Evolutionary Economics & Adaptive Market Hypothesis

In the July 20th issue of The Economist, its 'Economics Focus' column had an article dealing with evolutionary economics: The Cambrian Age of Economics. Evolutionary economists seek to look at problems in economics using methodology adapted from evolutionary biology (especially the more mathematically inclined branches of biology). Although some economists and biologists might snicker at the marriage of economics and biology, it should be noted that both fields have drawn inspiration from each other. For example, John Maynard Smith, FRS (not to be confused with John Maynard Keynes) -- an important figure in mathematical biology -- used game theory to develop the kind of evolutionary biology popularized by Richard Dawkins' The Selfish Gene.

Reading the article reminded me of Andrew Lo, a finance professor at MIT, and his 'adaptive market hypothesis' (his Journal of Portfolio Management article on the subject can be downloaded here; a less technical overview of the adaptive market hypothesis can be read from this article in Business Week). Basically, the adaptive market hypothesis is an alternative to the efficient market hypothesis, which underlies much of academic and (even) quantitative finance. Unlike the efficient market hypothesis, the adaptive market hypothesis incorporates evolutionary models of human behavior in order to better explain and account for what we actually see empirically from financial market data.