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MIT economist visits CMU

Economist Andrew Lo visited Carnegie Mellon last week. (credit: Courtesy of David Shankbone on Wikimedia Commons) Economist Andrew Lo visited Carnegie Mellon last week. (credit: Courtesy of David Shankbone on Wikimedia Commons)

Carnegie Mellon welcomed one of Time magazine’s 100 Most Influential People and Massachusetts Institute of Technology professor, Andrew Lo, for a series of talks on his adaptive markets hypothesis as well as on ways to tackle problems with financial engineering.

Lo, who currently serves as director of the Laboratory for Financial Engineering at MIT, gave two open lectures last week, and appeared as a guest speaker in the Introduction to Game Theory course for the Quantitative Social Science program.

Lo is known for his multidisciplinary approach to economics. He calls upon fields of psychology, neuroscience, and evolutionary biology to better understand and explain the ways markets and people interact.
Before undertaking a career in teaching, Lo worked at a consulting firm where he noticed that financial strategies, while based on current economic wisdom, often gave less-than-expected results.

“I was frustrated that some of the economics and behavioral papers I read did not match with what I was seeing in practice,” Lo said. “That’s when I really began thinking about exploring economics from different angles.”

This eventually led him to his adaptive market hypothesis, a potential paradigm-changing explanation on how markets work. In his talks, Lo explained how the participants in a market — the investors, firms, and market makers — can be categorized as “species” that evolve and adapt to their economic environments, which results in the adaptation of the entire market.

According to Lo, a highly competitive market will adapt into a market that is efficient. His study of adaptive markets made him a sought-after adviser after the 2008 financial crisis.

“With such polarized political parties, it will be difficult to get out of the financial crisis,” Lo said. “However, I see hope in that there is a certain number of extremely dedicated and hard-working people working on the problem.”

While the U.S.’s economic woes may need to be fixed in Congress, Lo said that finding a cure for cancer can be reached through strategic funding from the private sector. In one of his talks, titled “How Financial Engineering Can Cure Cancer,” Lo said that even though funding research into cancer treatments can be an extremely risky investment, the potential rewards are just as huge.

But due to the high risk and yet-to-be-seen reward, funding for cancer research has declined significantly. Lo explained, however, that these risks can be minimized by creating a $30 billion fund, comprised of money from private firms, investors, and American citizens. Instead of investing in just one cancer treatment method, they could invest in a large quantity of different treatments.

Lo said the success of just one or two of these methods would be more than enough to cover the costs of the failures. Citing recent medical breakthroughs, Lo said, “The technology and methods of fighting cancer are improving at a rapid rate ... now would be an optimal time to invest in cancer research.”

Lo’s description of how cancer and other large-scale problems can be tackled with financial engineering excited many in the audience. “It’s a very ingenious idea,” said Sojin Kim, a first-year economics major. “It’s pretty cool how the risk is hedged. I never thought of doing it that way before.”

Those in the Game Theory class were equally receptive to Lo’s ideas. “He explained complex theories in a very understandable way.... I came away with a better idea of how people make economic decisions,” said Tennley Noble, a first-year decision science major.