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.