On December 17, 2014, then-President Barack Obama announced that the United States would restore its international relations with Cuba. In addition to many expected diplomatic consequences, the decision had an odd effect: boosting the popularity of a small, closed-end fund that trades as CUBA.
Despite its name, CUBA’s holdings in Cuba are minor and have little value.* There was no rational financial explanation for why investors would buy up this fund—which nearly doubled in price—on this particular day.
The investments in CUBA are a reminder that the market isn’t always “efficient”: Investors don’t always make rational decisions and go with whatever gives them the greatest risk-adjusted return. Yet stock prices often are relatively predictable based on rational, mathematical models. CUBAs in the stock market don’t happen all the time, nor do unexpected dips and crashes.
In a complex system like the stock market, rationality and irrationality coexist. Determining what strategies make the most sense depends on the constantly changing conditions, says Andrew Lo, a professor at MIT’s business school.
To better understand complex financial markets, a growing number of economists are looking beyond math and physics, the roots of the field’s historic models, to what might seem an unrelated discipline: evolutionary biology. Much like a biological organism living in an ecosystem, the stock market is a network. As cells do within a human body, or as bacteria do in their colony, investors and companies interact with, influence, and compete with each other—and they need to adapt for survival.