What a bug's life can teach us about investing

A new Utah State University study (here's a look at some interesting research previously done at the University of Colorado) separates chance from choice in the process of genetic mutation.  The study is interesting on its own—offering insight into how and under what conditions creatures might be capable of adapting to habitat shifts—it also offers those looking for mental models to apply elsewhere an extraordinary look at evolutionary change. 

What do bugs have to do with investing?

Thinkers ranging from Charlie Munger to Robert Hagstrom laud biology and evolutionary theory as providing especial illumination to understanding similar processes in economics and market behavior. Hagstrom’s book “Investing: The Last Liberal Art” draws parallels between natural selection and the evolution of profitable trading strategies; unprofitable strategies, he suggests, will die off in the process of competition. 

“At the market level, what we think and have done well is to recognize that it’s not an equilibrium-based theory, as modern portfolio theory dictates it should be,” Hagstrom said. “But that it’s more biological in nature.” 

Because of his study in biological systems, Hagstrom isn’t fazed when financial markets act in ways that would horrify anyone steeped in physical models (a more fecund source for the mathematical-driven rational choice theory-based economic modeling that inspire work done by many interested in forecasting economic behavior). Stuff that doesn’t occur in physics—five standard deviation, non-linear events—happen all the time in biological systems.

 

Principles of predictable adaptation

USU scientist Zachariah Gompert, who worked on the new study, asks the kind of question many investors would love to know, "As we change the landscape, change the environment, it would be nice to know how populations can evolve or not. It seems like there are components that are predictable."

To locate the kind of predictable responses that have inspired Hagstrom and others, the USU research team looked at insect genomes of the timema cristianae, isolating genetic mutations of the in the same places. They determined that separate populations of the insects that had adapted to the same plant had nearly twenty percent of mutations in common. "There’s a significant portion of the genome that is showing these repeatable patterns," Gompert said.

Gompert and colleagues tried to glean predictable components in this process by looking at two varieties of the same species of stick insects that possess different physical characteristics. Each of these adapts into two ecotypes: one with a black the other a green stripe down its back. These adaptations provide camoflauge in the plant species native to California’s Santa Ynez Mountains where they live.

"We have a population repeatedly adapting to some similar environment … either it takes the same route each time or it doesn’t," Gompert said. "Most people look at it in the context of a single trait or gene. Here, we’re able to say, if we looked across the entire genome, is it doing the same thing if you expose it to the same environment?"

Testing the hypothesis

Not content to identify predictable patterns and similar mutations, the team took an additional, and interesting step. If the evolutionary response exhibited by the insects were really as predictable as they thought, wouldn’t they be able to guess how they’d change in response to different stimuli? They thought so. So, they moved a population of the stick insects to a new plant to find out. 

Why the T. cristinae changed her stripes.

One generation later, the team observed genetic divergences in the species that were about 1.5 times more likely to correlate with each other than random chance would predict.

"There’s this core set of things that seem to be predictable from long-term patterns in nature and from our experiments," Gompert said, "and they seem to be important things."

Timothy Farkas and a team from the University of Colorado team provides an explanation of some of those important things. By empirically examining the ecological effects of evolutionary processes other than natural selection--their study also looked at gene flow and founder effects--they were able to observe "ongoing effects of rapid evolutionary processes on ecology: year after year, natural selection rapidly increases local adaptation, and gene flow breaks it down, allowing eco-evolutionary effects to persist through time." 

It is fascinating to know that the evolutionary changes to T. cristinae due to its habitat are accounted for in this way: "that poor camouflage...approximately 7% of variation in population size...the effects of host-plant species 5% and habitat patch size 14%."