Darwin visits Wall Street
If you have money in the stock market, then you are probably anticipating a profit over the long term — a rational expectation given that stocks have historically performed well. But when stocks plunge, even for one day, you may also feel some fear and want to dump all those stress-creating equities. There is a good reason for this: You’re human. And that means, to generalize, that you have both a rational side and some normal human emotions. To Andrew Lo, the Charles E. and Susan T. Harris Professor and director of the Laboratory for Financial Engineering at the MIT Sloan School of Management, accepting this basic point means we should also rethink some common ideas about how markets work. In economics and finance, after all, there is a long tradition of thinking about investors as profit-maximizing rational actors, while imagining that markets operate near a state of perfect efficiency. That sounds nice...