Written by our Director of Equity Advisory, Jeremy McKeown, the HyperNormalTimes provides in-depth and considered long-term commentary on major macroeconomic and market-shaping themes.

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January 4, 2021

Complex Adaptive Systems, Fat Tails & Fell Running


The Christmas and New Year break is often a good time to indulge some new reading material. My book of choice this year was a Bill Gates’ recommendation from a couple of years ago, Origin Story by David Christian. Christian is the originator of the study of Big History, an attempt to synthesize the history of humanity, the known World, the universe and the nature of our cognition. It takes history back to its origin, 13.8bn years ago (give or take a split second). Christian divides the entirety of what the universe knows about itself into a series of discrete thresholds. The history of everything, by bullet point. These are the defining moments of how we have arrived into the position of being the only part of the universe, that we know of, that is aware of its existence. These thresholds are the events responsible for the formation of stars and our solar system, the formation and evolution of life on earth, humanity, the adoption of agriculture, the structure and evolution of our knowledge and our interconnected journey to the present day. It is a powerful narrative and a valuable reminder that certain unintuitive concepts have perpetuated and played critical parts in shaping our reality and that these factors will continue to help us form a better understanding of where we are heading. Clearly a book looking at the broad sweep of history from the beginning of time to the present is unlikely to give us any insight into how the world might look over the coming 12 months, but as helicopter views go, it does inform us strategically about how we should think about the journey the world is on and how we might position ourselves ahead of it.


My takeaways from The Origin Story are that: we are surrounded by a world of complex adaptive systems (the human body and the earth’s biosphere are both examples); our existence is based around fat tail probabilities; obliquity and serendipity play powerful roles; and energy and information flows are both critical factors in continued human development. I think all these factors are important when it comes to investment strategy and taking a long term view of how to be on the right side of Big History.


Our success as a species is based around our ability to build models of the world around us. In the early days life forms (our ancestors) evolved very basic and simplistic models (approximations and rules of thumb we today call algorithms) that improved the chances of survival. As our ancestors evolved to move around in an uncertain world survival depended on the ability to evolve more sophisticated models of reality with a far greater array of sensors connected to smarter controllers. As we came down from trees and explored new environments, we needed more and more brain power to help us adapt. We had to distinguish lions from antelope, nutritious fruits from poisonous berries and understand how different things feel and sound. This journey biased survival towards those with larger cognitive capacity. We and most of everything  around us has evolved from a simpler form of itself. Not just living organisms but emergent phenomena such as families, legal systems, computer systems, political systems, markets, and companies. (See Matt Ridley, The Evolution of Everything for more details).


To understand our reality we need to think about complex adaptive systems. While this might sound obvious, it is not the preferred convention we tend to adopt in trying to understand the investment world we inhabit. For this we tend to use static equilibrium analysis with linear growth assumptions based on normally distributed outcomes. In a reality that is changing at an accelerating pace on multiple planes, this framework is increasingly parochial and unhelpful. The world we inhabit and invest in is increasingly complex and interdependent and one where the distribution of returns is unequal and the constraints we operate under are liable to abrupt change.


The nature of the universe is one of incredibly heavily skewed distributions. Take matter (I will leave antimatter in the difficult box for the moment). Collections of dense matter (such as our planet) are incredibly unusual things. Planet Earth is a freak occurrence in a universe that is almost exclusively an empty void. Upon this freakish occurrence one must then consider the conditions that have allowed life to evolve, first at a basic level and ultimately to a level that has allowed for all the current variants of shared human cognition to develop (from philosophy to astrophysics to pilates). The end point we know as today’s reality is the outcome of a succession of billions of failed alternatives and dead ends. The history of the our existence is one of defying a succession of odds that have been stacked against us.


The investment conclusion is that successful innovation is insanely difficult, almost impossible by definition and the gains are heavily skewed in favour of those who manage to pull it off. While we are trained to think in terms of a “normally” distributed classic bell curve of outcomes around a mean, the reality is that life is full of fat tail distributions where the winners aren’t just the tallest in the class, but so tall they are taller than everyone else added together. The wealth of Jeff Bezos, the popularity of Google, the value of Tesla are all examples of fat tail outcomes of the recent past. The success of the nation state as a unit of human organisation over the last 2000 years and the success of eukaryotic cells over other life forms in the last 2bn years, are more enduring examples.


The narrative of Big History is not one of smooth progression and certainty of direction, let alone outcome. In fact it is, according to Christian, a punctuated continuum with 8 delineated thresholds. We and our modern day complex world are the result of a massively prolonged but interrupted journey to survivorship. We have benefited from the long term operation of survivorship bias. However, we usually prefer to fool ourselves that the random events that got us here were in some way pre-ordained or inevitable.


50m years ago things were looking pretty good for the dominant life form on this planet. Things had moved quickly in the previous 100m million years or so and replication was mainly predicated on energy efficiency, thus survival and success closely correlated to physical size. The dinosaurs ruled supreme and became enormous, but never had a requirement to use much of their valuable energy by developing energy intensive cognition. However, unknown to the dinosaurs, all was about to change, not because they weren’t clever, but because they were unlucky. A huge asteroid impacted earth and the resultant inferno wiped out 50% of all life, including all of the dinosaurs and gave a massive competitive advantage to the much smaller, more cognitively adaptable mammals, who could now start to move out from their hiding places. If the living beings in this era were investment opportunities the dinosaurs would have seemed like unbeatable long term bets. However, life’s environmental constraints changed. There was a huge and unkowable exogenous shock. The critical replicating factor that determined survival turned from energy efficiency (brawn) to cognition (brain). But it is worth bearing in mind that homo sapiens weren’t even in the race, we had to wait another 47m years to get involved.

So, what are the investment insights from all this?

1. Complex adaptive systems are not predictable or forecastable. They evolve, often from unlikely and unexpected beginnings. Companies and organisations might appear to be relatively stable and slow moving from a parochial perspective but evolution and adaptation operate continuously and relentlessly over the longer term.

2. Real long term winners are very rare and are extremely unevenly distributed. Competitive advantage can endure over time but the forces of entropy and organisational phase change are ever present threats, providing often unexpected opportunities for others.

3. The returns to success often accrue on a winner takes all (or nearly all) basis. Innovation is insanely difficult to execute. By definition it requires the protagonist to know something about the world that no one else does and have the ability to execute the plan against the tide of the “consensus” view.

4. The constraints within which things replicate and thrive change, sometimes abruptly. Climate change and the Global Financial Crisis could be respectively the asteroid moments for Big Oil and Big Banks, while the COVD-19 virus may well be a critical adaptive moment for programmable vaccines and bioengineering.


Overall, while this early period of 2021 can be seen in a gloomy context of mutating viruses and further lockdowns, the reality is we are past the worst of this pandemic. The lasting impact of 2020 will be in terms of the development of our ability to solve problems and become more efficient at what we do. Every company I have spoken to in the last few month have told of unexpected ways the lockdown has driven better ways of doing things. Minds have been opened, experiments have been undertaken and unexpected outcomes have emerged. Widespread and sustained incremental improvements can deliver a big aggregate result. Productivity growth that has eluded us for a decade or more maybe on the verge of coming through for us as we are all forced to adapt to the new constraints in our everyday lives and apply known technology to an increasingly widespread variety of activities.


One interesting example of this caught my attention as reported in the Times last week. The community British fell runners has spent many man hours over the last decade deriving the optimal route to run the 214 Lake District peaks over the shortest distance. The 512km route with 36000m of climbing has been completed in 6 days and 6 hours. However, the recent application of a standard machine learning algorithm by a group of physics students has shortened the route by 14% after being fed geospatial data and learning how quickly fell runners can move and how much energy they expend over different gradients and terrain types. One of the runners, who has spent a lot of his spare time solving this problem, was stunned by the speed and accuracy of the result said “the problem is you change one thing in the route and it’s a domino effect and everything else changes. I would have to spend two to three hours a week for six months redrawing the route on a computer to work out how long a slight tweak would change the time but now they have the algorithms they can put in all the peaks and find out instantly.” Fell running might not be about to change the universe or our understanding of ourselves, but the application of AI to a wider variety of our human derived problems should be cumulative and dramatic.

Here’s to the roaring 20s.



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