Swarm Theory

Christopher T. May, in Nonlinear Pricing: Theory and Applications, wrote this:

In 1975, Train wrote Dance of the Money Bees, a difficult title to find today. It is the first book ever, to my knowledge, to use a biological example to describe financial phenomena. Bees forage for food, and when they return, the state of agitation of their dance before the hive indicates the status of the find. The larger the agitation the better the find. Train used this phenomenon as an analogy to describe money managers when they are excited by a stock. Of course, fellow money managers and investors follow–they swarm like the hive. It is a wholly accurate, if unflattering, portrayal of how the real world works. Of course, it is now called swarm theory and modeled in computers.

Train’s insight was more prescient than even he could have imagined. The same year Dance of the Money Bees was published, John Holland at the University of Michigan was siring genetic algorithm, the mathematical technique and formalism that mimics biological adaptation and which would in time give rigor to Train’s intuition. Train effectively preceded the entire field of financial economics by over 20 years using biology as a paradigm.

Train, in his investing style, is a non-nonsense sort that does not care for academic theory, derivatives, or exotica. In writing Dance of the Money Bees, one of the most conservative men in investing has penciled a sketch that many others, including myself, are trying to complete in color and with technologically appropriate terms. It will be interesting to note Train’s reaction to the maturation of his thought. It may resemble Bohr’s when he sired quantum mechanics. Bohr said, “Anyone who is not shocked by it has not understood it.”

The conclusion I would like to draw is that even if Train’s peers do not explicitly embrace nonlinear pricing because they find the terminology off-putting, implicitly they do because nonlinearity describes the state of the world that embraces them every trading day of the year. ■