Scholars trying to penetrate the complexity of the stock market get inspiration from wherever they can find it. Lately, that includes honeybees and index fingers.
Honeybees, which do different dances to communicate the location of food sources and nest sites, offer a case study in the dynamics of complexity that’s simpler than the market. Index-finger length reflects a physiology that favors a sure-footed ability to respond quickly to fast-changing circumstances.
One way to study a complex system such as the stock market is to build a mathematical model. That’s a bunch of equations a computer can use to simulate the system. To make such simulations work, designers have to build in certain initial assumptions. They might assume, for example, that the system has only one consistent mode of behavior.
But real-life systems such as the stock market or the way a bee dances don’t work that way. Bee dances have three distinct modes and can suddenly shift between them.
So Emily Fox at the Massachusetts Institute of Technology and Erik Sudderth and Michael Jordan at the University of California in Berkeley developed a way to cut through the modelers’ limitation. Their computer-based method sorted through relevant data and came up with the simplest mathematical model that describes how a complex system works. No built-in assumptions needed. When tested on bee-dance data, their method correctly identified the three dance modes, which mode was used at a given time, and the probability the bees would shift to a different mode. Ms. Fox also used the model on four years of Brazilian stock-market data. It was able to identify the market’s different states of volatility and the probability it would shift between them.
The MIT announcement of this research last month made clear that this is a work in progress. Its “primary objective” is finding ways to simulate complex behavior using known data. The hope is that, once found, such simulations “could also be used as the basis for real-time estimation, tracking, and prediction,” the announcement said.
John Coates at Britain’s University of Cambridge and colleagues have been pursuing a different stock-market question. They noted earlier this month in the Proceedings of the National Academy of Sciences that the relative length of the index finger to the ring finger “has been shown to predict success in highly competitive sports.”
It’s a known fact that Olympic athletes can benefit from physiological capacities acquired in the womb prior to birth. Taking that notion a step farther, the researchers wondered if the quick reaction times and rapid decisionmaking which characterize successful stock traders might also be rooted in prenatal physiological development.
Index fingers gave them a clue.
Over 20 months, the researchers studied 44 male stock traders in London’s financial district. They found that traders with shorter index fingers, compared to their ring fingers, had greater success. According to the study, the finger-length ratio that predicted successful athletes also “predicted the traders’ long-term profitability as well as the number of years they remained in the business.”
Whether it’s bee dances or prenatal development, it seems that biology can shed at least a little light on stock-market dynamics.