Banking and Capital Markets Macro
September 27, 2012
Unlocking the Economy of the Mind
Researchers are using new approaches and tools — including agency, evolution and “neuroeconomics” — to reconcile the differences between neoclassical and behavioral finance.
By Ben Baris · Frances Denmark & Michael Peltz
MIT SLOAN SCHOOL OF MANAGEMENT FINANCE PROFESSOR Andrew Lo traces his interest in economics to a seemingly unlikely source: science fiction author Isaac Asimov. As a student at New Yorks Bronx High School of Science in the mid-70s, Lo was a fan of Asimovs Foundation series, whose central character, Hari Seldon, develops a fictional field of study called psychohistory that combines history, psychology and statistics to predict the actions of a large group of people. The idea that you couldnt tell what an individual was going to do but that you could say with more certainty what a population of individuals might do struck me as being quite plausible, explains Lo, who graduated in three years from Yale University with a BA in economics in 1980 and earned his Ph.D. from Harvard University four years later at the age of 24. Thats exactly what the field of financial economics is all about. Today academics like Lo are drawn to finance because it deals with very practical real-world problems such as what an asset is worth or where to invest capital. For those with a strong quantitative bent Lo, for example, originally intended to major in biochemistry, math and physics at Yale finance is especially attractive as a laboratory in which they can develop and test their theories. But for much of the history of finance, which has been around for as long as there have been markets, serious economists largely ignored the field. It didnt start to attract the attention of theoreticians until the 1960s and 70s. ....