Murmuration

The market is a giant living organism of human behavior and trying to predict what the market will do in two weeks, much less twelve months from now, is pure folly.

However, by looking at the price trends, and using some statistical analysis, we can garner a view of the direction that the “herd” is most likely heading.

There is a fascinating analogy in nature, called murmuration, that very much resembles the “herd mentality” in the markets.

Starlings, which gather in the evenings to roost, will often participate in what is called a murmuration — a huge flock that shape-shifts in the sky as if it were one swirling liquid mass.

This behavior is often sparked by the presence of a predator, like a hawk, and the movement is based on evasive maneuvers. There is safety in numbers, so the individual starlings do not scatter, but rather are able to move as an intelligent cloud, feinting away from a diving raptor, thousands of birds changing direction almost simultaneously.

The question that has had scientists stumped is how a bird, tens or hundreds of birds away from those nearest danger, sense the shift and move in unison?

The secret lies in the same systems that apply to anything on the cusp of a shift,like snow before an avalanche, where the velocity of one bird affects the velocity of the rest. It is called “scale-free correlation” and every shift of the murmuration is called a critical transition.

Giorgio Parisi, a theoretical physicist with the University of Rome, wrote:

“The change in the behavioral state of one animal affects and is affected by that of all other animals in the group, no matter how large the group is. Scale-free correlations provide each animal with an effective perception range much larger than the direct inter-individual interaction range, thus enhancing global response to perturbations.”

This is critically important to understand when it comes to investing as the markets, much like a flock of starlings, are an interconnected web of individuals all reacting simultaneously to the same set of inputs. When the “velocity” of a small portion of the“herd” changes, the velocity of the rest of the “herd” is changed as well. The idea of a“scale-free correlation” is a critical dynamic in market movements.