Fishy futures and stock exchange / by Francisco Blaha

Dr. George Sugihara has gone from an academic career in biological oceanography to the world of high finance, and back again. “Basically, I modeled the fear and greed of mobs that trade.” Now he is applying the lessons he learned in business to the management of fish stocks.

Sugihara’s experience of the markets has changed the way he thinks about managing the ocean’s natural resources. For decades, investors have traded on markets for the future prices of virtually every commodity, from grain crops, through orange juice, to oil. Yet despite worldwide sales of at least US$80 billion a year, there is no futures market for fish. Sugihara hopes to change that. By providing people with the means to make money, and offering a structured financial environment for the worldwide catch and sale of fish, he argues, it should be possible to prevent stock depletion.

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He has the luxury of being able to support some of his own research, using a trust fund set up during his Deutsche Bank days. In part, that was how he funded his work, on an analysis of environmental fluctuations and ecological catastrophes in the North Pacific. This suggests that fishing quotas may need to be set more conservatively, and adjusted more frequently to compensate for environmental conditions, than is typically the case. “The way fish quotas are set is wrong,” says Sugihara. “It doesn’t fit nature or reality.”

Imagine, he says, a 1000 Kg fish in an aquarium. Feed it more, and it gets fatter. Feed it less, and it gets thinner. The population (of one) is stable. But put 1,000 1kg fish in that aquarium, and food shortages could result in the deaths of hundreds, because the small fry have less stored body fat—and therefore cannot ride out a short famine. Food abundance does not necessarily mean all the fish get bigger, either; it could en­courage reproduction and a population boom—which might in turn overwhelm the food supply and lead to another bust. It is an unstable system. “That’s the reality of fisheries, of economies, of a lot of natural systems”.

But this instability is not understood by people who run fisheries, Sugihara insists. By law they manage fisheries for “maximum yield.” The notion that such a maximum yield exists implies that fish grow at an equilibrium rate and that the harvest can be adjusted in accordance with that growth to keep yields stable. In contrast, Sugihara sees fisheries as a complex, chaotic system, akin to financial networks.

The practical implications of Sugihara’s work are clear. Current fishing regulations usually have minimum size limits to protect smaller fish. That, Sugihara maintains, is exactly wrong. “It’s not the young ones that should be thrown back but the larger, older fish that should be spared,” he explains. They stabilize the population and provide “more and better quality offspring.”

Most regulations consider each species—sardines, salmon or swordfish—in isolation. But fishing, he says, is like the stock market—the crash of one or two species, or a hedge fund or mortgage bank, can trigger a catastrophic collapse of the entire system. 

Hence we need to work on new kinds of fisheries management schemes. One is the notion of tradable “bycatch” credits. Bycatch refers to the turtles, sharks and other animals that fishing fleets do not seek but catch accidentally. In the tradable bycatch credits plan, fishing boats could be allocated a certain number of credits. As they used those credits, they would need to stop fishing or buy more credits on the open market. As the bycatch increased, the number of outstanding credits would fall, and their price would increase. Fishing boats would thus have financial incentive to minimize their bycatch—because by doing so, they could keep fishing longer.

He has set the Ocean Resource Exchange hoping it will provide an incentive to preserve fish stocks that doesn’t rely on a detailed understanding of complex biological systems, and instead taps into people’s baser instincts. “Show them how to make more money,” he says. The first derivative is likely to be a futures contract for a certain percentage of a fisherman’s catch at an agreed price at a specified time. Another planned derivative is an instrument for trading fish quota allotments, called an ‘individual transfer quota’. “Essentially, these are tradable poker chips or options for fishing rights,” Sugihara says.

Fishermen and investors could hedge their bets, which should reduce the tendency for catches to swing between boom and bust, and give all stakeholders a tangible financial incentive not to cheat and plunder the ecosystem for the maximum short-term return. The motive here is public service,” he says. “I think we can use market forces for conservation.”

Sources: here and here