Jul

30

 One of the most fascinating events in nature is the collaborative schooling behavior exhibited by about 80 percent of fish species. Researchers Geir Huse, Steve Railsback, and Anders Ferno at the University of Bergen, Norway have been modeling migration patterns of herring and have come up with some interesting observations which may shed some light on the behavior of the markets as well.

In their paper entitled Modeling Changes in Migration Patterns of Herring by Numerical Domination , the authors postulate that first time spawning herring tend to learn their migration pattern from older and more experienced members of the school. This pattern, however, is disrupted when the first time learning class becomes unusually large. They note that there have been four years in a fifty year period in which the "newbie" spawning class was unusually large. Each of these four years produced significant changes from the herrings' previously established migration patterns. The authors propose the idea that there are so many learners in the school during these abundant years, they actually follow each other instead of the experienced fish. As a matter of fact, even the experienced fish will eventually follow the learning fish due to their strong desire to collaborate with the other members of the school. They use computer modeling of fish schooling to illustrate their point.

One could argue that the same schooling instincts exhibited by the herring is also at work in the markets. Under normal conditions, the feedback systems at work with experienced participants tend to keep market valuations in traditional ranges. This could be disrupted when there is an unusually large influx of new participants in the market. The boom in day traders in the stock market in the 1990s or the boom in house and condo flippers of this decade may provide two examples. It would be interesting to know if the herring experience a population collapse in the years after their errant migratory patterns and if subsequent spawning classes go back to the traditional patterns to once again build up their numbers, another ever changing cycle.

Gary Rogan writes:

I think the phenomena are related through the disruption of the existing order by a lot of new participants, but somewhat different in terms of their dynamics. A rising market attracts a lot of newbies who of course all buy and drive the price even higher. This is a positive feedback loop. The pre-existing participants don't follow the newbies as much as the resultant (and also pre-existing) positive momentum. A market in the middle of a mania cares only about one variable: the price momentum.

The fish situation is somewhat more complicated because there is no clear up and down (well there is, but not in terms of migrations), and the choice of whom to follow is somewhat more complicated. 


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