"Investors should recognize the market as a complex adaptive
system. Complex means there are lots of investors within the system. Adaptive means investors
change their decision rules in response to market conditions. And system means the whole is
greater than the sum of the parts””prices emerge from the interaction of the investors within it.
Complex adaptive systems are everywhere in natural and social systems.
The "wisdom of crowds" is a colloquial way of describing the market as a complex system. The
work on wisdom of crowds shows that when certain conditions are met””diversity, aggregation,
and incentives””markets tend to be efficient. Conversely, when one or more of those conditions
are violated, markets can and do become inefficient (i.e., price is no longer an unbiased reflection
of value).
For a host of social psychological and sociological reasons, diversity is the most likely condition to
be violated.
what’s essential to recognize is the relationship between diversity breakdowns and asset price
performance is nonlinear. Diversity can be on the decline as the asset price rises, which makes
the market fragile. Like a rubber band that’s stretched, the tension builds and the inevitable
snapback is often painful.
Considering the market as a complex adaptive system allows us to understand the mechanism by
which prices are set. While many questions remain unanswered, we can look to three
conditions for guidance for how well the market is functioning. Further, we can see why most
large market moves are internal to the system (endogenous) versus external factors imposed on
the market (exogenous).
Our estimate is 80 percent of the market’s largest moves in the past 60
years are attributable to endogenous activity."
London Bridge Is Swaying ‘Round
On June 10, 2000, the Millennium Bridge opened to the public with great fanfare.
London’s first bridge across the Thames in over a century, it had a sleek design””the architect wanted it to look
like a “blade of light.” 9 However, when thousands of people stepped on the bridge that day, it
started to sway from side to side so much that people had to stop or hold on to the rails.
Fearing
for the public’s safety, officials closed the bridge two days later and, following a retrofitting, it
reopened in February 2002.
What led to this high-profile failure? People exert a small amount of lateral excitation when they
walk. Normally, these excitations cancel out when a group crosses a bridge. However, the
Millennium Bridge initially had insufficient lateral dampeners, which allowed a little swaying when
a sufficient number of people were on the bridge.
That swaying forced people to change their gait
by widening their steps, leading to greater lateral excitation and more swaying. The wobbling and
crowd synchrony emerged simultaneously.
The crucial insight is the existence of a critical point. Simulations show that roughly 165 people
can walk on the bridge with little impact on the wobble amplitude.
But adding just a
few more pedestrians causes the amplitude to change dramatically, especially as the feedback
between gait adjustment and wobble amplitude kicks in . For the
first 165 bridge crossers, there’s little wobble and no sense of any potential hazard even though
the bridge is on the cusp of a state change.
You can imagine testing the bridge with 50, 100, or even 150 people. The harmful wobble lies in
the wait, outside of your awareness.
The large-scale outcome is due to the internal workings of
the system””people walking””not from some external shock.
What does Synchrony bring about ?
Tops and Bottoms
What characteristic makes Tops dangerous ?
What characteristic makes Bottoms Safe ?
The hint of the answer is found on the millennium bridge..
And with our 19th century Tape readers.
And the above discourse from---Michael J. Mauboussin
Tops and Bottoms
and then the question of scale,
and character.
Diversity declines steadily, even as the asset price rises.
As the asset reaches a short-term price peak, diversity is at its lowest. This is an example of
invisible vulnerability, similar to what we saw with the bridge.
And where is diversity greatest ?
At the ( real ) bottoms
In the Tape readers language
The BASE.... A
Foundation is built from diversity or where the diversity arises.
Where the work is done...
This not the same as "on the way down"
Bubbles and Anti Bubbles
motorway