In the aftermath of the economic crisis, financial engineers will probably abandon their exotic risk models used and shift to more traditional risk management and econometric analysis techniques. But is this enough?
According to an article from Steve Lohr (New York Times), market experts believe that these risk models proved insufficient because they were too simple-minded and did not take into account human behavior. In the future, experts say, models need to be opened up to accommodate more variables and more dimensions of uncertainty. So, are we going to abandon the “efficient-market” theory and the assumption that people always behave rationally?
Andrew W. Lo, director of the Laboratory for Financial Engineering at the Massachusetts Institute of Technology, focuses on applying insights from disciplines, including evolutionary biology and cognitive neuroscience, to create a new perspective on how financial markets work, which Mr. Lo calls “the adaptive-markets hypothesis.”
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