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Financial Foraging
Using evolutionary animal behavior theories, researchers find daytime stock traders’ strategies are maladapted.
By Beth Marie Mole
Just as animals want to maximize their caloric intake while minimizing their effort, daytime stock traders develop strategies to make high profits with few mental costs. But while animals have evolved optimal foraging strategies, stock traders haven’t—at least not for longer than 5 minutes—according to a new study published last week (January 30) in the Proceedings of the Royal Society B. After tracking the steps of 30 daytime traders for 2 years, researchers found that they optimized their gains for short, 5-minute windows, but were maladapted at optimizing for long-term net profits.
“We applied the optimal foraging theory to the sort of choices that traders have to make,” said lead author Serguei Saavedra, an integrative ecologist at the Doñana Biological Station in Seville, Spain. “If we compared their profits to what happens under the short time period—anything under a 5 minute window—they were maximizing their relative profit.” In other words, they were making good, money-making trades . But when the researchers looked at an entire day of trading, or the entire study period, they found that smart trades in the moment didn’t necessarily add up to a pay out in the end. “We couldn’t see any relationship between what they were maximizing [in the short term] and their net profits [over time],” Saavedra said.
To understand the traders’ strategies, Saavedra and colleagues turned to two classic animal foraging behaviors. One is patch exploitation, in which animals will continue to forage in one area, or in terms of the financial world, traders will continue to trade the same stock. The other is patch exploration, in which foraging animals switch to different areas that—they hope—have more food, or in financial terms, traders who switch to trading different stocks that may be more profitable…
Keep reading: Financial Foraging | The Scientist Magazine®.
Source: S. Saavedra et al., “Foraging under conditions of short-term exploitative competition: the case of stock traders,” Proceedings of the Royal Society B, http://dx.doi.org/10.1098/rspb.2012.2901, 2013.
