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Speaker 1: s I PC. This is Masters in Business with very
Speaker 1: Ridholtz on Boomberg Radio. This week on the show, I
Speaker 1: have an extra special guest, Professor Andrew Lowe of m
Speaker 1: I T. I first heard Professor Lowe speak at a
Speaker 1: conference about a decade ago, and I was I was
Speaker 1: quite fascinated by his willingness to I don't want to
Speaker 1: say attack, but take on the efficient market hypothesis and
Speaker 1: adapt it uh to what he sees as some obvious
Speaker 1: modern changes in how people in technology are interacting with markets,
Speaker 1: be they more efficient or less efficient. It's pretty clear
Speaker 1: that the strong efficient market hypothesis, which essentially states markets
Speaker 1: reflect the all information about stock prices in any given
Speaker 1: instant's a little bit of an overstatement. You have to
Speaker 1: work in the actual human side, the emotions and and
Speaker 1: as well as the adaptive side, how markets are consisting
Speaker 1: of organic participants and they themselves become organic and adapt
Speaker 1: to changes fairly rapidly. UM. I think Professor Lowe's read
Speaker 1: on the efficient efficient market hypothesis predated the Nobel Committee
Speaker 1: giving Bob Shiller of Yell and Gene Fama of chicag
Speaker 1: University of Chicago uh CO Nobel prizes, one for m
Speaker 1: H and the other for behavioral economics the same year.
Speaker 1: It's not a coincidence, and and he very much was
Speaker 1: clued into that before the Nobel Committee was. Anyway, if
Speaker 1: you are at all interested in how markets operate, how
Speaker 1: they adapt, what investors do that's right and wrong, and
Speaker 1: as well as the significance of hedge funds within the
Speaker 1: universe of market participants, I think you'll find this to
Speaker 1: be a fascinating conversation. So, with no further ado, my
Speaker 1: conversation with Professor Andrew low of m I T. This
Speaker 1: is Masters in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: My special guest today is Professor Andrew Lowe of the
Speaker 1: m I T. Sloan School of Management. He has been
Speaker 1: the director of m I T. S Laboratory for Financial Engineering,
Speaker 1: since he comes to US with a PhD in economics
Speaker 1: from Harvard. He briefly taught at Wharton before going to
Speaker 1: m I T and is the author of numerous books
Speaker 1: about finance, including A non random Walk Down Wall Street,
Speaker 1: Analytic Perspective on hedge Funds, The Evolution of Technical Analysis,
Speaker 1: most recently Adaptive Markets, Financial Evolution at the Speed of Thought.
Speaker 1: Professor Andrew Low, Welcome to Bloomberg. Thanks for having me.
Speaker 1: I'm thrilled you here. I've been a fan of your
Speaker 1: work for a long time. Let's jump into your background
Speaker 1: a little bit before we get to some of the
Speaker 1: heavy financial engineering work. Ironically, you right that you weren't
Speaker 1: an especially good math students as a kid, and yet
Speaker 1: you end up in a field that is dominated by
Speaker 1: heavy mathematics. How did that come about? Well, you know,
Speaker 1: I didn't know this at the time, but when I
Speaker 1: was going through elementary school and middle school, UM, I
Speaker 1: had a learning issue, which was I guess the mathematical
Speaker 1: equivalent of dyslexia. I think it's called DS calculia really,
Speaker 1: and uh, I had a terrible time memorizing the multiplication
Speaker 1: tables and were you transposing exactly? And uh, some of
Speaker 1: my teachers told my mother that they thought I was
Speaker 1: mentally retarded. That was the term of art in those
Speaker 1: days and um, but it was a third grade teacher,
Speaker 1: Mrs Barbara pick Laura that saw something in me and
Speaker 1: encouraged me and appointed me to this position of class scientists,
Speaker 1: where I was able to do experiments and demonstrate the
Speaker 1: various kinds of knowledge that I had gotten over the
Speaker 1: course of several periods during the school and that really
Speaker 1: boosted my self confidence. I still struggle with math until
Speaker 1: high school, where the new math came about, and which
Speaker 1: is essentially when we talk about new math, we're talking
Speaker 1: about what well replacing algebra, trigonometry, and geometry with things
Speaker 1: like group theory, ring theory and abstract algebra. And it
Speaker 1: was an incredibly important moment for me because I went
Speaker 1: from a C student in math to an A student
Speaker 1: pretty much overnight. And it was because I could handle
Speaker 1: abstract concepts much better than being able to do multiplication,
Speaker 1: and so it was a really wonderful thing. I know
Speaker 1: that new math is viewed is a failure in New
Speaker 1: York City back in the nineteen seventies, but for me
Speaker 1: it was a godsend. So now let's let's jump forward
Speaker 1: a little bit and and bring the idea of abstract
Speaker 1: concepts to markets. What's more important to markets supply and
Speaker 1: demands or fear and greed? Well, you know the answer
Speaker 1: is both. And that's really the interesting thing that I
Speaker 1: discovered about human nature. We have two aspects to our
Speaker 1: cognitive functions. Were incredibly good at logical deliberation and being
Speaker 1: able to balance supply and demand using various fancy mathematical
Speaker 1: and statistical tools. But at the same time, every once
Speaker 1: in a while, we freak out. And when we freak out,
Speaker 1: emotion rules today, and fear and greed then take over.
Speaker 1: And it's this jackal and hide aspect of human decision
Speaker 1: making that I think we're missing in economics being able
Speaker 1: to integrate those two. So behavioral economics has become a
Speaker 1: huge field between Professor Schiller, Professor sailor Danny Kahneman. Go
Speaker 1: down the list of all the folks um who have
Speaker 1: who have worked in this area. What does this say
Speaker 1: about the efficient market hypothesis? Is it wrong or is
Speaker 1: it simply incomplete? Yeah, it's definitely not wrong. There's some
Speaker 1: very important elements of efficient markets hypothesis that actually can
Speaker 1: protect us from making some pretty bad investment mistakes. But
Speaker 1: it is incomplete in the sense that it doesn't capture
Speaker 1: the fear and greed aspect of it. And I think
Speaker 1: it's trying to integrate the two that really got me
Speaker 1: to start thinking down the road towards adaptive markets. So
Speaker 1: let's talk about another duality. Rational rationality and irrationality coexist
Speaker 1: even within the same person. How does that manifest itself
Speaker 1: in in investment. Well, you know, it really comes from
Speaker 1: the neuroscientific aspect of decision making. So neuroscientists like Antonio
Speaker 1: Dimazio have come up with a really interesting notion of
Speaker 1: what rationality means. And what he developed was this idea
Speaker 1: that rationality actually requires a certain degree of emotion. In
Speaker 1: other words, when you take a look at patients that
Speaker 1: have had brain surgeries that have removed the emotional part
Speaker 1: of the brain, they end up acting in a very
Speaker 1: irrational way because they have no way of balancing the
Speaker 1: various different demands on their time. You know, when we
Speaker 1: think about showing up to work on time or meeting
Speaker 1: a deadline, emotion actually plays an important role in those
Speaker 1: kinds of behaviors. So with the proper balance of emotion
Speaker 1: and logical deliberation, we end up seeming quite rational. But
Speaker 1: when that balance goes askew, when we have too much
Speaker 1: or too little emotion, we end up making mistakes. And
Speaker 1: that's very much along the same lines of how investors
Speaker 1: actually behave. So when we talk about fear and greed,
Speaker 1: we're really talking about the moments when the irrational side
Speaker 1: of the brain takes over and the logic steps back,
Speaker 1: and no one says to themselves, g I'm gonna be
Speaker 1: able to time my in and out perfectly. I'm going
Speaker 1: to be able to jump back in despite having the
Speaker 1: being in a terrible crash. We just tend to panic exactly.
Speaker 1: And you know, panic is actually a very important evolutionary adaptation.
Speaker 1: Fear and greed are a lot older than the ability
Speaker 1: to solve differential equations, and so when we start becoming threatened,
Speaker 1: we will react emotionally and and for physical threats that's
Speaker 1: actually a great response, but for financial threats it doesn't
Speaker 1: work out nearly as well. I'm Barry Hults. You're listening
Speaker 1: to Masters in Business on Bloomberg Radio. My special guest
Speaker 1: today is Professor Andrew Low of m I. T. Sloan School,
Speaker 1: of management. Let's talk a little bit about economists, and
Speaker 1: especially financial economists. I've long been a fan of the
Speaker 1: phrase that economists suffer from physics envy, and there's a
Speaker 1: quote of years that I have to share. Physicists can
Speaker 1: explain of all observable physical phenomena using Newton's three laws
Speaker 1: of motion. Economists probably have laws that explain three percent
Speaker 1: of all economic behavior. Explain that, well, you know, economics
Speaker 1: is about a much more complicated subject in physics, and
Speaker 1: I think that's the first point that we have to
Speaker 1: grapple with. I think it was the physicist Richard Feynman
Speaker 1: who speaking at a Caltic graduation said, imagine how much
Speaker 1: harder physics would be if electrons had feelings, And I
Speaker 1: think that really captures it. We're dealing with people that
Speaker 1: have feelings, and they react emotionally, sometimes as opposed to
Speaker 1: logically and rationally, and so the laws of physics don't
Speaker 1: really apply to human interactions in the same way that
Speaker 1: they apply to particles in a gravitational field. And it's
Speaker 1: very tempting for us to use the mathematics and the
Speaker 1: mantle of physicists, but the fact is that we're dealing
Speaker 1: with a very different object to say the very least.
Speaker 1: So let's talk about the criticism of the profession. Do
Speaker 1: you think, first, do you think economists get unfairly criticized
Speaker 1: and if so, what four? I think they do get
Speaker 1: unfairly criticized for certain things. Uh. It was once said
Speaker 1: that economists predict five out of the last three recessions.
Speaker 1: And uh, of course, you know, we don't have a
Speaker 1: perfect track record or prediction, but neither do weather forecasters.
Speaker 1: The nature of the task is much more challenging, and
Speaker 1: so I think that people have to understand the difficulty
Speaker 1: in making these kinds of economic predictions. We're getting better
Speaker 1: all the time, but it's still not purely predictive science.
Speaker 1: We need to actually take into account the art of
Speaker 1: economic forecasts. So let me push back on that a
Speaker 1: little bit. Yeah, that whether people are not perfect, but
Speaker 1: they could usually tell you a day or so before
Speaker 1: if it's going to rain, or if there's a possibility
Speaker 1: of rain, bring your umbrella. It's always always couched in
Speaker 1: probabilistic terms, which if you say there's a ten percent
Speaker 1: chance of rain and it rains, hey, the one intent
Speaker 1: chance came in. But the big criticism about economists, especially
Speaker 1: in the past decade, has was how did you guys
Speaker 1: miss the single biggest financial crisis since the Great Depression?
Speaker 1: If you can't see that coming, how, how why should
Speaker 1: people rely on you? And I know that's a loaded question,
Speaker 1: but defend the entire profession for missing the financial crisis, Well,
Speaker 1: you know, I'm not sure we did miss it. For example,
Speaker 1: in two thousand and five, Bob Schiller, ragu Rajan, and myself,
Speaker 1: all three of us wrote papers that described stress fractures
Speaker 1: in the financial system. Bob Shiller talked a bit about
Speaker 1: the real estate market and how that was going to
Speaker 1: be another kind of irrational exuberance UH bubble that was
Speaker 1: about to burst. In two thousand and five, ragu Rajan
Speaker 1: talked about the banking system becoming over extended and developing
Speaker 1: these kinds of UH risks of financial crisis. And some
Speaker 1: of my students and I wrote about the fact that
Speaker 1: the hedge fund industry was also heading for another debacle,
Speaker 1: very much along the line NDS of what happened in
Speaker 1: and so there was evidence in the data, and all
Speaker 1: three of us wrote papers and gave talks about it.
Speaker 1: But the fact is that unless you've got a very
Speaker 1: strong notion from the entire financial profession that we're headed
Speaker 1: to a crisis. It's very difficult to engage in policies
Speaker 1: to try to do anything about it. And certainly the U. S.
Speaker 1: Treasury and the FED were not in a position to
Speaker 1: make very strong changes in policy because there was no
Speaker 1: official word like the National Weather Service to tell you
Speaker 1: that a hurricane was coming. We need to have something
Speaker 1: like a national weather service for financial crisis. Isn't that
Speaker 1: supposed to be part of the role of the Federal Reserve.
Speaker 1: Shouldn't they be looking at the sustainability of the system
Speaker 1: and looking for those hurricanes coming. Well, you know, that's
Speaker 1: part of their responsibility. But their focus is on the
Speaker 1: banking system, and as we know from the financial crisis,
Speaker 1: it was the shadow banking system that actually grew very
Speaker 1: very quickly, and that they don't actually have jurisdiction. But
Speaker 1: the other thing is that the FED has a dual responsibility.
Speaker 1: They're actually all is supposed to be encouraging economic growth
Speaker 1: with their monetary policies, and so it's very difficult when
Speaker 1: you've got this dual mission to be able to focus
Speaker 1: single mindedly on preventing financial crises from occurring. See I
Speaker 1: think that you yourself, um, Professor Schiller, and who was
Speaker 1: which was Raja? And there were a handful of others
Speaker 1: who had pointed out, um, the the huge um disquilibria
Speaker 1: that was existing in the in the system um. Righthart
Speaker 1: and Rogoff put out a paper in late oh seven
Speaker 1: early oh eight saying, hey, here's what the prior five
Speaker 1: financial crisis looked like and if the United States as one,
Speaker 1: which they were strongly implying, this is what we should expect.
Speaker 1: Turned out to be fairly prescient. But the run of
Speaker 1: people of economists who were warning or at least talking
Speaker 1: about it, UH are notable because they are the exceptions
Speaker 1: and the by and large most of the profession kind
Speaker 1: of missed it, Which raises the question how we learned
Speaker 1: anything from the last crisis, and might the profession be
Speaker 1: better suited to identify the next hurricane that comes along. Well,
Speaker 1: there's no doubt that the economics profession has been indelibly
Speaker 1: altered by the events of the past, chastened, absolutely humbled.
Speaker 1: We've had many individuals who have stated publicly that they
Speaker 1: felt economics, particularly macroeconomics, has let down the profession, and
Speaker 1: I think part of it was a devotion to these
Speaker 1: extraordinarily complex, rigorous mathematical formulations which were precise but precisely wrong.
Speaker 1: And uh, someone once said that it's better to be
Speaker 1: approximately right than precisely wrong. And I think we're sort
Speaker 1: of taking that now to heart. Do do we? Are
Speaker 1: we overly enamored with precision and data, specifically for things
Speaker 1: that as you described, You know, the the old joke
Speaker 1: is why why do economists um provide data to two
Speaker 1: decimal points? And the answer is to shoot show they
Speaker 1: have a sense of humor. Are we overly reliant on
Speaker 1: the illusion of precision? And is that part of the
Speaker 1: problem that we run into? Well, that's definitely a problem,
Speaker 1: and I think that a number of economists have written
Speaker 1: about it, and I believe that there is some kind
Speaker 1: of a reaction or a backlash to the mathematization of economics.
Speaker 1: There's no doubt that rigor has a role to play
Speaker 1: in our field. But someone once said that along with
Speaker 1: rigor usually goes mortis. So I think we have to
Speaker 1: be very careful about how we use mathematics. I'm Barry Ridholts.
Speaker 1: You're listening to Masters in Business on Bloomberg Radio. My
Speaker 1: special guest today is Professor Andrew Lowe of the m
Speaker 1: I T. Sloan School of Management, where he is the
Speaker 1: director of the m I T Labs for Financial Engineering.
Speaker 1: He has a PhD from Harvard and is the author
Speaker 1: of numerous books, including most recently, Adaptive Markets Financial Evolution
Speaker 1: at the Speed of Thought. Let's talk a little bit
Speaker 1: about the new book, because I I it's really fascinating
Speaker 1: and accessible. I don't want to call it a primer,
Speaker 1: but really a next generation look at how markets have
Speaker 1: changed over time and how investors should be interacting with them.
Speaker 1: Let me let me pull a quote right to begin with.
Speaker 1: The adaptive markets hypothesis is based on the insight than
Speaker 1: investors and financial markets behave more like biology than physics,
Speaker 1: comprising a population of living organisms competing to survive, not
Speaker 1: a collection of inanimate objects subject to the immutable laws
Speaker 1: of motion. How did you come about this biological organic
Speaker 1: explanation as opposed to the more traditional mathematical physics explanation. Well,
Speaker 1: you know I came about it. I guess really being dragged,
Speaker 1: kicking and screaming through various different disciplines. So the book
Speaker 1: is really a travelogue of my intellectual journey from a
Speaker 1: I heard devotee of efficient markets and rational expectations into
Speaker 1: the realm of first psychology and behavioral finance, and then
Speaker 1: to neuroscience and how people really make decisions, and then
Speaker 1: to the evolutionary biology of how our brain evolved, and
Speaker 1: then ultimately to the ecology of all of the various
Speaker 1: different dynamics of multiple competing species. So it wasn't that
Speaker 1: I was looking for these other disciplines, but they ultimately
Speaker 1: ended up becoming really important for understanding the very simple
Speaker 1: idea that you've got to explain these facts using as
Speaker 1: whatever tools you have at your disposal. We were speaking
Speaker 1: um off air that I had seen you Um give
Speaker 1: a lecture I think it was right after the financial crisis,
Speaker 1: trying to explain some of the reasons why markets were
Speaker 1: less efficient than they appear. How do you end up
Speaker 1: with a crisis and you end up with these wild
Speaker 1: highs and these crazy lows. If the markets are truly efficient,
Speaker 1: it can't be. That can't be the case. And the
Speaker 1: genesis of this process of the organic way of looking
Speaker 1: at markets were evident in your lecture. How long have
Speaker 1: you been playing with this idea? It has to be
Speaker 1: at least a decade, if not longer. Well, it's actually longer.
Speaker 1: It really started in when I started looking at the
Speaker 1: data for the random walk hypothesis. That's a particular version
Speaker 1: of efficient markets, which says that stock prices follow random walks.
Speaker 1: You can't predict where you're gonna be tomorrow based upon
Speaker 1: where you are today. At least that was the theory,
Speaker 1: And when my co author Craig McKinley and I started
Speaker 1: looking at the data, no matter which way we sliced it,
Speaker 1: we couldn't get the random walk to work. In other words,
Speaker 1: the data are not consistent with the random walk. There
Speaker 1: are predictability, there's some persistence and some momentum and other factors.
Speaker 1: In fact, you wrote a book A non random Walk
Speaker 1: down Wall Street, and you also wrote a book on
Speaker 1: the Heretics of Finance about technical analysts. How does that
Speaker 1: play into the biological approach? Well, so it was really
Speaker 1: looking at the technical analysis literature that got me to
Speaker 1: start thinking a little bit more broadly. For those of
Speaker 1: the listeners who don't know, technical analysis is really a
Speaker 1: somewhat disreputable uh field of study that academics often pooh pooh,
Speaker 1: but which I think actually has quite a lot of value,
Speaker 1: and it's the idea that you can use geometric patterns
Speaker 1: in price data to be able to make forecasts and
Speaker 1: to try to understand how markets move. The technical analysts
Speaker 1: from the nineties, forties and fifties really understood that markets
Speaker 1: were driven not just by supplying demand, but also by
Speaker 1: the nature of emotion, by fear and greed, and so
Speaker 1: they would actually come up with patterns, trends, reversals, and
Speaker 1: other kinds of tools that, for those days where they
Speaker 1: didn't have computers and fancy technology, actually allowed them to
Speaker 1: make pretty useful forecasts. And it was reading that literature
Speaker 1: that got me to start thinking a little bit more
Speaker 1: oddly that maybe the mathematical equations that we use in
Speaker 1: modern finance is not the be all, in the end
Speaker 1: all of how you think about financial markets. And to
Speaker 1: that point, another quote of yours were more impulsive over
Speaker 1: the short term and more logical over the long term,
Speaker 1: very reminiscent of Danny Kahneman's thinking fast and slow. Tell
Speaker 1: us what you mean by impulsive versus logical. Well, if
Speaker 1: you take a look at how people make decisions, it
Speaker 1: turns out that from the neurophysiological perspective, there are multiple
Speaker 1: competing components of the brain that are at work. For
Speaker 1: long term decisions where we have the luxury of thinking
Speaker 1: carefully and deliberating on various different choices, for example, asset
Speaker 1: allocation or retirement planning. We can make supremely rational, mathematically
Speaker 1: precise decisions. But then crisis hits, events happen and we react,
Speaker 1: and in those cases we're reacting emotionally, not necessarily logically.
Speaker 1: And it's the emotional components of the brain, which are
Speaker 1: far older than the ability to do mathematics, that kick in,
Speaker 1: and the way they kick in they really overwhelm us.
Speaker 1: We are overwhelmed by our emotional centers, and when that happens,
Speaker 1: the decisions that we make are not particularly good when
Speaker 1: it comes to for our financial health. I'm Barry rid Halts.
Speaker 1: You're listening to Masters in Business on Bloomberg Radio. My
Speaker 1: special guest today is Professor Andrew Lowe of the m I. T.
Speaker 1: Sloan School of Management. Let's talk a little bit about
Speaker 1: hedge funds, which you've written about extensively as well as
Speaker 1: written a book, Hedge Funds and Analytic Perspective. Let's start
Speaker 1: with a quote of yours. At the start, the general
Speaker 1: partner brings all the experience and the limited partners bring
Speaker 1: all the money. At the end, the general partner leaves
Speaker 1: with all the money and the limited partner leaves with
Speaker 1: all the experience. I find that to be a hilarious quote.
Speaker 1: How do you really feel about hedge funds? Well, you know,
Speaker 1: that was really meant to represent the kind of skepticism
Speaker 1: that a lot of people have for hedge funds. But
Speaker 1: I think that hedge funds play an incredibly important role
Speaker 1: in the financial ecosystem. They're the tip of the spear
Speaker 1: in terms of taking advantage of profit opportunities as they emerge,
Speaker 1: but they're also the canary in the coal mine. They
Speaker 1: get hit first when financial distress starts to develop. Why
Speaker 1: is that? Why are they so fast to react when
Speaker 1: an opportunity exists, but sometimes fast to embrace risks that
Speaker 1: don't pay off in fact have a negative ramification. Well,
Speaker 1: it's because of their unregulated nature. Hedge funds are allowed
Speaker 1: to do anything and everything in order to make returns
Speaker 1: for their investors, and the fact that they are unregulated
Speaker 1: is actually really important. It's because it allows us to
Speaker 1: see what all of the various different dynamics are in
Speaker 1: financial markets unfettered by regulation of any sort. So they're
Speaker 1: the laboratory. They're the experiment where these different things take place.
Speaker 1: And while they're three trillion dollars, which sounds like a
Speaker 1: lot of money in the grand scheme of global and
Speaker 1: sestable assets, that really is a few percentage of total
Speaker 1: um money that's out there at work. Well, it seems
Speaker 1: like a small number compared to say, Vanguard. Vanguard just
Speaker 1: passed their four trillion two right, So the entire hedge
Speaker 1: fund industry is only three trillion, But that number is
Speaker 1: misleading because hedge funds can use leverage, and they can
Speaker 1: go short, and they can trade at much higher frequencies
Speaker 1: than say mutual funds, So that three trillion goes a
Speaker 1: long long way in terms of having market impact. And
Speaker 1: one of the things that I'm always surprised when people
Speaker 1: bring up the financial crisis and hedge funds, and somehow
Speaker 1: I believe hedge funds were responsible. They really survived the crisis.
Speaker 1: They might have taken a little bit of a beating.
Speaker 1: I think the numbers were down, but they certainly weren't
Speaker 1: the cause of the crisis. In any way, shape or
Speaker 1: form or or Am I overstating it? No, No, you're
Speaker 1: right that it's really hard to attribute cause to any
Speaker 1: one player in the system. I think we all contributed
Speaker 1: to the financial crisis in one form or another. It's
Speaker 1: really the complex city of the system and the fact
Speaker 1: that we have these non linearities that people really weren't
Speaker 1: focusing on that ultimately caused this huge debacle. But really,
Speaker 1: hedge funds were not a big player in all the
Speaker 1: spaces that ultimately blew up. They weren't giant in securitization
Speaker 1: of mortgages, they weren't underwriting uh, subprime credit. They really
Speaker 1: were doing what they normally do, which is buying and
Speaker 1: selling stocks, bonds, and even some derivatives exactly. But the
Speaker 1: hedge fund industry showed some very important stress fractures that
Speaker 1: had we been listening, had we really spent time watching
Speaker 1: what was going on in the hedge fund world, we
Speaker 1: would have seen all sorts of early warning signs, And
Speaker 1: in fact, a number of us did write about them
Speaker 1: back in two thousand and five and six. And I
Speaker 1: think that's one of the reasons why the hedge fund
Speaker 1: industry is such an important part of the financial ecosystem.
Speaker 1: Has your thinking about hedge funds evolved over the years,
Speaker 1: or or how has your perspectives? How might your perspectives
Speaker 1: have changed? Well, you know, I'm now more convinced than
Speaker 1: ever that hedge funds play an important role and that
Speaker 1: we can learn a lot by monitoring the industry. But
Speaker 1: I think that the hedge fund industry itself is undergoing
Speaker 1: some pretty dramatic changes, both because hedge funds have become
Speaker 1: more sophisticated technologically, but also because competition has actually winnowed
Speaker 1: the field. A lot of hedge funds disappointed in their
Speaker 1: returns over the last five to ten years, and so
Speaker 1: the hedge fund industry has seen a lot of consolidation.
Speaker 1: So the industry today is very different than what it
Speaker 1: was a decade ago. Any theories as to why the
Speaker 1: performance of hedge funds over the last decade has been
Speaker 1: not only below with their traditional returns have been, they've
Speaker 1: been below just a straight up sixty forty portfolio, Yeah,
Speaker 1: you know, there are three factors that are going on
Speaker 1: in the hedge fund industry that have really challenged its performance.
Speaker 1: The first is that the risk free rate is actually
Speaker 1: much lower now than before, and so hedge fund industries
Speaker 1: relied to some degree on the risk free rate in
Speaker 1: order to be able to add to its expected wouldn't
Speaker 1: that make their borrowing costs that much cheaper and allow
Speaker 1: their leverage to be more effective? Or am I oversimple
Speaker 1: You would think so. But that's the second factor that's
Speaker 1: actually hurting hedge fund returns. It's that leverage is way down.
Speaker 1: Even though risk free rate is lower, the amount of
Speaker 1: leverage that hedge funds are afforded is much lower now
Speaker 1: because people are less risk seeking. And that we know
Speaker 1: that policies like the FEDS changes in leverage restrictions among
Speaker 1: banks have made it more difficult for hedge funds to
Speaker 1: get the same kind of leverage that they did in
Speaker 1: the early two thousands. And what's the third reason. And
Speaker 1: the third reason is that if you look at the
Speaker 1: volatility of markets, it's lower now than it's been in
Speaker 1: quite a long time. And hedge funds really make money
Speaker 1: on volatility. They actually look for high volatility to be
Speaker 1: able to earn their returns. Well, we saw a lot
Speaker 1: of volatility in the financial crisis, and a decent amount
Speaker 1: of volatility in the first couple of years afterwards. They
Speaker 1: didn't do too great that period as well. Well, you know,
Speaker 1: there was actually a lot of diversity. There are some
Speaker 1: hedge funds that did spectacularly well crisis, and but you're
Speaker 1: right that overall hedge funds were challenged, and I think
Speaker 1: it's because the relationships that they were trading on. Those
Speaker 1: relationships changed when we had this huge shock called the
Speaker 1: financial crisis, and over time they're gonna learn how to
Speaker 1: adapt to that. But it's gonna take time and not surprisingly,
Speaker 1: just like when we lost the dinosaurs, when that meteorite
Speaker 1: hit the planet, kicked up a cloud of dust, killed
Speaker 1: the trees, you know, sixty five million years ago, that
Speaker 1: same kind of extinction event occurred in two thousand and eight,
Speaker 1: two thousand and nine. So Michael Mobison of Colombia and
Speaker 1: Credit Swiss talks about the paradox of of skill. Um
Speaker 1: Jim Chenos of Kindicost Partners, who's been running a hedge
Speaker 1: fund for about thirty years, said, in the early days,
Speaker 1: there were a hundred hedge funds generating alpha, and now
Speaker 1: there's eleven thousand, but it's the same hundred. How much
Speaker 1: does that paradox of of skilled tremendous number of really sharp,
Speaker 1: really smart guys, and it's mostly guys. Uh, not exclusively,
Speaker 1: but but almost um primarily. How much does that wave
Speaker 1: of new hedge funds reduce the amount of alpha that's
Speaker 1: there to go around. Well, you know, there's no doubt
Speaker 1: that you're going to have much more competition in any time.
Speaker 1: You have an industry that does well for a period
Speaker 1: of time because it draws people from all walks of
Speaker 1: life to start applying their trade in the hedge fund industry.
Speaker 1: And by the way, you're right that the hedge fund
Speaker 1: industry seems to be dominated by men, but I want
Speaker 1: to mention there is an organization called one Women in
Speaker 1: Hedge Funds, So I think we are drawing women into
Speaker 1: the field as well. Over time, you're going to see
Speaker 1: that competition create these kinds of periods of consolidation. But
Speaker 1: then when you have large events like the financial crisis,
Speaker 1: that's also an opportunity for lots of new hedge funds
Speaker 1: to spring up, like new species that come into existence
Speaker 1: after an extinction event. So it's not surprising that, say,
Speaker 1: the hedge high frequency trading funds popped up over the
Speaker 1: course of the last ten years, whereas they didn't play
Speaker 1: nearly as big a role the previous decade. And I
Speaker 1: know I've seen studies about women as trade leaders generally
Speaker 1: outperformed men. They're less emotional, they're less attached to bad decisions,
Speaker 1: They're quicker to cut their losses. I'm surprised we haven't
Speaker 1: seen more women hedge fund managers, given given some of
Speaker 1: the academic data. I think that there's going to be
Speaker 1: more women coming into the industry over time. And I
Speaker 1: think I welcome that because you're right that women tend
Speaker 1: to have a very different trading profile, and some of
Speaker 1: our experiments we've seen that women do tend to perform better,
Speaker 1: not just on an absolute basis, but on a risk
Speaker 1: adjusted basis. They tend to be much more careful about
Speaker 1: managing their risk. Let's let's talk about one of those
Speaker 1: hedge funds that are in the few hundreds that generate alpha.
Speaker 1: You you spoke with the David Shaw of d Shaw
Speaker 1: and UM, which also spawns some guy named Jeff Bezos
Speaker 1: and and Amazon UM. He said, anomalies that had previously
Speaker 1: generated significant profits stopped making money, and you were forced
Speaker 1: to discover other more complex effects that people had not
Speaker 1: yet found. The market is never completely efficient, but it
Speaker 1: certainly has a tendency to become more efficient over time.
Speaker 1: Does that help to explain why we've seen hedge fund
Speaker 1: performance sort of flatten out over the last decade. Absolutely.
Speaker 1: I think what David was talking about is exactly this
Speaker 1: process of adaptation, innovation, competition, and over time, the evolution
Speaker 1: of financial markets with one trading strategy at a time.
Speaker 1: And you know, he's a real pioneer in the in
Speaker 1: the field and having developed some of the earliest trading
Speaker 1: strategies for statistical arbitrage, and that's an area that's really
Speaker 1: evolved quite a bit over the last decade. So our
Speaker 1: markets now adapting too fast to all these changes in
Speaker 1: all these new strategies. It used to be you would
Speaker 1: come up with an idea before anybody else, you could
Speaker 1: work on it for a while and it would be
Speaker 1: profitable for a couple of years. It seems that these
Speaker 1: ideas are either smaller and rower, or the markets adapting
Speaker 1: that much faster and whatever edge exists goes away pretty quickly. Yeah.
Speaker 1: You know, technology plays a much bigger role today than
Speaker 1: it did ever before, and it's kind of a financial
Speaker 1: arms race where if you've got a good idea you
Speaker 1: can implement it now faster than you can even think
Speaker 1: about it. Uh. It's what I call the confluence of
Speaker 1: Moore's law meets Murphy's law. And I think that's the challenge.
Speaker 1: It's that we now have technologies that are so powerful
Speaker 1: it allows us to do things that we really never imagined,
Speaker 1: and there are going to be unintended consequences. We have
Speaker 1: been speaking with Professor Andrew low of m I T.
Speaker 1: S Sloan School of Management. If you enjoy this conversation,
Speaker 1: be sure and check out our podcast extras where we
Speaker 1: keep the tape rolling and continue to talk about all
Speaker 1: things financial engineering. You can find that on SoundCloud, iTunes
Speaker 1: and Bloomberg dot com. You can find all the Professor
Speaker 1: lows uh written work either at the m I T.
Speaker 1: Website or at any bookstore Barnes, Noble or Amazon dot com.
Speaker 1: Be sure and check out my daily column on Bloomberg
Speaker 1: View dot com or follow me on Twitter at Rit Halts.
Speaker 1: I'm Barry Rit Halts. You're listening to Masters in Business
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Speaker 1: Bank of America. Mary Lynch makes available pducts and services
Speaker 1: offered by Merrill Lynch. Pierce, Feder and Smith Incorporated, a
Speaker 1: registered broker dealer. Remember s I PC. Welcome to the podcast.
Speaker 1: Thank you Professor Lowe for doing this and being so
Speaker 1: generous with your time. I had I had mentioned um earlier,
Speaker 1: I had seen you speak it's got to be a
Speaker 1: decade ago. It was right after the financial crisis, and
Speaker 1: I had discussed with you how how the high efficient
Speaker 1: market hypothesis could really exist in its strong form When
Speaker 1: we see how can I how can I market be
Speaker 1: worth X on day one and Y on day too,
Speaker 1: it doesn't really seem to make a whole lot of sense.
Speaker 1: And I thought you're marriage of of the biological to
Speaker 1: to the markets is really fascinating, and because it brings
Speaker 1: in not only behavioral economics, but it brings in some
Speaker 1: of the neuroscience that's out there, that that's pretty fascinating.
Speaker 1: You do some interesting experiments at M I t looking
Speaker 1: at this sort of stuff. Um. The one that stood out,
Speaker 1: I think it was this book the study where you
Speaker 1: took twenty eight students and had them go through a
Speaker 1: simulated market, and you ended up with fairly efficient um
Speaker 1: decision making with just participants. Am I? Am I misstating that?
Speaker 1: Or no, that's right, So so explain explain that lab
Speaker 1: a little bit and and what you're looking to accomplish
Speaker 1: with it and what that experiment showed. Sure, well, you know,
Speaker 1: it was an interesting collaboration between myself and a neuroscience
Speaker 1: as Tommy Poggio, and a marketing expert Elita Han, and
Speaker 1: a couple of our students Nicolas Chan and Adler Kim.
Speaker 1: What we were trying to do there was to understand
Speaker 1: how the standard consumer marketing surveys could be replaced with
Speaker 1: a simple market simulation. And we did the experiment where
Speaker 1: we compared a situation where you were trying to get
Speaker 1: consumers to express their preferences about different kinds of bicycle pumps.
Speaker 1: And so typically a consumer survey would involve a long
Speaker 1: series of studies where you ask a bunch of customers
Speaker 1: features about particular bicycle pump that they may or may
Speaker 1: not like, and these surveys generally take many hundreds of
Speaker 1: thousands of dollars and weeks and weeks to conduct. We
Speaker 1: decided to run a simulation where we created synthetic securities
Speaker 1: representing each of these different bicycle pumps, and we allowed
Speaker 1: students to trade them over the course of thirty minute
Speaker 1: interval in a kind of a mock trading session in
Speaker 1: our trading lab. And what we found at the end
Speaker 1: of that thirty minutes is that the relative prices of
Speaker 1: these synthetic securities actually corresponded precisely to the marketing surveys
Speaker 1: that took weeks and weeks to conduct. In other words,
Speaker 1: by using the market, you could actually collect the wisdom
Speaker 1: of crowds much more quickly than if you've just done
Speaker 1: the surveys individual by individual. Even a simulated market with
Speaker 1: a small number of participants exactly so instead of having
Speaker 1: to use hundreds or thousands of consumers, just a small
Speaker 1: number over a short period of time can actually give
Speaker 1: you much the same results. How do you set that
Speaker 1: up where you're incentivizing the participants to actually put the
Speaker 1: time and energy into it to to do it so
Speaker 1: it's functional and efficient. Well, that's the beauty of markets.
Speaker 1: People are already incentivized to try to beat the market,
Speaker 1: that to try to come up with the winning picks.
Speaker 1: And it's that process, that kind of competitive spirit that
Speaker 1: financial markets bring out in people that allow us to
Speaker 1: extract information in a much more efficient manner. So let me, UM,
Speaker 1: I'm gonna pull something from UM one of the efficient
Speaker 1: market issues that had come up that has always it
Speaker 1: has always annoyed me, and it had to do with
Speaker 1: the This is why I never print on two page,
Speaker 1: two sided. UM. It always had had to do with
Speaker 1: the Challenger explosion and the reaction. And I always thought, Um,
Speaker 1: the wisdom of crowds got it wrong, and a few
Speaker 1: other things got it wrong. But I'm curious as to
Speaker 1: your perspective. Here, here's something we pulled from the book.
Speaker 1: The day the Challenger exploded provided evidence that prices rapidly
Speaker 1: reflect all available information. So I'm gonna stop there. Morton
Speaker 1: Theicole was halted for training thirteen minutes after the Challenger exploded,
Speaker 1: even though it was one of four potential culprits had
Speaker 1: closed the day down twelve no evidence of insider trading.
Speaker 1: The other three didn't sell off. And I want to
Speaker 1: say the other three were wing Um. It might have
Speaker 1: been Northbrook, Brumen. I don't know if they were separate
Speaker 1: companies back then and one other. Um what took the
Speaker 1: smartest minds five months to figure out, the stock market
Speaker 1: figured out in hours. I've always hated that argument because
Speaker 1: Morton theicle essentially had a soul. Their business was providing
Speaker 1: the sort of stuff too the government, these sort of
Speaker 1: contracts for aerospace and aviation. All the other companies had massive,
Speaker 1: unrelated businesses to the Challenger. So it wasn't so much
Speaker 1: that the market figured out who made the OH ring
Speaker 1: and we knew and the market figured out the O
Speaker 1: ring was. It was essentially a bet. Hey, if it
Speaker 1: was Grumman or north Rope or Boeing, the business has
Speaker 1: nothing to do with this, it's not gonna have a
Speaker 1: big impact. But if it's Morton theical, hey, this is
Speaker 1: really potentially problematic. It wasn't. It's always presented as Oh,
Speaker 1: the market figured out that Morton the cole knew that
Speaker 1: they were responsible for the Challenger disaster. In reality, their
Speaker 1: business was so tied to it that it mattered more
Speaker 1: to them than everybody else. That does that criticism hold
Speaker 1: water well? I think it does hold water to some degree,
Speaker 1: but it's very difficult for us to separate out the
Speaker 1: two effects, because you know, Morton Thiacle was responsible for
Speaker 1: creating the booster rocket that ultimately exploded, whereas Rockwell International,
Speaker 1: Martin Marietta, and Lockheed were involved in other parts of
Speaker 1: the Space Shuttle mission. And you're quite right that they're
Speaker 1: bigger companies that were involved in different aspects. But the
Speaker 1: fact that within minutes of this event, Martin thy Call
Speaker 1: was singled out does suggest that, for whatever reason, there
Speaker 1: was wisdom in the crowds in saying that that company
Speaker 1: was going to be more effective. But you're absolutely right
Speaker 1: that we had no idea about the o ring and
Speaker 1: that really required the five and a half month investigation
Speaker 1: that the Roger's Commission conducted. Yeah, I've always looked at
Speaker 1: as as hey, if any of these other companies are
Speaker 1: found responsible, this is a small part of their business.
Speaker 1: But for Morton Thoicle, this this is really problematic, and
Speaker 1: it's always always seems to be um misdescribed, or at
Speaker 1: least that's that's how I've looked at it. We talked
Speaker 1: about hedge funds before. What we didn't get to two
Speaker 1: questions that I thought were really important. One was hedge
Speaker 1: funds and an e T F rapper. Good idea, terrible idea.
Speaker 1: What do we think about this? Well, I think it's
Speaker 1: a mixed idea. And the reason is that for many
Speaker 1: kinds of hedge fund strategies, retail investors should and want
Speaker 1: to get access to them. But the problem is that
Speaker 1: certain kinds of hedge funds strategies carry with them very
Speaker 1: subtle risks that retail investors are not in a position
Speaker 1: to be able to evaluate. So a good example is
Speaker 1: tail risk, for example, catastrophe reinsurance. UH, that kind of
Speaker 1: risk is very subtle in the sense that it generally
Speaker 1: doesn't happen the time, and so most to the time
Speaker 1: you're earning pretty decent returns at relatively the low risk.
Speaker 1: It sounds like a great deal. But every once in
Speaker 1: a while, in the parlance of Wall Street, you get
Speaker 1: your face ripped off. And that's the thing that retail
Speaker 1: investors don't fully appreciate, don't understand, and aren't really prepared for.
Speaker 1: So the hedge fund strategies that have those kinds of
Speaker 1: risks are going to be very difficult for investors to
Speaker 1: tolerate in an E t F format, and that that's
Speaker 1: the concern that I have about these kinds of strategies.
Speaker 1: The criticism that i've I've seen about the E t
Speaker 1: F hedge funds, some people have described them as muppets.
Speaker 1: Famous quote from one of the earlier Goldman sachs Um
Speaker 1: litigations that was pulled out of context, but salespeople describing
Speaker 1: their clients as muppets. But what it means in this
Speaker 1: context is, Hey, the really good hedge funds are filled up.
Speaker 1: They have institutions that can swing billions of dollars around.
Speaker 1: By the time you get to the hedge funds that
Speaker 1: are put into an e t F rapper, lesser managers,
Speaker 1: lesser track records, not as strong a model, or at
Speaker 1: least a perspective model looking forward, So you're left with
Speaker 1: second tier hedge funds in an E t F rapper
Speaker 1: for them uppets, fair criticism or again overstating it. I
Speaker 1: think that's a bit of an overstatement, and I think
Speaker 1: it misses the point that there's actually a spectrum of
Speaker 1: risk reward opportunities that investors are really looking for. At
Speaker 1: the one extreme of that spectrum are investors that are
Speaker 1: looking for absolute return, high octane investments. They don't care
Speaker 1: if you lose in a year as long as there's
Speaker 1: a chance of making in a year. And that's perfectly
Speaker 1: fine for that group of investors. But for typical retail
Speaker 1: investors that are saving money for their four oh one
Speaker 1: K plan, they don't want that to turn into a
Speaker 1: tool one K plan. They want to make sure that
Speaker 1: the downside is not going to be completely devastating, and
Speaker 1: so you've got to put in various kinds of protections
Speaker 1: and risk management tools that will definitely reduce the upside,
Speaker 1: but it will also reduce the downside. There's no free lunch,
Speaker 1: as the old adage goes, and so you've got to
Speaker 1: take the good with the bad. And I think there's
Speaker 1: a role for those kinds of vehicles, and that's really
Speaker 1: what the hedge fund industry is transforming into when they
Speaker 1: develop mutual fund products. It reminds me of yet another
Speaker 1: quote of yours. Traditional market cap weighted static index funds
Speaker 1: still work very well for the average investor, but some
Speaker 1: investors continue to look for an edge, hoping to find
Speaker 1: alpha in an ocean of beta. That raises two questions.
Speaker 1: One is is it really just a drop of alpha
Speaker 1: in an ocean of data? How much alpha exists for
Speaker 1: the hedge fund industry to to go after. Well, you know,
Speaker 1: the way I think about alpha is that really represents
Speaker 1: sort of the the creative opportunities that active competitive investors
Speaker 1: are trying to come up with. And so by definition,
Speaker 1: all of these kinds of creative opportunities are going to
Speaker 1: be limited. The more compare editive a market is, the
Speaker 1: more difficult it is to be coming up with genuine alpha.
Speaker 1: You know, the famed investor Marty Lebowitz wrote an article
Speaker 1: once UH that called uh, these particular objects alpha hunters
Speaker 1: versus beta grazers, And I think that really captures the spirit,
Speaker 1: that's the dynamic between alpha and beta, alpha hunters and
Speaker 1: beta grazers. I like the way, I like the way
Speaker 1: that UM sounds. Let's let's talk a little bit about
Speaker 1: something that is UM somewhat related. So, over time, we've
Speaker 1: seen the drag that high fees put on returns. We
Speaker 1: talked earlier about Vanguard at four point to trillion. They've
Speaker 1: been notorious for driving fees down. It's even called the
Speaker 1: Vanguard effect. What are we given what we know about
Speaker 1: the drag of high fees and the effect of compounding
Speaker 1: over time, are we likely to see a substantial change
Speaker 1: in hedge fund fees anytime soon. Well, there's no doubt
Speaker 1: that it's going to be pressure on hedge fund fees
Speaker 1: because of all of the very different lower cost vehicles. Uh.
Speaker 1: In fact, you know Jack Bogel's principle, the cost matter hypothesis,
Speaker 1: I think really summarizes at all. Uh. Well, I think
Speaker 1: we have to be careful about that trend. But at
Speaker 1: the same time, investors are also looking for new investment opportunities,
Speaker 1: and to the degree that they can come up with
Speaker 1: great returns beyond fees, they're going to actually be able
Speaker 1: to command whatever it is that the market will bear. So,
Speaker 1: speaking about Jack Bogel, the rise of indexing has really
Speaker 1: taken off again since the uh this is a story
Speaker 1: that's fifty years in the making. One was Bogel's famous paper.
Speaker 1: He launched Vanguard, and I think seventy two or seventy
Speaker 1: four something like that didn't do too well for the
Speaker 1: first five years. Really, since the financial crisis, they've exploded.
Speaker 1: I want to say they were about a trillion dollars
Speaker 1: before the financial crisis. Now they're over fourt brilliant. That
Speaker 1: raises an interesting question, does the rise of indexing distort
Speaker 1: markets and at what point does indexing become too big?
Speaker 1: Estimates are all over the place. It's five percent, it's
Speaker 1: fift it's of global investable assets um. Even Vanguard is
Speaker 1: a third active management there over a trillion dollars an
Speaker 1: active low cost funds. How big is too big for indexing?
Speaker 1: That's a great question, and it's funny because that's a
Speaker 1: question that I would have expected people would have asked
Speaker 1: long time ago, just the same way that people ask
Speaker 1: how much capacity does a hedgeman have. It's only recently
Speaker 1: that people who started asking the question about index funds. So,
Speaker 1: first of all, index funds are an unqualified success. It's
Speaker 1: clearly that they really benefit investors in the long run
Speaker 1: by reducing costs and giving them diversification. However, there is
Speaker 1: one aspect that we have to think about, and that's
Speaker 1: something that the adaptive markets hypothesis points to, which is
Speaker 1: that when everybody starts investing in the same vehicle, that
Speaker 1: means that there's gonna be a hardwired correlation that we
Speaker 1: create among various different investors experiences. Because now, if we've
Speaker 1: got lots of people investing in the same index fund,
Speaker 1: if and when that index fund declines we're all going
Speaker 1: to be facing those declines at the same time, and
Speaker 1: if those declines are severe enough to trigger our emotional reaction,
Speaker 1: we're all going to be freaking out at the same time.
Speaker 1: So inadvertently, these kinds of index fund holdings could actually
Speaker 1: create more systematic risk in the financial system. It's not
Speaker 1: to say that they don't add value. Absolutely they do,
Speaker 1: and they're an incredible part, important part of the financial ecosystem.
Speaker 1: But because they're so big, they can actually create these
Speaker 1: kinds of ripple effects that were only now seeing. So
Speaker 1: let me tell this back to your earlier UM study
Speaker 1: where you had the limited number of students replacing the
Speaker 1: giant UM public survey. How many people does it take
Speaker 1: to make markets efficient enough? For asked differently, what percentage
Speaker 1: of investors have to be active traders in order for
Speaker 1: price discovery to work its magic. Well, it looks like
Speaker 1: from the experiments that we conducted, if you've got very
Speaker 1: well funded traders, only a few percentage points of markets
Speaker 1: need to be informed trading in order to make them
Speaker 1: very efficially. So we could have making up numbers of
Speaker 1: the investing public indexing as long as ten percent as
Speaker 1: active management. You'll still get price discovery, you'll still get
Speaker 1: markets working efficiently, will still actually be equivalent to as
Speaker 1: if everybody was was actively trading. Well, in fact, I
Speaker 1: think that it might work even better if everybody weren't
Speaker 1: actively trading, because when you have everybody competing to make
Speaker 1: a slight margin, than any small bump in the road
Speaker 1: can quickly escalate into a financial crisis. You want to
Speaker 1: have a majority of the market participants focusing on passive,
Speaker 1: long term investments in order to maintain market stability. So
Speaker 1: indexing lowers volatility in the long haul, It certainly can
Speaker 1: as the potential right that that that's quite fascinating. One
Speaker 1: of the complaints I've heard from the active community about
Speaker 1: indexing is, well, there goes price discovery, the markets will
Speaker 1: no longer be efficient, and how can you identify the
Speaker 1: true value of a company when you have these big
Speaker 1: indexers just buying everything. You're saying, that's not necessarily a
Speaker 1: fair criticism, not at all, because I think that if
Speaker 1: you take a look at the size of hedge funds
Speaker 1: and the ability for them to trade and take advantage
Speaker 1: of market opportunities, despite the fact that they don't have
Speaker 1: nearly the size of assets as the passive index funds,
Speaker 1: they can move markets much more rapidly and in greater
Speaker 1: depth on any given occasion. Alright, So so it gives
Speaker 1: rise to another quote of yours, which I really want
Speaker 1: you to explain, because, um, I kept coming back to
Speaker 1: it within the book. I was having a hard time,
Speaker 1: UM grasping part of it. It takes a theory to
Speaker 1: beat a theory. Explain what you mean by that. In academia,
Speaker 1: it's not good enough to just throw stones at an idea.
Speaker 1: You've got to come up with a better one. You
Speaker 1: have to replace the bad idea with a good idea exactly.
Speaker 1: Or the way I would put it is that there
Speaker 1: really aren't any bad ideas. We really have approximations to reality,
Speaker 1: and we try to improve on those approximations one after
Speaker 1: the other. So version one point oh is a starting point,
Speaker 1: but then you've got to get to one point one
Speaker 1: and then eventually two point oh. So we're trying to
Speaker 1: come up with theories that can actually beat existing theories
Speaker 1: in order to move of these ideas forward. So I'm
Speaker 1: I'm gonna mangle a quote and I don't remember if
Speaker 1: it was physics or economics that I think it was
Speaker 1: physics originally, Um, and the quote and it'll come to
Speaker 1: me later who said it, physics advances one funeral at
Speaker 1: a time, meaning you have these theories that let's call
Speaker 1: him the one point oh theories, and there's a whole
Speaker 1: generation of grad students and subsequent scientists trained on it,
Speaker 1: and it takes a long time before these theories are
Speaker 1: finally put to rest and the newer, faster, smarter, better
Speaker 1: theories replace them. How much inertia is there in academia
Speaker 1: and how much inertia is in the world of financial
Speaker 1: modeling and theorism. I think it was Max Planck who
Speaker 1: originally said that, and then Paul Samuelson paraphrase that to
Speaker 1: said they to say that science progresses funeral by funeral,
Speaker 1: and uh, you know, that's a particularly morbid kind of
Speaker 1: an average. Um. But I think there's a truth. There's
Speaker 1: a certain element of truth to it, and it has
Speaker 1: to do with the fact that, you know, academics become
Speaker 1: very attached to their ideas, and so at some point,
Speaker 1: in order to challenge an existing theory, you really need
Speaker 1: to develop a competing alternative that really provides some compelling actions. UM.
Speaker 1: Cliff Astness tells the story. When he was uh doing
Speaker 1: his doctoral work, his his financial advice, his academic advisor
Speaker 1: was Eugene Fama, and he had the bright idea of
Speaker 1: writing his PhD thesis on why momentum actually worked and
Speaker 1: the markets weren't really all that efficient. And to Fama's credit,
Speaker 1: he approved the idea and ultimately that was asthnes is
Speaker 1: of a q rs um thesis. So there are some
Speaker 1: I don't want to paint with tubro to brush. There
Speaker 1: are some academics who clearly display and intellectual flexibility. I
Speaker 1: give huge credit to Fama for saying, sure, poke hole
Speaker 1: in the thesis and if it works, well, we'll start
Speaker 1: calling you doctor. I think that's a but, but that
Speaker 1: isn't necessarily true. Um. Everywhere you you do end up
Speaker 1: with certain theories that have I mean, look how long
Speaker 1: it took for behavioral economics to really catch on, And
Speaker 1: it was so clear that Homo economists was a fabricated
Speaker 1: um description of human behavior. But it took you know,
Speaker 1: almost two generations before these ideas. So so why what
Speaker 1: is it about human nature that we marry even bad
Speaker 1: ideas and we're so slow to change? And again, how
Speaker 1: does that manifest itself in markets. Well, you know, now
Speaker 1: we're veering into a topic on the sociology of science,
Speaker 1: and I'm not sure I'm an expert hunt, but there
Speaker 1: is a definite cultural element to our field. We do.
Speaker 1: We get attached to certain ideas and theories and we
Speaker 1: start thinking along these lines. You know, I call that narrative.
Speaker 1: You know, we all have our own narrative of what's
Speaker 1: going on. And the fact is that unless we take
Speaker 1: our narrative and try to match them to the data,
Speaker 1: will always be caught up in our own hypotheses and theories.
Speaker 1: But when you start confronting these theories with data and
Speaker 1: you see that they don't fit, then at some point
Speaker 1: you're gonna actually have to develop better theories. And that's
Speaker 1: really what I experienced over time. I have to bring
Speaker 1: up an anecdote, which is what led me to these
Speaker 1: previous questions. The first time you gave a presentation at
Speaker 1: the National Bureau of Economic Research, you got called out
Speaker 1: with the accusation, this work is wrong when the numbers
Speaker 1: don't add up to something off Here, it turns out
Speaker 1: you were right. Describe that anecdote and explain how this,
Speaker 1: how this came about. Yeah, that was a very memorable
Speaker 1: event November. It was the first presentation that I'd given
Speaker 1: in an academic forum among my peers. I was an
Speaker 1: assistant professor, just graduated a couple of years ago from
Speaker 1: graduate school. And Craig McKinley, a colleague of mine at
Speaker 1: the Wharton School, and I we'd written a paper rejecting
Speaker 1: the random walk hypothesis, and it's basically saying markets are
Speaker 1: not quite random. There is there's I'm doing this from memory,
Speaker 1: but it's persistence and momentum and other factors that said, hey,
Speaker 1: if I know this information, I have a better than
Speaker 1: coin flip chance of predicting that. Exactly. We were looking
Speaker 1: at weekly stock returns and we found short term momentum
Speaker 1: in the data, and no matter which way we sliced it,
Speaker 1: we couldn't get rid of this kind of anomaly. And
Speaker 1: so we presented the results as we found them, and
Speaker 1: our discussant, who is a very distinguished academic economist, reviewed
Speaker 1: our results and said, the theory is very interesting, but
Speaker 1: the numbers have to be wrong because this would imply
Speaker 1: way too many profits for our Wall Street traders, And
Speaker 1: so we were really taken aback by that is the
Speaker 1: first time that we sort of got hit with the
Speaker 1: route awakening that you could actually get publicly shamed for
Speaker 1: your research. What was it? This was in a public forum. Ye,
Speaker 1: and we'll we'll leave the accuser's name out, but essentially, no, no,
Speaker 1: you have to be wrong. Did did they at least
Speaker 1: give a basis for saying why you're wrong other than
Speaker 1: hold the data aside, we just don't like the theory. Well? No,
Speaker 1: The only basis was that if this were really correct,
Speaker 1: then this would imply untold profits for traders. But aren't
Speaker 1: there untold profits? Well, it turned out, unbeknownst to us
Speaker 1: and this discussant, this was exactly the time when statistical
Speaker 1: arbitrage came into its own and when David Shaw was
Speaker 1: engaged in what would then become a multibillion dollar hedge
Speaker 1: fund and many many billions of dollars of profits for investors.
Speaker 1: Did you ever get a mia culpa from the person
Speaker 1: who made the ruling accusation? We did a few months
Speaker 1: later he wrote back saying that he had apparently checked
Speaker 1: our results and in fact agreed that the data are
Speaker 1: definitely inconsistent with the findings and how interesting, So we
Speaker 1: did come to uh two terms and I think a
Speaker 1: number of academics went back to their home institutions and
Speaker 1: replicated our results. How So, in a way, the act
Speaker 1: public accusation helped validate the research, which is a good
Speaker 1: thing it did, and in fact, that illustrates the kind
Speaker 1: of adaptive nature of academics. It's very competitive. You come
Speaker 1: up with innovations, and if you survive over time, then
Speaker 1: your theory ultimately takes over. And that was a pretty
Speaker 1: um pivotal theory. Really early in the process of saying
Speaker 1: the strong E. Mh thesis isn't the best one, you
Speaker 1: really want to look at the weaker meaning. Markets are
Speaker 1: mostly sort of efficient, but at times there are inefficiencies
Speaker 1: and sometimes they can last a long time. We still
Speaker 1: have the Fama French five factor model, which would start
Speaker 1: as three factors but essentially says, well, markets aren't perfectly efficient.
Speaker 1: And that seems to be the takeaway. UM. I love
Speaker 1: that story. I think it's fascinating that someone could actually
Speaker 1: call you out and turn turn out to be um wrong.
Speaker 1: I'm going through the questions that we missed. There's one
Speaker 1: or two I want to get to. Here's one that
Speaker 1: I find really interesting. While money again, another quote from UH,
Speaker 1: the adaptive market. Adaptive markets, financial evolution at the speed
Speaker 1: of thought. While money is historically ancient, it's a novelty
Speaker 1: in comparison to the length of time the human species
Speaker 1: has been on the planet. We're using our old brains
Speaker 1: to respond to new ideas discuss well, you know, Homo
Speaker 1: sapiens has been in the current form for about a
Speaker 1: hundred thousand years, and what that means is that the
Speaker 1: adaptations that are with us today we're really the kind
Speaker 1: of features that were most useful for the Neolithic Ice
Speaker 1: Age and uh, if you take a look at what
Speaker 1: we're dealing with though in modern society, things like financial
Speaker 1: markets are much much newer innovation, and so our decision
Speaker 1: making capabilities are not ideally adapted to that environment. And
Speaker 1: so it's not surprising that what helps us on the
Speaker 1: planes of the African savannah don't necessarily help us on
Speaker 1: the floor of the New York Stock Exchange. We have
Speaker 1: to develop new capabilities that aren't quite there yet, and
Speaker 1: so periodically we're going to be left with some very
Speaker 1: poor reactions to financial market threats. One of the bigger
Speaker 1: books of the past couple of years has been Sapiens,
Speaker 1: but the book I always mentioned whenever that comes up.
Speaker 1: Um is a look at evolutionary biology called last ape standing,
Speaker 1: and there's some at least according to the fossil record,
Speaker 1: there are twenty eight different species of hominid that existed
Speaker 1: or coexisted with humans over the past few hundred thousand
Speaker 1: years or past a few million years for the immediate ancestors.
Speaker 1: And it's really a little bit of a little bit
Speaker 1: of luck involved that we are the last ape standing.
Speaker 1: Apparently there were a number of places where we were
Speaker 1: not all that far from being wiped out and got
Speaker 1: a little bit lucky versus Chro magnum and a couple
Speaker 1: of other um, a couple of other near human species
Speaker 1: is which raises the question how poorly adapted are we
Speaker 1: for making the sort of capital market decisions that you describe. Well,
Speaker 1: that's exactly right, you know. Ian Tattersall at the American
Speaker 1: Museum and Natural History has some wonderful writings about how
Speaker 1: Homo sapiens came to be and how we competed with
Speaker 1: Neanderthals and other early hominids, and at some point we
Speaker 1: succeeded beyond all expectation. And the theory is because we
Speaker 1: developed the ability for abstract thought, and that allowed us
Speaker 1: to cooperate. We developed language and engaged in all sorts
Speaker 1: of activities and toolmaking that allowed us to dominate our civilization.
Speaker 1: The problem is that we haven't yet developed all of
Speaker 1: the necessary tools to dominate the financial landscape that we
Speaker 1: live in today. It's no longer the case that we
Speaker 1: have to live by our wits and survive with physical threats.
Speaker 1: We have to actually think about surviving financial threats. And
Speaker 1: so we're still a work in progress, and we have
Speaker 1: to worry about how the various different evolutionary mechanisms will
Speaker 1: interact with modern life. The what made me think of
Speaker 1: last State Standing while speaking with you is that author's key.
Speaker 1: It wasn't just tools, because lots of other species had tools.
Speaker 1: We did have language, but more than anything else we had,
Speaker 1: we were more adaptable than every other species, and we
Speaker 1: could survive in a range of um environments, or range
Speaker 1: of geographies, or range of weather conditions. Uh not everybody
Speaker 1: had that ability. Especially if you're bigger and stronger, well
Speaker 1: then you need a lot of resources. And if you're
Speaker 1: uh like humans, a little somewhat frail or somewhat smaller,
Speaker 1: well you don't need the same range of of calories
Speaker 1: to to survive, and so when the weather changed, it
Speaker 1: was real problem. Well that's what I call the revenge
Speaker 1: of the nerds, to say the least. All Right, so
Speaker 1: I know I only have you for a finite amount
Speaker 1: of time. Let's let's jump into some of our favorite
Speaker 1: questions that we ask all of our guests. Um, so
Speaker 1: have you you pretty much have always been in academia?
Speaker 1: Is that fair statemon? So you come out of Harvard
Speaker 1: with PhD, you go straight to Wharton, Isn't that right?
Speaker 1: And then from Wharton you end up at M I T.
Speaker 1: A Was there a way station? That was it? And
Speaker 1: you've been in M I T now for years? Well,
Speaker 1: I was gonna say almost thirty years. That's that's a
Speaker 1: great run. Um, tell us about some of your early mentors,
Speaker 1: who were the people who inspired you and shepherded your
Speaker 1: career along when you first began. You know, I was
Speaker 1: very lucky in having a whole series of extraordinary teachers. Know,
Speaker 1: I grew up in New York City and benefited from
Speaker 1: the New York City public school system, the best education
Speaker 1: that money didn't have to buy. Um had a great
Speaker 1: third grade teacher Mrs Barbara Pico Laura who really believed
Speaker 1: in me and gave me the runway to develop intellectually.
Speaker 1: Then in high school and went to the Bronx High
Speaker 1: School of Science, the best education that I've gotten even
Speaker 1: to date. I'm just amazed by the quality of the
Speaker 1: faculty there and Mrs Henriette amazing. Mr Milton Copleman fantastic teacher,
Speaker 1: is very supportive and really gave me the thirst of
Speaker 1: knowledge that I still benefit from today. And then in
Speaker 1: college I had very fortunate to be able to have
Speaker 1: us all Leve Moore from my econ one on one class,
Speaker 1: and my advisor Sharon Aster was incredibly inspirational. And then
Speaker 1: in grad school, um Andy Abel my thesis advisor, Jerry
Speaker 1: Housman another thesis advisor, and of course Bob Merton, the
Speaker 1: inspirational finance professor that really got me to start thinking
Speaker 1: about a career in finance. So all of these individuals
Speaker 1: are just extraordinarily important in giving me the boost that
Speaker 1: got me to where I am today. Let's let's talk
Speaker 1: about investing in general. Who what investors and or authors
Speaker 1: influence the way you approach the world of investment. Oh,
Speaker 1: there are whole host of them. Obviously, Jim Simons at
Speaker 1: Renaissance Technologies, David Shaw at d Shaw. These are the
Speaker 1: first quants that really demonstrated that using mathematical models can
Speaker 1: actually add value. But then there's Warren Buffett and George
Speaker 1: Soros who have made their money in very different ways
Speaker 1: using qualitative aspects of the business world. And it demonstrates
Speaker 1: that there's more than one way to skin a cat,
Speaker 1: and it really gave me some some fascinating ideas about
Speaker 1: how to integrate the two worlds. Let's let's talk about books,
Speaker 1: be they fiction or nonfiction, investing related or not. This
Speaker 1: is the single biggest question we get from from listeners.
Speaker 1: Tell us about some of your favorite books. What, what
Speaker 1: do you enjoy, what influenced you? What are you reading currently?
Speaker 1: So you know, I'm a big science fiction fan, and
Speaker 1: in a way, I think that's what really got me
Speaker 1: to start thinking along the lines of economics and finance.
Speaker 1: It was Isaac Asthmas Foundation Trilogy in high school. You
Speaker 1: and Paul Krugman, I'm in great company. There um very
Speaker 1: interesting idea of psycho history, the fictitious branch of mathematics
Speaker 1: that allow you to predict human behavior using the law
Speaker 1: of large numbers in the central limit theorem. But I
Speaker 1: loved Arthur C. Clark and more recently or Sin Scott
Speaker 1: Card and Endo games Enders Game. Yeah, the whole Enders series.
Speaker 1: Speaker for the dad, just fascinating ideas. It really allowed
Speaker 1: you to to let your imagination run wild. How about, um,
Speaker 1: something finance related. Tell us some books that you've enjoyed
Speaker 1: in that space. Well, you know, the first book that
Speaker 1: really got me thinking along the lines of finance and
Speaker 1: economics was Hal Browner's Worldly Philosophers. I loved that book.
Speaker 1: And then after that, of course Burton mal Kills random
Speaker 1: walked down Wall Street. I mean he writes so clearly
Speaker 1: and makes finance come alive that that just got me
Speaker 1: really excited about the stock market and thinking about all
Speaker 1: of these financial issues. Any of the books you wanna
Speaker 1: mention reference? I know you have a giant library of
Speaker 1: stuff that it would take readers a lifetime to plow.
Speaker 1: I do I have. That's my guilty pleasure. I love books. Um. Well,
Speaker 1: you know E. L. Wilson, the famous evolutionary biologist, has
Speaker 1: been a long time hero of mine. Uh, not just
Speaker 1: because of his theories and his impact and sociobiology, but
Speaker 1: because he writes like an angel, it's just extraordinary. Reading
Speaker 1: his work is just such a pleasure. Give us one
Speaker 1: book of Wilson's, his current book, Half Earth, that describes
Speaker 1: a new way of thinking about conservation and environmental impact.
Speaker 1: It's really fascinating. It's a very important book that I'm
Speaker 1: hoping more and more people will read. All Right, anything
Speaker 1: else before we leave books? That that's a good starting run.
Speaker 1: I think that's uh. I think that's it. We'll we'll
Speaker 1: leave it with that. That that's a that's a good
Speaker 1: run of books. Um, So, since you started looking at finance,
Speaker 1: what do you think the most significant changes in the
Speaker 1: industry has been and and are these for the better
Speaker 1: of for the worst. I think one of the most
Speaker 1: significant changes is the much bigger role that technology has
Speaker 1: played in our industry. It's really transformed the financial system,
Speaker 1: and I think it's both bad and good. I think
Speaker 1: that obviously technology has allowed us to engage in all
Speaker 1: sorts of financial transactions and services that we really wouldn't
Speaker 1: have been able to undertake. But at the same time,
Speaker 1: I think it's also created some vulnerabilities that we don't
Speaker 1: fully understand the financial system is a lot more complex
Speaker 1: now than it ever was, And I'm not sure that
Speaker 1: we really think about the system as a system. You know,
Speaker 1: we have regulators that focus on mutual funds and futurest
Speaker 1: markets and banks, but we don't have any regulator focused
Speaker 1: on the stability of the financial system as a whole.
Speaker 1: And I think that's really an accident waiting to happen.
Speaker 1: Wasn't Dodd Frank supposed to introduce all of these systemic
Speaker 1: survivability issues companies that are systemically important financial um? What
Speaker 1: is it? Cities? And uh, the idea that a bank
Speaker 1: needs a living will um and then discussions of now
Speaker 1: that's fascinating the new crew in d C. There seems
Speaker 1: to be a new impetus to bring Backglass Stiegel separate
Speaker 1: depository institutions and with checking accounts and and mortgages from
Speaker 1: financial institutions that are going to engage in trading and
Speaker 1: syndication underwriting. And if you do that goes the argument
Speaker 1: you could get rid of most of these regulations. You
Speaker 1: just need some minimum capital rules. And if one of
Speaker 1: those companies blows up, so what you're not affecting the
Speaker 1: rest of the financial system. What what are your thoughts
Speaker 1: on that well. Financial regulation is also an adaptive process,
Speaker 1: and that was one of the things that I really
Speaker 1: learned from watching the process of Dodd Frank. You know,
Speaker 1: DoD Frank isn't perfect, but it actually has done some
Speaker 1: very important things in changing the way we think about
Speaker 1: financial regulation, for example, creating the Office of Financial Research
Speaker 1: to collect data and to monitor the stability of the
Speaker 1: financial system. So I think that we've gotten a long
Speaker 1: ways away from the old days of the wild wild West.
Speaker 1: But at the same time, I don't think that we're
Speaker 1: focusing on financial regulation from a systemic perspective. You know,
Speaker 1: we do have the Financial Stability Oversight Council, which is
Speaker 1: this college of Financial Regulators and the US Treasury Secretary
Speaker 1: as the head, but that College isn't really a single
Speaker 1: regulatory body focus specifically on financial stability. It doesn't necessarily
Speaker 1: have regulatory authority that cuts across all the different jurisdictions
Speaker 1: of financial regulations. So I think we have to start
Speaker 1: thinking more adaptively about financial regulation. We have to think
Speaker 1: about the system not going from one extreme to the other,
Speaker 1: but rather changing in terms of its regulatory approach as
Speaker 1: markets heat up and as they cool down, so that
Speaker 1: that's pretty straightforward. Um, look at that, let where do
Speaker 1: you see as the next major shifts? And I know
Speaker 1: I famously say no forecasts. However, you're in a unique
Speaker 1: situation where you're looking at trends that are changing and
Speaker 1: you're seeing where those canaries in the coal mines are
Speaker 1: starting to either tweet or not. What is the next
Speaker 1: thing that the financial industry is going to have to
Speaker 1: adapt to? I think the process of convergence between hedge
Speaker 1: funds and mutual funds is one trend that we have
Speaker 1: to watch. Because of a combination of competition and innovation
Speaker 1: and the demand from investors looking for more active strategies
Speaker 1: and higher yield, we're going to see a greater retailization
Speaker 1: of hedge fund strategies. That's both an opportunity as well
Speaker 1: as a potential source of financial instability. Second is the
Speaker 1: role of financial technology, or fintech as we call it.
Speaker 1: The fact that investors are now engaging in robo advising
Speaker 1: services means that they're going to be subject to again
Speaker 1: greater algorithmic shifts as we see more and more sophisticated
Speaker 1: robo advisors. Just like we have driverless cars, at some
Speaker 1: point we may have driverless portfolios. And that's again both
Speaker 1: a good thing and a bad thing because it can
Speaker 1: create unintended consequences. This is another reader question. Tell us
Speaker 1: about a time you tried something and failed. What did
Speaker 1: you learn from the experience. How should investors deal with
Speaker 1: with failure, and how should they adapt to to that experience. Well,
Speaker 1: one form of failure was when Craig McKinley and I
Speaker 1: failed to realize how much of a sacred cow we
Speaker 1: were attacking when we started presenting our work on the
Speaker 1: random walk hypothesis. And I think that's a broader theme,
Speaker 1: which is that one has to be careful about the
Speaker 1: fact that other people have very strong narratives, and whether
Speaker 1: the narrative is passive investments or only active investments. We
Speaker 1: have to understand where investors are coming from. We have
Speaker 1: to understand the lens through which they're looking at the
Speaker 1: financial landscape, and we have to try to be realistic
Speaker 1: and develop products and services that take into account those lenses,
Speaker 1: as opposed to trying to force investors into particular ways
Speaker 1: of thinking that they're simply not equipped to do. I'm
Speaker 1: I'm about to google. I'm trying to remember who said
Speaker 1: sacred cows make the best hamburgers, and I'm trying to
Speaker 1: it comes to my head. But um, it was a book,
Speaker 1: there you go, and it was a book by Robert Kriegel.
Speaker 1: All Right, I knew that I knew the phrase was
Speaker 1: out there, but I didn't know where where it came from. Um,
Speaker 1: what do you do to relax outside of the office? Again?
Speaker 1: Another reader question, listener question, what do you do to
Speaker 1: say mentally and or physically fit well? For? For mental fitness,
Speaker 1: obviously doing research and being challenged by my students, I
Speaker 1: work with a lot of undergraduate and graduate students and
Speaker 1: at M I t these students are extraordinary, so that
Speaker 1: keeps me mentally fit. I would imagine for physical fitness,
Speaker 1: I'm an avid squash fan. I'm not a very good
Speaker 1: squash player, but I'm what I What I lack in
Speaker 1: skill I make up for an enthusiasm. And um, what
Speaker 1: about relaxation? What do you do outside of the office
Speaker 1: to relax well? At this point, my kids are still
Speaker 1: my number one focus. My younger son is in high school,
Speaker 1: my oldest son is just graduated from college, so spending
Speaker 1: time with them has been my best source of relaxation.
Speaker 1: I can imagine um. You work with a lot of
Speaker 1: of college students and and millennials. If one of them
Speaker 1: comes to you and says Professor Loh, I'm thinking about
Speaker 1: a career in finance, what sort of advice would you
Speaker 1: give them? I would say that finance is one of
Speaker 1: the most exciting fields to go into, but to keep
Speaker 1: in mind that finance is really a means to an end,
Speaker 1: not an end unto itself, and I think very often
Speaker 1: we lose sight of that. Even I lose sight of
Speaker 1: that because of the research that I do. But over
Speaker 1: the course of the last few years, I've begun to see,
Speaker 1: number one, how finance can be perverted in ways that
Speaker 1: it was never intended. But at the same time, I
Speaker 1: also see that finance can be used to achieve some
Speaker 1: of the greatest challenges that are facing mankind, including things
Speaker 1: like dealing with cancer, Alzheimer's, energy, all sorts of societal
Speaker 1: challenges that require large amounts of financing. So I think
Speaker 1: that this is a great feel to be in and
Speaker 1: it's an important one to focus on. And our final question,
Speaker 1: what is it that you know about financial engineering today
Speaker 1: that you wish you knew thirty years ago when you
Speaker 1: were first arriving in M I T. I wish I
Speaker 1: understood just how important human emotion is in financial decisions.
Speaker 1: I didn't really appreciate enough that logic was not enough
Speaker 1: in determining how people actually behave that. That is a
Speaker 1: answer that I've heard from a number of of guests,
Speaker 1: the behavioral side. It was overlooked way back when, and
Speaker 1: now it's really risen risen to the four. Professor low
Speaker 1: thank you for being so generous with your time. We
Speaker 1: have been speaking with Professor Andrew Lowe of M I T,
Speaker 1: author most recently of Adaptive Markets, Financial Evolution at the
Speaker 1: Speed of Thought. Book is getting tremendous reviews. We read
Speaker 1: it in our office and everybody seemed to really enjoy it.
Speaker 1: Speaking of enjoyment, if you enjoy this conversation, be sure
Speaker 1: and look up an inch or down an inch on
Speaker 1: Apple iTunes and you could see the other Let's call
Speaker 1: it hundred and forty or so such conversations that we've
Speaker 1: had over the past almost three years. I would be
Speaker 1: remiss if I did not thank my producer, Taylor Riggs,
Speaker 1: my head of research, Michael Batnick, and my recording engineer
Speaker 1: Medina Parwana. I'm Barry Ridholts. You're listening to Masters in
Speaker 1: Business on Bloomberg Radio. Our world is always moving, so
Speaker 1: with Mery Lynch you can get access to financial guidance online,
Speaker 1: in person or through the app. Visit mL dot com
Speaker 1: and learn more about Mery Lynch. An affiliated Bank of America,
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