Wolf packs were absent from Yellowstone for 70 years. It completely changed the behavior of other animals. It removed fear from the system.
Survival for most animals means finding a balance between eating and watching for predators. Fear plays a vital role in keeping animals alive. But when you remove the top of the food chain, like wolves, the balance tilts to one side and upends the system.
Without wolves in Yellowstone, elk could eat without fear of predators. They could sit in one place and graze all day. More offspring also survived which did the same. Eventually, the number of elk grew beyond the capacity of the park. In other words, they ate and ate and ate until they ate at a faster rate than the trees and other vegetation could grow. After seven decades, they grazed the park clean of new saplings. That changed the landscape, forced other animals to change their habits (or leave for other habitats), and upended the ecosystem.
But that all changed in 1995. The reintroduction of wolves to the park forced the elk to change their behavior. They quickly learned they couldn’t sit around and eat all day. They had to move more often. They were more vigilant of predators. So they ate less and avoided higher-risk areas of the park. Things compounded from there.
At the time of wolf reintroduction to the park in 1995 and 1996, elk numbers were high. Elk provided an abundance of food that allowed the wolf population to grow rapidly. As wolf numbers increased, elk numbers decreased… There is now significant evidence that elk in Yellowstone have changed their habits to feed in safer areas, where wolf ambushes are less likely. This appears to have allowed riparian vegetation such as aspen, cottonwood, and willow trees that were previously heavily browsed to recover, with knock-on effects such as an increase in bird diversity.
The elks’ fear of wolves gave trees and other vegetation a chance to grow. It led to a wider variety of food. Which brought other animals in, and continued to spread. In the end, fear returned the park to a diverse balanced system.
Fear stabilizes systems because it plays a pivotal role in how animals make decisions. Be it Yellowstone Park or stock markets, an ecosystem can become severely unbalanced from an absence of fear.
The risk of losing money is ever-present in markets. It usually keeps investors from paying wildly optimistic prices. And since the price paid for an asset is a big determinant of whether money is made or lost, that’s a good thing.
Of course, there are exceptions. Pockets of the market will always exist where too little (or too much) fear influences prices.
Broader markets also have the potential for excess in any market cycle. However, markets spend a lot of time in the middle ground, where dueling bullish and bearish voices yell equally loud, and prices trade in a range that is kind of reasonable. Most of the time, markets tend to exist with a healthy amount of fear that drives investors to stop and consider their decisions. So investors avoid the mistake of paying exorbitant prices for assets.
But rare occasions arise where fear seems to disappear. It takes a backseat to greed. Decisions to become biased by optimism. Which leads to mistakes like paying higher and higher prices. And it becomes widespread.
Market history is filled with brief episodes where any stock price is considered reasonable. The late 1920s, the Nifty-Fifty, the Dot-com Bubble, were all periods where fear of losing seemed to disappear. Optimism abounded. Stock prices soared. Markets became top-heavy. Yet, most participants believed it was normal. It took a widespread realization that prices were excessive — a reminder that losing was possible (inevitable) — to bring it crashing down.
Finding a healthy balance takes time with markets. Like a pendulum, markets that swing too far in one direction, do the same in the opposite direction. Fear can be infectious. Widespread pessimism biases decisions and prices shoot past the middle point and fall too far.
But eventually, the excessive fear subsides. Markets calm down. Pessimism and optimism find a balance. Prices swing within a more reasonable range. Fear stabilizes the system.
The key for investors is to realize that too much or too little fear can lead to biased decisions, mistakes, and losses that can impact markets. A healthy amount of fear prevents it.
- What Do You Care What Other People Think? – J. Zweig
- What Looks Large to You May Not Look Large to Her – Klement on Investing
- Inflation Doesn’t Have to Crash the Stock Market – Irrelevant Investor
- Our Outlook for Value? Brighter Days Ahead! – Vanguard
- Daniel Kahneman: Clearly AI is Going to Win. How People are Going to Adjust is a Fascinating Problem – Guardian
- Joel Greenblatt: Investing Made Simple (podcast) – Knowledge Project
- The Economics of Customer Businesses (pdf) – M. Mauboussin
- Phar Too Ambitious – Tedium
- The Truth About Lying – Jstor Daily
- Sex, Deceit, and Scandal: The Ugly War Over Bob Ross’ Ghost – DailyBeast