How Individuals Fail to Understand Evolving Markets

Greetings to readers. This is my first column for Benzinga, and don't be surprised if they decide it will be my last. I am a biologist by training, and my task as a Benzinga columnist is not to comment on specific investing tactics, but rather to raise awareness of macro perspectives that limit the ability of individuals to understand, and hence protect themselves from, complex markets. In this new role, I'm constantly asked to stick to tactical issues and jargon that people in the trenches will easily understand, while also educating them about valuable systemic and organizational perspectives. Go figure! I will try to strike a happy medium in this and future columns. Your feedback will, with practice, help tune this approach to be useful for Benzinga readers. A

earlier this week placed many important market topics into better perspective, and therefore allows an opportunity to apply well known lessons from biological model systems to a few concepts that seem to befuddle most investors. For me, Bill Black's column usefully reviewed the propensity for markets to both deliver frustratingly brief opportunities and blindside us with seemingly unpredictable dangers, all of our own doing! Bill described, at length, how fraudulent activity, from the lowest to the highest levels of markets, is always present and only seems to be briefly forced elsewhere by whack-a-mole interactions with regulators and their partner criminologists. Here's where I'll first switch gears and challenge readers with concepts long known in biology, but seemingly rarely acknowledged in economics. We've known for centuries that social species dominate the upper reaches of the phylogenetic scale. In short, social species have invented the vast majority of what we think of as better/faster/cheaper tools and practices. You may quibble, based on whatever local value scale fascinates you, but the fact is that few humans would voluntarily trade places with members of any other species, and we wouldn't miss any that did. With that as a tease, let's just say that a direct link can be followed from a variety of research fields to the business truism well stated by the statistician Walter Shewhart, back in the 1920s. Walter said

That should remind investors to always help manage both known risks as well as systemic uncertainties. In the contexts described by Bill Black, why are we surprised that there are always opportunities to divert aggregate resources to narrow uses, i.e.,

in the specific jargon of criminologists? Furthermore, why do we always let the amount of fraudulent activity get out of hand before members of an aggregate can be recruited to take effective, collective action? This may mystify the average market investor, but it is very old hat to biologists used to studying countless model systems. Most biologists, if asked, would be amused, and wonder why investors would be confused by such a simple topic.

The simple truth is that all aggregates face very complex problems in scaling up existing methodologies for application to larger populations with more individual degrees of freedom. Every day, we have more people entering more fields, and inventing more business processes. As these people enter these new frontiers, they are by default the first ones exposed to and aware of any significant new resources. Pioneers in any new context, whether geographically bounded or otherwise, may become privy to valuable information, yet may also be cut off from full group intelligence. That is, they typically are not yet receiving full group feedback. Why would you ever be surprised that many people in those situations tend to subvert newly discovered resources to narrow uses vs optimal aggregate benefit? It's all many of them are capable of, without more constant feedback. This is not so different from the tasks faced millions of years ago by, say, slime molds and social insects, as they faced the task of scaling up the bigger population-aggregates some of them used to make more successful mushrooms and colonies, respectfully. Since this analogous task has been solved so many times, by so many species, how, you might ask, did these other, known model systems handle this universal task? Let me first try to clarify things with a few questions. Q1:  Since aggregate coordination costs are always the highest costs, by far, then return on coordination is always the highest net return, by far, and failure to coordinate always generates the greatest losses, by far. Given those facts, how, exactly, do populations & individuals invest in aggregate coordination?  Is there an operations fund somewhere that invests directly, say, in some of the

strategies of the US Constitution, and other brilliant extensions of it?  

Q2:  What, exactly, makes it so hard for unprepared groups to recognize coordination tasks, explore group options, and tune coordinated responses?   Now, the answer to how model systems seem to solve this task is

. Those systems that preserve the most coordination, and keep higher proportions of their pioneer

fully integrated with aggregate requirements are the ones that quickly widen the competitive gap separating their performance from the performance of other aggregates. And when such systems cannot progress by further coordinating what they already have, they eventually find success by reorganizing some rare mutant form of their aggregate that does prove capable of coordinating on a larger scale. This is just a subtly different restatement of an old answer. An ounce of system prevention is worth far more than a pound of aggregate rehabilitation. Any delay, any failure to execute better/faster/cheaper aggregate coordination is squandering the potential of the nation-state and market your children will live in. Q3: What should we be doing to make more market participants more prepared to solve the never ending list of coordination tasks which are very clearly rate limiting for the USA?   There will eventually be many, many options, from which we must select wisely, and the sooner the better. So I'll issue a challenge for

reading this column, and offer only three obvious hints. What form of market catalysts might, without us even knowing, increase our proportional level of group interactions, especially with pioneer entrepreneurs? What form of market catalysts might help us accelerate selection of the leanest possible interaction models sufficient for emerging contexts (so that we don't waste valuable time NOW on redundant or irrelevant interactions, but can always QUICKLY recreate them later on, when needed)? What form of market catalysts might increase the time all entrepreneurs spend practicing the leanest amount of coordination that proves to be adaptive for our nation? If our older public servants and entrepreneurs cannot quickly orient to these tasks, let's hope the next generation of teenagers can! We need coordination entrepreneurs holding every public servant office. To summarize, when the details of regulatory problems seem insurmountable, expanding perspective outside of existing silos has always delivered a solution, by rephrasing an old to a more useful question. This problem will never go away, since growing aggregates must constantly struggle to efficiently evolve new operations quickly enough. Our entire spectrum of current practices always fails to scale up, in some subtle way, to meet the coordination demands facing larger populations equipped with more individual options. Luddite ignorance is always a memory of transient bliss. For investors exasperated with the lack of adequate regulation, look in the mirror. An electorate - or any industry standards organization - which lacks adequate discourse & practice at coordination, .. well, that is an electorate which is unable to coordinate upon demand, and is therefore unable to mobilize fast enough.  That is very obviously our greatest national security vulnerability.    Despite all current expenditures, is our republic dissolving, right before our eyes, at the dimensions of interaction and coordination? It's certainly possible, and always inevitable if we don't continuously accelerate our rate of adaptive coordination, because the target and competition never stops moving. Across all the model systems that we call biology, adequate practice goes on constantly, in what you might call

or

. In our markets, the group that does this most systematically is the DoD, through repeated War Games and the practice of continuous staff rotations,

You might easily conclude that any industry sector that doesn't at least openly simulate

, and any government that doesn't start doing periodic self-exams via

will continue to be vulnerable to the dominant threats that both Bill Black and Walter Shewhart alluded to. Lack of vigilance on total-system coordination will continue to allow maximal losses from the very pinnacle of all organizations and industry segments, via Control Fraud. If continuous recurrences of those loopholes are not systematically closed, and quickly, by an actively coordinated electorate, some other country may very quickly leapfrog our mobilization capabilities and execute strategies we won't be able to counter fast enough. Those model systems that develop a continuous strategy for closing this loophole, are still here. Those that didn't, aren't. End of story. After all this, are you really still worried ONLY about your micro-economic personal investments, or about balancing our nominal currency budget? To make sure your children, not just you, survive modern markets, you need to divert at least some, constant fraction of your efforts to aggregate coordination at local, state and national levels, or face the inevitable consequences of a dis-coordinated market that cannot mobilize as fast as emerging challenges. We are all constantly being selected, or not, not just at individual levels, but even more critically at our aggregate level. Based on the testimony of all known model systems, our only chance is to stick together and explore aggregate options through vigilant, internal coordination. All aggregate populations constitute, by default and circumstance, a large, analog-computing system. We need to start acting like one, or we needn't bother investing at all. Next column: Exploring the budding field of

, the only branch of economics that makes biological sense.