Behavioral finance FAQ / Glossary (Genetic)

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Dates of related message(s) in the
Behavioral-Finance group (*):
Year/month, d: developed / discussed,
i: incidental

Genetic algorithm, computing

.05/3i + see neural nets,
soft computing, fuzzy logic,

system trading, model

Can the machine do the thinking job
while the human brain enjoys life on the beach?

Definition

A genetic algorithm is an analysis / simulation software that mimics how the

  human brain learns and decides. Genetic algorithms are
robotic bricks used in the quest for "artificial intelligence".

The purpose of such an algorithm / model is:

Either (as a theoretical research mode), to understand mental phenomena

by finding abstract explanations that fit realities the closest possible,

Or (as a predictive model) to detect what could happen in the short or

long term by factoring human experience.

Or (as an operational model) to find solutions that fit optimally some

preset criteria so as to make adequate decisions.
Or even, for the model, as an Asimov robot, to decide by itself,
the case for example in high frequency trading. Hmm, better stay near it
and not take a nap while it does it !

How it works

Trial and errors for muscle self building

The algorithm builds itself by approximations,
tests, trials and errors so as to sort,
among explanations, the most consistent one,
or among solutions the most optimal one.

In some way it reproduces what biological evolution did for the human mind,
thus the "genetic" term.

For example it might use computer software that are inspired by
neural connections (see neural net).

The analysis process is somewhat related to fuzzy logic (see that word).

When using such a software, the computer, in the best cases:

1) Generates a model, that would be able to simulate a real
    situation.

2) Feeds it with data (simple or massive ones, "big data" is now a

    buzzword ) and process them in the  mixer, well, the
    computer


3) Compares its results with how things behave in the real world,

or with preset performance criteria (the case in investment
models).

4) Makes iterative changes (*) until the results match reality
    or criteria the closest possible.

(*) In other words, it uses the above said comparisons to
      correct its own errors, a kind of mental self-repair ....that
      we should all do for ourselves ;-))

The great issue

Will the model beat us?

Or become brainless when facing the unexpected?

Will the machine and its "artificial intelligence"
beat "the human mind?"


In some repetitive cases it does already.

But it has its limitation, mostly when facing situations and issues that
are totally new
, which can be sometimes chaotic, and are more generally
filled with uncertainty.

As examples of applications (and limitations), notably in

economics  and finance, see quantitative analysis, system
trading (*), model, quant...

(*) now done at the speed of light between computers by big banks and
     other
financial institutions, bringing new market risks (computer herding)
     and an asymmetry
between small and big traders)

 

Dates of related message(s) in the
Behavioral-Finance group
(*):
Year/month, d: developed / discussed,
i: incidental

Genetic utility


03/3i 06/4i + see utility, crowd,
herding, neuroscience, ethics,
fairness, altruism

When the attraction to people complements
the attraction to money.

Genetic utility is not just a biological concept.

It is used also as an allegory in economics (and related social sciences),
which roughly encompasses the notions of empathy and altruism.

Definition:

In economics, genetic utility differs from personal economic utility
(see utility)
as an alternative - or combined - preference (see that word)
for the wellness of
human beings in general, or at least for those that
the person feels close to.

  It leads a person to share its feelings and behaviors
     with those of the group or the crowd
even
       if its own
utility would command to follow a more independent
      path.


It is a bit different from "emotional intelligence" (see that phrase)
which is just being conscious of one's own emotions and of other
people emotions, without necessarily sharing them.

Balancing competition with cooperation

       War and love?

Genetic utility is an attitude based on a sense of belonging and
togetherness that seems to come from some genetic tendency
towards social cooperation, generosity, fairness, loyalty and solidarity.

To use economic words, people tend to give

a value not only to their "personal" utility but also

to what they consider a "social utility" (see utility).

Of course, better not draw the conclusion that we are all social
     angels (or herd members).

This sharing tendency rarely overrides totally the "economic man"
in us who puts his own interest as an absolute priority.

Is it OK?

Like Aesop said about our tongue, it is at the same time the
best and the worst thing
.

This social disposition is in some degree ethical (see ethics,
fairness...) and legitimate.

But it might go to extremes, when it is considered whithin groups and
societies that those common bodies are always right and that what is seen
as their common interests (or whims) are always above individual one's.

=> In such cases, it can mislead individuals into sharing blindly some
      common
behaviors that might be risky and damaging (see herding).

Empathy (and the affect heuristic: see that phrase) is a good
thing ...unless it verges on gullibility or collective hysteria.

How to explain this type of utility?

In the long history of evolution,
did the other human beings genetically modify our mind?

Here are possible explanations:

Self serving evolution?

It might show a 300,000 years evolution towards empathy

between human beings.

Our animal brain might have the long memory that grouping into
    herds
gave safety against predators, which preferred

to attack isolated preys.

More generally we might have a collective long memory on the

practical advantages of fairness, cooperation, loyalty, solidarity
...and, of course, plain love.

     The most clear-cut cases are those in which cooperation serves
          better somebody's interests than competition does (see game
          theory
).


A gene of goodness?

It might make the person feel good , by
   activating brain's
pleasure areas and chemicals  (*).


It might give the donor (and also the risk-taker) a subconscious

impression of robustness.

The person might get the feeling that its generosity (or risk-taking) 

makes him/her attractive for "mating" within the crowd.

Well, to include some sexual urge in that phenomenon might
go a bit far into shrink-type interpretations, but why not.


Not to forget that education is driven by the
    community and disseminates moral principles about what is

good or bad for it.

(*) Neurosciences (see that word) - a field of research that has some links
      with genetics - studies what are the stimuli tat affect the brain cells and

the innerchemical secretions, which are related to feelings of pain or
pleasure and active in decision-making.

Those studies show that some of those brain zones
and chemicals (such as oxytocin) are "empathy
oriented"
and also "fairness oriented".

(*) To find those messages: reach that BF group and, once there,
      1) click "messages", 2) enter your query in "search archives".

Members of the BF Group, please
 vote on the glossary quality at
BF polls

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This page last update: 10/09/15  

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