“It is not often that a man can make opportunities for himself. But he can put himself in such shape that when or if the opportunities come, he is ready.” – Theodore Roosevelt
Apparently we can learn a lot from sand piles.
Some years ago three physicists studying at the Brookhaven National Laboratory on Long Island, New York, developed a computer program that would “build” virtual piles of sand. Their goal was to observe and learn about the behavior of so-called “non-equilibrium” systems—that is the many complex and unpredictable schemes that surround and interact with us every day. Things like weather patterns, ecological systems, global markets, ocean currents, etc.
The program was designed to build each sand pile in a deliberate and methodical fashion, stacking one grain at a time and then observing the results.
One might assume some sort of pattern-like behavior would have emerged, i.e. a typical size or average number of grains would increase the likelihood of a change or collapse in a given sand pile.
But this was not the case.
On the contrary, each time the experiment was run the results were completely unpredictable. After thousands of tests—with millions of grains of sand—they observed no patterns, no typical number required to trigger a system collapse. Sometimes it was a single grain, others 10, 100, or 5,000 grains.
Still others involved massive mountains of sand incorporating millions of grains that would collapse in a single and seemingly random onset of failure.
In other words, literally anything, at any time, might occur. This kind of stuff sticks with me when I think of the markets—and positioning portfolios.
In an attempt to gain some insight into the cause of such unpredictability in their sand-pile game (or in an effort to assign some order to the disorder they observed) the scientists pushed the experiment further.
They then looked at the virtual sand pile from above, and they color coded its regions according to steepness, with relatively flat areas green and steeper sections red.
In the beginning, the piles were mostly green of course (though they would still shift and collapse periodically), but as the experiment progressed and some of the piles grew, more red areas would infiltrate.
For the largest piles, a dense skeleton of red spots coursed throughout. They called these patterns “fingers of instability.” Now the physicists had some insight into the peculiar behavior of their piles.
What they could observe is that the greater the number of interconnected red spots in the pile—or fingers—the greater the intensity of a systemic collapse.