What Can Fungus Teach Us About Making Money?

Published on INFORMS Analytics Magazine (Joseph Byrum)

Looking at finance through the lens of biology offers a unique way of considering the financial world.

Financial markets are so complex they could almost be said to be alive. They share characteristics of living organisms, such as the response to stimulus, and in the financial sector, we refer to bear and bull markets. So perhaps biology, which studies complex interactions and vital processes, can be useful in understanding economic questions in a way that might even make some money.

In the investing world, success is measured by “alpha” or above-market returns. That happens when the investor not only makes the correct choices, but also the choices that others didn’t think to make. That requires insight and seeing things that others miss. Deviating from the crowd while finding that different, but effective, perspective is easier said than done. If it were easy, everyone would do it.

Looking at finance through the lens of biology offers a unique way of considering the financial world that just might lead to better choices. Both disciplines are deeply rooted in mathematical patterns, such as the golden ratio or, expressed slightly differently, the Fibonacci sequence. For example, we learned from Alan Turing, the father of artificial intelligence, that the spiral patterns on the face of a sunflower follow the Fibonacci sequence [1]. Similarly, many traders use the Fibonacci ratios (23.6, 38.2, 50, 61.8, 78.6 and 100) as targets when deciding whether a stock has risen too high and might begin to decline, or conversely has hit rock bottom and is about to grow.

But financial analysts aren’t thinking about sunflowers when they use Fibonacci trading ratios. They’re thinking about things that will make them money, and, more often than not, the technique works for them. Thinking about things in an unconventional way gives them an edge.

Odd Couple: Fungus and Finance

Dutch researchers decided to investigate the relationship between finance and biology in a more direct way [2]. In a study published last year in Current Biology, they tested how a symbiotic fungus “trades” with its host organism, in this case the root of a plant.

Mycorrhizal fungi are nature’s mining company, drawing nutrients like phosphorus out of the soil. The fungi provide this resource to the host plant in exchange for carbohydrates that are the byproducts of photosynthesis. These carbs give the fungi the energy they need to grow. The fungus and the plant need one another to operate at peak efficiency, so it’s not a surprise that many plants have even developed signals that welcome the fungus to take up residence on the root system. Nearly every land-based plant can take advantage of this arrangement.

To watch this happening directly, the researchers put a carrot root and a fungal network into a segmented Petri dish. They then introduced fluorescent nanoparticles to track the movement of the phosphorous throughout the dish. At various points over the course of 60 days, the researchers varied phosphorus levels in different compartments of the dish to create what they called “rich” and “poor” areas.

The experiment found when there was an abundance of the resource phosphorus, the fungi began distributing less of the nutrient to the root. In the poor compartment, the fungi would send more resource to the root. The researchers noted this behavior meant the fungi were saving or moving the resources to areas where they had greater value – from areas of low demand to areas of high demand.

This is the opposite kind of result some might expect from a purely economic perspective. When one company gets ahead in the marketplace, it can use its advantage in profits to grow even larger – perhaps large enough that new entrants have no realistic chance of competing. Many have tried to come up with competitors to YouTube and Twitter, for example, but they rarely get far [3, 4]. Success builds upon success and creates inequality. Depending on the industry in question, the big players can even reach the “too big to fail” status and enjoy government protection. This concept is usually expressed as “the rich get richer, and the poor get poorer.”

The fungal experiment did not produce this result. Instead of tending toward inequality, the fungus responded to an opportunity by using trade in a way that advanced an overall balance. As the authors put it, “We found that increasing exposure to inequality stimulated trade.” Sometimes the rich might get richer, but not always.

Results Contrary to Expectations

Biologists regularly find results that are contrary to expectations. It’s expected when dealing with extremely complex interactions such as the symbiosis between plants and fungi. That’s why biologists are well suited to providing a different perspective to complex interactions between the billions of people whose decisions put the economy in motion.

It’s an oversimplification to think in zero-sum terms, in both finance and biology. With fungus, the balanced outcome represents a long-term benefit for both sides of the transaction. Plant and fungus each grow more when their systems are optimized. Economies can also grow in a way that makes both the rich and the poor better off over time [5].

But do living things always choose the long-term outlook? Researchers writing for the Royal Society [6] decided to uncover whether stock market day traders demonstrate any of the behavioral patterns that wild animals exhibit while foraging. A joint team of biologists and finance professors watched a team of 30 day traders over the course of two years, logging each stock trade, as well as the time spent hunting for new investment opportunities. The resulting dataset contained 300,000 trades among 3,000 different NYSE and NASDAQ stocks.

With instincts honed by the fight for survival over millennia, wild animals turned out to be a bit better at making long-term foraging decisions. Foraging refers to the choice between continuing to hunt for food in the current location or taking a chance that better opportunity awaits in a new spot. Competition is fierce, and the wrong choice can prove fatal. But even if the new foraging grounds are safe, it still takes energy to move where other animals could be hunting the same prey.

The trader’s “foraging” choice is between continuing to trade the same stock or class of stock multiple times – buy low, sell high – and switching to something new that promises a greater return. There’s a cost and benefit for each decision to “explore” or “exploit.” Sticking with the known, comfortable stock or class of stocks could mean missing out on a big opportunity. Switching to something new means expending mental energy to dive into the research needed to thoroughly explore it.

Though not life and death, the traders’ commission rests entirely on making the right call and getting the timing right.

Day Traders, Different Perspective

Day traders operate fast, and they tend to hold a position for a day at most. If other traders decide to buy that “new” stock at the same time, it won’t be as valuable. Achieving alpha requires finding the bargains, the undervalued companies, that others don’t see. In the study, the choice traders ultimately made tended to focus on gaining a short-term edge against their competitors. “We found,” the authors noted, “that exploration and exploitation choices can, in fact, be explained by traders trying to maximize their daily short-term comparative returns.” The choice wasn’t optimized for making more money over time in absolute terms.

In other words, they were missing out on bigger opportunities because their overarching goal was to one-up their peers. So, investors could very well benefit from thinking with a different perspective, and they’d make more money if they did so.

Biology is just one source of the fresh perspective that finance needs. Whether it’s thinking about a fungus or a deer looking for a snack, developing a habit of mind for thinking in terms of complex systems is critical to finding the alternatives that others miss. There’s no guarantee that this method will pay off every time, but over the long run, having a source of inspiration is definitely going to provide an edge.

References

1. Alan M. Turing, 1952, “The chemical basis of morphogenesis,” Philosophical Transactions of the Royal Society of London, Vol. 237, No. 641, pp. 37-72, https://royalsocietypublishing.org/doi/10.1098/rstb.1952.0012.
2. Mathew D. Whiteside, et al., 2019, “Mycorrhizal Fungi Respond to Resource Inequality by Moving Phosphorus from Rich to Poor Patches Across Networks,” Current Biology, June 6, https://www.cell.com/current-biology/fulltext/S0960-9822(19)30490-7.
3. Janko Roettgers, 2012, “Whatever happened to the YouTube killers?,” GigaOm, June 14, https://gigaom.com/2012/06/14/whatever-happened-to-the-youtube-killers/.
4. Sam Hollingsworth, 2019, “R.I.P. to the Top 10 Failed Social Media Sites,” Search Engine Journal, April 25, https://www.searchenginejournal.com/failed-social-media-sites/303421/#close.
5. https://ourworldindata.org/no-matter-what-global-poverty-line
6. Serguei Saavedra, et al., 2013, “Foraging under conditions of short-term exploitative competition: the case of stock traders,” The Royal Society, March 22, https://doi.org/10.1098/rspb.2012.2901.