Memetics
Throughout the following writing, I will attempt to explain the meaning of memetics and how it relates to financial markets. Whilst the world of finance often seems to revolve around numbers, growth and generally all things mathematical, memetics often goes without consideration. With this in mind, an understanding of memetics can be added to your repertoire of mental models and provide a competitive edge as you try to outperform financial markets.
Introduction
To incorporate the concept of memetics into your investing process, it is first essential to study the source. Memetics was coined by Richard Dawins in his book: The Selfish Gene released in 1976. To spare you the effort of disseminating this book, I will summarise it in the following two paragraphs:
The Selfish Gene
Through the process of natural selection biology has favoured ruthless selfishness to replicate, strengthen and expand over the long term. Focusing down to the gene level, each gene is encouraged to favour replication of itself over the interests of other genes. That being said, genes may appear altruistic to enable their own survival. In other words, to be selfish would be counterproductive and may contribute to its own destruction. In essence, there is an element of give and take to ensures one’s own survival – total domination would destroy the very environment in which the gene prospers. Whist Richard Dawkins does not refer to this specifically as ‘memetics within biology’, the selfish gene acts in the same way as a meme (discussed below). To simplify this concept even further we would say:
- Give = altruism
- Take = selfishness
- Give + Take = Optimum Environment for Survival and Replication
Memetics Within Culture – The Origins of What We Now Call Memes
The necessity to replicate has transcend biology in the human race and has extended to culture which Richard Dawkins coined ‘meme’. Memes reflect cultural dissemination vs the prior mentioned occurrence of biological dissemination. Each meme represents a unit of cultural transmission. All memes compete with each other to take a certain percentage of culture. Memes compete in the same way as genes compete for atoms of which there are only a certain number in the universe. Overall, there is a finite supply of room within culture, the same way as there is a finite supply in biology.
A clear example that I can think of that anyone can relate to is the power of fiat money (money backed by no hard asset with value such as gold and is trust based). Fiat money has value because everyone views it as a unit of account to exchange for products and services and trusts that it will remain so. If you as an individual had godlike power and were able to seize all the money in the world, there is a very high chance most people would no longer accept it as tender. You have single handedly destroyed the network effects which make fiat currency valuable. As soon as the money ceases to be exchanged, the broader population will decide over a period of time on a new form of tender. The difference is the money you stole is now worthless. From this example there was no
altruism only selfishness which destroys the underlying value. As you can see this is not the optimum environment for fiat money to both survive and thrive.
The Beginning of Memetics
Memetics simply refers to the process of an idea or behaviour spread by imitation 1. The earliest utilisation of memetics in homoserines (humans as they exist today) is detailed in the book Sapiens by Yuval Noah Harari. In this book the birth of the cognitive revolution around 70,000 years ago enabled humans to convey stories. The sharing of stories whether that be myths, laws, principles or anything else that contains complexity gave birth to the formation of modern civilization. It is clear that the ability for memes to spread formed civilization as we know it today. If we imagine ourselves existing thousands of years ago, memes would have been spread to unite homoserines through religion and ethics. All of this helped encourage cooperation so that the human race could thrive 2 .
How Does This Relate to Financial Markets?
With an understanding of how memetics work it should come as no surprise that investing is an ‘inherently social activity’3. If the financial market is a complex system made up of millions of humans all of which are social and want to know what other people think, it is clear that memetics are at play.
Is it a good time to invest? Are the markets up and what is everyone else doing? Mr and Mrs Jones next door have said they were able to go to the Caribbean and by a new car with their profits from the stock market – maybe this is something I should do to… Sound familiar? In essence this is memetics at play. You may be looking to enter the market because everyone else is. A stock going up looks like a good buy whilst you would have viewed the exact same stock crashing with disgust just two months ago. What changed? Your social consensus as you follow everyone else into the trade. As Raoul Pal said: ‘A lot of what is quality is social consensus’4 .
The Warning
Whilst you might first think that memetics demonstrates an ability for you to recognise a pattern and profit from the continued trend of adoption, you should proceed with caution. This applies to a specific stock, broader financial index such as the S&P 500 or asset class in general – for example cryptocurrency. The unfortunate reality is that by the time a meme reaches mainstream headlines, it has often already saturated the minds of most participants. You may be late to the game and the only person left without a chair as everyone else starts taking profits; you essentially provide exit liquidity to the more savvy or lucky. An understanding of memes within financial markets should highlight the possibility of mania. Use this mental model as a safety mechanism to check yourself – am I the sucker at the table?
1Meme, https://en.wikipedia.org/wiki/Meme, Access date: 29/06/2024
2 A good explanation of The Cognitive Revolution can be found by watching the following You Tube video: Terry Ortlieb, Harari Sapiens Part 1 Cognitive Revolution, https://www.youtube.com/watch?v=h9xM9nKdyus
3 Michael J. Mauboussin, More Than you Know, 1st Edition 2006, Page 70
4 Raul Paul The Journey Man, Surfing the Crypto Wave ft. Chris Burniske, Time 1-hour 23minutes and 45 seconds on Spotify. If watching on YouTube the name and time is slightly different going by The BULL ARRIVES: Chris Burniske's BOLD Crypto Predictions, Time 1-hour 23 minutes and 10 seconds.
The Way You Win
By now you may have caught on that you need to catch a meme before it catches you. How do you do that? Research, research, research.. Without understanding you are unable to locate true value. Value tends to rise to the top. If you are correct and as this information spreads, the meme will strengthen, allowing you to benefit from its adoption and network effects.
Lollapalooza Effect
A final point worth considering is the Lollapalooza effect coined by Charlie Munger 5. This is the process of multiple factors reinforcing and greatly amplifying each other. The consequence of these forces amplifying and operating in the same direction can have major effects. As you can imagine, the power of memetics can cause a specific stock or financial indexes to fall out of balance. For instance, extreme optimism or pessimism can cause the market to exceed or drop below the underlying fundamentals of the financial markets. To the uneducated this can be the cause of extreme financial loss and to the educated or lucky, this can be their chance to capitalise on the ‘Animal Spirits’6 of extreme optimism. The lollapalooza effect in financial markets is where memetics and other principles combine to create an exceptional event exposing individuals to extremes. An ability to anticipate a lollapalooza event can save great heartache in the future and maybe provide the knowledge of when to take profits. I will give an example below.
Several Elements That May Combine to Create a Financial Bubble: Memetics – as discussed
Critical Mass – the number of new investors starts to have an impact on the price of the market or stock to the upside. Houston we have lift off! The price starts to rocket!
Incentives – the market or stock is going up; I want to get in on the action and profit.
Reinforced Feedback Loop – the more capital comes in, the more the market or stock goes up, the more people join, rinse and repeat.
The Inevitable Crash: Lollapalooza to the Downside:
The Law of Large Numbers and Diminishing Returns – the overall growth in price has caused the asset or market value to grow to an extreme level of value. The pace of new participants and capital has reached equilibrium. Rapid growth starts to slow and turn negative. Participants start to take profits and the amount of selling pressure outweighs the buying. The price starts to go down.
All of the Above Principles Work, But to the Downside.
5 Peter D Kaufman, Poor Charlies Almanack Expanded 3rd Edition 15th Printing 2019, page 57
6 The following explanation was generated by Chat GPT but I thought it suitable for context and fits nicely with this discussion on memetics: ‘The term "animal spirits" was popularized by the British economist John Maynard Keynes in his 1936 book, The General Theory of Employment, Interest, and Money. It refers to the emotional and psychological factors that drive economic decision-making by individuals and businesses. These factors include confidence, optimism, and trust, which can significantly influence economic activities like investment, consumption, and overall market behaviour’. As you can see, he is basically referring to memetics long before it was coined by Richard Dawkins.
Conclusion
From the above discussion of memetics and broader Lollapalooza effects, it is worth emphasising that these factors often result in extreme market swings that outweigh the underlying fundamentals. It is your objective as an investor to recognise and take advantage of these situations. Simple to explain on paper but not so easy in reality. You may have it figured out now, but when the money starts flowing one way or the other you will be fighting your own emotions. An understanding of the above will hopefully help you navigate the chaos that ensues from dislocations within the financial markets.
I hope you have enjoyed the relatively brief and simple discussion on memetics. Whilst relatively simple it is not so often discussed and slip many people by. Add this to your checklist when assessing companies and broader markets and you are sure to recognise the occasional irrational market move. Use the above to help decide when mania or pessimism are at extremes. Avoid and buy accordingly. I will leave you with a brilliant quote from Warren Buffet that helps encapsulate this point perfectly:
“I call investing the greatest business in the world … because you never have to swing. You stand at the plate; the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There’s no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.”7
7 Warren Buffett’s 106 Best Quotes Of All Time | Investing, Money & Life, https://www.suredividend.com/warren-buffett-quotes/, Access date 13/07/2024
Bibliography
Meme, https://en.wikipedia.org/wiki/Meme, Access date: 29/06/2024
Memetics, https://en.wikipedia.org/wiki/Memetics, Access date: 29/06/2024
Richard Dawkins, The Selfish Gene (30th Anniversary Addition), Access date: 03/07/2024
Michael J. Mauboussin, More Than you Know, 1st Edition 2006, Access date 09/07/2024
Peter D Kaufman, Poor Charlies Almanack Expanded 3rd Edition 15th Printing 2019, Access date 13/07/2024
Rhiannon Beaubien, Farnam Street The Great Mental Models Volume 2: Physics, Chemistry and Biology 2019, Access Date: 13/07/2024
Rhiannon Beaubien, Farnam Street The Great Mental Models Volume 3: Systems and Mathmatics Access Date: 13/07/2024
Warren Buffett’s 106 Best Quotes Of All Time | Investing, Money & Life, https://www.suredividend.com/warren-buffett-quotes/, Access date 13/07/2024
Terry Ortlieb, Harari Sapiens Part 1 Cognitive Revolution, https://www.youtube.com/watch? v=h9xM9nKdyus, Access date: 13/07/2024
Yuval Noah Harari, Sapiens (Amazon audio book) Access date: 13/07/2024