Market Anthropology: the Fringe Theory

Saturday, May 21, 2011

the Fringe Theory

It’s an hour after midnight and I find myself appreciating the concept of punctuated equilibrium, and how wherever I seem to turn, I find the character of the cosmos expressed both blatantly and discretely in the markets and culture. 

I suppose it’s just more evidence of nature’s fractal expression in everything we touch. 

Perhaps it’s just because I am tired. 

Your mind finds the strangest attractions and corollaries in these moments of exhaustion. After a week of literally passing the bucket from one child, to another, to another – I have a moment of relative familial gastrointestinal stillness. Unfortunately for my better half – she’s still in the thick of it assisting our daughter.

In any case, for those that need a quick refresher, the concept was brought to the forefront of scientific debate in 1972 by paleontologists Niles Eldredge and Stephen Jay Gould. The abstract thought being – a theory within evolutionary biology that believes that the majority of species originated in viable punctuationsrather than the gradual evolutionary process described by Darwin. As paleontologists, they argued that the fossil record was in fact void of evidence of gradualism as expressed by Darwin.

The theory proposed that adaptations leading to evolutionary change are made at the fringe of an organisms community where they can develop survival advantages in isolation; rather than the dominant mainstream population where interbreeding is rampant and geographic isolation impossible. 

Clearly you see where this is headed – no?

The tie-between (which may require a few leaps of logic) is that most investors and traders perceive the financial system as a dichotomous construct. It’s very similar to how we perceive politics. Right and wrong. Good and bad. Matt Taibbi and Goldman Sachs. 

I get that – mostly because the markets are fashioned (broadly speaking – I know this will ruffle those absolutist feathers, the irony) as a zero sum game. Someone is always taking possession of another persons capital. It doesn’t exactly breed respect and understanding between those participating on the short end of the exchange. 

The market’s many handlers, pundits and sellers float on a sea of overconfidence and conviction towards their respective beliefs and biases. I myself am prone to it on a regular basis. You could say it is an intrinsic trait to capitalism – or whatever we call this today. You find it on both sides of the spectrum. On CNBC and in the Harvard Business Review. Everyone seems to know what is best for the market and for the economy. 

It’s black and white and has arrested development written all over it.

What I am getting at, in a very circuitous fashion, is that we would all benefit; both in our absolute returns and our culture’s evolution – if we gravitated towards the fringe. Not the fringe that produced this week’s passing Rapture – the fringe that sees things for what they are; an imperfect system trying to seek equilibrium within an ever changing and bifurcated world. 

As a trader, you can hold both arguments in your head at the same time and walk between them. Philosophy is never a zero sum game. You just may find that with greater perspective – comes more opportunities and greater profits.

Nothing is more dangerous than a dogmatic worldview – nothing more constraining, more blinding to innovation, more destructive of openness to novelty. – Stephen Jay Gould