Animal Spirits

Un articulo muy interesante sobre la teoría de la Adaptative Markets Hypothesis en la que creo (y II)

Escrito 21 Jul 09

Although few of us encounter such threats on a daily basis, much of our instincts are still adapted to the plains of the African savannah 50,000 years ago. Brain scans have shown these same instincts can be triggered by more modern threats such as shame, social rejection and financial loss. And as social animals, humans will react en masse if the perceived threat is significant enough, occasionally culminating in lynch mobs, riots, bank runs and market crashes. Markets are not always efficient, nor are they always irrational - they are adaptive.

This Adaptive Markets Hypothesis - essentially an evolutionary biologist's view of market dynamics - is at odds with economic orthodoxy, which has been heavily influenced by mathematics and physics. This orthodoxy has emerged for good reason: economists have made genuine scientific breakthroughs, such as general equilibrium theory, game theory, portfolio optimisation and derivatives pricing models. But any virtue can become a vice when carried to an extreme. The formality of mathematics and physics, in which mainstream econ- omics is routinely dressed, can give outsiders - especially business leaders, regulators, and policymakers - a false sense of precision regarding our models' outputs.

From an evolutionary perspective, markets are simply one more set of tools that Homo Sapiens has developed in his ongoing struggle for survival. Occasionally, even the most reliable tools can break or be misapplied.

The AMH offers an internally consistent framework in which the EMH and behavioural biases can coexist. Behaviour that may seem irrational is, instead, behaviour that has not yet had time to adapt to modern contexts. For example, the great white shark moves through water with fearsome grace, thanks to 400m years of natural selection. But place it on a beach, and its flailing will look . . . irrational.

The origins of human behaviour are similar, differing only in the length of time we have had to adapt to our environment (about 2m years), and the speed with which that environment is now changing.

Like the six blind monks who encountered an elephant for the first time - each monk grasping a different part of the beast, and coming to a wholly different conclusion as to what an elephant is - disciples of the EMH and behavioural finance have captured different features of the same adaptive system.

The implications of the AMH for regulatory reform are significant. Markets can be trusted to function properly in normal times, but if humans are subject to emotional extremes, animal spirits may overwhelm rationality, even among regulators and policymakers.

Therefore, fixed rules that ignore changing environments will almost always have unint- ended consequences: those enacted in the aftermath of crisis may be too severe during normal times, and those repealed after long periods of prosperity may lead to future excesses. The only way to break this vicious cycle is to recognise its origin - adaptive behaviour - and design equally adaptive regulations to counterbalance human nature.

The writer is Harris & Harris Group Professor at the MIT Sloan School of Management

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