Naive Evolutionary Theories

NAIVE EVOLUTIONARY THEORIES

Traders with fragile strategies can prosper for a time before an adverse event exposes their risks. One must be either blind or foolish to reject the theories of Darwinian self-selection. However, the simplicity of the concept has drawn segments of amateurs (as well as a few professional scientists) into blindly believing in continuous and infallible Darwinism in all fields, which includes economics.

The biologist Jacques Monod bemoaned a couple of decades ago that everyone believes himself an expert on evolution (the same can be said about the financial markets); things have gotten worse. Many amateurs believe that plants and animals reproduce on a one-way route toward perfection. Translating the idea in social terms, they believe that companies and organizations are, thanks to competition (and the discipline of the quarterly report), irreversibly heading toward betterment. The strongest will survive; the weakest will become extinct. As to investors and traders, they believe that by letting them compete, the best will prosper and the worst will go learn a new craft (like pumping gas or, sometimes, dentistry).

Things are not as simple as that. We will ignore the basic misuse of Darwinian ideas in the fact that organizations do not reproduce like living members of nature—Darwinian ideas are about reproductive fitness, not about survival. The problem comes, as everything else in this book, from randomness. Zoologists found that once randomness is injected into a system, the results can be quite surprising: What seems to be an evolution may be merely a diversion, and possibly regression. For instance, Stephen Jay Gould (who was accused of being more of a popularizer than a genuine scientist) found ample evidence of what he calls “genetic noise,” or “negative mutations,” thus incurring the wrath of some of his colleagues (he took the idea a little too far). An academic debate ensued, plotting Gould against colleagues like Dawkins who were considered by their peers as better trained in the mathematics of randomness. Negative mutations are traits that survive in spite of being worse, from the reproductive fitness standpoint, than the ones they replaced. Harmful variants can persist through genetic drift, especially when selection against them is weak.

Furthermore, things can get even more surprising when randomness changes in shape, as with regime switches. A regime switch changes the conditions under which a strategy succeeds, sometimes enough to make past performance a poor guide. Darwinian fitness applies to species developing over a very long time, not observed over a short term—time aggregation eliminates much of the effects of randomness; things (I read noise) balance out over the long run, as people say.

Owing to the abrupt rare events, we do not live in a world where things “converge” continuously toward betterment. Nor do things in life move continuously at all. The belief in continuity was ingrained in our scientific culture until the early twentieth century. It was said that nature does not make jumps; people quote this in well-sounding Latin: Natura non facit saltus. It is generally attributed to the eighteenth-century botanist Linnaeus who obviously got it all wrong. It was also used by Leibniz as a justification for calculus, as he believed that things are continuous no matter the resolution at which we look at them. Like many well-sounding “make sense” types of statements (such dynamics made perfect intellectual sense), it turned out to be entirely wrong, as it was denied by quantum mechanics. We discovered that, in the very small, particles jump (discretely) between states; they do not slide between them.