Adaptive Markets

Markets Are Adaptive, Not Necessarily Efficient

Accepted financial theory – based on seminal works such as Eugene Fama’s efficient markets hypothesis and Burton Malkiel’s book, A Random Walk Down Wall Street – holds that financial markets already incorporate all information; therefore, no investor can beat the market. This line of thought underpins the growth of index funds, which track market performance rather than relying on a fund manager’s stock-picking prowess. The efficient markets theory assumes that investors are rational, profit-maximizing and self-interested, meaning that institutions will protect the equity held by their shareholders, thereby making financial markets self-regulating. According to this model, the 2008 financial crisis should not have happened. Indeed, former Federal Reserve chair Alan Greenspan, a champion of “unfettered capitalism,” professed to being “in a state of shocked disbelief” as the crisis developed.

The efficient markets worldview came under fire in the crisis aftermath. But another way to look at markets is through the “...