Friday, October 2, 2009

Dr. Andrew Lo on the Financial Crisis

Today we had the distinct privilege and great honor of hosting Professor Andrew Lo of the Sloan School at MIT who gave the lecture Kill All the Quants?: Models vs. Mania in the Current Financial Crisis. His talk was co-hosted by the UMass Amherst INFORMS Speaker Series and the Finance Series in the Isenberg School of Management. He spoke to a standing room only crowd and provided us with his unique insights into the financial crisis.

He discussed securitization as being at the heart of the financial crisis and the role that financial innovations played. He described how correlations increased and the role that human behavior played when we were in an era of prosperity and complacency. He discussed how the human brain has difficulty perceiving risk when we don't experience it. He showed us a video in which we were to count the number of times a basketball was passed from one white t-shirted individual to another while he randomly counted. He then asked the audience how many had noted that in the video there had been a person in a gorilla suit that had walked past. Most of the audience had not noticed the gorilla until he replayed the video (which says a lot about our human cognitive abilities to multitask).

Professor Lo spoke about the value of a PhD and why the associated training is so important. PhD students in creating something original and writing about it come to know the limitations of their knowledge. He discussed the psychology of greed that makes these crises unavoidable and how we must prepare for such eventualities. He has been promoting a National Transportation Safety Board for the financial system. He noted that finance should be taught even in high schools. Professor Lo spoke about the rebuilding of our financial infrastructure (a theme that resonated with me since critical infrastructure and its rebuilding permeates my Fragile Networks book). He also stated that it would take an act of Congress for us to get the data that we need to be able to analyze the topology of the complete financial network and mentioned my Network Economics chapter in the Handbook on Computational Econometrics.

He even spoke about complex systems and feedback loops. He mentioned the adaptive market hypothesis that he has been promulgating and that we need alternative theories that capture neuroscience, evolutionary principles, and economics. He mentioned that we need to let the smaller fires burn to prevent the huge inflagrations.

The doctoral students also immensely enjoyed discussions with Professor Lo after his talk and the lunch that followed at the University Club. They called him truly inspirational!

We thank Professor Lo for his time, his wisdom, and for his brilliance!