What Can Replace Efficient Markets Theory?

The most interesting thing about the efficient markets hypothesis is not whether it is valid or not – clearly it is not – but how it has managed to remain so influential for so long. At a recent conference in London on the subject, organised by the CFA Institute, Professor Andrew Lo of Massachusetts Institute of Technology offered the audience a simple explanation: “physics envy”.

This was a reference back to the early inspiration of the Nobel economics laureate Paul Samuelson, who set out to find for economics a set of fundamental laws that would do for the dismal science what Newton’s laws of thermodynamics had done for physics, and from which a rigorous general theory with practical uses could subsequently be developed.

Using such building blocks as utility theory, equilibrium and the principle of no arbitrage (“no free lunches”), this led Mr Samuelson and his many successors to develop what we have come to know as the discipline of microeconomics that is universally taught to every finance and economics student at university and business school. The efficient markets hypothesis and the notion that stock prices follow a random walk are offshoots of this approach.

The attempt to bring order and an overarching theoretical framework into analysis of the seemingly unruly behaviour of financial markets was a temptation that has for years proved too great for academics (and many market participants) to resist, but it has turned out to be a long and largely fruitless journey. The problem of course, as Prof Lo has helped to demonstrate with his empirical studies of the random walk, is that the financial markets simply don’t lend themselves to deductive theory as well as the physical world.

If a theoretical approach is not firmly grounded, it is not surprising that the predicted consequences that flow from it should fail to show up consistently in the way that investors and markets actually behave. Behavioural finance has grown to become a popular alternative approach precisely because it does appear to explain more clearly how investors, individually and collectively, appear to act. In Prof Lo’s words: “Economic systems involve human interactions, which almost by definition are more complex than interactions of inanimate objects governed by fixed and known laws of motion.”

The real beauty of the efficient markets hypothesis, and the explanation for its longevity in the face of consistent empirical evidence that it is invalid, surely lies in its beguiling simplicity. As the future is uncertain and many of the key variables that concern investors cannot be predicted with confidence, a theoretical structure that appears to offer a way to live with uncomfortable reality has obvious attractions.

Prof Lo’s own response has been to develop what he calls the adaptive market hypothesis, which seeks to draw on the insights of neuroscience and evolutionary biology. The hypothesis aims to create a framework that seeks to relate the behaviour of financial markets to a number of different factors, including the emotional condition of market participants at different points in time and the current balance of advantage between competing groups of market participants.

“Market efficiency,” he says “cannot be evaluated in a vacuum, but is highly context-dependent and dynamic, just as insect populations advance and decline as a function of the seasons, the number of predators and prey they face, and their abilities to adapt to an ever-changing environment.”

What is at work in financial markets, he believes, is a Darwinian process of “survival of the richest”. The implications of this approach are interesting. One is that the relationship between risk and return will not be stable over time, which seems right both intuitively and empirically. Another is that, rather than markets becoming steadily more efficient over time, as early proponents of the EMH proclaimed, this world is one in which new profit opportunities will continue to emerge at a constant rate.

This is the engine that provides the continuing incentive for active managers to remain in the market. But they will need to be innovative and adaptive to changing market conditions if they are to remain successful, Prof Lo argues. One-trick ponies risk going out of business before their kind of market next comes around. Most important of all, investors cannot rely on the comforting message of the efficient market hypothesis that all you need to do to obtain an expected return is to take the appropriate level of risk.

The biggest problem with this new approach, as with all alternatives to EMH, including behavioural finance, is that it doesn’t give investors a simple metric for understanding what to do. Its great merit, however, is that it appears to relate to the complex and uncertain world that we all actually inhabit, something the efficient markets hypothesis has never done.

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Source: http://www.ft.com/cms/s/0/cf6d096a-6d7a-11de-8b19-00144feabdc0.html

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CFA Institute, Professor Andrew Lo, Massachusetts Institute of Technology, MIT, “physics envy”, behavioural finance, Global Economic News, Darwinian process, “survival of the richest”, “Market efficiency”, financial markets,

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Singularity University Launches

MOFFETT FIELD, Calif. – June 25, 2009 – Singularity University (SU) — the new academic institution with the goal of preparing the next generation of leaders to address “humanity’s grand challenges” — today announced the selection of 40 students to represent the inaugural class for the Graduate Summer Program (GSP). Singularity University narrowed the final 40 students from a pool of more than 1,200 candidate applications around the globe. The summer program begins on June 29, 2009, based at its campus on the NASA Ames Research Park.

SU also announced that leading Silicon Valley venture capital firm, ePlanet Ventures, joins SU as the newest Corporate Founder to support the institution.

Singularity University is modeled after the successful International Space University, founded at MIT in 1987, which has become one of the leading interdisciplinary, international and intercultural institutions for the study of space. The Graduate Summer Program is a nine-week graduate-level interdisciplinary curriculum designed to facilitate understanding, collaboration, and innovation across a broad range of carefully chosen scientific and technological disciplines whose developments are exponentially accelerating.

A Look at the Summer Class

Students for the inaugural summer program were chosen based on their level of expertise in individual “tracks,” demonstrated entrepreneurial and leadership skills, and their commitment to addressing and solving important issues facing our world.

“The level of interest from candidates around the world exceeded our initial expectations,” said Dr. Ray Kurzweil, co-founder of Singularity University.

“We received applications from expert candidates in over 60 countries, so competition was very tough for the 40 open spots. Narrowing the field was challenging. The selected students embody the key characteristics, experience, and ‘start-up mentality’ we believe are required to address our grandest challenges today and tomorrow.”

The summer class is composed of 26 men and 14 women, ranging in age from 22 to 47 years old. The 13 nations represented are: USA, Canada, Israel, United Kingdom, Mexico, Brazil, Bolivia, India, New Zealand, Poland, Portugal, Turkey, and Russia.

Specific experience and expertise in one of the ten key fields of study, or “tracks,” was required to secure a spot in the inter-disciplinary institution. The number of student experts in each of the ten tracks are: future studies and forecasting - 5; policy, law and ethics - 7; finance and entrepreneurship - 5; networks and computing systems - 6; biotechnology and bioinformatics - 3; nanotechnology - 2; medicine, neuroscience and human enhancement - 4; AI, robotics - 3; energy and ecological systems - 2; and space and physical sciences - 3.

“It’s rare that a new university comes into existence, and we are proud of the students representing this first class,” said Dr. Peter H. Diamandis, co-founder of Singularity University. “Ray Kurzweil and I look forward to seeing what this stellar combination of students and faculty will produce throughout the course of the program. The potential is unlimited. And, we truly believe Singularity University will positively impact humanity.”

Venture Capital Support Behind SU

ePlanet Ventures joins SU as the only venture capital firm at the Corporate Founder level, with a donation of $250,000. In addition to financial support for SU, the firm will mentor students as they develop projects and new business ideas, a partner will serve as an advisor and lecturer on the Finance and Entrepreneurship track, and sit on the Board of Trustees. Google is an existing Corporate Founder.

“The close alignment of our goals with SU made the partnership a natural fit,” said Asad Jamal, Chairman and CEO of ePlanet Ventures. “ePlanet Ventures was founded to support innovation in technology and sciences, and has been a leader in discovering disruptive innovation and promoting cross-border migration of technological innovation, business models and entrepreneurship. We anticipate great ideas and global solutions to come from SU with the expert concentration of students, faculty, and other supporters. We’re thrilled to be a part of this innovative venture from the start.”

Interest in sponsoring Singularity University has been strong since its founding, and nearly all its financial supporting positions have been filled. Three positions are still available to join ePlanet Ventures and Google as Corporate Founders, and SU is in discussions with a number of the Bay Area companies to fill the remaining positions. Please visit the Founders’ Circle for more information on corporate and individual sponsorship.

Looking Forward

Singularity University will offer 3-day “C-level” and 10-day “mid-level” executive management programs in Fall ’09. Exact program dates will be announced later in the year. Interested candidates can submit applications and request additional information at www.singularityu.org/interested

ABOUT SINGULARITY UNIVERSITY

Singularity University (SU) is an interdisciplinary university whose mission is to assemble, educate and inspire a cadre of leaders who strive to understand and facilitate the development of exponentially advancing technologies in order to address humanity’s grand challenges. With the support of a broad range of leaders in academia, business and government, SU hopes to stimulate groundbreaking, disruptive thinking and solutions aimed at solving some of the planet’s most pressing challenges. SU is based at the NASA Ames campus in Silicon Valley. For more information, go to www.singularityu.org.

ABOUT EPLANET VENTURES

ePlanet Ventures is a leading global venture capital firm headquartered in Silicon Valley, with international offices in London, New Delhi, Bangalore, Shanghai, and Beijing, as well as a presence in Hong Kong, Seoul and Tokyo. ePlanet Ventures has funded over 80 innovative high-growth companies worldwide, including landmark deals Baidu (NASDAQ:BIDU), Skype (sold to eBay for approx. US$3B in 2005), and Focus Media (NASDAQ:FMCN). ePlanet is one of the leaders in promoting the cross-border migration of technological innovation, business models and entrepreneurship.

The Firm has made investments in sectors such as the Internet (consumer Internet, Internet services and applications), wireless communications and applications, VoIP and other broadband services, entertainment, semiconductor design, life sciences and other emerging services sectors. The firm has won the China Venture Capital Association Exit of the Year 2005 for Baidu, and the European Venture Capital Association Deal of the Year 2005 Award for Skype, and has been profiled in FORBES Feb. 2007 as a “Pioneer in Global Venture Capital.” Asad Jamal, Chairman and CEO of ePlanet Ventures was recently profiled in FORBES MIDAS List 2008 as a top 10 venture capitalists in the world.

Source: http://singularityu.org/news/2009/06/su-launches-press-release/

Tags: Singularity University, ePlanet Ventures, NASA, Silicon Valley, International Space University, MIT, Graduate Summer Program, Ray Kurzweil, Peter Diamandis, Google, Entrepreneurship, Global Development News,

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A Cell Phone That Never Needs Charging

Nokia hopes to create a device that could harvest enough power to keep a cell phone topped up.

A cell phone that never needs recharging might sound too good to be true, but Nokia says it's developing technology that could draw enough power from ambient radio waves to keep a cell-phone handset topped up.

Ambient electromagnetic radiation--emitted from Wi-Fi transmitters, cell-phone antennas, TV masts, and other sources--could be converted into enough electrical current to keep a battery topped up, says Markku Rouvala, a researcher from the Nokia Research Centre, in Cambridge, U.K.

Rouvala says that his group is working towards a prototype that could harvest up to 50 milliwatts of power--enough to slowly recharge a phone that is switched off. He says current prototypes can harvest 3 to 5 milliwatts.

The Nokia device will work on the same principles as a crystal radio set or radio frequency identification (RFID) tag: by converting electromagnetic waves into an electrical signal. This requires two passive circuits. "Even if you are only getting microwatts, you can still harvest energy, provided your circuit is not using more power than it's receiving," Rouvala says.

To increase the amount of power that can be harvested and the range at which it works, Nokia is focusing on harvesting many different frequencies. "It needs a wideband receiver," says Rouvala, to capture signals from between 500 megahertz and 10 gigahertz--a range that encompasses many different radio communication signals.

Historically, energy-harvesting technologies have only been found in niche markets, powering wireless sensors and RFID tags in particular. If Nokia's claims stand up, then it could push energy harvesting into mainstream consumer devices.

Earlier this year, Joshua Smith at Intel and Alanson Sample at the University of Washington, in Seattle, developed a temperature-and-humidity sensor that draws its power from the signal emitted by a 1.0-megawatt TV antenna 4.1 kilometers away.

This only involved generating 60 microwatts, however. Smith says that 50 milliwatts could require around 1,000 strong signals and that an antenna capable of picking up such a wide range of frequencies would cause efficiency losses along the way.

"To get 50 milliwatts seems like a lot," adds Harry Ostaffe, head of marketing for Pittsburgh-based company Powercast, which sells a system for recharging sensors from about 15 meters away with a dedicated radio signal.

Steve Beeby, an engineer and physicist at the University of Southampton, U.K., who has researched harvesting vibrational energy, adds, "If they can get 50 milliwatts out of ambient RF, that would put me out of business." He says that the potential could be huge because MP3 players typically use only about 100 milliwatts of power and spend most of their time in lower-power mode.

Nokia is being cagey with the details of the project, but Rouvala is confident about its future: "I would say it is possible to put this into a product within three to four years." Ultimately, though, he says that Nokia plans to use the technology in conjunction with other energy-harvesting approaches, such as solar cells embedded into the outer casing of the handset.

Source: http://www.technologyreview.com/communications/22764/

Tags: Nokia, Ambient power, Intel, University of Washington, Vibrational energy, ambient cell phone charging, RFID, Powercast, Global IT News, MP3, MIT, Wifi, Nokia Research Centre,

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