What is the foundational formula for the adaptive market approach?

The foundational formula for the adaptive market approach is best captured by the combination of the Efficient Market Hypothesis (EMH) along with bounded rationality and satisficing. The adaptive market hypothesis suggests that markets are not always efficient and that their efficiency can change over time in response to new information and environmental conditions.

This approach incorporates the idea that investors are not always perfectly rational (bounded rationality) and often make decisions that are good enough (satisficing) rather than optimal, due to limitations in information processing and cognitive biases. This nuanced view allows for a better understanding of market behavior, especially during periods of change or crisis, where traditional models based solely on the EMH may fall short.

In contrast, a perspective that relies solely on the Efficient Market Hypothesis emphasizes that all available information is already reflected in asset prices, neglecting the complexities of human behavior in decision-making. Similarly, focusing only on evolutionary principles or bounded rationality without the context of market efficiency fails to capture the full essence of market dynamics as proposed by the adaptive market hypothesis.