FT.com / Comment / Analysis – Organic mechanics
Prof Lo believes that some of the features of human behaviour – such as loss aversion, overconfidence, overreaction and other behavioural biases – that are underappreciated by simpler models are, in fact, rational. These aspects of human behaviour, while not conforming to the caricature of homo economicus, may be optimal strategies for human behaviour that have been honed by millennia of evolutionary pressure.
Indeed, he takes this evolutionary process seriously: he is fond of pointing out to his audiences that they have both “mammalian” and “reptilian” brains that can be employed at different moments. Prof Lo believes that prices reflect not just information in the market place, but also deep-seated and slowly evolved human biases.