Never Bet Against Nature

Romain/ juin 19, 2020/ Finance, Science/ 2 comments

“We have control over when, how, and where to plant a seed. Not over what it will become”.

Mokokoma Mokhonoana


There is nothing new here, but humankind has always suffered from anthropocentrism. If we refer to the Wikipedia page, anthropocentrism can be defined as “the belief that human beings are the most important entity in the universe”.

While a majority of people on Earth would laugh at the religious authorities of the early 17th century condemning Galileo’s work in astronomy, it is unclear whether people would be comfortable or not with recent findings in fields like physics, biology, computer sciences, and even social sciences, as it becomes more and more evident that all aspects of human life are just the subproduct of nature and that we should not try to break its laws.

1. Covid-19 Pandemic

Coronavirus crisis has sounded a warning to the world, reminding that we form a complex system characterized by criticality, avalanches, and power-tailed distributions. In my opinion, the best book to learn more about those concepts is How Nature Works by Danish physicist Per Bak.

As people like Nicholas Nassim Taleb have said, there are both necessary and unnecessary measures when dealing with such an epidemics risk. Nevertheless, if a country refuses to adopt necessary measures to limit the spread of a virus, then big troubles lie ahead as long as no vaccine is available.

2. Climate Change and Species Extinctions

Another property of self-organized critical systems, like human networks or biological life, is the fact that risk cannot be eliminated. It can just be transferred.

Humankind has recently realized that homo sapiens have dramatically impacted life on Earth. What is more, we might be on the verge of a huge environmental change, impacting nothing more than climate, natural resources and almost every biological specie.

However, there is no simple solution to handle this problem. We are facing a choice between two types of risk transfer.  On the one hand, we could decide to change the way we live and go back to an old way of life, with less negative externalities. But we would have to face economic and political chaos. On the other hand, we could bet on technology to drive changes. But from a biological perspective, it might be just a temporary solution, as even bigger problems are very likely to arise afterward.

3. Money Printing and Markets Euphoria

In economic terms, the pandemic has led to more debt and more quantitative easing in order to save a system on the verge of collapse. Besides, leaders are also talking about new debt issues to finance so-called green revolution. Thus, it is all about debt.

Once again, in a self-organized system like the economy or capital markets, risk cannot be eliminated, it can just be transferred. And this is exactly what is happening. Authorities are trying to eliminate a bankruptcy risk, but by doing so they are creating an even bigger risk for markets and the economy.

I am currently working on a concept that I would call swarm intelligence singularity. In my opinion, capital markets are not efficient, but are driven by narratives. When a narrative becomes dominant, markets tend toward swarm intelligence, exhibiting a macro-behavior. But such a state is a singularity and markets are vulnerable to any shock that would result in a brutal volatility spike.

In other words, if you encourage people to take more and more risk, then you might eventually succeed in forcing all bears to capitulate. But what happens next? The market will rely on one single opinion and thus will tend toward swarm intelligence singularity.

Therefore, the natural outcome is a severe reversal. Of course, people are free to believe that “this time is different”. But this is how nature works, and we do not have the power to change it.

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  1. Hi. Great website – bookmarked! You should really take a look at work by Prof. Andrew Lo, regarding the Adaptive Market Hypothesis. He tries to explain both systemic and idiosyncratic risks, in financial markets, through the lenses of evolution and adaptation. He also has an interesting take of how narratives develop, (a sort of mind-heuristics approach to memory) and how they are selected, reinforced, and spread through society. I believe you are onto something. Are we close to another Minsky moment?

    1. Thank you very much for your comment.

      I have read the paper on the AMH, and you’re right it is a very interesting approach. I think that the concept of memes is also relevant to explain how narratives spread among investors (Blackmore S. The Meme Machine), just like cultures, religions or ideologies.

      I do believe that we are close to another Minsky moment. Markets are only driven by the perception that assets can only go up. It is what I call « the Fed Put narrative ». This narrative has become so dominant that the market displays a macro-behavior, which is not a good sign from a statistical perspective.

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