This may seem strange to some but serious studies are looking to biology for models to better understand the financial markets. One recent paper, reported on the BBC website, even examined the behaviour of bacteria to see if investment trade-offs could be better understood.
The academics involved had to do some intellectual contortions but they found a way of drawing analogies between the natural world and financial markets. According to the BBC report: “Externally imposed ‘market conditions’, represented by changing salt and acid contents of their environment, influenced the outcome of the ‘investment decisions’ made by each bacterium, with success rewarded by survival, and failure leading to extinction.”
Dr Ivana Gudelj, one of the authors of the report and an academic at the University of Exeter, was quoted as saying that the research showed that investors in real life markets often missed the importance of subtle trade-offs. She went on to argue: ”The study is a classic demonstration of Darwinian economics and survival of the fittest.”
Some will welcome these insights as useful while others will dismiss them. To understand why they have a fatal flaw it is necessary to look at their core assumption.
The main problem with the approach is sometimes called a naturalistic fallacy. It wrongly assumes that the natural world and the social world can be understood in the same way. This misses a crucial difference: humans have consciousness. They can alter their surroundings by purposefully interacting with other people. Bacteria, in contrast, simply respond to their environment.
For this reasons the natural world cannot be used to accurately model markets. The latter, as human creations, are constantly responding to our decisions. They are also, although this is a subject for another day, involved in a complex interaction with the real economy.
The latter part of Gudelj’s quote suggests she is not fully aware of this debate. Social Darwinism, despite its name (which was coined later), predated Charles Darwin (1809-1882). It goes back at least as far as the Revered Thomas Malthus (1766-1834).
The British cleric and scholar famously argued that any population would inevitably be kept in check by the limited food supply. He constructed a model to show that populations tend to grow geometrically (2, 4, 8, 16 and so on) while the food supply only grow arithmetically (1,2,3,4 and so on), The inevitable result, he argued, was that war and famine would sooner-or-later bring any population in check. A new equilibrium would be achieved.
Malthus’s contention was based on the same naturalistic assumption: that humans, like other animals, were not capable of bolstering their food supply substantially. He missed out our power of ingenuity.
In the event his prediction proved hopelessly wrong. The world’s population has grown more than seven-fold since Malthus made it yet, on average, we are far better fed than ever.
The abysmal failure of Malthus’s approach flowed directly from his naturalistic premise. He ignored our human capability to reshape and improve our surroundings.
Those who want to model investment decisions on the natural world have been warned. Humanity trumps biology.
Daniel Ben-Ami is a writer on economics and finance. His personal website can be found at www.danielbenami.com