Overall, face the market. As Lo (2004)

Overall, this essay has identified
the main characteristics with EMH and AMH, and explained their implications in financial
market. Firstly, we have understood the classical efficient market hypothesis, and
try to interpret the criticisms between the efficient market hypothesis and behavioural,
we can clearly recognize the strength and weakness of the EMH.  Turn to the adaptive market hypothesis, we
find the AMH correlates
with evolutionary perspective, psychological, and others, it has more complete explanations
of financial behavior market, and it recognizes the
complex in human behavior, in particular when individuals make decisions that related
with many elements. In contrasting, the implications between EMH and AMH, we
forward find out whether EMH and AMH, they have their own perspectives to face
the market. As Lo (2004) illustrate the story: “five blind people, blind from
birth, encounter an elephant for first time, the fist blind people felt the elephant’s
leg like a three, the second blind people felt the elephant’s trunk like a
snake, so on.” Through the story, we cannot say the individuals’ perspectives
are wrong but that we can determine that are not complete. Similarly reason
between EMH and AMH, the efficient market hypothesis contributed reasonably principles
to the financial market, but less evidences around behavioral principles. The adaptive
market hypothesis provided compositive and logically principles to the financial
market, and it has more complete evidences to interpret the perspectives and the
market conditions. Therefore, whether the EMH or AMH their perspectives and contributions
for financial market and economics should be honored in the world.We have
organized three implications between EMH and AMH. The first implication that we
considered is the relations between risk and reward, we believe they may not to
be stable over time. In the fact, the several factors exist could affect the
relations between risk and reward, such as the regulatory environment and tax
laws, as follow these factors changing over time, any risk and reward have possible
to be affected. In the context of rational expectation equilibrium model, if “risk
preference” changes, meanwhile, the “equity risk premium” also must change. However,
in the AMH, the aggregate risk preference will not never change constant,
because of the pressure of natural selection. According the example from Lo
(2004), in US market there has a group who never experience a genuine bear market,
but that shaped the risk preferences of US economy. This case affected current
investors same as the past technology bubble, experienced technology bubble’s investors,
they may prefer leaving the market, but todays investors are entirely different
with past years. Moreover, Lo (2004) emphasizes there also have several research
have develop around this issue, such as economics and finance, psychology, operate
research, brain and science, these further to interpret how individuals make
decisions. The second
implication is the arbitrage opportunity exists frequently in AMH that is
different with EMH. In the context of Grossman and Stiglitz (1980) indicated,
if there without the opportunity, no profit, gathering information will not
exist in the market, and the financial market will collapse. As the idea of
evolutionism through the financial market imply the profit opportunity should
be existed in the market. However, the appearance of new perspective sometimes
imply the old perspective die out, that looks like the new opportunity born. Lo
(2004) accepts the perspective of AMH considered the market is complex that
involves many phenomena, such as fear, bubbles, crashes and others, rather than
the EMH predicted higher efficiency trend.

The third
implication is innovation that is an important skill for surviving in the financial
market. In the EMH perspective, if investors want to achieve the levels of expected
returns, as long as they could hold the same levels of risk. However, the AMH has
a different perspective with EMH, in the context of AMH has mentioned the
relations between risk and reward will changes with time that implies if
investors want to achieve better expected returns, adapt the market changing is
the inevitable step. But the multiply abilities develop will not make the investment
manager die out in financial market.

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Overall, this essay has identified
the main characteristics with EMH and AMH, and explained their implications in financial
market. Firstly, we have understood the classical efficient market hypothesis, and
try to interpret the criticisms between the efficient market hypothesis and behavioural,
we can clearly recognize the strength and weakness of the EMH.  Turn to the adaptive market hypothesis, we
find the AMH correlates
with evolutionary perspective, psychological, and others, it has more complete explanations
of financial behavior market, and it recognizes the
complex in human behavior, in particular when individuals make decisions that related
with many elements. In contrasting, the implications between EMH and AMH, we
forward find out whether EMH and AMH, they have their own perspectives to face
the market. As Lo (2004) illustrate the story: “five blind people, blind from
birth, encounter an elephant for first time, the fist blind people felt the elephant’s
leg like a three, the second blind people felt the elephant’s trunk like a
snake, so on.” Through the story, we cannot say the individuals’ perspectives
are wrong but that we can determine that are not complete. Similarly reason
between EMH and AMH, the efficient market hypothesis contributed reasonably principles
to the financial market, but less evidences around behavioral principles. The adaptive
market hypothesis provided compositive and logically principles to the financial
market, and it has more complete evidences to interpret the perspectives and the
market conditions. Therefore, whether the EMH or AMH their perspectives and contributions
for financial market and economics should be honored in the world.We have
organized three implications between EMH and AMH. The first implication that we
considered is the relations between risk and reward, we believe they may not to
be stable over time. In the fact, the several factors exist could affect the
relations between risk and reward, such as the regulatory environment and tax
laws, as follow these factors changing over time, any risk and reward have possible
to be affected. In the context of rational expectation equilibrium model, if “risk
preference” changes, meanwhile, the “equity risk premium” also must change. However,
in the AMH, the aggregate risk preference will not never change constant,
because of the pressure of natural selection. According the example from Lo
(2004), in US market there has a group who never experience a genuine bear market,
but that shaped the risk preferences of US economy. This case affected current
investors same as the past technology bubble, experienced technology bubble’s investors,
they may prefer leaving the market, but todays investors are entirely different
with past years. Moreover, Lo (2004) emphasizes there also have several research
have develop around this issue, such as economics and finance, psychology, operate
research, brain and science, these further to interpret how individuals make
decisions. The second
implication is the arbitrage opportunity exists frequently in AMH that is
different with EMH. In the context of Grossman and Stiglitz (1980) indicated,
if there without the opportunity, no profit, gathering information will not
exist in the market, and the financial market will collapse. As the idea of
evolutionism through the financial market imply the profit opportunity should
be existed in the market. However, the appearance of new perspective sometimes
imply the old perspective die out, that looks like the new opportunity born. Lo
(2004) accepts the perspective of AMH considered the market is complex that
involves many phenomena, such as fear, bubbles, crashes and others, rather than
the EMH predicted higher efficiency trend.

The third
implication is innovation that is an important skill for surviving in the financial
market. In the EMH perspective, if investors want to achieve the levels of expected
returns, as long as they could hold the same levels of risk. However, the AMH has
a different perspective with EMH, in the context of AMH has mentioned the
relations between risk and reward will changes with time that implies if
investors want to achieve better expected returns, adapt the market changing is
the inevitable step. But the multiply abilities develop will not make the investment
manager die out in financial market.

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