DEFINITION of 'Natural Selection'

Natural selection is a process whereby species which have traits that enable them to adapt in an environment survive and reproduce, passing on their genes to the next generation. Natural selection means that species which can adapt to a specific environment will grow in numbers and eventually greatly outnumber those species that cannot adapt. The natural selection process enables a species to better adapt to its environment by changing its genetic configuration with every passing generation. These changes are gradual and may occur over thousands of years, although in some instances natural selection may occur much faster, especially in species with short life spans and rapid reproduction rates.

BREAKING DOWN 'Natural Selection'

One of the most well-known examples of natural selection in the field of biology is that of the English peppered moth. Although they were found in a number of shades, until the Industrial Revolution in England, the light gray, spotted variety was the most abundant, as they were easily camouflaged against lichen of a similar light color. On the other hand, dark-winged moths were easy targets for birds and other predators. But the Industrial Revolution produced massive pollution that killed the lichen which covered most rocks, while white-colored buildings turned black with soot. As a result, the light gray moths could no longer blend in with their surroundings and were easily spotted by predators, which led to their near-extinction. The dark-winged variety was now better-camouflaged and had a much better chance of survival than their lighter cousins.

Natural Selection in Finance

In the financial context, natural selection means that over the long term, only those players who can respond and adapt to the many changes in the financial and business environment will survive. The dynamism and complexity of the business environment means that only a handful of companies can remain in business for very long periods. For example, General Electric is the only remaining stock of the first 12 constituents of the Dow Jones Industrial Average when it was introduced in 1896.

Another example of natural selection in the financial context can be seen in the fate of brokerages such as Bear Stearns, founded in 1923; Merrill Lynch, founded in 1914; and Lehman Brothers, founded in founded in 1850, during the credit crisis of 2008. As a result of the dramatic deterioration in the financial landscape in 2008, these brokerages were unable to retain the independence they had had for decades, and were either acquired by larger banks (Bear Stearns by JPMorgan Chase and Merrill Lynch by Bank of America) or forced into bankruptcy (Lehman Brothers).

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