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Crowd-Sourcing, Greed, Ingenuity: A Cancer Cure?

Posted By Prucia Buscell, Thursday, October 18, 2012

MIT Finance Professor Andrew Lo believes financial engineering can provide the money and motivation to cure cancer within two decades.

Lo, who is director of the Laboratory for Financial Engineering at the MIT Sloan School of Management, also runs the AlphaSimplex group, an investment firm with $3 billion in assets. Time magazine named him one of the year’s 100 most influential people in the world, and notes he has challenged traditional economics with his belief that markets have more in common with biological systems than they do with rule based physics. He applies evolutionary and neurobiological models to finance and risk. As Time describes his approach, "Market participants aren’t coldly rational creatures but squirmy evolving species interacting with one another in a primordial sludge of money.”

In one of his lectures, Lo observes cancer is not a single disease, but a complex collection of more than 200 diseases. He lost his mother to lung cancer, and notes nearly everyone has been touched in some way by the disease. Government and private sources already pour billions into cancer research, but Lo thinks new methods are needed to foster drug research and development, and he believes the recent financial crisis provide lessons on how that can be achieved. .

He proposes creation of a $30 billion megafund with money from a large number of individual and institutional investors that could support as many as 150 simultaneous research projects. Right now, he says, a typical clinical trial costs $200 million, takes 10 years, and has a five percent chance of success. While researchers have discovered as many as 200 compounds that might be useful in treating cancers, he says, only a small portion of that potential can be investigated under the present system. In his view, crowd-sourcing combined with an appeal to both greed and social conscience can promote a new way of financing large scale biomedical innovation.

A small scale example of how a megafund might work, he says, is the Defense Advanced Research Projects Agency (DARPA) balloon experiment in 2009. The agency placed 10 large red weather balloons throughout the country and offered a $40,000 reward to the team that could find them all first. The MIT Lab team, which won the challenge in less than nine hours, explained the secret to success was financially rewarding not only the individuals who reported the location of the balloons, but everyone who helped in any way.

Lo says the extraordinary growth of the housing market in the decade before 2006 shows what vast sums of money can be generated and analysis of the subsequent crashes suggests the stability of the financial system can be maintained by strict enforcement of rules on sales practices, disclosure, corporate governance, and suitability criteria for investors. The megafund would be a portfolio entity that could raise money by issuing debt and could use financial engineering techniques such as securitization to create a new kind of investment called a Research Backed Obligation. The new system, with its mix of equities, could potentially spread risk, maximize capital, expand research, and generate returns ranging from five to eight percent, depending on the investor’s chosen risk. Lo plans a conference next year, where cancer scientists, financial experts and large institutional investors will be invited to discuss details of how a megafund could be created and managed. Read "Commercializing biomedical research through securitization techniques," by Lo, Jose-Maria Fernandez and Roger Stein in Nature Biotechnology online and a Boston Globe story by Beth Healy. Lo thinks the same financial engineering techniques can address energy and climate change issues.

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