Contents
List of Figures and Tables ix
Acknowledgments xii
Preface xiv
1 Introduction 1
2 The “Old” View of Finance 10
2.1 The efficient markets hypothesis: The traditional (albeit
incomplete) standard-bearer for information assessment 10
2.2 A little more on the link between the theory and the
applied 13
2.3 Cost, ability and speed: Important information
determinants 17
2.4 Do empirical studies of the EMH shed any light on the
actual speed of information transferal? 22
2.5 Is “Strong EMH” all there is to the “Traditional” view of
markets and information? 27
3 The “New” View of Finance 32
3.1 “New” view challenge no. 1: Determinism, complexity
theory and the nonlinear dynamics school 33
3.2 “New” view challenge no. 2: Bounded rationality,
heterogeneous agents and the Behavioral Finance school 46
3.3 “New” view challenge no. 3: Trading rules, evolutionary
games and artificial markets 55
3.4 So where does Evolutionary Finance fit-in to the “new”
view genre? 71
4 The Mechanics of Modeling Information as an
Evolutionary Process 73
4.1 Evolutionary information basics: Memetics and the
contribution of Richard Dawkins 75
4.2 Moving past the elementary: Taking the evolutionary
information concept further into the field of finance 78
4.3 The building blocks of our evolutionary approach toward
information in finance 82
4.4 Some consequences of our evolutionary approach toward
modeling information 90
4.5 How investors interpret Evolutionary Information 103
5 Putting it Altogether – An Evolutionary Model of the
Marketplace 118
5.1 Stage I: Developing an intertemporal optimization
model of information production/consumption and
solving for general equilibrium conditions 121
5.2 Stage II: Linking analyst research output to asset price
dynamics 131
5.3 Stage III: Highlighting our preferred evolutionary model
of the market – constructing the informational genome
of asset prices 143
6 The Implications of Our Evolutionary Perspective for
Distributional Form 161
6.1 Foundations for an evolutionary approach toward
distributional form 163
6.2 Analyst/investor strategies and the ecology of the market 180
6.3 Some implications of our results 185
7 Evolutionary Finance – an Applied Perspective 202
7.1 A primer on Evolutionary Algorithms 206
7.2 Evolutionary asset selection 220
7.3 Evolutionary Portfolio construction 227
7.4 Does it work? the results of ten years of out-of-sample
backtesting for the investment recommendations from
Natural Selection™ 229
8 Future Directions – The Path Ahead for
Evolutionary Finance 235
8.1 Future directions for Evolutionary Finance – the theory 237
8.2 Future directions for Evolutionary Finance – the practice 238
Appendix 1: A Glossary of Investment Terms 239
Appendix 2: An OLG Form Evolutionary Model of the
Marketplace 267
A2.1 An introduction to our OLG framework 268
A2.2 Equilibrium for the consumer 269
A2.3 Equilibrium for the producer 269
A2.4 Factor market equilibrium 270
A2.5 General equilibrium 270
A2.6 Introducing money and prices 272
A2.7 Adding analyst driven expectations 274
Appendix 3: Some Background on Evolutionary Finance™ Ltd 278
References 280
Index 295