Ubiquity, Complexity, and Sandpiles

“How did you go bankrupt?”
“Two ways. Gradually, then suddenly.”

―Ernest Hemingway, The Sun Also Rises

Change happens quickly and, often, unpredictably. And as we will see, the unpredictable part is actually a mathematical principle. As in the Hemingway quote above, not just bankruptcy but change also happens slowly and then, seemingly, all at once. It’s time passing without change that causes the worst problems, including some historic economic catastrophes. It turns out we shouldn’t just accept change; we actually need it.

Last week, I said we would skip this letter since I’m fishing with friends at Camp Kotok. But over the weekend, I realized it would be a perfect opportunity to repeat part of a letter I originally wrote in 2006 and have referred to several times. It is the single most-read letter I have written and the most commented-on, too. I consider it, in some ways, my most important letter. You should read it again if you’ve read it before. I have updated it a little bit, but the principles are timeless.

I’ll be quoting from a very important book by Mark Buchanan called Ubiquity, Why Catastrophes Happen. I HIGHLY recommend it if you, like me, are trying to understand the complexity of the markets. The book isn’t directly about investing—although he touches on it—it’s about chaos theory, complexity theory, and critical states. It is written so any layman can understand—no equations, just easy-to-grasp, well-written stories and analogies.

Here’s that story with some new comments and thoughts afterward.

Ubiquity, Complexity Theory, and Sandpiles

As kids, we all had the fun of going to the beach and playing in the sand. Remember taking your plastic bucket and making sandpiles? Slowly pouring the sand into ever bigger piles until one side of the pile starts to collapse?

Imagine, Buchanan says, dropping one grain of sand after another onto a table. A pile soon develops. Eventually, just one grain starts an avalanche. Most of the time, it’s a small one. But sometimes, it builds up, and it seems like one whole side of the pile slides down to the bottom.