Wednesday, December 23, 2009

Is trading self-poisoning?

I’ve started reading Peter Ward’s The Medea Hypothesis: Is Life on Earth Ultimately Self-Destructive? (Princeton University Press, 2009). I doubt that I’ll read it cover to cover, but its premise is intriguing in a Malthusian, doomsday sort of way.

Contrary to Gaia hypotheses that envisioned “Mother Nature” as a kindly, nurturing force, Ward offers us Medea. She, of course, was the quintessential bad mother who murdered all her children after she found out that husband Jason, who could cast a spell over any woman (and bewitched her), was a cad—and an unlikable one at that. Ward’s Medea hypothesis is that “the overall effect of life has been and will be to reduce the longevity of the Earth as a habitable planet. Life itself, because it is inherently Darwinian, is biocidal, suicidal, and creates a series of positive feedbacks to Earth systems . . . that harm later generations. Thus it is life that will cause the end of itself, on this or any planet inhabited by Darwinian life. . . .” (p. 35) Only human intelligence and engineering, Ward suggests, can delay this fate.

Okay, you ask, what does this have to do with trading and investing? Let’s look at two characteristics of Medean life.

First, species keep increasing in population, ultimately outstripping resources vital to their continuance. Take the classic example of putting a breeding pair of insects in a closed jar with some food. The insects multiply, the food disappears, and the bugs die off from starvation, “usually with some last phase of cannibalism preceding the complete extinction.” I couldn’t help thinking of competing hedge funds when picturing the insects in the jar. Fortunately for some funds “angels” often add food to the jar. “But the point here,” says Ward, “is that . . . there are always too many bugs for the amount of food, and some are always dying of starvation or being killed by other bugs as they fight for food.” (p. 36) Simple Darwinism at work. Just ask the presumably dwindling number of real estate agents in Greenwich, CT.

Second, life is self-poisoning in closed systems. We need not linger over the image of increasing amounts of carbon dioxide in the air and liquid and solid waste in the ground. Instead let’s jump directly to the analogous question: is trading self-poisoning? We know that it can be. Just think of Frank Norris’s 1903 novel The Pit. (If you haven’t read this tale of the Chicago wheat pit, it’s available for free download online via the Gutenberg Project.) Perhaps Jesse Livermore’s suicide is another testament to the self-poisoning character of trading.

But there’s no reason a trader has to encapsulate himself in a world that excludes everything that isn’t market related. Moreover, isn’t trading, virtually by definition, an open system—that is, a system that continuously interacts with its environment and that has supplies of energy, however metaphorically defined, that cannot be depleted? Well, in some sense yes, but unfortunately we can’t extend the notion of energy supplies, no matter how hard we try, to include financial resources. They certainly can be depleted through trading.

I suspect that trading, at least for those who are successful at it, is both self-sustaining and self-poisoning. I also suspect that most trading systems start to degrade not only because markets change but also because they change markets; that is, they themselves have “self-poisoning” qualities. I have no proof of any of this, but it’s something to think about. And, oh yes, happy holidays! Ho-ho-ho.

1 comment:

  1. Right Brenda. Please pass the same poison that Paul Tudor Jones has been drinking for years.