Half of most Americans have money in the currency markets, yet economists can’t acknowledge whether traders and marketplaces are rational and efficient, as modern financial theory assumes, or irrational and inefficient, seeing that behavioral economists believe-and while financial bubbles, accidents, and crises suggest. That is one of the biggest debates in economics, and the value or futility of investment management and financial regulation hold on the outcome. Within this groundbreaking publication, Andrew W. Lo slashes through this controversy with a new framework, the Adaptive Marketplaces Hypothesis, where rationality and irrationality coexist.

Sketching on psychology, evolutionary biology, neuroscience, artificial intelligence, and other fields, Adaptive Market segments shows that the theory of market place efficiency isn’t wrong but merely incomplete. When marketplaces are unstable, traders react instinctively, creating inefficiencies for others to exploit. Lo’s new paradigm explains how financial development shapes behavior and marketplaces at the swiftness of thought-a truth exposed by swings between stability and crisis, income and loss, and technology and regulation.