Barrier States, from Jim Sogi

December 12, 2008 |

 Models of Adaptive Behavior by Houston and McNamara models biological systems (such as little birds) using states. At one bound there are barrier states, i.e, death, birth, beyond which, in scientific theory, organisms cannot go beyond. Another concept is that of the life history of the individual and that of the group, which can be very very different as traders know. The organism trades off behavior choices that optimize and balance the state of its health, food, and reproduction.

Looking at markets, there are certain theoretical barriers. In bonds, it is a zero yield. For companies, it is zero value or bankruptcy. In Yen, the G7 inform us it is near $1.10. As an adaptive ecology of the markets we see some markets approaching their barrier levels. The fear of course blaring in the press is death — of companies, of countries and of markets, and in some cases, we are seeing this. But for the group, what does the barrier represent? For the adaptive survivor, isn't it going to provide opportunity? How might the trade balance the various states in an optimal manner? Will a broader range of behaviors improve overall state than perhaps the single behavior which previously sufficed. For example, we see broad move in bonds and currencies where as equities are quiet. Houston speaks of convergence to a stable state. Vic and Laurel have spoken of the tradeoff in bonds and equities seeking stability. Houston uses models with tradeoff charts which seem similar to Friedman's Price Theory charts of marginal values. Bonds are up 15 points, Yen up .03 in a month and SP is basically flat on the month. Where is the food for the little bird? Would a classical asset diversification have helped? Many tough questions in a stressed environment.

Jeff Watson writes:

Biologists like to study the “Edge Effect,” which is the result of the boundary between environments in an ecosystem, a good example is where a forest meets a grassy field. The whole ecosystem is affected for a distance from the edge, and many changes from the norm occur with regularity in this area. At the edge, one might find increased wildlife, changes in flora and fauna, territorial changes, adaptive behavior, irregular patterns of animal behavior, ecological imbalances, and changes in weather. The edge has patterns that might not make natural sense, but is natures way of achieving homeostasis. It would be interesting to study what kind of “Edge effect” is exhibited by different markets juxtaposed upon one another.


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