The July 2007 issue of National Geographic contains an extremely interesting article by Peter Miller on "Swarm Theory". Swarm Theory attempts to quantify how individual actions of unintelligent individuals develop into the complex behavior of a group. The way ants or bee colonies work together for the good of the group is discussed in detail then how this can be applied to complex human/business systems. For instance, Marco Dorigo, a computer scientist at Universite' Libre in Brussels modeled ant behavior to solve logistical truck routing problems. One company specializing in artificial intelligence applies algorithms gleaned from the foraging activity of Argentinean Ants to manage industrial plant applications.

Upon reading this piece, I immediately considered how these ideas can be applied to the markets, stock indexes in particular. The base factors appear to be similar regarding the unintelligent individual player/relative small group. (unintelligent in regard to the unknown future price movement). Complex group behavior resulting in the changing cyclical nature of indexes, etc. This is definitely something worthy of additional study.

Steve Bal adds:

I have looked at this in the past reviewing such theories as flocking and how ants lay trails for other ants to follow (like the ants found in trees that seem to follow a perfect zigzag pattern). However, most animals have a rapid maturing process unlike humans and thus their environment has a smaller role in their behavior. It would appear that ants and bees act according to pre-programmed genes and evolve over time as laid out by Darwin.

One area of interest to me has been how birds act as a group with group coherency and no need for a formal leader of the pack. I would think this may be similar in the markets as the smart money is the one that makes the most noise and pilots the crowd in its direction of change. 



One-year ATM EUR/USD vol given at 5.95% today, an all time low. The extension of carry, plus easy monetary policies.


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