The patience gene thrives, the impatience gene dies. Natural selection results in a self-improving cycle, as with dieting, happiness and exercise. But there is a second equilibrium where this cycle operates in reverse gear. With a large fraction of momentum traders, prices deviate persistently from fundamentals. Among untested investors, momentum strategies now flourish while long-term fundamentalists fail. The speculative balance of investors rises, increasing the degree of misalignment in prices. The patience gene falls into terminal decline. Natural selection results in a self-destructive cycle, as with drug, alcohol and food addiction. 20  For example, McNamara (2004). 21  Christakis and Fowler (op.cit.). 6  BIS Review 114/2010  These self-destructive dynamics would have been familiar to economist, and some-time investor, John Maynard Keynes. He quipped: “markets can remain irrational for longer than you or I can remain solvent”. In the sketch model, a Keynesian dynamic selection process is at work. Myopic finance bankrupts the long-sighted. This echoes an earlier evolutionary game in finance – Gresham’s Law. Named after English financier Sir Thomas Gresham in the 16th century, this refers to the tendency for bad money to drive out good. The first paper money example of Gresham’s Law pre-dated Gresham. It came from China during the Yuan (1271–1368) period. Then, paper money drove out silver coinage. 22 This bad money dynamic has since been replicated across many monetary economies. China also provided the world with its first example of the reverse phenomenon – a selfimproving cycle of good money driving out bad.

During the Ming (1368–1644) dynasty, paper money was swept away by commodity money. 23 This dynamic has also since been replicated across a number of monetary economies, including dollarizing emerging market economies over recent decades. Today, finance faces its own Gresham’s dilemma – the patient or impatient path. Innovation has, of course, transformed finance over the intervening years. Liberalisation has resulted in far greater information and liquidity in financial markets. Perhaps these developments have helped good finance drive out bad, nudging money towards the patience path? Not necessarily. Take information. In an evolutionary game, information is a double-edged sword. It supports the cause of the long-term investor, by allowing them more easily to compare prices with fundamentals. But it also tests the patience of the untested investor subject to regular performance evaluation. Investors whose judgement is right, but whose timing is wrong, stand an increasingly high chance of exiting the game. More frequent information on performance risks contaminating the gene pool, driving out the patient to the benefit of the impatient. Anecdotally at least, performance evaluation intervals have progressively shortened. Over recent decades, companies have migrated from annual general meetings, to a six monthly or quarterly reporting cycle to today’s steady stream of within-cycle trading updates. In finance, information is in general a good thing. But in finance, as in life, it is possible to have too much of a good thing. Liquidity is similarly double-edged. It reduces the impact of momentum trading on prices, thereby increasing market efficiency.