The future may not be clear, but our commitment is so when you sit with an advisor at Merrill Lynch, we'll put your interests first. Visit mL dot com and learn more about Merrill Lynch. An affiliated Bank of America, Mary Lynch makes available products and services offered by Merrill Lynch Pierce Veneran Smith Incorporated or Register Broker Dealer remember s I PC. This is Masters in Business with very Ridholtz on Boomberg Radio. This week on the show, I have an extra special guest, Professor Andrew Lowe of m I T. I first heard Professor Lowe speak at a conference about a decade ago, and I was I was quite fascinated by his willingness to I don't want to say attack, but take on the efficient market hypothesis and adapt it uh to what he sees as some obvious modern changes in how people in technology are interacting with markets, be they more efficient or less efficient. It's pretty clear that the strong efficient market hypothesis, which essentially states markets reflect the all information about stock prices in any given instant's a little bit of an overstatement. You have to work in the actual human side, the emotions and and as well as the adaptive side, how markets are consisting of organic participants and they themselves become organic and adapt to changes fairly rapidly. UM. I think Professor Lowe's read on the efficient efficient market hypothesis predated the Nobel Committee giving Bob Shiller of Yell and Gene Fama of chicag University of Chicago uh CO Nobel prizes, one for m H and the other for behavioral economics the same year. It's not a coincidence, and and he very much was clued into that before the Nobel Committee was. Anyway, if you are at all interested in how markets operate, how they adapt, what investors do that's right and wrong, and as well as the significance of hedge funds within the universe of market participants, I think you'll find this to be a fascinating conversation. So, with no further ado, my conversation with Professor Andrew low of m I T. This is Masters in Business with Barry Ridholts on Bloomberg Radio. My special guest today is Professor Andrew Lowe of the m I T. Sloan School of Management. He has been the director of m I T. S Laboratory for Financial Engineering, since he comes to US with a PhD in economics from Harvard. He briefly taught at Wharton before going to m I T and is the author of numerous books about finance, including A non random Walk Down Wall Street, Analytic Perspective on hedge Funds, The Evolution of Technical Analysis, most recently Adaptive Markets, Financial Evolution at the Speed of Thought. Professor Andrew Low, Welcome to Bloomberg. Thanks for having me. I'm thrilled you here. I've been a fan of your work for a long time. Let's jump into your background a little bit before we get to some of the heavy financial engineering work. Ironically, you right that you weren't an especially good math students as a kid, and yet you end up in a field that is dominated by heavy mathematics. How did that come about? Well, you know, I didn't know this at the time, but when I was going through elementary school and middle school, UM, I had a learning issue, which was I guess the mathematical equivalent of dyslexia. I think it's called DS calculia really, and uh, I had a terrible time memorizing the multiplication tables and were you transposing exactly? And uh, some of my teachers told my mother that they thought I was mentally retarded. That was the term of art in those days and um, but it was a third grade teacher, Mrs Barbara pick Laura that saw something in me and encouraged me and appointed me to this position of class scientists, where I was able to do experiments and demonstrate the various kinds of knowledge that I had gotten over the course of several periods during the school and that really boosted my self confidence. I still struggle with math until high school, where the new math came about, and which is essentially when we talk about new math, we're talking about what well replacing algebra, trigonometry, and geometry with things like group theory, ring theory and abstract algebra. And it was an incredibly important moment for me because I went from a C student in math to an A student pretty much overnight. And it was because I could handle abstract concepts much better than being able to do multiplication, and so it was a really wonderful thing. I know that new math is viewed is a failure in New York City back in the nineteen seventies, but for me it was a godsend. So now let's let's jump forward a little bit and and bring the idea of abstract concepts to markets. What's more important to markets supply and demands or fear and greed? Well, you know the answer is both. And that's really the interesting thing that I discovered about human nature. We have two aspects to our cognitive functions. Were incredibly good at logical deliberation and being able to balance supply and demand using various fancy mathematical and statistical tools. But at the same time, every once in a while, we freak out. And when we freak out, emotion rules today, and fear and greed then take over. And it's this jackal and hide aspect of human decision making that I think we're missing in economics being able to integrate those two. So behavioral economics has become a huge field between Professor Schiller, Professor sailor Danny Kahneman. Go down the list of all the folks um who have who have worked in this area. What does this say about the efficient market hypothesis? Is it wrong or is it simply incomplete? Yeah, it's definitely not wrong. There's some very important elements of efficient markets hypothesis that actually can protect us from making some pretty bad investment mistakes. But it is incomplete in the sense that it doesn't capture the fear and greed aspect of it. And I think it's trying to integrate the two that really got me to start thinking down the road towards adaptive markets. So let's talk about another duality. Rational rationality and irrationality coexist even within the same person. How does that manifest itself in in investment. Well, you know, it really comes from the neuroscientific aspect of decision making. So neuroscientists like Antonio Dimazio have come up with a really interesting notion of what rationality means. And what he developed was this idea that rationality actually requires a certain degree of emotion. In other words, when you take a look at patients that have had brain surgeries that have removed the emotional part of the brain, they end up acting in a very irrational way because they have no way of balancing the various different demands on their time. You know, when we think about showing up to work on time or meeting a deadline, emotion actually plays an important role in those kinds of behaviors. So with the proper balance of emotion and logical deliberation, we end up seeming quite rational. But when that balance goes askew, when we have too much or too little emotion, we end up making mistakes. And that's very much along the same lines of how investors actually behave. So when we talk about fear and greed, we're really talking about the moments when the irrational side of the brain takes over and the logic steps back, and no one says to themselves, g I'm gonna be able to time my in and out perfectly. I'm going to be able to jump back in despite having the being in a terrible crash. We just tend to panic exactly. And you know, panic is actually a very important evolutionary adaptation. Fear and greed are a lot older than the ability to solve differential equations, and so when we start becoming threatened, we will react emotionally and and for physical threats that's actually a great response, but for financial threats it doesn't work out nearly as well. I'm Barry Hults. You're listening to Masters in Business on Bloomberg Radio. My special guest today is Professor Andrew Low of m I. T. Sloan School, of management. Let's talk a little bit about economists, and especially financial economists. I've long been a fan of the phrase that economists suffer from physics envy, and there's a quote of years that I have to share. Physicists can explain of all observable physical phenomena using Newton's three laws of motion. Economists probably have laws that explain three percent of all economic behavior. Explain that, well, you know, economics is about a much more complicated subject in physics, and I think that's the first point that we have to grapple with. I think it was the physicist Richard Feynman who speaking at a Caltic graduation said, imagine how much harder physics would be if electrons had feelings, And I think that really captures it. We're dealing with people that have feelings, and they react emotionally, sometimes as opposed to logically and rationally, and so the laws of physics don't really apply to human interactions in the same way that they apply to particles in a gravitational field. And it's very tempting for us to use the mathematics and the mantle of physicists, but the fact is that we're dealing with a very different object to say the very least. So let's talk about the criticism of the profession. Do you think, first, do you think economists get unfairly criticized and if so, what four? I think they do get unfairly criticized for certain things. Uh. It was once said that economists predict five out of the last three recessions. And uh, of course, you know, we don't have a perfect track record or prediction, but neither do weather forecasters. The nature of the task is much more challenging, and so I think that people have to understand the difficulty in making these kinds of economic predictions. We're getting better all the time, but it's still not purely predictive science. We need to actually take into account the art of economic forecasts. So let me push back on that a little bit. Yeah, that whether people are not perfect, but they could usually tell you a day or so before if it's going to rain, or if there's a possibility of rain, bring your umbrella. It's always always couched in probabilistic terms, which if you say there's a ten percent chance of rain and it rains, hey, the one intent chance came in. But the big criticism about economists, especially in the past decade, has was how did you guys miss the single biggest financial crisis since the Great Depression? If you can't see that coming, how, how why should people rely on you? And I know that's a loaded question, but defend the entire profession for missing the financial crisis, Well, you know, I'm not sure we did miss it. For example, in two thousand and five, Bob Schiller, ragu Rajan, and myself, all three of us wrote papers that described stress fractures in the financial system. Bob Shiller talked a bit about the real estate market and how that was going to be another kind of irrational exuberance UH bubble that was about to burst. In two thousand and five, ragu Rajan talked about the banking system becoming over extended and developing these kinds of UH risks of financial crisis. And some of my students and I wrote about the fact that the hedge fund industry was also heading for another debacle, very much along the line NDS of what happened in and so there was evidence in the data, and all three of us wrote papers and gave talks about it. But the fact is that unless you've got a very strong notion from the entire financial profession that we're headed to a crisis. It's very difficult to engage in policies to try to do anything about it. And certainly the U. S. Treasury and the FED were not in a position to make very strong changes in policy because there was no official word like the National Weather Service to tell you that a hurricane was coming. We need to have something like a national weather service for financial crisis. Isn't that supposed to be part of the role of the Federal Reserve. Shouldn't they be looking at the sustainability of the system and looking for those hurricanes coming. Well, you know, that's part of their responsibility. But their focus is on the banking system, and as we know from the financial crisis, it was the shadow banking system that actually grew very very quickly, and that they don't actually have jurisdiction. But the other thing is that the FED has a dual responsibility. They're actually all is supposed to be encouraging economic growth with their monetary policies, and so it's very difficult when you've got this dual mission to be able to focus single mindedly on preventing financial crises from occurring. See I think that you yourself, um, Professor Schiller, and who was which was Raja? And there were a handful of others who had pointed out, um, the the huge um disquilibria that was existing in the in the system um. Righthart and Rogoff put out a paper in late oh seven early oh eight saying, hey, here's what the prior five financial crisis looked like and if the United States as one, which they were strongly implying, this is what we should expect. Turned out to be fairly prescient. But the run of people of economists who were warning or at least talking about it, UH are notable because they are the exceptions and the by and large most of the profession kind of missed it, Which raises the question how we learned anything from the last crisis, and might the profession be better suited to identify the next hurricane that comes along. Well, there's no doubt that the economics profession has been indelibly altered by the events of the past, chastened, absolutely humbled. We've had many individuals who have stated publicly that they felt economics, particularly macroeconomics, has let down the profession, and I think part of it was a devotion to these extraordinarily complex, rigorous mathematical formulations which were precise but precisely wrong. And uh, someone once said that it's better to be approximately right than precisely wrong. And I think we're sort of taking that now to heart. Do do we? Are we overly enamored with precision and data, specifically for things that as you described, You know, the the old joke is why why do economists um provide data to two decimal points? And the answer is to shoot show they have a sense of humor. Are we overly reliant on the illusion of precision? And is that part of the problem that we run into? Well, that's definitely a problem, and I think that a number of economists have written about it, and I believe that there is some kind of a reaction or a backlash to the mathematization of economics. There's no doubt that rigor has a role to play in our field. But someone once said that along with rigor usually goes mortis. So I think we have to be very careful about how we use mathematics. I'm Barry Ridholts. You're listening to Masters in Business on Bloomberg Radio. My special guest today is Professor Andrew Lowe of the m I T. Sloan School of Management, where he is the director of the m I T Labs for Financial Engineering. He has a PhD from Harvard and is the author of numerous books, including most recently, Adaptive Markets Financial Evolution at the Speed of Thought. Let's talk a little bit about the new book, because I I it's really fascinating and accessible. I don't want to call it a primer, but really a next generation look at how markets have changed over time and how investors should be interacting with them. Let me let me pull a quote right to begin with. The adaptive markets hypothesis is based on the insight than investors and financial markets behave more like biology than physics, comprising a population of living organisms competing to survive, not a collection of inanimate objects subject to the immutable laws of motion. How did you come about this biological organic explanation as opposed to the more traditional mathematical physics explanation. Well, you know I came about it. I guess really being dragged, kicking and screaming through various different disciplines. So the book is really a travelogue of my intellectual journey from a I heard devotee of efficient markets and rational expectations into the realm of first psychology and behavioral finance, and then to neuroscience and how people really make decisions, and then to the evolutionary biology of how our brain evolved, and then ultimately to the ecology of all of the various different dynamics of multiple competing species. So it wasn't that I was looking for these other disciplines, but they ultimately ended up becoming really important for understanding the very simple idea that you've got to explain these facts using as whatever tools you have at your disposal. We were speaking um off air that I had seen you Um give a lecture I think it was right after the financial crisis, trying to explain some of the reasons why markets were less efficient than they appear. How do you end up with a crisis and you end up with these wild highs and these crazy lows. If the markets are truly efficient, it can't be. That can't be the case. And the genesis of this process of the organic way of looking at markets were evident in your lecture. How long have you been playing with this idea? It has to be at least a decade, if not longer. Well, it's actually longer. It really started in when I started looking at the data for the random walk hypothesis. That's a particular version of efficient markets, which says that stock prices follow random walks. You can't predict where you're gonna be tomorrow based upon where you are today. At least that was the theory, And when my co author Craig McKinley and I started looking at the data, no matter which way we sliced it, we couldn't get the random walk to work. In other words, the data are not consistent with the random walk. There are predictability, there's some persistence and some momentum and other factors. In fact, you wrote a book A non random Walk down Wall Street, and you also wrote a book on the Heretics of Finance about technical analysts. How does that play into the biological approach? Well, so it was really looking at the technical analysis literature that got me to start thinking a little bit more broadly. For those of the listeners who don't know, technical analysis is really a somewhat disreputable uh field of study that academics often pooh pooh, but which I think actually has quite a lot of value, and it's the idea that you can use geometric patterns in price data to be able to make forecasts and to try to understand how markets move. The technical analysts from the nineties, forties and fifties really understood that markets were driven not just by supplying demand, but also by the nature of emotion, by fear and greed, and so they would actually come up with patterns, trends, reversals, and other kinds of tools that, for those days where they didn't have computers and fancy technology, actually allowed them to make pretty useful forecasts. And it was reading that literature that got me to start thinking a little bit more oddly that maybe the mathematical equations that we use in modern finance is not the be all, in the end all of how you think about financial markets. And to that point, another quote of yours were more impulsive over the short term and more logical over the long term, very reminiscent of Danny Kahneman's thinking fast and slow. Tell us what you mean by impulsive versus logical. Well, if you take a look at how people make decisions, it turns out that from the neurophysiological perspective, there are multiple competing components of the brain that are at work. For long term decisions where we have the luxury of thinking carefully and deliberating on various different choices, for example, asset allocation or retirement planning. We can make supremely rational, mathematically precise decisions. But then crisis hits, events happen and we react, and in those cases we're reacting emotionally, not necessarily logically. And it's the emotional components of the brain, which are far older than the ability to do mathematics, that kick in, and the way they kick in they really overwhelm us. We are overwhelmed by our emotional centers, and when that happens, the decisions that we make are not particularly good when it comes to for our financial health. I'm Barry rid Halts. You're listening to Masters in Business on Bloomberg Radio. My special guest today is Professor Andrew Lowe of the m I. T. Sloan School of Management. Let's talk a little bit about hedge funds, which you've written about extensively as well as written a book, Hedge Funds and Analytic Perspective. Let's start with a quote of yours. At the start, the general partner brings all the experience and the limited partners bring all the money. At the end, the general partner leaves with all the money and the limited partner leaves with all the experience. I find that to be a hilarious quote. How do you really feel about hedge funds? Well, you know, that was really meant to represent the kind of skepticism that a lot of people have for hedge funds. But I think that hedge funds play an incredibly important role in the financial ecosystem. They're the tip of the spear in terms of taking advantage of profit opportunities as they emerge, but they're also the canary in the coal mine. They get hit first when financial distress starts to develop. Why is that? Why are they so fast to react when an opportunity exists, but sometimes fast to embrace risks that don't pay off in fact have a negative ramification. Well, it's because of their unregulated nature. Hedge funds are allowed to do anything and everything in order to make returns for their investors, and the fact that they are unregulated is actually really important. It's because it allows us to see what all of the various different dynamics are in financial markets unfettered by regulation of any sort. So they're the laboratory. They're the experiment where these different things take place. And while they're three trillion dollars, which sounds like a lot of money in the grand scheme of global and sestable assets, that really is a few percentage of total um money that's out there at work. Well, it seems like a small number compared to say, Vanguard. Vanguard just passed their four trillion two right, So the entire hedge fund industry is only three trillion, But that number is misleading because hedge funds can use leverage, and they can go short, and they can trade at much higher frequencies than say mutual funds, So that three trillion goes a long long way in terms of having market impact. And one of the things that I'm always surprised when people bring up the financial crisis and hedge funds, and somehow I believe hedge funds were responsible. They really survived the crisis. They might have taken a little bit of a beating. I think the numbers were down, but they certainly weren't the cause of the crisis. In any way, shape or form or or Am I overstating it? No, No, you're right that it's really hard to attribute cause to any one player in the system. I think we all contributed to the financial crisis in one form or another. It's really the complex city of the system and the fact that we have these non linearities that people really weren't focusing on that ultimately caused this huge debacle. But really, hedge funds were not a big player in all the spaces that ultimately blew up. They weren't giant in securitization of mortgages, they weren't underwriting uh, subprime credit. They really were doing what they normally do, which is buying and selling stocks, bonds, and even some derivatives exactly. But the hedge fund industry showed some very important stress fractures that had we been listening, had we really spent time watching what was going on in the hedge fund world, we would have seen all sorts of early warning signs, And in fact, a number of us did write about them back in two thousand and five and six. And I think that's one of the reasons why the hedge fund industry is such an important part of the financial ecosystem. Has your thinking about hedge funds evolved over the years, or or how has your perspectives? How might your perspectives have changed? Well, you know, I'm now more convinced than ever that hedge funds play an important role and that we can learn a lot by monitoring the industry. But I think that the hedge fund industry itself is undergoing some pretty dramatic changes, both because hedge funds have become more sophisticated technologically, but also because competition has actually winnowed the field. A lot of hedge funds disappointed in their returns over the last five to ten years, and so the hedge fund industry has seen a lot of consolidation. So the industry today is very different than what it was a decade ago. Any theories as to why the performance of hedge funds over the last decade has been not only below with their traditional returns have been, they've been below just a straight up sixty forty portfolio, Yeah, you know, there are three factors that are going on in the hedge fund industry that have really challenged its performance. The first is that the risk free rate is actually much lower now than before, and so hedge fund industries relied to some degree on the risk free rate in order to be able to add to its expected wouldn't that make their borrowing costs that much cheaper and allow their leverage to be more effective? Or am I oversimple You would think so. But that's the second factor that's actually hurting hedge fund returns. It's that leverage is way down. Even though risk free rate is lower, the amount of leverage that hedge funds are afforded is much lower now because people are less risk seeking. And that we know that policies like the FEDS changes in leverage restrictions among banks have made it more difficult for hedge funds to get the same kind of leverage that they did in the early two thousands. And what's the third reason. And the third reason is that if you look at the volatility of markets, it's lower now than it's been in quite a long time. And hedge funds really make money on volatility. They actually look for high volatility to be able to earn their returns. Well, we saw a lot of volatility in the financial crisis, and a decent amount of volatility in the first couple of years afterwards. They didn't do too great that period as well. Well, you know, there was actually a lot of diversity. There are some hedge funds that did spectacularly well crisis, and but you're right that overall hedge funds were challenged, and I think it's because the relationships that they were trading on. Those relationships changed when we had this huge shock called the financial crisis, and over time they're gonna learn how to adapt to that. But it's gonna take time and not surprisingly, just like when we lost the dinosaurs, when that meteorite hit the planet, kicked up a cloud of dust, killed the trees, you know, sixty five million years ago, that same kind of extinction event occurred in two thousand and eight, two thousand and nine. So Michael Mobison of Colombia and Credit Swiss talks about the paradox of of skill. Um Jim Chenos of Kindicost Partners, who's been running a hedge fund for about thirty years, said, in the early days, there were a hundred hedge funds generating alpha, and now there's eleven thousand, but it's the same hundred. How much does that paradox of of skilled tremendous number of really sharp, really smart guys, and it's mostly guys. Uh, not exclusively, but but almost um primarily. How much does that wave of new hedge funds reduce the amount of alpha that's there to go around. Well, you know, there's no doubt that you're going to have much more competition in any time. You have an industry that does well for a period of time because it draws people from all walks of life to start applying their trade in the hedge fund industry. And by the way, you're right that the hedge fund industry seems to be dominated by men, but I want to mention there is an organization called one Women in Hedge Funds, So I think we are drawing women into the field as well. Over time, you're going to see that competition create these kinds of periods of consolidation. But then when you have large events like the financial crisis, that's also an opportunity for lots of new hedge funds to spring up, like new species that come into existence after an extinction event. So it's not surprising that, say, the hedge high frequency trading funds popped up over the course of the last ten years, whereas they didn't play nearly as big a role the previous decade. And I know I've seen studies about women as trade leaders generally outperformed men. They're less emotional, they're less attached to bad decisions, They're quicker to cut their losses. I'm surprised we haven't seen more women hedge fund managers, given given some of the academic data. I think that there's going to be more women coming into the industry over time. And I think I welcome that because you're right that women tend to have a very different trading profile, and some of our experiments we've seen that women do tend to perform better, not just on an absolute basis, but on a risk adjusted basis. They tend to be much more careful about managing their risk. Let's let's talk about one of those hedge funds that are in the few hundreds that generate alpha. You you spoke with the David Shaw of d Shaw and UM, which also spawns some guy named Jeff Bezos and and Amazon UM. He said, anomalies that had previously generated significant profits stopped making money, and you were forced to discover other more complex effects that people had not yet found. The market is never completely efficient, but it certainly has a tendency to become more efficient over time. Does that help to explain why we've seen hedge fund performance sort of flatten out over the last decade. Absolutely. I think what David was talking about is exactly this process of adaptation, innovation, competition, and over time, the evolution of financial markets with one trading strategy at a time. And you know, he's a real pioneer in the in the field and having developed some of the earliest trading strategies for statistical arbitrage, and that's an area that's really evolved quite a bit over the last decade. So our markets now adapting too fast to all these changes in all these new strategies. It used to be you would come up with an idea before anybody else, you could work on it for a while and it would be profitable for a couple of years. It seems that these ideas are either smaller and rower, or the markets adapting that much faster and whatever edge exists goes away pretty quickly. Yeah. You know, technology plays a much bigger role today than it did ever before, and it's kind of a financial arms race where if you've got a good idea you can implement it now faster than you can even think about it. Uh. It's what I call the confluence of Moore's law meets Murphy's law. And I think that's the challenge. It's that we now have technologies that are so powerful it allows us to do things that we really never imagined, and there are going to be unintended consequences. We have been speaking with Professor Andrew low of m I T. S Sloan School of Management. If you enjoy this conversation, be sure and check out our podcast extras where we keep the tape rolling and continue to talk about all things financial engineering. You can find that on SoundCloud, iTunes and Bloomberg dot com. You can find all the Professor lows uh written work either at the m I T. Website or at any bookstore Barnes, Noble or Amazon dot com. Be sure and check out my daily column on Bloomberg View dot com or follow me on Twitter at Rit Halts. I'm Barry Rit Halts. You're listening to Masters in Business on Bloomberg Radio. What could your future hold? More than you think? Because at Merrill Lynch we work with you to create a strategy built around your priorities. Visit mL dot com and learn more about Merrill Lynch. An affiliated Bank of America. Mary Lynch makes available pducts and services offered by Merrill Lynch. Pierce, Feder and Smith Incorporated, a registered broker dealer. Remember s I PC. Welcome to the podcast. Thank you Professor Lowe for doing this and being so generous with your time. I had I had mentioned um earlier, I had seen you speak it's got to be a decade ago. It was right after the financial crisis, and I had discussed with you how how the high efficient market hypothesis could really exist in its strong form When we see how can I how can I market be worth X on day one and Y on day too, it doesn't really seem to make a whole lot of sense. And I thought you're marriage of of the biological to to the markets is really fascinating, and because it brings in not only behavioral economics, but it brings in some of the neuroscience that's out there, that that's pretty fascinating. You do some interesting experiments at M I t looking at this sort of stuff. Um. The one that stood out, I think it was this book the study where you took twenty eight students and had them go through a simulated market, and you ended up with fairly efficient um decision making with just participants. Am I? Am I misstating that? Or no, that's right, So so explain explain that lab a little bit and and what you're looking to accomplish with it and what that experiment showed. Sure, well, you know, it was an interesting collaboration between myself and a neuroscience as Tommy Poggio, and a marketing expert Elita Han, and a couple of our students Nicolas Chan and Adler Kim. What we were trying to do there was to understand how the standard consumer marketing surveys could be replaced with a simple market simulation. And we did the experiment where we compared a situation where you were trying to get consumers to express their preferences about different kinds of bicycle pumps. And so typically a consumer survey would involve a long series of studies where you ask a bunch of customers features about particular bicycle pump that they may or may not like, and these surveys generally take many hundreds of thousands of dollars and weeks and weeks to conduct. We decided to run a simulation where we created synthetic securities representing each of these different bicycle pumps, and we allowed students to trade them over the course of thirty minute interval in a kind of a mock trading session in our trading lab. And what we found at the end of that thirty minutes is that the relative prices of these synthetic securities actually corresponded precisely to the marketing surveys that took weeks and weeks to conduct. In other words, by using the market, you could actually collect the wisdom of crowds much more quickly than if you've just done the surveys individual by individual. Even a simulated market with a small number of participants exactly so instead of having to use hundreds or thousands of consumers, just a small number over a short period of time can actually give you much the same results. How do you set that up where you're incentivizing the participants to actually put the time and energy into it to to do it so it's functional and efficient. Well, that's the beauty of markets. People are already incentivized to try to beat the market, that to try to come up with the winning picks. And it's that process, that kind of competitive spirit that financial markets bring out in people that allow us to extract information in a much more efficient manner. So let me, UM, I'm gonna pull something from UM one of the efficient market issues that had come up that has always it has always annoyed me, and it had to do with the This is why I never print on two page, two sided. UM. It always had had to do with the Challenger explosion and the reaction. And I always thought, Um, the wisdom of crowds got it wrong, and a few other things got it wrong. But I'm curious as to your perspective. Here, here's something we pulled from the book. The day the Challenger exploded provided evidence that prices rapidly reflect all available information. So I'm gonna stop there. Morton Theicole was halted for training thirteen minutes after the Challenger exploded, even though it was one of four potential culprits had closed the day down twelve no evidence of insider trading. The other three didn't sell off. And I want to say the other three were wing Um. It might have been Northbrook, Brumen. I don't know if they were separate companies back then and one other. Um what took the smartest minds five months to figure out, the stock market figured out in hours. I've always hated that argument because Morton theicle essentially had a soul. Their business was providing the sort of stuff too the government, these sort of contracts for aerospace and aviation. All the other companies had massive, unrelated businesses to the Challenger. So it wasn't so much that the market figured out who made the OH ring and we knew and the market figured out the O ring was. It was essentially a bet. Hey, if it was Grumman or north Rope or Boeing, the business has nothing to do with this, it's not gonna have a big impact. But if it's Morton theical, hey, this is really potentially problematic. It wasn't. It's always presented as Oh, the market figured out that Morton the cole knew that they were responsible for the Challenger disaster. In reality, their business was so tied to it that it mattered more to them than everybody else. That does that criticism hold water well? I think it does hold water to some degree, but it's very difficult for us to separate out the two effects, because you know, Morton Thiacle was responsible for creating the booster rocket that ultimately exploded, whereas Rockwell International, Martin Marietta, and Lockheed were involved in other parts of the Space Shuttle mission. And you're quite right that they're bigger companies that were involved in different aspects. But the fact that within minutes of this event, Martin thy Call was singled out does suggest that, for whatever reason, there was wisdom in the crowds in saying that that company was going to be more effective. But you're absolutely right that we had no idea about the o ring and that really required the five and a half month investigation that the Roger's Commission conducted. Yeah, I've always looked at as as hey, if any of these other companies are found responsible, this is a small part of their business. But for Morton Thoicle, this this is really problematic, and it's always always seems to be um misdescribed, or at least that's that's how I've looked at it. We talked about hedge funds before. What we didn't get to two questions that I thought were really important. One was hedge funds and an e T F rapper. Good idea, terrible idea. What do we think about this? Well, I think it's a mixed idea. And the reason is that for many kinds of hedge fund strategies, retail investors should and want to get access to them. But the problem is that certain kinds of hedge funds strategies carry with them very subtle risks that retail investors are not in a position to be able to evaluate. So a good example is tail risk, for example, catastrophe reinsurance. UH, that kind of risk is very subtle in the sense that it generally doesn't happen the time, and so most to the time you're earning pretty decent returns at relatively the low risk. It sounds like a great deal. But every once in a while, in the parlance of Wall Street, you get your face ripped off. And that's the thing that retail investors don't fully appreciate, don't understand, and aren't really prepared for. So the hedge fund strategies that have those kinds of risks are going to be very difficult for investors to tolerate in an E t F format, and that that's the concern that I have about these kinds of strategies. The criticism that i've I've seen about the E t F hedge funds, some people have described them as muppets. Famous quote from one of the earlier Goldman sachs Um litigations that was pulled out of context, but salespeople describing their clients as muppets. But what it means in this context is, Hey, the really good hedge funds are filled up. They have institutions that can swing billions of dollars around. By the time you get to the hedge funds that are put into an e t F rapper, lesser managers, lesser track records, not as strong a model, or at least a perspective model looking forward, So you're left with second tier hedge funds in an E t F rapper for them uppets, fair criticism or again overstating it. I think that's a bit of an overstatement, and I think it misses the point that there's actually a spectrum of risk reward opportunities that investors are really looking for. At the one extreme of that spectrum are investors that are looking for absolute return, high octane investments. They don't care if you lose in a year as long as there's a chance of making in a year. And that's perfectly fine for that group of investors. But for typical retail investors that are saving money for their four oh one K plan, they don't want that to turn into a tool one K plan. They want to make sure that the downside is not going to be completely devastating, and so you've got to put in various kinds of protections and risk management tools that will definitely reduce the upside, but it will also reduce the downside. There's no free lunch, as the old adage goes, and so you've got to take the good with the bad. And I think there's a role for those kinds of vehicles, and that's really what the hedge fund industry is transforming into when they develop mutual fund products. It reminds me of yet another quote of yours. Traditional market cap weighted static index funds still work very well for the average investor, but some investors continue to look for an edge, hoping to find alpha in an ocean of beta. That raises two questions. One is is it really just a drop of alpha in an ocean of data? How much alpha exists for the hedge fund industry to to go after. Well, you know, the way I think about alpha is that really represents sort of the the creative opportunities that active competitive investors are trying to come up with. And so by definition, all of these kinds of creative opportunities are going to be limited. The more compare editive a market is, the more difficult it is to be coming up with genuine alpha. You know, the famed investor Marty Lebowitz wrote an article once UH that called uh, these particular objects alpha hunters versus beta grazers, And I think that really captures the spirit, that's the dynamic between alpha and beta, alpha hunters and beta grazers. I like the way, I like the way that UM sounds. Let's let's talk a little bit about something that is UM somewhat related. So, over time, we've seen the drag that high fees put on returns. We talked earlier about Vanguard at four point to trillion. They've been notorious for driving fees down. It's even called the Vanguard effect. What are we given what we know about the drag of high fees and the effect of compounding over time, are we likely to see a substantial change in hedge fund fees anytime soon. Well, there's no doubt that it's going to be pressure on hedge fund fees because of all of the very different lower cost vehicles. Uh. In fact, you know Jack Bogel's principle, the cost matter hypothesis, I think really summarizes at all. Uh. Well, I think we have to be careful about that trend. But at the same time, investors are also looking for new investment opportunities, and to the degree that they can come up with great returns beyond fees, they're going to actually be able to command whatever it is that the market will bear. So, speaking about Jack Bogel, the rise of indexing has really taken off again since the uh this is a story that's fifty years in the making. One was Bogel's famous paper. He launched Vanguard, and I think seventy two or seventy four something like that didn't do too well for the first five years. Really, since the financial crisis, they've exploded. I want to say they were about a trillion dollars before the financial crisis. Now they're over fourt brilliant. That raises an interesting question, does the rise of indexing distort markets and at what point does indexing become too big? Estimates are all over the place. It's five percent, it's fift it's of global investable assets um. Even Vanguard is a third active management there over a trillion dollars an active low cost funds. How big is too big for indexing? That's a great question, and it's funny because that's a question that I would have expected people would have asked long time ago, just the same way that people ask how much capacity does a hedgeman have. It's only recently that people who started asking the question about index funds. So, first of all, index funds are an unqualified success. It's clearly that they really benefit investors in the long run by reducing costs and giving them diversification. However, there is one aspect that we have to think about, and that's something that the adaptive markets hypothesis points to, which is that when everybody starts investing in the same vehicle, that means that there's gonna be a hardwired correlation that we create among various different investors experiences. Because now, if we've got lots of people investing in the same index fund, if and when that index fund declines we're all going to be facing those declines at the same time, and if those declines are severe enough to trigger our emotional reaction, we're all going to be freaking out at the same time. So inadvertently, these kinds of index fund holdings could actually create more systematic risk in the financial system. It's not to say that they don't add value. Absolutely they do, and they're an incredible part, important part of the financial ecosystem. But because they're so big, they can actually create these kinds of ripple effects that were only now seeing. So let me tell this back to your earlier UM study where you had the limited number of students replacing the giant UM public survey. How many people does it take to make markets efficient enough? For asked differently, what percentage of investors have to be active traders in order for price discovery to work its magic. Well, it looks like from the experiments that we conducted, if you've got very well funded traders, only a few percentage points of markets need to be informed trading in order to make them very efficially. So we could have making up numbers of the investing public indexing as long as ten percent as active management. You'll still get price discovery, you'll still get markets working efficiently, will still actually be equivalent to as if everybody was was actively trading. Well, in fact, I think that it might work even better if everybody weren't actively trading, because when you have everybody competing to make a slight margin, than any small bump in the road can quickly escalate into a financial crisis. You want to have a majority of the market participants focusing on passive, long term investments in order to maintain market stability. So indexing lowers volatility in the long haul, It certainly can as the potential right that that that's quite fascinating. One of the complaints I've heard from the active community about indexing is, well, there goes price discovery, the markets will no longer be efficient, and how can you identify the true value of a company when you have these big indexers just buying everything. You're saying, that's not necessarily a fair criticism, not at all, because I think that if you take a look at the size of hedge funds and the ability for them to trade and take advantage of market opportunities, despite the fact that they don't have nearly the size of assets as the passive index funds, they can move markets much more rapidly and in greater depth on any given occasion. Alright, So so it gives rise to another quote of yours, which I really want you to explain, because, um, I kept coming back to it within the book. I was having a hard time, UM grasping part of it. It takes a theory to beat a theory. Explain what you mean by that. In academia, it's not good enough to just throw stones at an idea. You've got to come up with a better one. You have to replace the bad idea with a good idea exactly. Or the way I would put it is that there really aren't any bad ideas. We really have approximations to reality, and we try to improve on those approximations one after the other. So version one point oh is a starting point, but then you've got to get to one point one and then eventually two point oh. So we're trying to come up with theories that can actually beat existing theories in order to move of these ideas forward. So I'm I'm gonna mangle a quote and I don't remember if it was physics or economics that I think it was physics originally, Um, and the quote and it'll come to me later who said it, physics advances one funeral at a time, meaning you have these theories that let's call him the one point oh theories, and there's a whole generation of grad students and subsequent scientists trained on it, and it takes a long time before these theories are finally put to rest and the newer, faster, smarter, better theories replace them. How much inertia is there in academia and how much inertia is in the world of financial modeling and theorism. I think it was Max Planck who originally said that, and then Paul Samuelson paraphrase that to said they to say that science progresses funeral by funeral, and uh, you know, that's a particularly morbid kind of an average. Um. But I think there's a truth. There's a certain element of truth to it, and it has to do with the fact that, you know, academics become very attached to their ideas, and so at some point, in order to challenge an existing theory, you really need to develop a competing alternative that really provides some compelling actions. UM. Cliff Astness tells the story. When he was uh doing his doctoral work, his his financial advice, his academic advisor was Eugene Fama, and he had the bright idea of writing his PhD thesis on why momentum actually worked and the markets weren't really all that efficient. And to Fama's credit, he approved the idea and ultimately that was asthnes is of a q rs um thesis. So there are some I don't want to paint with tubro to brush. There are some academics who clearly display and intellectual flexibility. I give huge credit to Fama for saying, sure, poke hole in the thesis and if it works, well, we'll start calling you doctor. I think that's a but, but that isn't necessarily true. Um. Everywhere you you do end up with certain theories that have I mean, look how long it took for behavioral economics to really catch on, And it was so clear that Homo economists was a fabricated um description of human behavior. But it took you know, almost two generations before these ideas. So so why what is it about human nature that we marry even bad ideas and we're so slow to change? And again, how does that manifest itself in markets. Well, you know, now we're veering into a topic on the sociology of science, and I'm not sure I'm an expert hunt, but there is a definite cultural element to our field. We do. We get attached to certain ideas and theories and we start thinking along these lines. You know, I call that narrative. You know, we all have our own narrative of what's going on. And the fact is that unless we take our narrative and try to match them to the data, will always be caught up in our own hypotheses and theories. But when you start confronting these theories with data and you see that they don't fit, then at some point you're gonna actually have to develop better theories. And that's really what I experienced over time. I have to bring up an anecdote, which is what led me to these previous questions. The first time you gave a presentation at the National Bureau of Economic Research, you got called out with the accusation, this work is wrong when the numbers don't add up to something off Here, it turns out you were right. Describe that anecdote and explain how this, how this came about. Yeah, that was a very memorable event November. It was the first presentation that I'd given in an academic forum among my peers. I was an assistant professor, just graduated a couple of years ago from graduate school. And Craig McKinley, a colleague of mine at the Wharton School, and I we'd written a paper rejecting the random walk hypothesis, and it's basically saying markets are not quite random. There is there's I'm doing this from memory, but it's persistence and momentum and other factors that said, hey, if I know this information, I have a better than coin flip chance of predicting that. Exactly. We were looking at weekly stock returns and we found short term momentum in the data, and no matter which way we sliced it, we couldn't get rid of this kind of anomaly. And so we presented the results as we found them, and our discussant, who is a very distinguished academic economist, reviewed our results and said, the theory is very interesting, but the numbers have to be wrong because this would imply way too many profits for our Wall Street traders, And so we were really taken aback by that is the first time that we sort of got hit with the route awakening that you could actually get publicly shamed for your research. What was it? This was in a public forum. Ye, and we'll we'll leave the accuser's name out, but essentially, no, no, you have to be wrong. Did did they at least give a basis for saying why you're wrong other than hold the data aside, we just don't like the theory. Well? No, The only basis was that if this were really correct, then this would imply untold profits for traders. But aren't there untold profits? Well, it turned out, unbeknownst to us and this discussant, this was exactly the time when statistical arbitrage came into its own and when David Shaw was engaged in what would then become a multibillion dollar hedge fund and many many billions of dollars of profits for investors. Did you ever get a mia culpa from the person who made the ruling accusation? We did a few months later he wrote back saying that he had apparently checked our results and in fact agreed that the data are definitely inconsistent with the findings and how interesting, So we did come to uh two terms and I think a number of academics went back to their home institutions and replicated our results. How So, in a way, the act public accusation helped validate the research, which is a good thing it did, and in fact, that illustrates the kind of adaptive nature of academics. It's very competitive. You come up with innovations, and if you survive over time, then your theory ultimately takes over. And that was a pretty um pivotal theory. Really early in the process of saying the strong E. Mh thesis isn't the best one, you really want to look at the weaker meaning. Markets are mostly sort of efficient, but at times there are inefficiencies and sometimes they can last a long time. We still have the Fama French five factor model, which would start as three factors but essentially says, well, markets aren't perfectly efficient. And that seems to be the takeaway. UM. I love that story. I think it's fascinating that someone could actually call you out and turn turn out to be um wrong. I'm going through the questions that we missed. There's one or two I want to get to. Here's one that I find really interesting. While money again, another quote from UH, the adaptive market. Adaptive markets, financial evolution at the speed of thought. While money is historically ancient, it's a novelty in comparison to the length of time the human species has been on the planet. We're using our old brains to respond to new ideas discuss well, you know, Homo sapiens has been in the current form for about a hundred thousand years, and what that means is that the adaptations that are with us today we're really the kind of features that were most useful for the Neolithic Ice Age and uh, if you take a look at what we're dealing with though in modern society, things like financial markets are much much newer innovation, and so our decision making capabilities are not ideally adapted to that environment. And so it's not surprising that what helps us on the planes of the African savannah don't necessarily help us on the floor of the New York Stock Exchange. We have to develop new capabilities that aren't quite there yet, and so periodically we're going to be left with some very poor reactions to financial market threats. One of the bigger books of the past couple of years has been Sapiens, but the book I always mentioned whenever that comes up. Um is a look at evolutionary biology called last ape standing, and there's some at least according to the fossil record, there are twenty eight different species of hominid that existed or coexisted with humans over the past few hundred thousand years or past a few million years for the immediate ancestors. And it's really a little bit of a little bit of luck involved that we are the last ape standing. Apparently there were a number of places where we were not all that far from being wiped out and got a little bit lucky versus Chro magnum and a couple of other um, a couple of other near human species is which raises the question how poorly adapted are we for making the sort of capital market decisions that you describe. Well, that's exactly right, you know. Ian Tattersall at the American Museum and Natural History has some wonderful writings about how Homo sapiens came to be and how we competed with Neanderthals and other early hominids, and at some point we succeeded beyond all expectation. And the theory is because we developed the ability for abstract thought, and that allowed us to cooperate. We developed language and engaged in all sorts of activities and toolmaking that allowed us to dominate our civilization. The problem is that we haven't yet developed all of the necessary tools to dominate the financial landscape that we live in today. It's no longer the case that we have to live by our wits and survive with physical threats. We have to actually think about surviving financial threats. And so we're still a work in progress, and we have to worry about how the various different evolutionary mechanisms will interact with modern life. The what made me think of last State Standing while speaking with you is that author's key. It wasn't just tools, because lots of other species had tools. We did have language, but more than anything else we had, we were more adaptable than every other species, and we could survive in a range of um environments, or range of geographies, or range of weather conditions. Uh not everybody had that ability. Especially if you're bigger and stronger, well then you need a lot of resources. And if you're uh like humans, a little somewhat frail or somewhat smaller, well you don't need the same range of of calories to to survive, and so when the weather changed, it was real problem. Well that's what I call the revenge of the nerds, to say the least. All Right, so I know I only have you for a finite amount of time. Let's let's jump into some of our favorite questions that we ask all of our guests. Um, so have you you pretty much have always been in academia? Is that fair statemon? So you come out of Harvard with PhD, you go straight to Wharton, Isn't that right? And then from Wharton you end up at M I T. A Was there a way station? That was it? And you've been in M I T now for years? Well, I was gonna say almost thirty years. That's that's a great run. Um, tell us about some of your early mentors, who were the people who inspired you and shepherded your career along when you first began. You know, I was very lucky in having a whole series of extraordinary teachers. Know, I grew up in New York City and benefited from the New York City public school system, the best education that money didn't have to buy. Um had a great third grade teacher Mrs Barbara Pico Laura who really believed in me and gave me the runway to develop intellectually. Then in high school and went to the Bronx High School of Science, the best education that I've gotten even to date. I'm just amazed by the quality of the faculty there and Mrs Henriette amazing. Mr Milton Copleman fantastic teacher, is very supportive and really gave me the thirst of knowledge that I still benefit from today. And then in college I had very fortunate to be able to have us all Leve Moore from my econ one on one class, and my advisor Sharon Aster was incredibly inspirational. And then in grad school, um Andy Abel my thesis advisor, Jerry Housman another thesis advisor, and of course Bob Merton, the inspirational finance professor that really got me to start thinking about a career in finance. So all of these individuals are just extraordinarily important in giving me the boost that got me to where I am today. Let's let's talk about investing in general. Who what investors and or authors influence the way you approach the world of investment. Oh, there are whole host of them. Obviously, Jim Simons at Renaissance Technologies, David Shaw at d Shaw. These are the first quants that really demonstrated that using mathematical models can actually add value. But then there's Warren Buffett and George Soros who have made their money in very different ways using qualitative aspects of the business world. And it demonstrates that there's more than one way to skin a cat, and it really gave me some some fascinating ideas about how to integrate the two worlds. Let's let's talk about books, be they fiction or nonfiction, investing related or not. This is the single biggest question we get from from listeners. Tell us about some of your favorite books. What, what do you enjoy, what influenced you? What are you reading currently? So you know, I'm a big science fiction fan, and in a way, I think that's what really got me to start thinking along the lines of economics and finance. It was Isaac Asthmas Foundation Trilogy in high school. You and Paul Krugman, I'm in great company. There um very interesting idea of psycho history, the fictitious branch of mathematics that allow you to predict human behavior using the law of large numbers in the central limit theorem. But I loved Arthur C. Clark and more recently or Sin Scott Card and Endo games Enders Game. Yeah, the whole Enders series. Speaker for the dad, just fascinating ideas. It really allowed you to to let your imagination run wild. How about, um, something finance related. Tell us some books that you've enjoyed in that space. Well, you know, the first book that really got me thinking along the lines of finance and economics was Hal Browner's Worldly Philosophers. I loved that book. And then after that, of course Burton mal Kills random walked down Wall Street. I mean he writes so clearly and makes finance come alive that that just got me really excited about the stock market and thinking about all of these financial issues. Any of the books you wanna mention reference? I know you have a giant library of stuff that it would take readers a lifetime to plow. I do I have. That's my guilty pleasure. I love books. Um. Well, you know E. L. Wilson, the famous evolutionary biologist, has been a long time hero of mine. Uh, not just because of his theories and his impact and sociobiology, but because he writes like an angel, it's just extraordinary. Reading his work is just such a pleasure. Give us one book of Wilson's, his current book, Half Earth, that describes a new way of thinking about conservation and environmental impact. It's really fascinating. It's a very important book that I'm hoping more and more people will read. All Right, anything else before we leave books? That that's a good starting run. I think that's uh. I think that's it. We'll we'll leave it with that. That that's a that's a good run of books. Um, So, since you started looking at finance, what do you think the most significant changes in the industry has been and and are these for the better of for the worst. I think one of the most significant changes is the much bigger role that technology has played in our industry. It's really transformed the financial system, and I think it's both bad and good. I think that obviously technology has allowed us to engage in all sorts of financial transactions and services that we really wouldn't have been able to undertake. But at the same time, I think it's also created some vulnerabilities that we don't fully understand the financial system is a lot more complex now than it ever was, And I'm not sure that we really think about the system as a system. You know, we have regulators that focus on mutual funds and futurest markets and banks, but we don't have any regulator focused on the stability of the financial system as a whole. And I think that's really an accident waiting to happen. Wasn't Dodd Frank supposed to introduce all of these systemic survivability issues companies that are systemically important financial um? What is it? Cities? And uh, the idea that a bank needs a living will um and then discussions of now that's fascinating the new crew in d C. There seems to be a new impetus to bring Backglass Stiegel separate depository institutions and with checking accounts and and mortgages from financial institutions that are going to engage in trading and syndication underwriting. And if you do that goes the argument you could get rid of most of these regulations. You just need some minimum capital rules. And if one of those companies blows up, so what you're not affecting the rest of the financial system. What what are your thoughts on that well. Financial regulation is also an adaptive process, and that was one of the things that I really learned from watching the process of Dodd Frank. You know, DoD Frank isn't perfect, but it actually has done some very important things in changing the way we think about financial regulation, for example, creating the Office of Financial Research to collect data and to monitor the stability of the financial system. So I think that we've gotten a long ways away from the old days of the wild wild West. But at the same time, I don't think that we're focusing on financial regulation from a systemic perspective. You know, we do have the Financial Stability Oversight Council, which is this college of Financial Regulators and the US Treasury Secretary as the head, but that College isn't really a single regulatory body focus specifically on financial stability. It doesn't necessarily have regulatory authority that cuts across all the different jurisdictions of financial regulations. So I think we have to start thinking more adaptively about financial regulation. We have to think about the system not going from one extreme to the other, but rather changing in terms of its regulatory approach as markets heat up and as they cool down, so that that's pretty straightforward. Um, look at that, let where do you see as the next major shifts? And I know I famously say no forecasts. However, you're in a unique situation where you're looking at trends that are changing and you're seeing where those canaries in the coal mines are starting to either tweet or not. What is the next thing that the financial industry is going to have to adapt to? I think the process of convergence between hedge funds and mutual funds is one trend that we have to watch. Because of a combination of competition and innovation and the demand from investors looking for more active strategies and higher yield, we're going to see a greater retailization of hedge fund strategies. That's both an opportunity as well as a potential source of financial instability. Second is the role of financial technology, or fintech as we call it. The fact that investors are now engaging in robo advising services means that they're going to be subject to again greater algorithmic shifts as we see more and more sophisticated robo advisors. Just like we have driverless cars, at some point we may have driverless portfolios. And that's again both a good thing and a bad thing because it can create unintended consequences. This is another reader question. Tell us about a time you tried something and failed. What did you learn from the experience. How should investors deal with with failure, and how should they adapt to to that experience. Well, one form of failure was when Craig McKinley and I failed to realize how much of a sacred cow we were attacking when we started presenting our work on the random walk hypothesis. And I think that's a broader theme, which is that one has to be careful about the fact that other people have very strong narratives, and whether the narrative is passive investments or only active investments. We have to understand where investors are coming from. We have to understand the lens through which they're looking at the financial landscape, and we have to try to be realistic and develop products and services that take into account those lenses, as opposed to trying to force investors into particular ways of thinking that they're simply not equipped to do. I'm I'm about to google. I'm trying to remember who said sacred cows make the best hamburgers, and I'm trying to it comes to my head. But um, it was a book, there you go, and it was a book by Robert Kriegel. All Right, I knew that I knew the phrase was out there, but I didn't know where where it came from. Um, what do you do to relax outside of the office? Again? Another reader question, listener question, what do you do to say mentally and or physically fit well? For? For mental fitness, obviously doing research and being challenged by my students, I work with a lot of undergraduate and graduate students and at M I t these students are extraordinary, so that keeps me mentally fit. I would imagine for physical fitness, I'm an avid squash fan. I'm not a very good squash player, but I'm what I What I lack in skill I make up for an enthusiasm. And um, what about relaxation? What do you do outside of the office to relax well? At this point, my kids are still my number one focus. My younger son is in high school, my oldest son is just graduated from college, so spending time with them has been my best source of relaxation. I can imagine um. You work with a lot of of college students and and millennials. If one of them comes to you and says Professor Loh, I'm thinking about a career in finance, what sort of advice would you give them? I would say that finance is one of the most exciting fields to go into, but to keep in mind that finance is really a means to an end, not an end unto itself, and I think very often we lose sight of that. Even I lose sight of that because of the research that I do. But over the course of the last few years, I've begun to see, number one, how finance can be perverted in ways that it was never intended. But at the same time, I also see that finance can be used to achieve some of the greatest challenges that are facing mankind, including things like dealing with cancer, Alzheimer's, energy, all sorts of societal challenges that require large amounts of financing. So I think that this is a great feel to be in and it's an important one to focus on. And our final question, what is it that you know about financial engineering today that you wish you knew thirty years ago when you were first arriving in M I T. I wish I understood just how important human emotion is in financial decisions. I didn't really appreciate enough that logic was not enough in determining how people actually behave that. That is a answer that I've heard from a number of of guests, the behavioral side. It was overlooked way back when, and now it's really risen risen to the four. Professor low thank you for being so generous with your time. We have been speaking with Professor Andrew Lowe of M I T, author most recently of Adaptive Markets, Financial Evolution at the Speed of Thought. Book is getting tremendous reviews. We read it in our office and everybody seemed to really enjoy it. Speaking of enjoyment, if you enjoy this conversation, be sure and look up an inch or down an inch on Apple iTunes and you could see the other Let's call it hundred and forty or so such conversations that we've had over the past almost three years. I would be remiss if I did not thank my producer, Taylor Riggs, my head of research, Michael Batnick, and my recording engineer Medina Parwana. I'm Barry Ridholts. You're listening to Masters in Business on Bloomberg Radio. Our world is always moving, so with Mery Lynch you can get access to financial guidance online, in person or through the app. Visit mL dot com and learn more about Mery Lynch. An affiliated Bank of America, Mary Lynch makes available products and services offered by Merrill Lynch Pierce Federan Smith Incorporated or Registered Broker Dealer remember s I PC