When Darwin Failed: "Fishing For Perfect Markets"

Tyler Durden's picture

Perhaps the biggest affront to the natural order of things set in motion by central planners' intervention in capital markets of all varieties, is that through sheer brute force (of a printer, of posturing, and of outright politicized pandering), several academics in a low-lit room can suppress, for a brief period of time, the Darwinian survival of the fittest. Key word here is "brief" because in the end nature always gets even, and usually with a vengeance. In the meantime, however, epic distortions in what are already indefinitely irrational markets, which however always eventually regress to a rational mean (in popular jargon a process better known as "crash"), succeed in driving out legacy traders who no longer can navigate the chaos unleashed by the authoritarian ambitions oh the kind that ultimately resulted in the collapse of the Soviet Union, and every other centrally-planned establishment, when abused on a long-enough timeline... For a vivid example of what happens "when Darwinism fails" we go to a parable from a just released letter to client by the English hedge fund Toscafund, which looks at modern day trading from the perspective of fishing in the Polynesian seas, which also does an admirable job in explaining why being lucky is almost always more important than being good (sadly, one can not sell "luck" in newsletter format for $29.95/ month).

By Savvas Savouri of Toscafund Asset Management

Fishing for perfect markets

I have spent many hours impressing upon students this sad reality. Whilst in theory forecasting using good fundamentals should be enough to deliver success, in practice financial markets are stubbornly imperfect and favour bad techniques. To make this point I go fishing for analogies.

To set a scene, I ask the audience to imagine watching a Polynesian fisherman going about his work. Having waded into the clear blue water of the South Sea's, he confidently holds a spear above his head and takes aim. With this imagery in mind I then ask the students to reflect on his fundamental technique. Why for instance is the trajectory of his aim not in the direction of where the fish appears to be. My point to them is 'good' forecasting does not confuse perception with reality. We consider the three judgements the fisherman is making; one based upon simple physics, another basic maths and the other behaviour theory. Using these in isolation the fisherman will fail, combine them and he will return home with a good return from his efforts.

Our good fisherman is aware the position of the fish is distorted. He may not know the precise science that because light travels at different speeds through air and water it kinks or refracts, but is aware of this distortion all the same. The second element our fisherman contemplates is momentum. He can see the fish is in motion and is aware it will have moved by the time the spear arrives. The third simultaneous judgement our Polynesian fisherman makes is the survival instincts of the fish. If it has not already been made aware it is being stalked by the shadow cast over it, it will certainly become conscious of a threat from the ripples set in motion by the harpoon entering the water.

Despite the complications, with painstaking teaching and practice the 'good' fisherman will not go home empty handed. His family is sure to be well fed, and he will impart to his sons the skills he had learned from his own father a transfer of knowledge that almost certainly has gone on for generations. Across our Polynesian fishing village bad fisherman have long vanished; Darwinian logic having seen they have. The population of the village has even steadied to reflect sustainable fishing levels. We have in effect a perfect market. Reaching this point I caution that financial markets have never reached this perfect state. To illustrate what I mean I return to the 'perfect' fishing village where only 'good' fishermen are at work.

I ask the student to assume 'bad' fishermen hadn't been eliminated by Darwinian evolution and congest the waters around our good fishermen. Their presence introduces not only complications to our good fisherman but a threat to their very survival. Not simply are the spears being thrown wildly around in such a random way they are a danger to our good fisherman, they are causing chaos in the waters. Where fish once moved sedately in calm waters they are now darting around in panic, and so more challenging targets for even the best of our 'good' fishermen. Matters are worse still for our good fishermen. Many fish have moved away from their preferred coastal water habitat into deeper, colder and more tidal waters; from one inhospitable place to another. Moreover, through their sheer weight of numbers, the bad fishermen are spearing ever more fish as the good fisherman return home empty handed. Before long fish numbers plummet and order in the fishing village has turned upside down. Whilst the families of 'good' fisherman go hungry, 'bad' fisherman boast of their successes, convinced they were good rather than lucky. I end my lecture with these words, "welcome to the imperfect world of investing, if you want perfect markets forget finance go fishing in the south seas".

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Colombian Gringo's picture

Fuck Darwin. 

2000 years of inbreeding, and the best they can come up with is Mark Zuckerberg? Eugenics is a fools theory.

James_Cole's picture

Yes, survival of the fittest - one of the most misconstrued references there is. Whoever wrote this article (and those commenting on survival of the fittest as "failed" or "eugenics") should read up on what was actually meant by natural selection. 

People should've paid more attention in science class during biology and these simple misunderstandings wouldn't come up with such frequency. 

Dr Benway's picture

Indeed. Probably one of the more common misconceptions out there.

chistletoe's picture

Whoever wrote this article is evidently totally unaware of the economic theory, first popularized in the late 1800's,

called "Social Darwinism".  The ultimate outcome of policies based on this theory led to the rise of the robber barons

of the 1900's and later, to the third reich.

http://en.wikipedia.org/wiki/Social_Darwinism

 

Needless tosay, after the second world war, few people ever openly espouse this theory anymore ....

 

(those who refues to study history are doomed to repeat it ......)

billwilson's picture

Typically the word fittest is misunderstood. It does not mean strongest or best, but most suited to the environment (as in the best fit to the environment). So in the analogy of the author, who seems not to understand Darwin, the fittest fisherman in the new environment may in fact be the bad lucky fishermen. So not a Darwin problem, but an author problem ... again.

gwiss's picture

I think you misunderstood what he was saying.  Read this paragraph again: "I ask the student to assume 'bad' fishermen hadn't been eliminated by Darwinian evolution and congest the waters around our good fishermen. Their presence introduces not only complications to our good fisherman but a threat to their very survival....  Moreover, through their sheer weight of numbers, the bad fishermen are spearing ever more fish as the good fisherman return home empty handed. Before long fish numbers plummet and order in the fishing village has turned upside down. Whilst the families of 'good' fisherman go hungry, 'bad' fisherman boast of their successes, convinced they were good rather than lucky."

He's not saying they are getting more fish per fisherman.  He's saying that there are so many that they disrupt the natural behavior of fish which the good fishermen over time learned to predict.  What this analogy requires is that you presume that some outside influence has made it possible for these fishermen to inundate this fishing village.  It requires you to presume that, by whatever method, somehow the village was flooded with bad fishermen.  It does not presume that these fishermen flooded the village because they were successful.

What he is asking you to presume is that the same thing happen to a fishing village that has happened to our society and markets, which is that a temporary outside influence totally disrupt the environment.  For a period of time, it seems that survival of the fittest has been conquered and overturned.  Thus, the population of those with minimal ability to provide for their young are somehow able to reproduce surviving offspring at rates surpassing those with more ability.  Or, businesses survive and even appear to prosper even though they have no cash flow at all (surely you see the dot.com bubble here, yes?)  Or, leaders whose only ability is the ability to thrive in the network wars of politics nevertheless end up successful, thus leading to the observation that both cream and shit float to the top.  Or, stocks react to those who BTFD whether it makes sense or not, thus eliminating the edge that those who thoroughly understood how to properly value a stock once had.

The point is, when you artificially fuck with a Complex Adaptive System, it seems temporarily that you have "beaten" the system, as those better suited for the manipulated system thrive while those better suited for the old system decline.  But you have not beaten the system, and you have not created a new system.  Instead, you have simply transferred the survival judgement from the individual to the system as a whole.  Normally, the fisherman and the fish evolve symbiotically, as the fisherman weeds out the slow and weak fish, and the fish weed out the slow and weak fishermen.  By destroying the symmetry of the system, you have made it unstable.  Thus, instead of the crappy individuals being weeded out, the crappy systems get weeded out, because crappy systems no longer have an intact process to improve themselves, and instead just collapse catastrophically.

qqqqtrader's picture

A little bit off topic but the price of fish is up 44.8% in the last 10 years.

francis_sawyer's picture

@QQQQ

~~~

LMFAO!... :-) +1

I just KNEW you had the perfect chart at your fingertips to make it all mean something... (on the topic of fish ~ listen 2 that dude peeps ~ he's an islander)...

Ookspay's picture

One billion fish are caught and eaten everday... Peak Fish!

nmewn's picture

lol...good thing they reproduce...Peak Caviar!!!

Precious's picture

Two-thirds of the Earth is covered by frigging fish water.

krispkritter's picture

If by 'fish water' you mean water full of fish poo I'd have to say that's a good thing. It grows great veggies.

LasVegasDave's picture

Zuckerberg is what, like a billion times richer than you?

scoreboard

boogerbently's picture

People keep blaming Mark Z, and waiting for him to "hit another home run."

They forget, he STOLE the FB idea from the Winklevoss boys.....he's played out.

Any "good ideas" will need to come from one of his employees.

TWSceptic's picture

Zuckerberg is only rich because the government and corporate powers allowed him to become rich. Facebook is not a fluke, it's a secretly government enabled centralization of public information.

 

BTW Zuckerberg already lost 50% of his wealth in a few months, so he did basically worse than most people in a short period of time. Who knows maybe some day he screws up even more, he may even end up broke. That's how incompetent he is.

Neethgie's picture

Wait, are you saying zuckerberg didnt make that?

TWSceptic's picture

I guess even a broken clock like Obama is right twice a day.

GMadScientist's picture

Not by a long shot, and half as "richer" as he used to be.

Lulz.

 

Renewable Life's picture

Tyler my man.........I know it's a Saturday and the news cycle is slow, but this topic is a sleeper debate!!!

On a related note however, I'm working at an MMA event right now and let me tell you, "survival of the fittest" is alive and well in this industry!!!

stocktivity's picture

The only fish in this market are suckers!

Winston Churchill's picture

The problem  for the traditional spear fishersman  is that the new

guys are using dynamite(algos), to harvest the sea.

Stock Tips Investment's picture

Financial markets are far from perfect. Even the term "perfect" may be questionable. When we turn daily market million people with ideas, methods, cultures, different strategies. That makes it interesting. There are many cases of good companies whose shares are deplorable behavior. Other companies, with poor results, have very good performance. Not to question both the fundamentals. I think it's more important to act in the market, considering them.

francis_sawyer's picture

 "I ask the student to assume 'bad' fishermen hadn't been eliminated by Darwinian evolution and congest the waters around our good fishermen. Their presence introduces not only complications to our good fisherman but a threat to their very survival. Not simply are the spears being thrown wildly around in such a random way they are a danger to our good fisherman, they are causing chaos in the waters. Where fish once moved sedately in calm waters they are now darting around in panic, and so more challenging targets for even the best of our 'good' fishermen"...

~~~

WTFF?

(a couple of threads ago, francis_sawyer got accused of being on an acid trip... maybe they were right)...

Ookspay's picture

Of course we unwashed traders are the "bad fisherman" complicating the waters for the "good fisherman".

Now I remember why I despise professors; those pompous arrogant pontificating little pricks.

LetThemEatRand's picture

The only thing worse is traders.

nmewn's picture

lol...its the central planning fisherman thats on acid here.

francis_the_wonder_hamster's picture

No, fellow Francis, this makes perfect sense. When we started rewarding failure in this country, we diminished the value of success.

My best example is all of the "successful" real estate "investors" I saw running around SoCal about 6 years ago.  Some of these clowns were friends of mine, and they thought they were very smart.  Any attempt to explain leverage to them, and its' negative effects (I left compounding out of the conversation), was lost on deaf ears.  Yes, a lot of them have hit me up for loans in the past few years, and yes, they all still send out emails proclaiming the housing market bottom.

Why this (the quote above) makes sense to me, is that I'd love to pick up a property, long-term, right now, but prices are still a joke because all of the "bad fishermen" are still running around this place and keeping prices unrealistic. 

(For the record, the only reason I'd buy property in SoCal right now is because I have no problem becoming a debtor if/when inflation hits.  If deflation hits first, I'm already covered).

AynRandFan's picture

The analogy was a pretty good one, until the author got lost and just ended the article.  In the stock market, traders are taking advantage of the high level of fear by throwing their money at every stock regardless of risk.  Because careful investors who bet their own money are unwilling to be involved, prices just rise and rise.  The good fishermen are those that bet on the predictable, and the bad fishermen are those that just throw their spears at everything that moves.  Eventually the "fish" (price appreciation) will disappear when enough people realize that the shotgun approach has been exhausted.

Peter Pan's picture

Why bother fishing when you can do a Corzine and steal fish instead?

Missiondweller's picture

"I promise, I'll keep your fish segregated in this bucket"

Kali's picture

you didn't spear that fish.

mkhs's picture

Couldn't you segregate it better in your stomach?

 

Zola's picture

Its only that way if you LET it BE. He should be talking to his students about the principle of ACTION and defending a JUST CAUSE. No he seems content to feed his captors the tools of his own destruction... Where did I see this before ? Ah yes... 

fonzannoon's picture

what happens when the good fishermen in the pacific catch radiated fish, the good fishermen in the gulf catch deformed fish and the good fishermen in the atlantic catch all the remaining fish?

francis_sawyer's picture

Get some irradiated Fukushima mutants going & it'll give 'givin' you the FISH EYE' a whole nother meaning...

Hedgetard55's picture

Darwinism is a big joke, the equivalent of telling me the more times I crash my car the better it will run.

nmewn's picture

I'm still waiting for the Lost Tribe of Missing Links to be found and tie it all together for us.

So far, after what amounts to trillions, they've come up with a lemur's femur...I think...very impressive ;-)

Ookspay's picture

Exactly. If humans evolved from apes why do we still have apes?

James_Cole's picture

"Exactly. If humans evolved from apes why do we still have apes?"

Either awe-inspiring stupidity or in need of a /sarc tag. 

nmewn's picture

Do you really believe we evolved from apes?

Where is the proof?...I mean, outside of Rosie O'Donnell.

Hedgetard55's picture

I want to say Michelle Obama but that would be racist, so I won't.  :~)

nmewn's picture

Precisely.

The math for green slime evolution doesn't work out...I've got my money on Roger Penrose, who even though an atheist, managed to unnerve himself ;-)

Hedgetard55's picture

The coelecanth supposedly died out 160 million years ago. Then they found them still alive, exactly as they appeared in the fossil record. NO evolution for 160 million years? Guess they were perfectr for their niche for all that time... what a joke.

Praetor's picture

No the coelacanth was thought to have died out 65 million yrs ago. No evolution? How do we know, have you conducted a DNA analysis on modern and ancestral coeleacanth to determine of the DNA sequences are the same? I think not.

Ants and spiders havent changed much structurally either, and yes, if an animal reaches the perfect requirements for survival in that ecological niche, further evolutionary changes may not be beneficial for the species continued survival.