The Adaptive Market Hypothesis (AMH) suggests that financial markets are not always perfectly efficient. Instead, they change and adapt over time based on how investors behave and learn.

It combines ideas from traditional finance and behavioural finance. Rather than assuming that investors are always rational, it recognises that people make decisions based on experience, emotions, and changing market conditions.

In simple terms, what works in the market today may not work tomorrow — because investors keep adapting.

Markets go through phases. Sometimes they behave efficiently, where prices reflect all available information. At other times, emotions like fear and greed take over, creating opportunities or mistakes.

Key Ideas:
• Markets evolve over time, just like living systems
• Investor behaviour changes with experience and environment
• No strategy works forever — success depends on current conditions
• Opportunities exist when markets are less efficient

For example, a group of traders in Mumbai may find that buying dips in banking stocks works well during a strong bull market. But as more people start using the same strategy, its effectiveness reduces. Over time, the market adjusts, and traders must change their approach to stay profitable.

This explains why some strategies work for a period and then stop working — not because markets are random, but because participants keep adapting.

Andrew Lo
evolutionary biology
market cycles