STREET DOGS: Trial and error
We make choices based on our past experience and our best guess as to what might be optimal
From an article by Andrew Lo at Evonomics: Under the adaptive markets hypothesis, individuals never know for sure whether their current heuristic is "good enough". They come to this conclusion through trial and error. Individuals make choices based on their past experience and "best guess" as to what might be optimal, and they learn by receiving positive or negative reinforcement from the outcomes. From this feedback, they will develop new heuristics and mental rules of thumb to help them solve their economic challenges. As long as those challenges remain stable over time, their heuristics will adapt to yield approximately optimal solutions to those challenges. Adaptive markets hypothesis can easily explain economic behaviour that’s only approximately rational and economic behaviour that looks completely irrational. Individuals and species adapt to their environment; if the environment changes, the heuristics of the old environment might not be suited to the new one. The hypothesis ...
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