ANDREW LO Professor of Finance, MIT How do people decide where to invest, and why do they make mistakes? That question, among the most vexing in all of finance, is the research focus of Massachusetts Institute of Technology Professor Andrew W. Lo, 37. You could make billions of dollars if you knew the answer to Lo's question. But he says he's studying the problem for ''less pedestrian'' reasons than merely devising new moneymaking strategies. For one, it could hold significant implications for policymakers responsible for regulating the world's financial markets. It could also help the growing number of people who are directing their own retirement plans. ''It's important to understand how people perceive risk, and how that translates into investment behavior,'' says Lo. His latest research involves an experimental Internet-based trading game designed to analyze how investors react to a mythical futures market on monthly employment figures (http://cyber-exchange.mit.edu). So far, the research points to two important lessons. First, capital-gains taxes are bad because ''they prevent investors from rebalancing their portfolios,'' he says. In addition, Lo thinks regulatory agencies should educate consumers about market risk. ''Maybe we should teach schoolchildren probability theory and investment risk management,'' he says. By Geoffrey Smith in Cambridge Return to main story

Updated Oct. 16, 1997 by bwwebmaster
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