Herds on the Street

Why messaging traders are like scared fish


What does it take to become a better investor? The answer is to think like a fish.

Let me explain. When small fish face an extremely difficult problem—an attack, say, from several predators at once—they deal with it by forming a school. This is an example of synchronous behavior, in which individuals quickly coordinate their actions. There is no leader, but that doesn’t matter. The school arises spontaneously.

In a forthcoming paper, scientists at Northwestern University show that the best stock traders at a leading hedge fund act a lot like those scared fish. Instead of coping with predators, of course, these traders are grappling with a surfeit of information, from confusing quarterly statements to reams of economic data. Their job is to act quickly—buying and selling shares—based on the latest news.

What’s interesting is that these traders don’t make sense of all this information alone. Rather, they constantly interact with each other, mostly by instant message (IM). They "disambiguate" the numbers together.

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