The Usual Mistake

The financial world gave scant attention to the passing of Murray Gell-Mann last May at the age of 89.

Gell-Mann was a Nobel Prize winning physicist known for, among other things, discovering and naming the quark. While the quark has little to tell us about financial markets, some of Gell-Mann’s later work with the Santa Fe Institute has more to say.

I first heard of the Santa Fe Institute through the novelist Cormac McCarthy. In 2007, McCarthy granted a rare interview with Oprah Winfrey, his first ever on-screen. McCarthy agreed to do the interview on the condition that it be held in the library of the Santa Fe Institute, in order to help SFI gain wider exposure.

Around that same time I had discovered Michael Mauboussin, chief investment strategist at Legg Mason, as he wrote a series of books about investor and market behavior. Mauboussin, it turned out was also a member of the Santa Fe Institute. Fast forward to 2019, and he serves as SFI’s chairman of the board.

SFI was founded way back in 1984, with Murray Gell-Mann as its first chairman. In a 2007 article in Rolling Stone, David Kushner wrote:

SFI took over an old convent in the heart of Santa Fe, filled it with renaissance thinkers and began forging an emerging science called complexity. It’s the study of the complex systems behind our livesfrom climate patterns to human societiesand how they evolve and adapt. By uncovering these systems and the agents that propel them, Gell-Mann and his colleagues reasoned, we can better understand the dynamics of life itself.

Kushner calls SFI “a sort of Justice League of renegade geeks, where teams of scientists from disparate fields study the Big Questions: Why financial markets crash. How terrorist cells form. Why viruses spread.”

Out of this work came the concept of the complex adaptive system. By nature it is a concept that crosses disciplines, tying threads together from the physical sciences, mathematics, and social science.

This is how you end up with a physicist (Gell-Mann), a novelist (McCarthy), and an investment strategist (Mauboussin) under the same roof as an army of biologists, linguists, and paleontologists, all working on the same problem.

In 2012, I attended a conference SFI hosted at George Mason University titled “Complexity & the Global Financial Crisis.” Most of what I heard was laughably over my head, though Mauboussin’s evening keynote has stuck with me ever since.

SFI hasn’t yet cracked the code on complexity, or “solved” the sticky problem of why markets crash. If they did, you’d know about it. But their work is pushing towards a better understanding of what drives markets, and how the whole can emerge as greater than the sum of its parts.

While complexity and the work of SFI is not easily summarized, Shane Parrish at Farnam Street effectively uses traffic as a metaphor to illustrate a complex adaptive system.

A car, while certainly a complex instrument, is not adaptive. Take away the rear passenger side wheel, and you’re stuck. The back bumper can’t adapt to solve the problem by morphing into a wheel to get moving again.

However, a collection of cars moving about in traffic is a pretty good model of an adaptive system. The components of the system (the drivers) are interacting with each other and adapting their behavior based on how others around them are behaving. Parrish explains:

The key element to complex adaptive systems is the social element. The belts and pulleys inside a car do not communicate with one another and adapt their behavior to the behavior of the other parts in an infinite loop. Drivers, on the other hand, do exactly that.

In traffic, if drivers see a car on fire in the right lane, they’ll slow down and move left, adjusting their speed and route. The traffic pattern as a whole adjusts, and the individuals in the system adjust their behavior to the new pattern.

The stock market, like traffic, is a complex adaptive system. The individual participants continually adjust their behavior to that of other participants in the market. This changes the market as a whole, which triggers a new set of reactions by the individual participants.

Over and over again, in a constant feedback loop.

But, curiously, when it comes to investing, while we certainly adjust our behaviors based on what others are doing, we don’t always do it efficiently. If investors see that the market is down or hear that a neighbor liquidated their portfolio, they find it difficult to steer clear to avoid the damage. In fact, more often than not, they douse themselves in gasoline, throw themselves onto the fire, and then try to convince their friends to join them.

The Santa Fe Institute hasn’t yet figured out how to stop us from steering into trouble in markets. But the work of Murray Gell-Mann and his successors is shining a light on the importance of behavior on market returns and volatility.

Murray Gell-Mann did leave (indirectly) one piece of wisdom for investors on how to better control their behavior and steer clear of danger in a difficult market.

Years ago, he was name dropped in a talk by Michael Crichton. Yes, that Michael Crichton, the author Jurassic Park. Crichton writes that,

Briefly stated, the Gell-Mann Amnesia effect is as follows. You open the newspaper to an article on some subject you know well. In Murray’s case, physics. In mine, show business. You read the article and see the journalist has absolutely no understanding of either the facts or the issues. Often, the article is so wrong it actually presents the story backwardreversing cause and effect. I call these the wet streets cause rain stories. Papers full of them.

In any case, you read with exasperation or amusement the multiple errors in a story, and then turn the page to national or international affairs, and read as if the rest of the newspaper was somehow more accurate about Palestine than the baloney you just read. You turn the page, and forget what you know.

Crichton goes out of this way to note that this isn’t a real, scientifically observed effect. But, by using Murray’s name, “I imply greater importance to myself, and to the effect, than it would otherwise have.”

This lesson is particularly important in the social media age, where anyone can publish instantly and assume an air of authority. If we find the content posted online and on social media to be completely deluded about politics, conspiracies, and the like, what makes investing opinions any different?

Why should we adjust our behavior in response to unreliable narratives and flawed feedback?

“I discover myself on the verge of the usual mistake,” Walt Whitman wrote, in section 38 of “Song of Myself.”

We would be wise to remember Whitman’s words in the context of the Gell-Mann Amnesia effect the next time markets, and headlines, are on fire.

The stock market is a complex adaptive system with millions of individual participants, in competition with billions of dollars’ worth of computer algorithms, trading trillions of dollars’ worth of shares.

What is the likelihood that all this activity is easily predicted? Can short gyrations be reduced to the simple cause-and-effect narrative we see in most headlines? And why should it matter to any one person?

We can choose to forget the nonsense we’ve read in the past, and throw ourselves into the blaze. Or we can ask ourselves if what we’re hearing makes sense, if it matters to us personally, and how we might steer clear of “the usual mistake.”

We would do well to heed Whitman as he closes section 38 of “Song of Myself” by imploring:

…continue your questionings


Murray Gell-Mann obituary by George Johnson, New York Times

An Introduction to Complex Adaptive Systems by Shane Parrish, Farnam Street

Michael Mauboussin on the Santa Fe Institute and Complex Adaptive Systems, Compounding My Interests

Cormac Country by Richard B. Woodward, Vanity Fair

Cormac McCarthy’s Apocalypse by David Kushner, Rolling Stone

Leaves of GrassWalt Whitman

All The Pretty Horses, Cormac McCarthy

Presented by Christopher Rivers, CFP®, CRPC®