Natural Selection

DEFINITION of 'Natural Selection'

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 typically occur over thousands of years, although in some instances natural selection may occur much faster.

BREAKING DOWN 'Natural Selection'

In the financial context, natural selection has a different connotation, that of “survival of the fittest.” This 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 .

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 variety of moths could no longer blend in with their surroundings and were easily spotted by predators, which led to their near-extinction. But the dark-winged variety was now better camouflaged and had a much better chance of survival than their lighter cousins.

In the financial field, 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 is that of brokerages such as Bear Stearns, Merrill Lynch and Lehman Brothers 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 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).