08 October 2025
In a striking analogy, Drew Estes maps the competition among companies for capital onto the biological contest for mates. His premise? Just as animals evolve traits to appeal to potential mates, firms evolve traits to appeal to investors. But those traits — “ornaments” rather than fundamentals — can lead to misallocations in markets.
Financial selection as a filter
Estes defines financial selection as any capital allocation decision, making investors the gatekeepers of capital flows. Over time, firms adapt their behavior and signaling to appeal to prevailing investment criteria. When many investors prize the same traits, capital floods toward firms that project those traits—even if those firms are not fundamentally the fittest.
In parallel, consumer selection (i.e. customers choosing products) shapes which firms survive in the marketplace. Ideally, financial and consumer selection align — capital backs firms that create lasting value. But sometimes, investor preferences deviate from consumer realities, and financial flows reward style over substance.
When style dominates substance
Biological theorists debate whether mate selection is fully nested within natural selection or can run independently. Estes argues financial selection is similarly quasi-nested: under certain conditions, investor preferences may dominate before consumer feedback corrects course.
He invokes the “peacock’s train” example: an elaborate tail signals fitness, but at some point, the ornament can become excessive, attracting predators without adding real value. In markets, traits like extravagant sustainability branding or flashy acquisitions may attract capital, even if they detract from long-term performance.
Herding, preference cascades, and the risk of seduction
Because investors not only seek value but also want to appeal to other investors, a herding effect often emerges. Estes references Keynes’s metaphor: professional investors may choose not what they love, but what they think others will love.
This leads to an arms race of traits. As more firms adopt a given “Green” or “growth” signal, the trait must escalate to remain differentiating, amplifying distance from underlying performance. Passive allocators, reacting mechanically to flows, often magnify this loop.
Practical implications for investors
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Ask whether a trait is substance or seduction. Are firms adopting changes because capital demands them, or because those changes create durable value?
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Resist herd impulses. Prioritize differentiation grounded in fundamentals over predictable momentum.
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Look for lagged correction. Consumer selection may eventually punish shallow strategies, but with delay. Prudent investors should prepare for that correction.
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Diversify behaviorally. Maintain allocations to those focused on long-term viability amid a landscape of seductive but shallow bets.
Estes’s essay doesn’t reject investor signaling as a necessary part of markets. Rather, it cautions that when the chase for style eclipses the pursuit of substance, the system risks distortion. In those moments, survival aligns not with seduction, but with patience, diligence, and fidelity to fundamentals.
For CFA Society Italy members, this is a useful lens: in markets increasingly influenced by flows, narrative, and algorithmic momentum, staying anchored to economic fitness may be your best defense.