How financial engineering can cure cancer

According to professor Andrew Lo, cancer research is a losing investment for pharmaceutical companies - which is why it needs to take more of a hedge-fund approach.

We are making breakthroughs almost weekly in our understanding of cancer and other deadly diseases, both in how to treat and – in some cases – how to cure them. So why is funding for early stage biomedical research and development declining just when we need it most?

CSAIL principal investigator Andrew Lo discusses the pharmaceutical industry, and how tools from financial engineering could help incentive investors to fund cancer-research.

 

More specifically, Lo says that the financial risk of drug development has increased, and investors don’t like risk. What if we could reduce the risk and increase the reward through financial engineering?

By applying tools like portfolio theory, securitization, and derivative securities to construct “megafunds” that invest in many biomedical projects, we can tap into the power of global financial markets to raise billions of dollars.  If structured properly, investors can earn attractive returns with tolerable levels of risk, and many more patients can get the drugs they desperately need. Finance doesn’t have to be a zero-sum game; we can do well by doing good if we have sufficient scale.

Lo is the Charles E. and Susan T. Harris Professor at the MIT Sloan School of Management and the director of MIT’s Laboratory for Financial Engineering. He is the author of five books and over 100 research articles. His research spanns many areas, including: the econometrics of hedge funds; mathematical and statistical models of systemic risk in the financial system; evolutionary models of human behavior; and, most recently, applying financial engineering to fund biomedical innovation more efficiently.