As we sift the debris though the current crisis, economists and policy makers as well try to assess why the risk management systems and regulatory constraints did not die before the world economy has become engulfed in a tsunami in red ink. But the economist Andrew W. Lo, Harris & Harris Group Professor Sloan School of Management at the Massachusetts Institute of Technology, Director of the Laboratory for Financial Engineering School and founder and chief scientific officer AlphaSimplex Group LLC, an investment advisor in Cambridge, Massachusetts, is less surprised than most experienced observers . Lo studied the relationship between financial decision making, neuroscience and evolutionary psychology for over ten years. Among its findings, that professional traders, not cool and rational, can be pierced by the extreme price movements, their decision-making capabilities are temporarily trapped emotions such as fear and anxiety. According to Luo, "behavioral blind spots" (which he defines as evolutionarily wired reactions to perceived risks and benefits), are especially dangerous in times of extreme:. Bubbles and crashes "Hide
by Andrew W. Lo Source: MIT Sloan Management Review 7 pages. Publication Date: April 1, 2009. Prod. #: SMR312-PDF-ENG
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