In modern biology, natural selection is a process whereby species with traits that enable them to thrive in their environment survive and reproduce, subsequently passing on their genes to future generations. Continual adaptation ensures that species best suited to specific environments will grow in numbers and eventually dominate over those unable to adapt.
The natural selection process allows species to better fit their environmental niches by gradually altering their genetic makeup across generations. While these changes often occur slowly over thousands of years, some species exhibit rapid adaptations, particularly those with short life spans and quicker reproduction rates.
When the concept of natural selection is transposed to the financial world, the premise holds that only those companies that can respond to and effectively navigate changes in the economic landscape will endure.
Key Takeaways
- In biology, natural selection facilitates the survival and reproduction of species well adapted to their environments, thereby inheriting and propagating advantageous traits.
- In finance, natural selection suggests that businesses that efficiently adapt to market changes will prosper, whereas those that fail to evolve could face diminishing market share or even bankruptcy over time.
Understanding Natural Selection
A quintessential biological example of natural selection is the evolution of the English peppered moth. Historically, before the Industrial Revolution in England, the light gray, spotted variety of moths predominated, blending well with the similarly colored lichen in their habitat. In contrast, the darker-colored moth variants were more vulnerable to predation.
During the time span between 1760 and 1840, the Industrial Revolution caused significant air pollution. This pollution darkened building surfaces and killed the prevalent lichen. Consequently, the lighter gray moths, stripped of their natural camouflage, faced higher predation risks and near-extinction. Conversely, the darker moths became better camouflaged in the polluted environment and survived in greater numbers.
In financial dynamics, natural selection dictates that only companies adept at navigating fluctuating market conditions can stay afloat long-term. Businesses unable to adapt may see a declining market position against more capable competitors. Over extended periods, incapacity to adjust leads to potential bankruptcy. Similarly, traders or investors who fail to adapt to market changes incur continuous financial losses, resulting in depletion of capital and eventual market exit.
Natural selection remains a continuous and oscillating process. The capacity to adjust to recent industry changes is indicative of a company’s or trader’s abilities but doesn’t guarantee futural adaptability in continuously evolving economic landscapes.
Example of Natural Selection
The 2008 financial crisis cast a spotlight on the concept of natural selection in economics. Prominent brokerage firms such as Bear Stearns (founded in 1923), Merrill Lynch (founded in 1914), and Lehman Brothers (founded in 1850) succumbed to the sweeping financial turmoil. These once-mighty firms either faced acquisitions—Bear Stearns by JPMorgan Chase, Merrill Lynch by Bank of America—or forced into bankruptcy like Lehman Brothers.
The Bottom Line
Preceding the 2008 financial meltdown, it was a common belief that some institutions were “too big to fail.” However, the events of that period underscored the principle of natural selection: size isn’t the ultimate factor. What is crucial is the agility and ability of businesses and investors to dynamically recognize, react, and adapt to evolving market conditions.
Related Terms: evolution, adaptation, Darwinism, financial crisis, business strategy, market adaptation.
References
- Arizona State University. “Ask a Biologist: Natural Selection”.
- JPMorgan Chase & Co. “History of Our Firm”.
- Bank of America. “Bank of America Buys Merrill Lynch Creating Unique Financial Services Firm”.
- U.S. Department of the Treasury. “The Lehman Bankruptcy Seven Years Later”.
