LIVING PORTFOLIOS

When ecology and evolution get into the bank

In recent months I have discovered, the “portfolio” theory, a mathematical theory developed by Harry Markowitz in March 1952 and published in a scientific paper entitled “Portfolio selection” in “The Journal of Finance, volume 7, pages 77-91 (the pdf is available for those who wish to read it).

 

Harry Markowitz worked for the Rand Corporation, a US think-tank based in Santa Monica, California. By using simple analytical and graphical models, he demonstrated the value of diversification as a financial investment strategy to reduce risk.

If some financial advisors were to read these lines, they would find them superfluous to say the least, because they tell things that are well known in that world. This is that the selection (here we begin to use terms familiar to those involved in plant breeding) of an efficient financial investment portfolio is based on a correct evaluation of the expected revenue with the investment and its volatility.

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Using Markowitz’s words, we consider the rule that the investor does (or should) consider expected return a desirable thing and variance – that is, the fluctuations (my addition) – of the return an undesirable thing.

The result of Markowitz’s analytical and graphical models is well known to financial advisors, who advise risk-averse customers on a diversified portfolio, which for the “portfolio theory” tends to produce more stable returns than do simple portfolios (less diversified), despite the variability of the individual components of the same. In fact, in a well-diversified portfolio, it is more likely to have individual products that are independent or inversely related.

I come to discover that, when the “portfolio” effect is applied to ecology and evolution, it provides important insights on how ecosystems are organized, on how species interact with each other and on how evolutionary strategies develop.

Ecologists had proposed, roughly in the same years when Markowitz published “Portfolio selection”, that those species-rich biological communities were less affected by external perturbations than biological communities with few species. Later, Tilman and Downing (1994) provided an empirical demonstration of this effect in the case of drought resistance of grasslands, which made them say “biodiversity generates stability”. A re-analysis of their data revealed that this stabilizing effect was the result of the statistical averaging between species that did not change synchronously over time, just like in diversified financial portfolios.

The hypothesis diversity-stability (i.e. a greater diversity corresponds to greater stability) was recently tested by Delphine Renard and David Tilman who analyzed the production of 176 crops in 91 countries from 1961 to 2010 (50 years). Their data, published in Nature on June 19 of this year, clearly indicate that a greater diversity of crops at the national level corresponds to greater stability of crop production over time. The same paper demonstrates the destabilizing effect on crop production of rainfall and temperature variability.

It seems to me that, perhaps, evolutionary populations and mixtures are nothing else but the application of the portfolio effect within the same crop. Then, why not call them LIVING PORTFOLIO?

Compared to the FINANCIAL PORTFOLIOS, the LIVING PORTFOLIOS have the advantage of evolving on their own in response to the VOLATILITY OF THE MARKET, which in their case is temperature and rainfall variation.

What does not add up is that there remains a bit of bitterness in finding that the well-consolidated portfolio effect in the financial world, when applied to the crops that supply our food, is still so strongly opposed by part of the Italian scientific world.

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