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Michael Mauboussin offers insight on memes. Download the white paper above.

Why Important?

Consider this excerpt from Michael Mauboussin:

Changes in our world are increasingly the result of cultural evolution, not genetic evolution. An understanding of the basic mechanism of memetic evolution provides an intelligent investor with a foundation to contemplate technological change and self-awareness of the (often hidden) assumptions that underlie their investment process.

We agree with Mauboussin on the importance of memes.

We don’t agree with Mauboussin’s use of the term stock picking, but that is a quibble of his overall work.

Mauboussin’s point about hidden assumptions is the one that matters most for traders. Every investment process rests on a set of assumptions about how markets work, what drives price, and what constitutes actionable information. Most of those assumptions are not explicitly examined. They were absorbed from the financial culture around the practitioner: from brokerage education, financial media, investment textbooks, and the professional consensus of the industry. These are the memes of investing, the ideas that replicate themselves through financial culture without necessarily being examined for their validity.

Buy and hold is a meme. The idea that diversification across a basket of stocks eliminates meaningful risk is a meme. The efficient market hypothesis in its strong form is a meme. The belief that fundamental analysis predicts future prices is a meme. All of these ideas spread through financial culture as apparently self-evident truths. The intelligent investor, as Mauboussin frames it, benefits from stepping outside those assumptions and examining whether they hold. The meme of buy and hold survived the Nikkei from 1989 to 2003 by being selectively applied to evidence that supported it and filtering out the evidence that did not. That is memetic evolution in action: the idea survives not because it is correct but because its carriers have developed defenses against contrary evidence.

Trend following, by contrast, was not transmitted through the financial mainstream. It developed outside the institutional consensus, among a small group of practitioners who examined the evidence rather than inheriting the conventional assumptions. It spread through documented performance and direct teaching rather than through the cultural transmission mechanisms that distribute mainstream investment memes. This gives it the characteristic of an idea that has been tested against evidence rather than propagated through cultural momentum. The distinction matters for the investor who wants to examine rather than absorb the assumptions underlying their process.

Mauboussin’s framework of memetic evolution is also relevant to understanding market behavior itself. Investor beliefs spread memetically through financial media, analyst reports, and social networks. When a belief about a company’s prospects becomes widely held, it produces correlated buying and selling behavior that generates price trends. The trend follower does not try to predict which beliefs will spread or how far. The system reads the price movement the spreading belief produces and follows it. The meme is irrelevant. The price effect of the meme is tradeable.

Frequently Asked Questions

What is a meme in the context Mauboussin uses?

A meme, in the sense developed by Richard Dawkins and applied by Mauboussin to investing, is a unit of cultural information that replicates itself through transmission from mind to mind. Investment beliefs, analytical frameworks, and market assumptions spread memetically through financial culture. Understanding this mechanism allows an investor to examine which of their own beliefs were examined for validity and which were simply absorbed from the cultural environment around them.

Why does Mauboussin say hidden assumptions underlie the investment process?

Because most investment frameworks rest on beliefs about how markets work that were adopted from the financial culture rather than derived from independent analysis. Buy and hold, diversification as risk management, and fundamental analysis as price predictor are all examples of investment memes that spread through professional culture without most practitioners explicitly examining whether they are correct. Self-awareness of these hidden assumptions is the prerequisite for honest evaluation of whether one’s investment process actually works.

How does memetic theory relate to price trends in financial markets?

Because investor beliefs spread through financial media and social networks in ways that produce correlated buying and selling behavior. When a belief about a company or sector becomes widely held, it generates price movement in the direction of that belief. The trend follower does not predict which beliefs will spread or to what degree. The system reads the price movement produced by spreading beliefs and follows it. The meme’s content is irrelevant. The price trend it produces is the signal.

Trend Following Systems
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