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February 14, 2006
Patents and innovative evolution
The normal argument for patents is that the exclusive rights granted by patents are needed to provide the financial incentives required by the innovators. That argument is often juxtaposed with the concern that these exclusive rights are a monopoly power that may impede future innovation.
The latter argument is hinted at in a remark by MIT Finance Professor Andrew W. Lo, a true Wall Street "rocket scientist." Dr. Lo is the director of the MIT Laboratory for Financial Engineering. Business Week describes his research:
One of his projects is an attempt to incorporate evolutionary psychology and evolutionary dynamics into modern finance with his Adaptive Market Hypothesis (AMH). In essence, AMH argues that investors use trial and error to establish rules of thumb in the markets. Their skills improve as they climb a learning curve, and then, inevitably, they confront changes in the market that render some strategies obsolete. The survivors innovate, and come up with new ways of making money.
In a recent interview with Business Week - Online Extra: "Economists Suffer from Physics Envy", Dr. Lo made an interesting side comment about patents:
Q: You think Charles Darwin's ideas about evolution, natural selection, and the like apply to the financial markets?
A: Yes. For instance, the hedge-fund industry is the Galapagos Islands -- where Darwin [developed the idea of] evolution -- of finance. Because of the lack of patents, speed of innovation, and the ruthlessness of competition, we can see evolution in the hedge-fund industry. It looks nothing like it did five years ago.
In other words, the lack of patent is a factor in the industry's ability to evolve, i.e. innovate. If Dr. Lo's Adaptive Market Hypothesis is a specialize version of a "general theory of innovation" (which I think it may be), then we need to think very carefully about how the patent system stands as a barrier to (rather than a facilitator of) innovation.
Posted by Ken Jarboe at February 14, 2006 11:51 AM
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