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Book Review from Victor Niederhoffer: 'An Illustrated Guide to Theoretical Ecology'
Every now and then one comes across a book that completely clarifies what every educated person should know about a subject that is essential to understand as we go about our the humdrum business of life and trading. Such a book is An Illustrated Guide to Theoretical Ecology by Ted J. Case. I cannot recommend this book too highly, as it provides a foundation for thinking about competition, mutualism, growth, resource depletion, diffusion, population density, predation, life cycles and space. The book introduces the basic principles behind each of these subjects with simple algebraic equations and illustrative charts that describe various plausible relations. It then follows through with analytic solutions to develop a deep understanding.
The book is divided into 16 chapters, starting with unrestricted exponential growth models, moving to spatial variations in birth rates, population growth classified by age, methods of analyzing age structures, growth when density-dependent resources are limited and density-regulating and limiting factors, life history, strategies, predations, predator-prey systems, stability, interspecies competition, multispecies communities and spatial variations.
A nice appendix introduces the main ideas from calculus and matrix algebra that are helpful in forming a backdrop for the kinds of techniques used in developing understanding using difference equations, differential equations, matrix solutions, Taylor expansions, correlograms, optimization solution, boundary analysis, phase space, Jacobian and reaction dispersal equations.
Many of the solutions have a closed form and are difficult to unravel, but the author is very good in giving graphs that illustrate the main relations involved and describing the likely outcomes for practical problems. The book was written in 1999 and it makes use of simulation in many areas, but probably not as many as would be desired in present-day technology, and there is a web site that provides simulation models for most of the areas covered. Some numerical work with the basic principles and simple examples would lead the average user to have a better understanding of the often complicated and unintuitive dynamics of the ecological factors considered.
The guiding principle that holds the book together is that everything that goes in life is the result of evolutionary forces. A key feature of this book that distinguishes it from others is that it shows how natural selection and changes in gene frequencies at different loci in the context of Darwinian thought bring about the ultimate populations and interactions observed. By the time you finish the book, and it can be read on all levels, you'll have a good understanding and analytic apparatus to understand all the things you're always reading about how s-x and genes control all our behavior, including a deep understanding of basic concepts found in the popular literature such as fitness, exploitation, disk equations, clutch sizes, reproductive value, Lottka Verra equations, niche theory, patch models, k versus r growth, Leslie matrices, cannibalism, pulses, chaos, stability, cycles, extinction and death.
The key variables considered in ecology that form the basis for everything in this book and other ecology books are the age, resource and competitor varying impacts on the structure of population, birth rate, survival rate, fecundity rate, death rate, inheritability. Based on simple models of how these affect each other, many beautiful regularities that will illuminate all aspects of your life and everything you've ever thought about ecology can be drawn from this book.
The study of ecology is key to markets. There is a finite amount of money and resources that different species in the market are competing for at all times. The growth of one species is constrained by the amount of money and people in the system, ability to communicate, and competition from all the other species. The species develop experience and knowledge as they grow, but their value to maintaining the market system is reduced as they gain it. The battle is between the strong and weak, the young and the old, the flexible and fast-moving versus the fixed and slow moving. Find a niche where the competition won't be too fierce, or perish.
I found the principles used to study growth in Case's book particularly helpful for considering the value of investments in new issues versus seasoned issues. The new issues have more opportunity for growth, but also much more of a chance for death. Thus, there is more risk, and depending on the space and resources available, and the stages of the life cycle that one is in, and the distribution of companies is in, different strategies are optimum.
The parents of new issues may be likened to the underwriters , and the care that they spend on their progeny must be considered in the context of the number of issues that they spawn, the survival rates for the companies, and the reputation and age of the underwriter.
Companies developing new products or hiring new managers must face some of the same issues that birds face in determining clutch size. How many eggs or new products should they lay? How much resources or money should they spend upon raising them? And how should they change their strategies based on competition? Some conclusions of Case in his chapter on Life History Trade-offs might illustrate some of the illuminating principles that ecology offers here:
One of my favorite sections in the book comes in the chapter on density dependence where Case uses the child's game of rock, paper, scissors to illustrate one aspect of the competition among species. "Scissors cut paper, paper covers rock, but rock breaks scissors. These interactions form an intransitive lock. In such cases, the fitness of each of these three strategies depends entirely on the strategy your opponents are playing. Under conditions like these, all hell can break loose and cyclic solutions can emerge. In pairwise species bouts, usually one of the pair is dominant, yet several species can apparently coexist because of intransitive relations."
No better model for the existence of hedge funds, dealers, and the public and their changing populations at various stages of the market cycles has ever been developed.
As someone who, along with my former colleague, Harvard professor Richard Zeckhauser, was a pioneer in considering the ecology of markets, having written thousands of pages on it over the course of 30 years, including two chapters in my 1997 book, "Education of a Speculator,"e; I can say that this is the one book that I would recommend to all who wish to understand the nitty-gritty of the competition, cooperation, growth and decay of the everyday life that market people live in. This book bridges the gap between the anecdotal examples and topics covered in most books on ecology, and the completely abstruse mathematical material that regrettably has seeped into so much of the mainstream ecology studies and journals today. It will leave you with a foundation for understanding such crucial overriding principles as your strengths and weaknesses, the effect on your activities of those with resources and knowledge different from yours, opportunities for longevity and extinction, the relative merits of growth versus value, the time to move at high velocities and slow, and will enrich your thoughts and pocketbook over a lifetime.
Steve Ellison adds:
A similar problem to optimum clutch size in ecology is an existing business attempting to develop a new line of business. I read two papers this weekend on developing new businesses, one by Strebel and Ohlsson in the Winter 2006 Sloan Management Review, and the other by Andrew Campbell in Strategy & Leadership in 2005.
Campbell believes that most companies try far too many diversification initiatives. Individually, the new business efforts receive too little management support to succeed; collectively, they cost too much and divert management attention from the core business. Many a company has regarded its own industry as having unattractive potential, tried to venture into a faster-growing segment, failed, and realized in hindsight there were opportunities it could have seized in its own industry had it not been distracted by its diversification efforts.
Most dangerous of all are the hot growth industries everyone is excited about. Such markets attract the most competition and can incite management to suspend its usual risk aversion. Campbell suggests choosing a line of business based on where the firm's capabilities provide advantage rather than on the potential growth rate. To guard against hubris and limit the number of new ventures, he suggests a hurdle rate of 130% of the likely leading competitor's profit margin. Strebel and Ohlsson find a higher success rate on ventures that are distinctive relative to the competition. Extensions of the company's existing knowledge generally are better than "leaps into the unknown".
Very similar to the rock-paper-scissors analogy is Strebel and Ohlsson's finding that management of a new venture must balance the needs for innovation, efficiency, and customer intimacy. The most effective way to do so is to periodically reprioritize the relative importance of each and manage differently to support the new priorities. In another Strategy & Leadership article, Leavy describes the practice at Intel of alternating between "letting chaos reign" and "reining in the chaos". The cycles change because a particular management style, while it meets the immediate priorities, produces unbalanced results if pursued too long.