MIT’s Lo Predicts the Future of Finance

By Jane Wollman Rusoff | ThinkAdvisor | December 9, 2021

Financial regulators are “three or four steps behind” technological innovation — and that gets dangerous,” argues Andrew W. Lo, finance professor at MIT Sloan School of Management and director of the MIT Laboratory for Financial Engineering, in an interview with ThinkAdvisor.

The “biggest challenge” for regulators is trying to keep pace with the years-long pick-up in tech innovation, says Lo, who is on FINRA’s Economic Advisory Committee.

Financial regulation is just one area of his current research.

For another, he is a principal investigator at the MIT Computer Science and Artificial Intelligence Laboratory.

Time magazine named Lo one of “the 100 Most Influential People in the world” in 2012.

Co-founder of the tech-driven QLS Advisors, he is on the board of biopharmaceutical company Roivant Sciences.

His newest book is In Pursuit of the Perfect Portfolio, co-written by Stephen R. Foerster and published in August.

In the interview, Lo cites the necessity for “additional oversight” of robo-advisors because of their inherent risk, which the typical retail investor isn’t prepared to manage.

He also discusses new technologies, like cryptocurrencies, which are difficult to monitor and regulate, he says.

Lo’s AI research focuses on “artificial humanity,” which he calls “a second-generation AI.”

“Until we have an algorithmic understanding of how humans would likely behave [in market downturns], you’re never going to have truly intelligent software,” he contends.

This involves incorporating into algorithms investors’ “freak-out factor,” as he terms it, and their “pain point.”

ThinkAdvisor recently interviewed Lo, speaking from his office at MIT. The conversation embraced what regulators are doing to try to avoid another devastating financial crisis and his research on systemic risk, which is about how the financial system’s subcomponents are interconnected and how that affects risk.

The professor is also studying the financial impact of impact investing and is at work on a framework for “discharging fiduciary duties” when shareholders, plan sponsors or plan participants are interested in making such investments.

Here are highlights of our interview.

By MIT Sloan CDO