Quantitative Finance and the Mantis Shrimp: Unlikely Connections

During their recent episode, Taylor, Carlisle, and Morgan discussed Quantitative Finance and the Mantis Shrimp: Unlikely Connections, here’s an excerpt from the episode:

Tobias: Tom, usually, we do veggies at the top of the hour. JT, you want to serve up some–? It’s all veggies this episode. We’re just going to interrupt Tom’s veggies to do Jake’s veggies.

Jake: Yeah, I feel like mine are going to be kind of– They’re not going be as– [crosstalk]

Tobias: No pressure, JT.

Jake: Actually, you know what? I’m a little bit proud of this one. So, we’ll see if everyone agrees or not. All right. So, the mantis shrimp. [chuckles] I find it ironic, actually, that people happen to often love the animal-based veggies, the best, veggies and meat together. It’s like the inverse of beyond meat, where the vegetables are masquerading as animals. But we’ll start with some amazing facts about the mantis shrimp.

They’re typically four inches in length, but can be up to 15 inches. They hunt and feed off of fish, crabs, snails, rock oysters, other mollusks. But there are two things that really stand out with the mantis shrimp. It’s their eyes and their punch.

The first, the eyes. The shrimp here has the most complexed eye in the animal kingdom. It has the most complex front end of any visual system ever discovered. So, if you think about it like this, humans have relatively simple eyes, and then we use the software of our neurons to make it effective. I actually was thinking about this the other day, we’re a little bit more like Tesla, actually, where it’s camera based more and then they use software to try to do the self-driving, whereas Waymo is more like the mantis shrimp, which uses beefier hardware. Like, they’ve got all the cameras on there, they’ve got the lidar, all that stuff. And then they use more relatively simple software to solve the problem.

So, the human eye contains millions of light sensitive cells called rods and cones. The rods let us see light and motion, and the cones enables us to see color. And so, dogs have two types of cones, green and blue. So, they can see basically blue, green and a little bit of yellow. Humans have three types of cones. And so, we can see blue, green and red, which then also allows us to see red plus yellow, which is orange, and red plus blue, which is purple. Butterflies have five types of cones. So, they can see two additional colors that we don’t even really have names for, as well as the combinations of those if however much gradient you want to include.

Now, are you ready for this? How many color receptive cones do you think that the mantis shrimp has?

Tobias: More than the butterfly.

Jake: More than the butterfly.

Tom: 6.

Tobias: 10.

Jake: Put those two numbers together and– [crosstalk]

Tobias: 16.

Jake: 16 color receptive cones. So, just try to imagine what the rainbow looks like for them. I mean, you can’t really. So, they can perceive wavelengths of light ranging from deep ultraviolet, which is 300 nanometers to far red which is 720 nanometers, as well as polarized light, which is interesting. No one actually knows for sure why they can see polarized light. One hypothesis is that it helps them avoid predators like barracudas, who have shimmering scales to distract prey. So, if you can polarize it, when you look through sunglasses that are polarized, it lets you see past shimmer.

So, now the second remarkable thing about the mantis shrimp is its punch. They have these two raptorial appendages on the front of their bodies that can basically shoot out from below. They accelerate with the same velocity as a bullet from a 22-caliber rifle. In three one thousandths of a second, it can strike prey with the force of 1,500 newtons. Just to give a little context, a 1,000 newtons is the equivalent of force of someone who’s 100 kg or 220 pounds sitting on your chest. The mantis shrimp’s limbs, they move so quickly that the water around them boils, and it’s called super cavitation.

So, when these cavitation bubbles, then collapse, it produces a shockwave that can kill or concuss the prey. So, it’s almost like a second punch that works even if they miss. So, there’s so much force that tiny bursts of light are emitted, if you can imagine. [chuckles] Imagine being able to punch so hard that you could create light. Now, if a human– [crosstalk]

Tobias: Underwater.

Jake: Underwater. Yeah. If a human could accelerate their arm at 1/10th of the speed, you could throw a baseball into orbit. The mantis shrimp, they basically dismember their prey by smashing them to pieces with these clubs. In a lifetime, they can have as many as 20 to 30 breeding episodes, which is the same schedule that Toby’s on.

Tom: [laughs]

Jake: So, aquariums typically don’t house mantis shrimp, because they’re voracious predators. They basically eat everything that’s desirable in a fish tank. Plus, there’s also cases of them actually breaking the aquarium glass. These little guys are basically like little hellraisers.

So, let’s connect this back to the investment world, if I can. Last week, we lost a true iconoclast, a man who never wore socks and smoked like a chimney, Jim Simons. Simons, born 1938, Cambridge, Mass. He’s a mathematician, hedge fund manager and was really renowned for his groundbreaking work in quantitative finance. He had a math degree from MIT. He earned a PhD from UC Berkeley in math in 1961. He actually worked as a codebreaker for NSA and later as a math professor at Stony Brook.

So, in 1982, he founded Renaissance Technologies, which was a hedge fund. And in 1988, they established the Medallion Fund. Some of the numbers on this thing have just been absolutely insane. Simons himself earned over $100 billion, or the funded in trading profits since 1988. It translated into supposedly a 66% average gross annual return and 39% net between 1988 and 2018. Just numbers you can’t even hardly fathom, right?

So, he utilized his expertise in math and he pioneered the use of quantitative models and algorithms to predict trends. When he passed, he was worth more than $31 billion. All of it basically scraped off of day trading [unintelligible 00:39:51] as far as I could.

Tom: [laughs]

Jake: I’m kidding. But Simons was a serious philanthropist. He supported lots of research in mathematics and basic sciences and autism. So, let’s try to tie these two together, the Jim Simons and the mantis shrimp, if we can. All right. Both excellent vision. The shrimp possesses the most complex visual system. Simons, he said, “Don’t run with the pack. Do something original.” He was known for his ability to see patterns and opportunities in financial markets and then take advantage of them. He was leveraging his superpower really of advanced mathematical understanding. Both had powerful, precise strikes, despite their very small size.

Of course, Simon said, “If you’re really fast, maybe you’re going to be the winner.” He made really powerful, decisive moves in financial markets with the trading and achieved these high returns through RenTech, but famously constraining the capital and keeping it small to allow for the opportunities. And then adaptability. Both of them thrived in various–

The mantis shrimp, it survives in various marine environments and is very adaptable and resilient. Simon’s, over his track record in a career, he obviously was successful across a lot of different market regimes. So, lastly, like the mantis shrimp, you don’t want to let Jim into your fish tank. It probably wouldn’t take long before he dismembered all the other traders that he was competing with. So, that’s– [crosstalk]

Tobias: Can the mantis shrimp chain smoke to 86?

Jake: I think so. I think that checks out.

Tobias: There’s a good question from the crowd here. “Does the mantis shrimp think the dress is black/blue or white/gold? We need a definitive answer.”

Jake: Hmm. Fair. That’s a good question. Depends on what you’re primed with, I think.

Tobias: Good one, JT.

Tom: I was watching a video about the mantis shrimp with my five-year-old boy. Did you know that the water is heated to such temperature when they punch that it is the same temperature as the surface of the sun?

Tobias: Wow.

Jake: That’s insane.

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