How Evolution Can Make Sense of the Stock Market
On December 17, 2014, then-President Barack Obama announced that the United States would restore its international relations with Cuba. In addition to many expected diplomatic consequences, the decision had an odd effect: boosting the popularity of a small, closed-end fund that trades as CUBA.
Despite its name, CUBA’s holdings in Cuba are minor and have little value.* There was no rational financial explanation for why investors would buy up this fund—which nearly doubled in price—on this particular day.
The investments in CUBA are a reminder that the market isn’t always “efficient”: Investors don’t always make rational decisions and go with whatever gives them the greatest risk-adjusted return. Yet stock prices often relatively predictable based on rational, mathematical models. CUBAs in the stock market don’t happen all the time,
