Fingers of Instability & Glimmers of Hope -- An Explanation

This is Our Man’s way of (exceptionally broadly) applying the concepts of Bak-Tang-Wisenfeld’s sandpile model to how he thinks about investing. While Our Man has no physics background, he’s stumbled across various descriptions of the game (most clearly in “Ubiquity” by Mark Buchanan, which he recently re-read), and found the idea fascinating and most helpful as a discipline in thinking about the world.

So what’s the idea and what does this have to do with investing?
Bak, Teng & Wisenfeld model stems from their investigations into the instability of complex systems, and their discovery was that these systems tended to naturally arrive at a “critical state”, after which any sand grain landing in the wrong spot can start an avalanche. Furthermore, the size of the avalanche is the result of a domino effect – how unstable was where the grain landed, and did the resulting slide cause grains to move over other unstable spots thereby creating more slippages, etc. Clearly the number and size of the “fingers of instability” that are impacted (primarily, and as an after-effect) by that falling grain of sand will play a key role in determining how large the eventual avalanche will be.

Fascinatingly, Bak-Teng-Wisenfeld discovered a mathematical property connecting the number of grains involved in an avalanche and the frequency of an avalanche of that size. Simply put, if you doubled the number of grains involved in an avalanche it becomes about 2.14x as rare. Moreover, the presence of a power law, critical state, and fingers of instability appears to be more widespread; for example, in Ubiquity, Buchanan talks about how similar properties are found in the size of earthquakes, forest fires, scientific paper citations (as a proxy for “new” scientific ideas), deaths in wars & last (but not leastly) stock price fluctuations (though Benoit Mandelbrot deserves a big nod for his works on that specific topic, but Our Man shall leave that for another time).

As such, in an attempt to impose some discipline over his thought process, Our Man hopes to jot down some of the Fingers of Instability (that could drag stock markets downwards) and Glimmers of Hope (that could drag it upwards) to: help him remind himself what he was worried about at the start of each year, to provide a guide of things to keep an eye on during the year, and to look back on in futures and see what he missed & why. It should be noted that these lists are absolutely 100% NOT predictions (it’s a mug’s game) but are things that Our Man is watching out for, worried about, or hoping for – if other people call something a “Black Swan” (something, along with 20-standard deviation events, that Our Man doesn’t believe in) and it’s not on Our Man’s list, he just missed it…