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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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Sun, 08/19/2012 - 11:43 | 2718036 WmMcK
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"I don't drink water. Fish fuck in it.”

? W.C. Fields

Sun, 08/19/2012 - 15:06 | 2718589 MeBizarro
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Another trader/financial professor/economist who tries to come up with an analogy based on Darwin and completely mangles and convutes it.  Stick to something you actually read instead. 

Sun, 08/19/2012 - 15:24 | 2718630 MeBizarro
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Always shocked/saddened that the amount of debate there is around the theory of evolution in this country since the Scopes trial, how you still don't have a majority of US citizens who believe/understand it although that is changer as the Boomer's parents are dying off, and how many Americans when polled still adhire some form of creationism based upon Genesis.  Then again, shocking amounts of Americans still think that modern man walked around Jurassic age dinosaurs because they saw it as a kid wathcing the Flinestones. 

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