Rat-powered Hedge Funds? A Frightening Concept

Rat-powered Hedge Funds? A Frightening Concept

September 24, 2014 Uncategorized
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(Last Updated On: September 24, 2014)

A professor buddy sent a link to an outstanding article that mentions a study where researchers study the performance of a rat’s ability to learn how to “beat the market:”

Marcovici says the rats “outperformed some of the world’s leading human fund managers.” The rats were trained to press a red or green button to give buy or sell signals, after listening to ticker tape movements represented as sounds. If they called the market right they were fed, if they called it wrong they got a small electric shock. Male and female rats performed equally well. The second generation of rattraders, cross-bred from the best performers in the first generation, appeared to have even better performance, although this is a preliminary result, according to the text. Marcovici’s plan, he writes, is to breed enough of them to set up a hedge fund.

Here is a picture depicting the study:


A few key takeaways from the research:

  1. Some rats outperform the greatest hedge fund managers in the world.
  2. Male and female rats perform equally well.
  3. Rats, sired by rats with great performance, tend to perform better than “normal” rats in the population.

The researchers end-state is to breed a crew of genius rats and start a hedge fund so he can charge 2/20.

I can’t help but think this study is 100% in jest, but as far as I can tell, the research is fairly serious…even though the outcome and methodology are hilarious/frightening

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Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray received a PhD, and was a finance professor at Drexel University. Dr. Gray’s interest in entrepreneurship and behavioral finance led him to found Alpha Architect. Dr. Gray has published three books: EMBEDDED: A Marine Corps Adviser Inside the Iraqi Army, QUANTITATIVE VALUE: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors, and DIY FINANCIAL ADVISOR: A Simple Solution to Build and Protect Your Wealth. His numerous published works has been highlighted on CBNC, CNN, NPR, Motley Fool, WSJ Market Watch, CFA Institute, Institutional Investor, and CBS News. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.

  • Chris Scott

    You missed a key takeaway – Hedge fund traders should receive an electric shock when they make a bad trade to motivate better performance…

  • That is probably against the rules and regulations when conducting research experiments. But yes, a great idea! Maybe a Milgram experiment for hedge fund managers that underperform is warranted: http://en.wikipedia.org/wiki/Milgram_experiment

  • hari

    This is a hilarious idea, brilliant, but a bit silly if there is any truth to it. First, it’s not very nice for the poor rats. More to the point, the scientist needs to select an “algorithm” for breeding the rats and for training them. This is very inefficient, if you compare it with a straight forward genetic algorithm. The GA can learn much more quickly, rigorously and cheaply than a population of rats!