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STUDY: Traders, Cicadas "Strangely Analogous"

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A new research paper from Serguei Saavedraa, Kathleen Hagerty, and Brian Uzzi of Northwestern University, titled "Synchronicity, Instant Messaging and Performance among Financial Traders," makes an interesting correlation between the behavior of stock operators and animals.

"Successful animal systems often manage risk through synchronous behavior that spontaneously arises without leadership," the authors write. Turns out, the same "simultaneous activity" among traders, an "individual and spontaneous characteristic [Saavedra, et al] call synchronous trading" may actually lead to more successful trades.

And cicadas? What exactly do they have in common with the guys on Goldman's prop desk?

From the MIT Technology Review:

Cicadas chirp to attract mates but the noise can also bring the unwanted attention of predators. That leads to an interesting synchronised behaviour in which the creatures chirp in a coordinated fashion, creating a kind of chorus.

It continues:

It's not so hard to see why. Cicadas that chirp ahead of the chorus stand out. That makes them more likely to attract a mate but also more likely to be eaten by a predator. However, it turns out there is a best time to chirp, a kind of "sweet spot" in time, that maximises the likelihood of reproductive success while minimising the risk of death. That's what generates the chorus.

Humans also demonstrate synchronised behaviour. One of the most interesting examples is in science when a number of individuals often make the same discovery at the same time. The reason is that those who announce their discoveries too early are likely to be condemned as cranks by their peers, while those that are too late have obviously missed the boat.

The synchronization occurs via instant messaging between traders, as "messaging patterns are positively correlated with the level of synchrony. In other words, as traders exchange more messages, they become more synchronised."

According to MIT's summation, this means "the behaviour of traders and cicadas is strangely analogous. Just as chirping is designed to improve reproductive success, messaging can improve trading success. But both work best when they are executed at specific sweet spot in time."

However, "Saavreda and Co. found no evidence of any centralised control. So the synchrony is an emergent phenomenon in traders, just as it is with cicadas."

One commenter finds the comparison between day traders and a different member of the animal kingdom to be more apt.

Writes "zrzzz":

For some reason lemmings come to mind. So the takeaway here is that if you can get a bunch of suckers to buy the same crappy stocks, the value will go up temporarily. That's pretty much the basis of our modern financial system.

POSITION:  No positions in stocks mentioned.