious.
Lo has been pressing and expanding his “Adaptive Markets Hypothesis” at least since 2004, when he wrote a paper with that phrase in its title for the Journal of Portfolio Management. The gist of it was that although the ECMH postulates individuals who “maximize expected utility and have rational expectations,” an adaptive hypothesis postulates “organisms that have been honed, through generations of natural selection, to maximize the survival of their genetic material.”
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Christopher Faille is a Jamesian pragmatist. William James has taught him, for example, that "you can say of a line that it runs east, or you can say that it runs west, and the line per se accepts both descriptions without rebelling at the inconsistency."