“Bubbles” are old. Variations on the most legendary one, Holland’s tulip craze of the 1630s, have recurred time and again. In the past decade alone, we’ve experienced the “dot-com” boom and bust, only to be followed by the current financial meltdown triggered by the decline in U.S. housing prices and reduced credit. Now, sifting through the debris of today’s crisis, economists and policy-makers alike are trying to assess why risk management systems and regulatory constraints didn’t kick in before the global economy became engulfed in red ink. Executives are trying to assess what the whole business means for how to run their companies. And nearly everyone is trying to get over the shock.

But Andrew W. Lo is a lot less surprised than most seasoned observers. As the Harris & Harris Group Professor at MIT’s Sloan School of Management, director of the school’s Laboratory of Financial Engineering and founder and chief scientific officer of AlphaSimplex Group LLC, an investment adviser in Cambridge, Massachusetts, Lo has been studying the connections between financial decision making, neuroscience and evolutionary psychology for over a decade. His ideas about the role of human behavior in the financial markets have recently attracted the attention of policy-makers in Washington, who... To read the complete article, login or sign-up using the form below.