Bulls, Bears and the Moa?

When thinking about markets in the New Year, perhaps we should not just read the multitudes of 2015 forecasts by every expert under the sun, but rather reflect on bulls, bears and the Moa (the New Zealand equivalent to the Dodo). Our aversion to risk comes from deep biological imperatives that have allowed humans to avoid extinction. Any theory of markets must surely take account of this and, whilst surviving bulls and bears, avoiding extinction to fight another day, is paramount.

The moa were nine species of flightless birds, endemic to New Zealand. The two largest species were Dinornis robustus and Dinornis novaezelandiae, which reached about 3.6 m (12 ft) in height, with neck outstretched, and weighed around 230 kg (510 lb). In CE 1280, when Polynesians settled New Zealand, the moa population numbered approximately 58,000. The nine species of moa were the only wingless birds, lacking even the vestigial wings, which all other ratites have. They were the dominant herbivores in New Zealand’s forest, shrub land and sub-alpine ecosystems for thousands of years and, until the arrival of the Māori, were hunted only by the Haast’s eagle. Moa extinction occurred in CE 1440 (± 20 years), primarily due to overhunting by Māori.

The poor old moa became extinct because they perhaps failed to see that the game had changed. Quite possibly, the biggest change in our generation is that of information technology and communication, but second is definitely the debate on Oil. Most experts forecast that Oil would stay stronger in their 2014 forecasts a year ago and almost no one predicted $40 per barrel oil. Most did not see the supply side glut that was caused by shale and fracking, but now Goldman Sachs see much lower for longer until this supply side disequilibrium is restored.

Without making this a debate on Oil, research discussed by John Arthurs, in the FT late last year, attempts to apply biology to finance. Colleagues from the MIT School of Business have published a paper providing mathematical equations to show how risk-averse behaviour is necessary for survival. This may mean that investors will take risk–averse actions, rather than the purely rational decisions that economists have classically assumed. If one engages in more conservative behaviour, it’s much less likely that nature will eliminate you.

The moa lived in a comfortable island environment, but once their idyll ended they became extinct in just over a century. Birds who adopted a more diversified strategy to reproduction may not have dominated in 1300 AD but could have avoided extinction. When an environment is stable for a long time, we adapt to it, but if the environment shifts, that learnt behaviour can suddenly become very counterproductive.

In the same way, external shocks to markets environments cause long running and deep seated changes in investors behaviour. The theory explains why markets move in long secular phases and buying the dips works, until it doesn’t! Learnt behaviour or complacency, in the year ahead, may be eventually be the biggest enemy.