Bacteria give lessons in investment economics

A trade-off between protection and growth determines bacterial success

Colonies of bacteria balance growth against risk, just like financial investors, ecologists have found.

Using lab-based synthetic biology, experiments in bacterial evolution, and mathematical modelling the study finds links between organisms and markets.

Bacterial investment crashes and boom-bust cycles are described in a paper in the journal Ecology Letters.

The study is the clearest experimental test of a 50-year-old theory relating trade-offs to competitive success.

The evolutionary successes of bacteria are plain to see as they are found across the globe, but bacteria may also have something to say about investment success more generally.

A research group from the UK and Australia used strains of the bacterium E. coli that were constrained in the amount of resource that they had for growth, but that were also subjected to varying degrees of biological stress.

Different strains of E. coli developed covering a range of ability to cope with stress and invest in growth.

Petri dish as trading floor

Externally imposed "market conditions", represented by changing salt and acid contents of their environment, influenced the outcome of the "investment decisions" made by each bacterium, with success rewarded by survival, and failure leading to extinction.

The consequences of the trade-offs between development of stress-resistance, which involves the acquisition of costly proteins, or increasing consumption to grow were recorded in the evolution of the genetic codes of the successful bacterial strains.

Trading floors and Petri dishes share common features

The observations were used to test and validate mathematical models of bacterial investment booms and crashes.

Dr Ivana Gudelj from the University of Exeter was one of the authors of the study, and said: "We have shown that very different investment opportunities can require different investment strategies.

"These strategies are constrained by the subtleties in trade-offs that are usually invisible or ignored in real markets. The study is a classic demonstration of Darwinian economics and survival of the fittest."

Evolutionary niche

Almost half a century ago Richard Levins first suggested that trade-offs in organisms' investment decisions lead to them exploiting different niches, and this concept may apply both in biological ecology and in financial markets, but it has not previously been demonstrated as clearly by experimental observations.

Prof Dan Lovallo, senior research fellow in Innovative Management at University of California, Berkeley, US, was not involved in the study, and commented: "This paper breaks exciting new ground in the integration of sciences... of interest to multiple fields: economics, finance, business strategy, and biology."

The applicability of the results to real investment decisions in financial markets should probably be treated with caution however, since the markets constructed for the study were simplified to allow testing of the model.

They do, nonetheless, show how small changes in market conditions can sometimes correspond to huge differences between optimal strategies.