“Chaos is a friend of mine.” (Bob Dylan).
These are the saddest of possible words: | “Complexity, Chaos and Chance.” | Trio of disrupters, fleeter than memes, | Complexity, Chaos, and Chance. | Ruthlessly pricking our grandiose schemes, | Turning to feces our favorite themes – | Words that are heavy, despoiling our dreams: | “Complexity, Chaos, and Chance.”
“I returned, and saw under the sun, that the race is not to the swift, nor the battle to the strong, neither yet bread to the wise, nor yet riches to men of understanding, nor yet favor to men of skill; but time and chance happeneth to them all.” (Ecclesiastes 9:11).
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“Chaos is a friend of mine.”
Over 60 years ago, Edward Lorenz created an algorithmic computer weather model at MIT to try to provide accurate weather forecasts. During the winter of 1961, Professor Lorenz was running a series of weather simulations using his computer model when he decided to repeat one of them over a longer period. To save time (the computer and the model were primitive by today’s standards – those who reserved computer time in the middle of the night while holding punch cards will remember), he started the new run in the middle, typing in numbers from the first run for the initial conditions, assuming the model would provide the same results as the prior run and then go on from there.
Instead, the two weather trajectories diverged wildly.
After ruling out computer error, Lorenz realized that he had not entered the initial conditions for the second run exactly. His computer stored numbers to an accuracy of six decimal places but printed the results to three decimal places to save space. Thus, Lorenz started the second run with the number 0.506; the original run began with 0.506127. Astonishingly, that tiny initial discrepancy altered the result enormously.
Accordingly, within complex adaptive systems, a tiny change in initial conditions can provoke monumental changes in outcome. This finding (even using a highly simplified model and confirmed by further testing) demonstrated that linear theory, the prevailing system theory at the time, could not explain what he had observed.
We tend to assume that whether a particular stoplight is red or green at a given time shouldn’t change our expectation for how long our commute to work is going to take. But it can and often does – sometimes enormously.
Chaos isn’t necessarily a bad thing, the Joker notwithstanding.
But, it needn’t be an opportunity, either.
It just is.
Lorenz built upon the work of late 19th century mathematician Henri Poincaré, who demonstrated that the movements of as few as three heavenly bodies are hopelessly complex to calculate, even though the underlying equations of motion seem simple (the so-called “three-body problem”). He was thus able to make the otherwise counterintuitive leap to the conclusion that highly complex systems are not ultimately predictable. This phenomenon (“sensitive dependence”) came to be called the “butterfly effect,” in that a butterfly flapping its wings in Brazil might set off a tornado in Texas.
Accordingly and, at best, complex systems allow only for probabilistic forecasts with significant margins for error and often seemingly outlandish and hugely divergent potential outcomes. We can generally accept mild outcome differences in our models, forecasts, and expectations. But the outcomes Lorenz discovered are another matter altogether. That’s because, per Lorenz, chaos is “[w]hen the present determines the future, but the approximate present does not approximately determine the future.”
Financial markets exhibit the kinds of behaviors that might be predicted by chaos theory (and the related catastrophe theory). They are dynamic, non-linear, and highly sensitive to initial conditions. As shown above, even tiny differences in initial conditions or infinitesimal changes to current, seemingly stable conditions, can result in monumentally different outcomes. Thus markets respond like systems ordered along the lines of self-organizing criticality – unstable, fragile and largely unpredictable – at the border of stability and chaos.
Traditional economics has generally failed to grasp the inherent complexity and dynamic nature of the financial markets, which (utterly chaotic) reality goes a long ways towards providing a decent explanation for the 2008-2009 real estate meltdown and financial crisis that seem inevitable in retrospect but were predicted by almost nobody.
Migrating viruses, wildfires, power grids, telecommunication systems, global terrorist movements, markets, the weather, and traffic systems (as well as many others) are all self-organizing, complex systems that evolve to states of criticality. Upon reaching a critical state, these systems then become subject to cascades, rapid down-turns in complexity from which they may recover but which may be experienced again repeatedly.
Chaos theory only became formalized, following Lorenz, in the second half of the 20th Century. What had been attributed to an imprecision in measurement or unexplained “noise” was considered by chaos theorists as a full component of the studied systems.
Storytellers, on the other hand, have understood the fundamentals of chaos theory – without calling it that or grasping the mathematical details – for millennia (since at least Herodotus’s Histories, in the 5th Century BC). Whether we’re talking about alternate history, time travel and other science fiction stories, fantasy, video games, literary devices, or speculative history, artists have long recognized that tiny changes of fact can have enormous and far-reaching consequences.
Ringo Starr described how he came to be part of the biggest band the world has ever seen as his version of “sliding doors.”
Ironically, while chaos theory shows that a small change in initial conditions can dramatically change outcomes, what I call the stasis hypothesis holds that even enormous changes in initial conditions often don’t change outcomes very much at all. That’s because, no matter how good the opportunity, the plan, or the operation, humans are always a wildcard.
For example, there is a paranoid paradox of espionage, almost universally true, that the better the intelligence, the stupider your use of it. Again and again, history shows that “those with the keenest spies, the most thorough decryptions of enemy code, and the best flow of intelligence about their opponents have the most confounding fates. Hard-won information is ignored or wildly misinterpreted. It’s remarkably hard to find cases where a single stolen piece of information changed the course of a key battle.”
Accordingly, even though a Union corporal from Indiana found the Confederate battle plan at Antietam wrapped around three cigars and quickly transmitted the fortuitous finding to the powers-that-be, it didn’t help. George McClellan did not become a better commander with the added information and twice the manpower of his Confederate enemy. He still had “the slows” and a decisive Union victory would not come until nearly a year later at Gettysburg, with McClellan in forced retirement. In other words, our “intelligence” isn’t any more intelligent than we are.
In case you need reminding, crazy beliefs are commonplace. We may see the world, but not very clearly. We are blinded by our commitments, wishes, and a desire to b e smarter than everybody else.
Almost half of Americans think Lee Harvey Oswald didn’t act alone. Roughly one-in-four of us thinks the government is hiding aliens in Area 51 and thinks 9.11 was an inside job. About one-out-of-five of us thinks climate change is a hoax, the Illuminati secretly controls the world, and the government is using chemtrails to control us. One-in-five also thinks QAnon is a good thing and expects a biblical-scale storm will soon sweep away evil elites and “restore the rightful leaders.”
More than ten percent of us think the moon landing was faked. The ancient Greeks figured out the shape of the earth (and even its circumference) in the third century BC yet seven percent of us today aren’t sure it’s round or, more accurately, a bumpy oblate spheroid, with millennials more likely than the rest of us to think the earth is flat. Perhaps worse, 27 percent of Americans don’t accept heliocentrism.
Even more troubling is that the craziness extends beyond fringe issues to exceedingly important ones. For example, according to Fidelity Investments’ 2022 State of Retirement Planning survey, released this week, a fifth of respondents said a financial professional would recommend a withdrawal rate of 10 to 15 percent of retirement savings every year. Twenty percent of Gen Xers and 15 percent of baby boomers held this insane view.
Chaos theory makes things far less predictable than we assume. Our general inability to make sense of what is right in front of us makes reality even more opaque.
But that’s not the story we tell ourselves, is it?
Totally Worth It
Maybe there’s no connection (it might be the result of closing 875 stores in Russia, leaving valuable infrastructure behind), but McDonald’s stock started tanking right around the time rival Arby’s dropped a track dissing the Filet-o-Fish.
Feel free to contact me via rpseawright [at] gmail [dot] com or on Twitter (@rpseawright) and let me know what you like, what you don’t like, what you’d like to see changed, and what you’d add. Praise, condemnation, and feedback are always welcome.
How did Scarlett Johansson manage to lose money on a real estate sale in this market?
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This is the best thing I read this week. The funniest. The saddest. The loveliest. The craziest. The coolest. The hottest. The most remarkable. The most sensible. The most unbelievable. The most amazing. The most promising. The most powerful (especially within the context of 14,000 total Russian soldiers lost in Afghanistan over a decade). The most important. The most informative. The most insightful. The most incendiary. The least surprising. Totally on-brand. Opportunity costs. True. Golden. Flor-i-duh. How it started; how it’s going (as of today, it has been a month since Ukraine was doomed to fall within 72 hours). It’s as if this were ripped from the pages of today’s newspaper. BOOM!
Please send me your nominations for this space to rpseawright [at] gmail [dot] com or via Twitter (@rpseawright).
“The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades,” CEO and founder Larry Fink wrote in his annual letter to shareholders of BlackRock, published yesterday. The war marks “a turning point in the world order of geopolitics, macro-economic trends, and capital markets.”
The Spotify playlist of TBL music has been divided in two. A Christmas music edition has been split off from the regular version so you needn’t listen to Christmas music all year – not that that’s a bad thing. The regular TBL playlist now includes more than 200 songs and about 15 hours of great music. I urge you to listen in, sing along, and turn the volume up.
Johann Sebastian Bach was born 337 years ago this week.
This section of TBL typically features a musical benediction, but silence can sing, too.
Mr. Rogers was born 94 years ago this week. Riffing off Fred’s famous Emmy award acceptance speech, the recent Mr. Rogers movie, A Beautiful Day in the Neighborhood, shows how he used silence to inspire gratitude and love.
May we all take a moment to do likewise.
Thanks for reading.
Issue 107 (March 25, 2022)