Where does bet-hedging collide?

In finance, diversification is the practice of holding a spread of imperfectly correlated assets so that the variance of a portfolio's return falls below the average variance of its parts, trading some expected return for a large reduction in risk. Harry Markowitz's 1952 Portfolio Selection made this precise, showing that an investor should choose among portfolios by mean and variance together and that combining assets whose returns do not move in lockstep is what lowers overall risk. The referent is the deliberate spreading of stakes across uncertain outcomes to stabilise the aggregate result, and it is the same variance-reducing move that evolutionary biology would later rediscover and call bet-hedging.[1]

Unit

The variance of a portfolio's return, lowered by spreading across assets

Recovery means

Not applicable

Measured by

Quantified by portfolio variance and covariance among holdings, and by the mean–variance efficient frontier

In evolutionary biology, bet-hedging is a strategy in which an organism accepts a lower arithmetic-mean reproductive output in exchange for reduced variance in output across generations, because long-run success is governed by the geometric mean of fitness and a single catastrophic year counts far more than a single good one. Slatkin's 1974 Hedging one's evolutionary bets named the strategy, and Cohen's 1966 Optimizing reproduction in a randomly varying environment had already modelled its clearest case, delayed and staggered germination in annual plants that spreads reproduction over unpredictable years. The referent is the same variance-reducing allocation of stakes as financial diversification, expressed in offspring and generations rather than assets and returns.[2][3]

Unit

The between-generation variance of an organism's reproductive output

Recovery means

Not applicable

Measured by

Inferred from geometric-mean fitness, the spread of germination or reproduction over time, and lowered variance in offspring number

In population ecology, spreading of risk is the idea that a population persists more reliably when its individuals are distributed across many partly independent sub-populations, patches, or times, so that a local disaster wipes out only part of the whole and the aggregate numbers stay more stable. Den Boer's 1968 Spreading of risk and stabilization of animal numbers argued that this heterogeneity, not tight regulation around a single equilibrium, is what damps the fluctuations of natural populations. The referent is again the stabilising effect of spreading stakes across imperfectly correlated outcomes, the same mechanism as portfolio diversification and evolutionary bet-hedging, framed at the level of a whole population rather than an investor or a genotype.[4]

Unit

The variance of total population size, damped by spreading across sub-populations

Recovery means

Not applicable

Measured by

Assessed by the independence of local dynamics and by reduced variance in pooled abundance across patches or years