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Swarming cicadas, stock traders, and the wisdom of the crowd

sc604 — Thu, 01 Feb 2024 14:36:51 +0000

Pick almost any location in the eastern United States – say, Columbus Ohio. Every 13 or 17 years, as the soil warms in springtime, vast swarms of cicadas emerge from their underground burrows singing their deafening song, take flight and mate, producing offspring for the next cycle.

This noisy phenomenon repeats all over the eastern and southeastern US as 17 distinct broods emerge in staggered years. In spring 2024, billions of cicadas are expected as two different broods – one that appears every 13 years and another that appears every 17 years – emerge simultaneously.

Previous research has suggested that cicadas emerge once the soil temperature reaches 18°C, but even within a small geographical area, differences in sun exposure, foliage cover or humidity can lead to variations in temperature.

Now, in a paper published in the journal Physical Review E, researchers from the ̽��ֱ�� of Cambridge have discovered how such synchronous cicada swarms can emerge despite these temperature differences.

̽��ֱ��researchers developed a mathematical model for decision-making in an environment with variations in temperature and found that communication between cicada nymphs allows the group to come to a consensus about the local average temperature that then leads to large-scale swarms. ̽��ֱ��model is closely related to one that has been used to describe ‘avalanches’ in decision-making like those among stock market traders, leading to crashes.

Mathematicians have been captivated by the appearance of 17- and 13-year cycles in various species of cicadas, and have previously developed mathematical models that showed how the appearance of such large prime numbers is a consequence of evolutionary pressures to avoid predation. However, the mechanism by which swarms emerge coherently in a given year has not been understood.

In developing their model, the Cambridge team was inspired by previous research on decision-making that represents each member of a group by a ‘spin’ like that in a magnet, but instead of pointing up or down, the two states represent the decision to ‘remain’ or ‘emerge’.

̽��ֱ��local temperature experienced by the cicadas is then like a magnetic field that tends to align the spins and varies slowly from place to place on the scale of hundreds of metres, from sunny hilltops to shaded valleys in a forest. Communication between nearby nymphs is represented by an interaction between the spins that leads to local agreement of neighbours.

̽��ֱ��researchers showed that in the presence of such interactions the swarms are large and space-filling, involving every member of the population in a range of local temperature environments, unlike the case without communication in which every nymph is on its own, responding to every subtle variation in microclimate.

̽��ֱ��research was carried out Professor Raymond E Goldstein, the Alan Turing Professor of Complex Physical Systems in the Department of Applied Mathematics and Theoretical Physics (DAMTP), Professor Robert L Jack of DAMTP and the Yusuf Hamied Department of Chemistry, and Dr Adriana I Pesci, a Senior Research Associate in DAMTP.

“As an applied mathematician, there is nothing more interesting than finding a model capable of explaining the behaviour of living beings, even in the simplest of cases,” said Pesci.

̽��ֱ��researchers say that while their model does not require any particular means of communication between underground nymphs, acoustical signalling is a likely candidate, given the ear-splitting sounds that the swarms make once they emerge from underground.

̽��ֱ��researchers hope that their conjecture regarding the role of communication will stimulate field research to test the hypothesis.

“If our conjecture that communication between nymphs plays a role in swarm emergence is confirmed, it would provide a striking example of how Darwinian evolution can act for the benefit of the group, not just the individual,” said Goldstein.

This work was supported in part by the Complex Physical Systems Fund.

Reference:
R E Goldstein, R L Jack, and A I Pesci. ‘How Cicadas Emerge Together: Thermophysical Aspects of their Collective Decision-Making.’ Physical Review E (2024). DOI: 10.1103/PhysRevE.109.L022401

̽��ֱ��springtime emergence of vast swarms of cicadas can be explained by a mathematical model of collective decision-making with similarities to models describing stock market crashes.

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Adult Periodical Cicada

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‘Gut feelings’ help make more successful financial traders

cjb250 — Mon, 19 Sep 2016 09:00:00 +0000

‘Gut feelings’ – known technically as interoceptive sensations – are sensations that carry information to the brain from many tissues of the body, including the heart and lungs, as well as the gut. They can report anything from body temperature to breathlessness, racing heart, fullness from the gut, bladder and bowel, and they underpin states such as hunger, thirst, pain, and anxiety.

We are often not conscious – or at least barely aware – of this information, but it provides valuable inputs in risky decision making. High-risk choices are accompanied by rapid and subtle physiological changes that feed back to the brain, affecting our decisions, and steering us away from gambles that are likely to lead to loss and towards those that are likely to lead to profit. This can enable people to make important decisions even before they are able to articulate the reasons for their choices.

Traders and investors in the financial markets frequently talk of the importance of gut feelings for selecting profitable trades. To find out the extent to which this belief is correct, researchers from the Universities of Cambridge and Sussex in the UK and Queensland ̽��ֱ�� of Technology in Australia compared the interoceptive abilities of financial traders against those of non-trader control subjects. Their results are published today in the journal Scientific Reports.

̽��ֱ��researchers recruited 18 male traders from a hedge fund engaged in high frequency trading, which involves buying and selling futures contracts for only a short period of time – seconds or minutes, a few hours at the most. This form of trading requires an ability to assimilate large amounts of information flowing through news feeds, to rapidly recognize price patterns, and to make large and risky decisions with split-second timing. This niche of the financial markets is particularly unforgiving: while successful traders may earn in excess of £10 million per year, unprofitable ones do not survive for long.

̽��ֱ��study took place during a particularly volatile period – the Eurozone crisis – so the performance of each trader reflected his ability to make money during periods of extreme uncertainty. ̽��ֱ��researchers measured individual differences in each trader’s capacity to detect subtle changes in the physiological state of their bodies by means of two established heartbeat detection tasks. These tasks test how accurately a person, when at rest, can count their heartbeats. Each trader was given a score which, essentially, measured the percentage of right answers, and these scores were compared against data from 48 students at the ̽��ֱ�� of Sussex.

̽��ֱ��researchers found that traders performed significantly better at the heart rate detection tasks compared to the controls: the mean score for traders was 78.2, compared to 66.9 for the controls. Even within the group of traders, those who were better at the heart rate detection tasks also performed better at trading, generating greater profits.

Strikingly, an individual’s interoceptive ability could be used to predict whether they would survive in the financial markets. ̽��ֱ��researchers plotted heartbeat detection scores against years of experience in the financial markets and found that a trader’s heartbeat counting score predicted the number of years he had survived as a trader.

“Traders in the financial world often speak of the importance of gut feelings for choosing profitable trades – they select from a range of possible trades the one that just ‘feels right’,” says Dr John Coates, a former research fellow in neuroscience and finance at the ̽��ֱ�� of Cambridge, who also used to run a trading desk on Wall Street. “Our findings suggest they’re right – they manage to read real and valuable physiological trading signals, even if they are unaware they are doing so.”

Although the results are consistent with recent studies showing that heartbeat detection skills predict more effective risk taking, the researchers caution that there may be other interpretations. For example, one study has found that heartbeat detection ability increases during stress, so it could be argued that heartbeat detection skills correlated with years of survival merely because experienced traders, taking larger risks, are subjected to greater stresses. ̽��ֱ��authors of the current study think this unlikely – in trading, as in many other professions, experienced and successful individuals, being more in control, are commonly less stressed than beginners.

̽��ֱ��findings also appear to contradict the influential ‘Efficient Markets Hypothesis’ of economic theory, which argues that the market is random, meaning that no trait or skill of an investor or trader – not their IQ, education, nor training – can improve their performance, any more than these traits and skills could improve their performance at flipping coins.

“A large part of a trader’s success and survival seems to be linked to their physiology. Such a finding has profound implications for how we understand financial markets,” adds Dr Mark Gurnell from the Wellcome Trust-Medical Research Council Institute of Metabolic Science at the ̽��ֱ�� of Cambridge.

“In economics and finance most models analyse conscious reasoning and are based on psychology,” Dr Coates continues. “We’re looking instead at risk takers’ physiology – how good are they at sensing signals from their viscera? We should refocus on the body, or more exactly the interaction between body and brain. Medics find this obvious; economists don't.”

̽��ֱ��research was largely funded by the Economic and Social Research Council, the European Research Council and the Dr Mortimer and Theresa Sackler Foundation. Additional support was provided by the National Institute for Health Research Cambridge Biomedical Research Centre.

Reference
Kandasamy, N, Garfinkel, SN, Page, L et al. Interoceptive Ability Predicts Survival on a London Trading Floor. Scientific Reports; 19 Sept 2016; DOI: 10.1038/srep32986

Financial traders are better at reading their ‘gut feelings’ than the general population – and the better they are at this ability, the more successful they are as traders, according to new research led by the ̽��ֱ�� of Cambridge.

In economics and finance most models analyse conscious reasoning and are based on psychology. We should refocus on the body, or more exactly the interaction between body and brain. Medics find this obvious; economists don't

John Coates

Rafael Matsunaga

That was supposed to be going up, wasn't it?

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Debt level analysis could help investors make sharper choices about real estate

tdk25 — Wed, 15 Jun 2016 04:00:48 +0000

Investors who buy stocks of Real Estate Investment Trusts in search of a “defensive security” should be careful to check those firms’ levels of debt before they commit, a new study suggests.

Real Estate Investment Trusts, or REITs, are publically listed companies that generate income by owning and operating large property portfolios. By purchasing stocks in these companies, investors can share in that income and any capital appreciation, without having to buy the capital-intensive properties themselves.

These stocks are often considered to be low-risk, because they typically generate high dividends for investors and used to be only moderately affected during periods of economic turmoil. As a result, they are often also attractive to the managers of pension and endowment funds looking for high, reliable long-term returns, and are often referred to as “defensive” stocks.

In the new study, however, two researchers from the Universities of Cambridge and Sydney point out that the performance of individual REIT stocks is not always as consistent as this suggests. Instead, they argue that investors should look carefully at certain characteristics within the specific firms.

In particular, they warn that investors should examine these firms’ overall leverage, or the amount of debt that they use to finance their assets. ̽��ֱ��more indebted the firm is, they suggest, the less robust these so-called defensive stocks are likely to prove, in particular during periods of economic downturn.

̽��ֱ��study was co-authored by Dr Eva Steiner, a Fellow and Director of Studies in Land Economy at St John’s College at the ̽��ֱ�� of Cambridge, UK, and Dr Jamie Alcock, from the ̽��ֱ�� of Sydney Business School.

“Investors sometimes think that because stock is generally classified as defensive, not much is going to happen to it in a downturn, but that may not be the case,” Dr Steiner said. “ ̽��ֱ��sensitivity of any stock to variation in the broader market environment will fluctuate over time and investors need to know more about the drivers of this sensitivity so that they can make sensible choices. We found that this depends, among other factors, on the overall financial position of the firm.”

̽��ֱ��idea that firm characteristics can be used to predict the overall sensitivity of its stock to market downturns has not been extensively investigated empirically until now. Most research has looked at the impact of broader, macro-economic trends, such as real and monetary conditions, on returns from real estate stocks, and this data suggests that they are, on average, quite resilient.

̽��ֱ��new study, however, shows that the state of a specific REIT can offer investors a more nuanced and accurate picture. Steiner and Alcock looked at a large sample of historical data about the returns and overall characteristics of numerous REIT firms in the United States, covering a 20-year period from 1993 to 2013. On average, they examined data for 55 firms during each quarter over the course of the two decades.

Unlike any previous study, they found that leverage was one of the sharpest means of predicting the likely stability of stocks in these companies – especially during downturns. ̽��ֱ��more debt a firm had, the more its stock proved sensitive to periods of recession – without any additional gains on the upside. ̽��ֱ��impact of this relationship seemed to be particularly pronounced during periods of extreme difficulty, such as the 2007/8 sub-prime mortgage crisis.

Other company characteristics also proved important predictors of stock sensitivity. For example, more defensive, lower-risk stocks were consistently associated with small, high-growth firms that were less intensively traded.

Similarly, the researchers found that companies which demonstrated strong growth opportunities were less sensitive to such change. This pattern, they suggest, may recur because such opportunities were often circumstantial, one-off prospects specific to those companies alone, meaning that they would not be affected by broader market fluctuations – making an investment in them more secure.

Although the findings could help investors to construct more robust portfolios capable of weathering an economic storm, the researchers point out that they could also offer guidelines for managers within REITs themselves.

“There are implications for investors at two levels – the ones who buy the stock, who need to know that they are making sensible choices, but also the REIT managers, for whom this has implications regarding the risk management of their firms,” Steiner said. “These results could help guide decisions about the investment risk of their firm, for example by choosing the appropriate level of leverage.”

̽��ֱ��research was funded by the Real Estate Research Institute. ̽��ֱ��paper, Fundamental Drivers of Dependence in REIT Returns, is published in ̽��ֱ��Journal of Real Estate Finance and Economics.

Retail and institutional investors alike often buy stocks in Real Estate Investment Trusts, because they are known as defensive stocks, able to withstand periods of economic downturn, but a new study explains why some of these companies could prove a much safer bet than others.

Investors sometimes think that because stock is generally classified as defensive, not much is going to happen to it in a downturn, but that may not be the case

Eva Steiner

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Traders’ hormones ‘may destabilise financial markets’

cjb250 — Thu, 02 Jul 2015 13:00:03 +0000

Researchers simulated the trading floor in the lab by having volunteers buy and sell assets amongst themselves. They measured the volunteers’ natural hormone levels in one experiment and artificially raised them in another. When given doses of either hormone, the volunteers invested more in risky assets.

“Our view is that hormonal changes can help us understand traders’ behaviour, particularly during periods of financial instability,” said Dr Carlos Cueva, one of the lead authors of the study, from the Departament of Fundamentos del Análisis Económico at the ̽��ֱ�� of Alicante.

̽��ֱ��researchers think the stressful and competitive environment of financial markets may promote high levels of cortisol and testosterone in traders. Cortisol is elevated in response to physical or psychological stress, increasing blood sugar and preparing the body for the fight-or-flight response. Previous studies have shown that men with higher testosterone levels are more likely to be confident and successful in competitive situations.

̽��ֱ��authors of the new study suggest the findings should be considered by policymakers looking to develop more stable financial institutions.

Dr Ed Roberts, one of the lead authors of the study, from the Department of Medicine at Imperial College London, said: “Our aim is to understand more about how these hormones affect decision making. Then we can look at the environment in which traders work, and think about whether it’s too stressful or too competitive. These factors could be affecting traders’ hormones and having an impact on their risk-taking.”

First the researchers measured levels of the two hormones in saliva samples of 142 volunteers, male and female, playing an asset trading game in groups of around ten. Those who had higher levels of cortisol were more likely to take risks, and high levels in the group were associated with instability in prices.

In a follow-up experiment, 75 young men were given either cortisol or testosterone before playing the game, once with the hormone and once on a placebo. Both hormones shifted investment towards riskier assets. Cortisol appeared to directly affect volunteers’ preference for riskier assets, while testosterone seemed to increase optimism about how prices would change in the future.

“ ̽��ֱ��results suggest that cortisol and testosterone promote risky investment behaviour in the short run,” said Dr Roberts. “We only looked at the acute effects of the hormones in the lab. It would be interesting to measure traders’ hormone levels in the real world, and also to see what the longer term effects might be.”

Economists have long recognised that the unpredictability of human behaviour can make financial markets unstable. John Maynard Keynes wrote of “animal spirits” and Alan Greenspan and Robert Shiller alluded to “irrational exuberance” as a possible cause of overvaluations in asset markets. However, scientists have only recently begun to explore the physiological basis for this phenomenon.

Professor Joe Herbert, a co-author of this study from the Department of Clinical Neurosciences at the ̽��ֱ�� of Cambridge, reported in an earlier field study that traders made significantly higher profits on days when their morning testosterone levels were above their daily average, and that increased variability in profits and uncertainty in the market were strongly correlated with elevations in their cortisol levels.

̽��ֱ��research was funded by the Economic and Social Research Council.

Reference
Cueva, C et al. Cortisol and testosterone increase financial risk taking and may destabilize markets. Scientific Reports, 2015.

Adapted from a press release by Imperial College London

̽��ֱ��hormones testosterone and cortisol may destabilise financial markets by making traders take more risks, according to a study published today in Scientific Reports.

Stéfan

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