As we sift though the wreckage of recent disaster, economists and policy makers alike are attempting to evaluate why regulatory constraints and risk management systems didn't kick in before the international market became engulfed in a tsunami of red ink. But economist Andrew W. Lo, the Harris & Harris Group Professor at MIT's Sloan School of Management, director of the school's Laboratory of Financial Engineering and founder and chief scientific officer of AlphaSimplex Group LLC, an investment adviser in Cambridge, Massachusetts, is less surprised than most seasoned observers.
Lo has analyzed the links between evolutionary psychology, neuroscience and fiscal decision making for over a decade. Among his findings are that professional traders, far from being cool-headed and rational, can become transfixed by extreme price movements, their decision-making capabilities temporarily hijacked by emotions like fear and worry. In Lo's viewpoint, "behavioral blind spots"(which he defines as evolutionarily hard-wired reactions to perceived risks and benefits) are particularly dangerous during periods of economic extreme: bubbles and crashes.
PUBLICATION DATE: April 01, 2009 PRODUCT #: SMR312-HCB-ENG
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