Book Review

The Nature of Value'The Nature of Value: How to Invest in the Adaptive Economy' July 2014 by Nick Gogerty.

This book tackles the difficult question of how to invest in a complex world of risk & uncertainty and delivers some important conclusions.

Nick Gogerty is not an academic but a cultural anthropologist and businessman with wide experience in commercial and technical organisations. Few businessmen write books, and even fewer write about evolutionary economics. This book is important to read for that reason alone, but the book is also a good challenging read delving into the deep depths of wealth creation and economic growth. 

The book is full of the difficult & counterintuitive concepts associated with complex adaptive systems, CAS. Ingenious diagrams on almost every page help understanding and there are lots of illustrative anecdotes, but nevertheless my fear is the book will be placed by many investors into the 'too difficult' category.

In 1996 Nobel laureate Paul Krugman analysed the communication of 'difficult' ideas and came to the depressing conclusion that however hard he tried most people just didn't get him! In 'Ricardo's Difficult Idea' Krugman tells a tale, 'I was trying to explain to an editorial writer for a major US newspaper why international trade was probably not the main cause of the country's ills. After a confused interlude, it became clear that one of the blocks was that he just didn't understand. Eventually I was reduced nearly to baby talk. This was not a successful conversation; he wanted to talk about global trends, and instead I was teaching him first grade arithmetic'.

Krugman argued that some readers will reject evolution simply out of a desire to be intellectually fashionable; or intellectually different. At another level, opposition to the evolution of CAS reflects the aversion of many intellectuals to an essentially non-linear mathematical way of understanding the world. The hostility that both evolutionary theorists and economists encounter from the humanities arises from the fact that both fields lie on the front line of the war between C P Snow's two cultures, territory that humanists feel is rightfully theirs, but which has been invaded by aliens armed with equations and computers. At a deeper level, the understanding of CAS is a much harder concept than it seems ... because like any scientific concept it is actually part of a dense web of interlinked ideas.

This unhappy situation is perhaps best understood as a 'false consensus bias'; a cognitive bias where we tend to overestimate how the degree to which our own behaviour, attitudes and beliefs are shared by other people. Others may simply not respond to these consequences of the 2nd law and the Darwinian process and believe something else is going on?

Prospective readers of this book may want to discuss investment & job creation in the rustbelt and may be unhappy with Nick Gogerty who starts the conversation with entropy and the 2nd law of thermodynamics!

However it is well worth persevering with the ideas outlined in this brilliant book because if Gogerty's process of value creation is correct, and the supporting evidence mounts every day, then the conclusion is shattering; it is physically impossible to control the process of evolution by human intention because human intention is an integral part of the system.

Each chapter brings us face to face with the reality of wealth creation & economic growth, this can be a frightening destruction of comfortable myths but also exciting for the opportunities that understanding presents. 


The dilemma is set up. Darwin's theory of evolution involves a blind copy/vary/natural selection process with no design foresight. But there are infuriating & fugitive patterns associated with CAS and the randomness of risk & the emergence of uncertainty.

The book investigates these patterns and its value becomes clear; it raises questions -

Can these patterns help the hopelessness of the task facing investors when there is change but no foresight?

and perhaps, what are the implications for economic policy going into the next election?

Immediately the dramatic scope of the project is introduced, starting from first principles and moving through thermodynamics, non-linear maths & computer simulation, physics & emergence, biology & history, psychology & neuroscience, anthropology & game theory, and sociology & economics, to a whole evolving shebang & caboodle of human behaviour; a complex adaptive system, CAS.

Up front, the book claims to be about understanding patterns & processes and not about the detailed knowledge of specifics for the prediction of the future.

The theory will be difficult falsify as it is built up from unimpeachable first principles; the 2nd law of thermodynamics and Darwin's universal process of evolution.

The book's theme is about the nature of business, about chasing profits and cutting losses; or in Gogerty's words, allocating capital for expected returns. The passion is to ask questions & seek understanding about wealth creation, economic growth and poverty reduction.

Chapter 1. Theory of Evolutionary Economics.

Wealth Creation is about survival 'know how' as a perception of value in the brain and not about the price of other factors of production.

The greatest survival aid that the human species has is a large brain. Value is ultimately all about pattern recognition and the capacity to perceive value as survival know how. These perceptions result from complex brain activity and trial & error heuristics.

In economic systems the scarce resources are human cognitive capacity and the energy that is necessary to drive it.

The perceptions of value emerge from local activity and involve unpredictable change. Emergence and unpredictability are properties of CAS which underpin the ideas in this book.

In 1914 economist Frank Knight (1885–1972) in 'Risk, Uncertainty and Profit' defined unpredictability. In 2006 Brian J Loasby in 'Knowledge, Innovation & Competitiveness' linked emergence with uncertainty, 'the unpredictability of emergent outcomes is the fundamental root of Knightian uncertainty. Thus uncertainty is inescapable but it is a condition of innovation'.

Money prices are mere reflections of value and are naturally pushed & pulled around by the foibles of opinion & beliefs as bargains are struck in the midst of cycles of excitement & fear. And excitement is infectious, cheap credit flows until the bubbles burst and history rhymes.

Unfortunately many economists and investors are still using flawed linear models of the economy which can deliver neat solutions. But reality is best described by the non-linear maths of CAS where any resolutions are intractable.

Chapter 2. Theory of Natural Selection.

Value as a perception of survival know how leads to understanding economics as the Darwinian natural selection of value, making survival value subjective and context dependent. Every level of Maslow's hierarchy of needs describes the evolution of social animals along a biological & behavioural journey through deep time towards an empathetic moral sense.

Understanding comes from the simple narrative process rather than the impossibly complex reductionist detail of 'intelligent design'.

Walter Bagehot in 'Physics and Politics' in 1873 understood the relevance of Darwin's creative destruction to political economy. And in 1890 Alfred Marshall again linked biology and economics in his 'Principles of Economics'. In the 1930s Friedrich Hayek endlessly stressed the process of evolution in economics and in the 1950s Joseph Schumpeter highlighted the adaptive process as socially and therefore economically value creating. The economics they described was no selfish, money measured, maximising endeavour which was suggested by many economists.

It seems Nick Gogerty had powerful friends! But he didn't mention the father of economics, Adam Smith, who described the ascent up Maslow's hierarchy to universal 'moral sentiments' in1759 in his 'Theory of Moral Sentiments', written long before his more famous and often misunderstood 'Wealth of Nations' from 1776. 

Alternatively Marx and Keynes were heavyweights who suggested economics was a top down controlled process and never stressed economics as a bottom up adaptive process.

Darwin's copy, vary, select process offers the potential for growth but the success of growth spreading through the population depends on survival value from social synergies.

May be understanding is helped by analysis of biological systems and economic systems separately but, and the point is implied but not emphasised, these are two ways of describing the same total system. Gogerty uses the word analogous but there is only one interconnected interactive reality both genes & ideas emerge in one universal process we call evolution. Everything is part of, and inseparable from, the whole shebang & caboodle.

In 2002 Geoffrey Hodgson wrote 'Darwinism in Economics: from Analogy to Ontology'. Gogerty has made the same journey. The economy is not analogy it is biological ontology and he spells out the theory in Chapter 3. Presenting economics as a biological analogy would have let his readers off the hook.

Chapter 3. Theory of Complex Adaptive Systems.

Darwin's copy/vary/select universal process is not simply 'survival of the fittest' it is complicated by the apparent responsiveness to spontaneous energy driven change in the environment.

Understanding of the only process going on in the universe is described by the 2nd law of thermodynamics. Energy gradients from hot to cold, from high to low, always involve a spontaneous flow of energy through surviving structures as work is done and entropy increases irreversibly. Energy is not lost but it does change its form as new structures and new complexity emerges. It is 'as if' the systems want to become more complex more quickly. But the flow is not a simple straight line flow out into the universe at constant speed because it flows through structures, structures that Boltzman identified. Entropy always increases but it increases in an orderly way as energy flows through structures which survive.

In this way the economy is a thermodynamic CAS where energy flows through structures that adapt for greater & greater flow capacities, more & more complexity, more & more survival know how and more & more entropy production, but work is involved taking low value inputs and processing them with energy and knowledge into higher value forms; a process of creative destruction.

And perhaps significantly, economic behaviours (interconnections) interact with the ecology (environments) which feeds back and influences behaviour as discontinuities emerge, bifurcations.

No gradients, no elements, no bacteria, no folk, no innovation, no know how, no economy ...

The process of evolution produces CAS which dissipate more energy more efficiently than competing alternatives. Evolution has built on synergies of specialisation & scale and pushed into biological structures and into economic structures. A perfectly natural spontaneous process of physics which results in tangled banks, butterflies wings, Boeing 747s and Wall Street crashes. Sequences of trial & error within particular local environments which lead to the discovery & accumulation of what seems to work ... until it no longer does.

There is no other process going on but the snag for us mortals is that we can't grasp all the complex detail. Gogerty gallantly suggests it is possible to skip the theory outlined in chapter 3 without impairing understanding of the process narrative.

Chapter 4. Creative Innovation.

Economic Growth involves the spread of innovative know how, continuous improvement, it is not a static imitation of best practice.

Innovative survival know how are structures of perceived value in the imagination, hitherto unconnected connections. Genes & ideas accumulate in teams of know how within an influential context, an environment which always includes the presence of competitors. Ideas only survive competitively if they deliver behaviours that result in better survival value, that's why they survive.

When co-operative teams of ideas have survived the rigours of experimental reality and delivered value and grown in the local environment they become organisational 'capabilities'.

98% of successful ideas are path dependent incremental innovative improvements, from combination & recombination of pre-existing bits; physical and imaginary. There are very few original mutations which lead to new emergent advantages; life is mainly sex.

The system survival depends on the self consistent delivery of a flow of value; the ideas, the individual behaviours, the capabilities, the organisations, the customers & the social group ... they are all in it together in a whole evolving shebang & caboodle.

But beware the whole cannot be understood by inspecting the individuals. 

Chapter 5. Organisation Capabilities.

Successful ideas first appear in the imagination as a good idea to try, they are tested for efficacy in the real world but they are sustained in the commercial organisations through sales in markets where discriminating customers test value and come back for more.

Successful sales involve the harnessing of a mix of interconnected interactive cost effective capabilities, the usual suspects are - business model, funding, cooperative networking, material procurement, production process, product quality, services, distribution channels, brand perceptions, customer satisfaction. Winning combinations of capabilities are revealed in the market place. It is the organisation itself which accumulates the know how not individual brains.

In a complex, changing, conflicting and scarce environment, the flow of value into society must be sustained in increasing quantities as organisations adapt and discover innovative ways of increasing the flow through increasingly complex structures.

A continuous flow of innovation is required.

The allocator of capital has to understand sustainability in terms of innovation in multiple competence areas for competitive delivery. This is a formidable challenge as each part of the competence jigsaw has to continuously innovate for sustained performance. Without innovation there must be margin erosion and reduced investment and there is only one way to go from the top.

A good place for the investor to start is the track record of the organisation. Path dependency is involved and there is an experience curve to innovation and investment in R & D. Successful know how & behaviours accumulate into a company culture.

However it is the bifurcations, the black swans, that upset the future. The investor is always searching for patterns from the past knowing full well that discontinuities are just round the corner. And discontinuities can mean death and well as new opportunities.

The threat of competition can keep the innovative culture sharp as competitors learn and play catch up. But the faster things move the more risk there is to the innovation flow from competitors.

The problem for the investor is that nobody knows where the next good idea is coming from. Innovations can be expressed outside the organisation, and firms can secure a competitive advantage from exploiting the innovations of others.

The siren call of innovative competitive advantage in a narrow super technology environment with a rapid growth rate may be fashionable and sought after but such advantage doesn't necessarily deliver sustainability because competitors are eager to join any band wagon. In this type of hyped up opportunity it is often the second mouse that gets the cheese. These companies are not for investors they are for punters. And beware it is the winners not the losers that are recorded in the history books.

Chapter 6. Specialisations Synergies.

Diversity inside the organisation reduces risk in the same way as portfolio diversity can reduce risk but the diversity mix could be 'sprinkling the desert with a teaspoon'. Whereas specialisation drives down the experience curve. Another conundrum.

The target is a mix of specialisations and capabilities which are durable and continuously innovative. Successful organisations seek positive sum co-operation, synergies of specialisation & scale, and avoid zero sum scenarios.

Everybody thinks they own the winning lottery ticket but each is interactive with others in the whole. Failure must be welcomed as the norm and successful organisations learn. In all evolved systems it is learning from failure that results in progress.

Innovation feeds off itself as division of labour specialisations, but growth is limited by the size of the market where interactions intensify.

Chapter 7. Economies of Scale.

In a CAS it is not as simple as eat or be eaten, the interconnected network of interactions is always shared by competitors because of the scarcity of survival value. There are more ways of being dead than alive. In any competence area there will be interactions with external expertise (suppliers, contractors, customers) which may also be available to competitors. There may be synergies with competitors. Competitors can help to develop the market niche; conditions in the pond determine which frogs survive.

Synergies require product differentiation. Gause's Law of Competitive Exclusion stresses that two species competing for the same resources cannot coexist if other ecological factors are constant. Even a slight disadvantage over time will result in extinction.

Stuart Kaufman at Santa Fe suggests that in biology & economics CAS involve experiments in the exploration of niches which create opportunities for growth and thus adaptations; ad infinitum. Each new niche offers new opportunities for others, symbiotic or parasitic.

But the chances are parasitic behaviours will tend to adapt to symbiotic behaviours because of synergies. There is a propensity for cooperation in social species as everyone depends on everyone else in the value chains. 

The hierarchy of emergence ensures sustainable self consistent value creation, in each successive layer; idea, capability, organisation, market niche, to globalisation, maintaining the flow of innovation and avoiding monopoly & stagnation.

Picking the right sector for investment is as important as picking the right company. Fast life cycle sectors where excitement & obsolescence make company selection risky & pushes up the price. So bet on a slow stable niches and a quick adaptable species for sustainable value creation.

Chapter 8. Life Cycles.

The successful organisations need a mix of capabilities in a slow cycle mature sector as survival value flows into the economy as their structures adapt to increasing opportunities for survival value from complexity.

But continuous improvement & creative destruction are about discarding failures not about human intention, failure is the mechanism for value growth. Risk & uncertainty are greatest in the birth and death phases of the cycle where most companies have limited adaptive capacity as physical malleability is limited and progress comes from new technology sectors birthed in imaginative commercial R&D departments.

Investors need to understand the cycle of excitement & fear -

hubris - excitement; the innovative free for all, diverse variety, wide open sector, fast innovation, many companies, high growth, high margins, rapid company obsolescence.

nemesis - fear; dominant design convergence emerges, maturity, experience curve cost reductions relentlessly squeeze out the competition, market share becomes important, innovation moves to maintaining a mix of capabilities, cost per unit of value is key and significant value accrues only to the dominant few.

catharsis - the flow of value; evolution ceaselessly creates new patterns of value and as decay & sector obsolescence sets in, the new rises from the ashes. Milking the end game may be the key to funding the new sectors, birthed from the bifurcation process. The focus on innovation is renewed as things get more complicated creating more opportunities for value creating survival niches.  

Some innovations will be exciting and the cycle will start again.

Chapter 9. Niche Construction.

The Baldwin Effect; ideas and associated behaviours, change the environment which then feeds back and effects the survival chances of the original ideas, thus reinforcing any pre-existing predispositions towards survival behaviour. There are no independent variables. Local niches are interconnected, everybody and everything interacts, 'as if' seeking to increase the value flow into the economy from the co-evolution of the right horse in the right race.

Investors need to understand niche characteristics - 

Lotteries - fast technology, fast obsolescent failure. 2% of technology IPOs accounted for 100% wealth created. Investors are paying for exploration.

Red Queens - no dominant defensive strategy, space fills up with lots of competition spending lots of money to compete. The second mouse may get the cheese.

Lollapalooza- a successful track record of specialised deep technologies can become autocatalytic. Grow the product and grow the niche from specialisation & scale.

Cash Cow - niches mature into stability as companies drive down the learning curve with a mix of capabilities and consolidate into big organisations.

Investors should be aware that the design bias assumes the jockey is important, and incentive structures can become perverse. 

Chapter 10. Valuable Defensive Capabilities.

Ideas (hitherto unconnected connection, a perception of survival value emerges), behaviour (hard work, honesty, thrift), capability mix(technology & organisation, quality, service, price, competitors), market sector (niche selection & construction), sustainable value over long cycles (a good horse and well chosen race give the jockey a clear run, he can only mess up). 

In changing environments the value flow needs to be defended for sustainability. The mix of capabilities in the appropriate sector results in pricing power relative to competitors and sustainable advantage over multiply cycles.

Investors should study the fossil records; Balance Sheets, Profit & Loss Accounts, Cash Flow Statements, business history and the case studies.

Understand the behaviour of CAS and the rest is nous. But beware interpretations of history are fraught. Accounts are full of judgments and money values are fickle. Honesty and trust may be hardwired but so too is due diligence and caveat emptor.

Chapter 11. Synergies of Specialisation & Scale - Chase Profits.

Network effects are about social interactions and not about winner takes all. More synergies come from more interconnections and more interactions. More division of labour and larger market size.

Models of the world can become polarised and mutually exclusive as evolutionary models and creationist models are incompatible. But perceptions can be addictive, physiologically addictive & psychologically addictive to the status quo. Folk resist change but sustainability requires continuous innovation. Organisations can expand the market, or move into adjacent niches, or become specialised suppliers, or create a new niche. There is always a competitive opportunity. Value is delivered to society by competitive pressure.

In the absence of knowledge economic anthropologists study CAS and understand that the heuristic short cuts of experiment & experience can help with the impossible calculation problem of reductionism.

The message for the investor is one of hope not hopelessness.  

Chapter 12. Management of Failure - Cut Losses.

Chase synergies of specialisation & scale by hard work, honesty & thrift but cut losses by experimenting & learning to fail.

Continuous improvement of innovation in the internal organisation involves the destruction of the obsolete external technology.

Either way the vision is of the quiet craftsmen patiently seeking value and trying his hand. He doesn't throw money at problems, he experiments & learns. Listens & responds, he doesn't drive fast in the fog. And just like butterfly wings some of the craftsman's innovations turn into into tsunamis. Visionary blind watchmakers don't exist.

The intelligent design bias pushes the CEO to 'do something'. But the quiet craftsman could return cash to shareholders or open up another niche as he weeds out failures.

The short term perverse incentives based on share price can easily distort the craftsman's process of long term value creation & economic growth.   

Chapter 13. Economies.

The book has described the nested sets of sets of innovative ideas, behavioural capabilities, productive organisations & market niches and now the book moves to the economy and political implications. The painstaking build up from first principles make Gogerty's arguments so robust that any critics may have to deny the 2nd law of thermodynamics and Darwin's theory of evolution.

The economy as a CAS offers an insightful approach to the polarised policy dilemmas which have been agonised over since the birth of democracies at the earliest. Dilemmas which go back to Plato's 'mob rule & emasculation of the wise', 'and who guards the guardians' and Adam Smith's 'division of labour is limited by the extent of the market' and Thomas Jefferson's 'he who knows nothing is closer to the truth than he whose mind is full of falsehoods & errors'. Polarisations have manifested themselves in many ways - mercantilism v. capitalism, resource grabs v. wealth creation, tax & state welfare v. privatisation & welfare choice and structural reforms v. crowd trouble.

These polarised dilemmas are summed up by Gogerty's comparison of -

inclusive, innovative systems (synergies of specialisation & scale) typically decentralised diverse liberal democracies

extractive, monopolistic systems (rent seeking power grabs) typically centralised convergent socialist dictatorships

Inclusive and extractive systems involve well rehearsed economic arguments; clearly the evolved CAS model fits the emergence of Liberal Democracy beautifully.

The structures of nature can't hide themselves as they emerge whenever energy flows down temperature gradients and dissipates as entropy increases. Enticing fudges and compromises appear doomed as 'mixed' economies competing for the same resources can result in extinction as the Competitive Exclusion Principle suggested. The sobering lesson from understanding evolved CAS is that even a slight advantage for inclusive wealth creation systems will eventually result in the demise of extractive tax, borrowing & default cycles.

This is natural selection at work. No equilibriums, no uniform responses just the emergence of adaptations amidst many deaths. Economic failure has a productive function.

Do we have a gamblers edge if we can see the patterns?

Investors should focus on economies with high GDP per capita & high Human Development Indecies, economies enmeshed in generating 'know how' and exploiting evolutionary processes - 

diversity with freedom to experiment and discover

inheritance with accumulation of what works

natural selection without subsidising failures

Chapter 14. Money.

Money discussion does not appear until chapter 14 where value as a perception of survival know how can be measured by money as a perception of trust in other folk. Money is a social measuring system, a social lubricant, a belief that allows value to flow more easily. A fair price is a perception of a perception of value; there is no doubt economics is a behavioural science.

When the value of money is stable, the flow of value will increase as more deals are lubricated and there is less distortion & opacity. When price and value are in balance the economy hums along. Central Banks try to keep the growth of the money supply in kilter with the growth of survival value by balancing value perceptions in private commercial bank Balance Sheets.

This balancing act is further complicated by the time factor. There is an impossible gap between ideas, capability and market exchange which has to be financed and time is risk and uncertainty. Purchasable value now & expected future value offer different risks of price & value getting out of kilter.

BalanceGogerty admirably summarises this balancing act in Fig 14.2 which illustrates how in CAS the MV = P is an attractor, and imbalances are unsustainable long term. But short term there is an impossible balance between excitement & fear in perceptions of money and perceptions of survival value, now and in the future, inducing cycles of booms & busts, distortions & dislocations.

How can you control the perceptions of folk and future expectations? This is the myth of the regulation of Knightian uncertainty. Central Bank Balance Sheets get out of kilter as both sides wrecked by beliefs and expectations! Both perceptions of money & who to trust and perceptions of value & what is survival know how? Belief in this balance is highly irrational and shows much of economics is a reckless misunderstanding.

Banks try to respond to changing beliefs and expectations and go for the balance by adjusting the price of money, the interest rate, to clear markets and avoids costly gluts & queues bringing savings & investment into kilter and price & value into kilter. Excitement & fear in perceptions of money and perceptions of survival value makes 'monetary policy' nothing more than messing with folk's heads?

money excitement = asset price bubbles, money printing.

money fear = debt servicing costs rise if income falls, austerity less debt, less services.

value excitement = know how growth, stimulus spending. 

value fear = destruction, bankruptcies.

Furthermore this balancing act of money & value is not achieved in isolation -

internal government fiscal tax & debt balance and

external trade balance are part of the same CAS.

For investors who know their company and sector, study input costs, purchasing power, production process, flow control, capacity utilisation, quality control, scale economies, outputs, pricing power ... this suggests a balance of four market sectors -

when value growth is high and money scarce go for capital assets (utilities)

when value growth is high and money plentiful go for cash intensive assets (insurance)

good when value growth is low and money scarce go for debt based assets (banking)

when value growth is low and money plentiful go for equity based assets (FMCG)

So do the distortions themselves create investment opportunities? Some say the Fed can stay distorted longer than you can stay liquid? If investors hold cash ready for the opportunities, inflation will erode it. In a variable environment fewer species can cope and attempts to respond to changing perceptions and expectations may exacerbate the cyclical booms & busts? Money & inflation & deflation are not the problem, the problem is the distortions of reality as the measuring system stretches and shrinks and twists and turns as folk meddle and interrupt the interconnections & interactions of deals which produce synergies of specialisation and scale. There are also cognitive biases like loss aversion as organisations fear deflation and revenue loss more than exciting inflation and revenue gain.

Balance always involves cyclical activity which is an integral part of the process as inefficient organisations are weeded out.

But remember in a stable environment there are more experiments & more long term projects.

In this chapter Gogerty described the opportunities and the dangers which admirably explain the intractable cycle of excitement & fear of human emotions.

Chapter 15. The whole shebang & caboodle = Chase Profits and Cut Losses.

Evolution involves relentless copy/vary/select without foresight. The helicopter view of the evolution of CAS does not lend itself to any easy explanation. Patterns and cycles may be uncovered and played with like a favourite toy but do not expect any single insight to explain it all and identify the detail of value. Wealth creation and economic growth in CAS are associated with fundamental patterns -

diversity grows but there is a direction to the flow of survival value.
Economies evolve in a direction of increasingly complex structures as the 2nd law of thermodynamics unfolds.

inheritance is involved but the path dependency to survival value always involves new innovation.
Economies evolve by inheritance with variation but infuriatingly nobody knows in advance which of the new variations will survive.

natural selection is unfathomable but there is an emergence of order out of the chaos and genuinely new survival value.
Economies evolves in a non linear process with interconnected & interactive structures with feedback which affects survival as new synergistic emerge.

Organisations are not sitting still they are either growing value or dying out.

Investors should be aware that economic know how grows at around 3% pa compound so many bet long term on the index linked fund. Active fund managers can't predict the future and the index has a better chance of picking up the high flyers. Charges, taxes and transactions costs weigh heavily on active investors.

Others understand a limited portfolio of business models with a track record of value creation and buy quality on a downturn and hold. They get away from the expensive herd and into understanding. Understand the psychological biases of the herd, particularly loss aversion; letting losing trades run results in an over representation of losers, and cashing in winners too early will miss the 'chase'. But remember you too are a paid up member of the herd are can't avoid excitement & fear.

Chapter 16. Conclusions.

Evolutionary economics explains how winning strategies are cooperative efforts which emerge through natural selection, the strategy or capability set can emerge from anywhere to surprise everyone, as everyone benefits.

The whole shebang & caboodle becomes a nested set of sets an amazing visual picture of a primordial soup, an immense hierarchy of interactive, interconnected complexity 'as if' each structure, at each level was competing for survival and growing in the populations as entropy is harvested more & more effectively as less effective dissipative structures die out. 

Understanding may enable investors to learn and make fewer mistakes but it does not give them the knowledge to identify the individual bits of innovative know how which will survive.

Survival know how has to be discovered & accumulated by hard work, honesty & thrift. 


john p birchall

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