Why do investors make stupid mistakes? Why do individuals consistently underperform the very funds they invest in? Are there strategies investors can follow to avoid self-destructive behavior? Those are some of the weighty questions Financial Thought Leader Andrew Lo is trying to answer from two vantage points, one as a professor of Finance at MIT and Director of its Laboratory for Financial Engineering, the other as strategist and fund manager at his firm AlphaSimplex Group. This week’s conversation will start with his most recent research project at MIT, titled “Artificial Stupidity”!
Andrew Lo interview and much more below, also check out his books, Hedge Funds: An Analytic Perspective (Advances in Financial Engineering). A Non-Random Walk Down Wall Street, The Heretics of Finance: Conversations with Leading Practitioners of Technical Analysis
George Soros And The Human Uncertainty Principle
The division between academic economics and the way traders look at the market is deep. The efficient market hypothesis assumes that markets and valuations are always pushing towards an equilibrium, and evidence to the contrary gets pushed aside as fluctuations or statistical deviations. But the dot com bubble, the
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Andrew Lo on one investment
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It’s not just individuals who make terrible timing decisions. It turns out corporations do too. As frequent WEALTHTRACK guest James Grant opined in a recent Grant’s Interest Rate Observer: “We humans seem genetically incapable of buying low and selling high.” Grant’s went on to say: “according to FactSet, the average price at which the companies of the S&P 500 repurchased stock between the fourth quarter of 2012 and the third quarter of 2013 was 99.8% of the average price of the preceding 12 months. In other words, managements bought in shares, not because the price was low, or the value commanding. They bought in shares, as we read the managerial mind, because everyone else was buying them in.”
This week’s WEALTHTRACK guest is on a mission to help investors avoid poor market timing and chronic underperformance. He is Financial Thought Leader Andrew Lo, Professor of Finance at the MIT Sloan School of Management and head of its Laboratory for Financial Engineering. Lo is a prolific writer for finance and economic journals. He applies his research in the real world as Founder, Chairman and Chief Investment Strategist at AlphaSimplex which runs a series of hedge fund-like mutual funds under theNatixis name, including his flagship Natixis ASG Global Alternatives Fund.
Lo discusses his latest project at MIT, which he and his colleagues have dubbed, with tongues firmly in cheek, “artificial stupidity!” They are working to understand why investors make the mistakes they do and come up with methods to correct them in portfolios.
In January of last year on WEALTHTRACK financial innovator Andrew Lo shared his proposal to use crowd financing to fund cancer research. Fast forward a year and his idea to attract investors to fund a diversified pool of cancer research projects is on its way. Lo believes a couple of smaller demonstration funds to finance research on several rare diseases will be launched within the next 6-12 months. As Lo explained to us the investment idea came to him from a very personal loss.