Drawing on findings from psychology, evolutionary biology, neuroscience, artificial intelligence, and other fields, this book demonstrates that the theory of market efficiency isn’t wrong, but merely incomplete. When markets are unstable, investors instinctively react, creating inefficiencies that others can exploit.
Beginning with one of humankind’s most important endowments—fear—leading finance scholar Wenquan Luo embarks on a captivating intellectual journey through captivating stories, exploring the origins and failures of market efficiency, then discussing the foundations of investor behavior. Finally, the book discusses the practical implications of these debates—including how hedge funds have become the “Galapagos Islands of finance,” the true story of the 2008 financial market crash, and how we can avoid future crises.
How does human nature “adapt” to the market?
Why do “efficient” markets fail during periods of financial frenzy? Why do rational economic people simultaneously fall prey to madness? The book’s overarching argument is that we need a new theory that delves deep into the brain, examining how humans make decisions, evolve, and adapt to their environments, drawing on psychology and new technologies to fully understand the underlying causes of asset bubbles, bank runs, and the discrepancies between rational markets and behavioral evidence. We fundamentally need a deeper understanding of human adaptive instincts in both individual and collective settings to complement mathematically informed efficient market and pricing theories, while also proposing a financial design more relevant to the future world.
This book also offers ambitious new thinking on many fundamental questions in economics and should be read by anyone interested in understanding how markets truly work.
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