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MIT Sloan Throughout the Crisis: Leading the Conversation (continued)

Andrew LoProf. Andrew Lo

Andrew Lo: New Responsibilities

Another leading voice within the MIT Sloan community is that of the Harris & Harris Group Professor of Finance, Andrew Lo. A former governor of the Boston Stock Exchange, Lo is currently a research associate of the National Bureau of Economic Research, as well as a member of the National Association of Securities Dealers’(NASD) Economic Advisory Board. Lo’s research into human reaction to risks and rewards and human instinct better illuminates people’s behavior in a financial crisis.

Lo earned a PhD in economics from Harvard University in 1984, after which he went on to teach at the University of Pennsylvania’s Wharton School until 1988. His research has focused on financial engineering and risk management; hedge-fund risk-and-return dynamics and risk transparency; as well as evolutionary and neurobiological models of individual risk preferences and financial markets. Currently, he is an associate editor of the Financial Analysts Journal, The Journal of Portfolio Management, the Journal of Computational Finance, and Statistica Sinica. He is also a co-author of The Econometrics of Financial Markets and A Non-Random Walk Down Wall Street, and author of Hedge Funds: An Analytic Perspective.

Exploring the link between financial decision making and neurobiology, Lo’s research provides valuable insight into the ways certain evolutionarily hardwired reactions to risks and rewards can affect the way people do business in times of crisis. A lot of it, he explains, has to do with fear, especially fear of the unknown. When a person is faced with an event he or she does not understand, he says, they tend to rely on instinctual responses, which can generate all sorts of seemingly irrational behavior. In the case of the sub prime credit crisis he believes it was the lack of transparency that allowed the problem to become as large as it did, because investors were left to rely on their fears and imagination. “Instinct,” he says, “is something by definition that is hardwired. In certain cases, it can keep us alive; but in other cases, it is absolutely deadly.” To know the difference we need access to definitive information.

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