Who first proposed the Adaptive Markets Hypothesis (AMH)?

• A. Fama
• B. Lo
• C. Shiller
• D. Berk

Answer: (B)

The Adaptive Markets Hypothesis (AMH) was first proposed by Andrew Lo in 2004. Lo's hypothesis seeks to reconcile traditional financial theories with behavioral economics, suggesting that market behavior evolves over time due to the adaptive nature of human investors. According to AMH, financial markets are influenced by the adaptive behavior of investors who use past experiences to inform their future decisions. This perspective places importance on the idea that market efficiency is not static, but rather can change and adapt based on prevailing market conditions and investor behaviors.

Lo's work emphasizes the role of psychology and environmental factors in financial decision-making, which contrasts with the classical efficient market hypothesis that implies markets are always perfectly efficient. By acknowledging the adaptive nature of both markets and investors, the AMH provides a framework for understanding phenomena such as market anomalies and bubbles, making it a significant contribution to the field of finance.