It was 99 years ago today, on the morning of June 28, 1914, that Archduke Franz Ferdinand was assassinated by Gavrilo Princip in Sarajevo — an act that became the cause of World War I. Princip’s capture is shown in the photograph, right. As recounted in Mark Buchanan’s terrific book, Ubiquity, the shooting came about because the driver of the Archduke’s car made a wrong turn off a main street and into a narrow passageway, pulling right in front of Princip, a member of the Serbian terrorist organization Black Hand. Princip recognized the passengers, drew his pistol, and shot the Archduke and his wife dead.
The resulting chain reaction proved catastrophic. Austria began planning an invasion of Serbia. Russia guaranteed the Serbs protection. Germany offered to help Austria if Russia jumped in and so on. World War I was on.
By the time the War ended five horrific years later, ten million people had died. Multiple competing narratives have since been offered as to why the War broke out. But beforehand, no experts were predicting an imminent conflagration of global proportion. The favored narrative at the time — a future of peace governed by reason — was shown to be dreadfully and cruelly false.
The obvious lesson here is a familiar one to regular readers. We humans are truly lousy at forecasting the future. But we are terrific at concocting post hoc narratives that make the events at issue seem inevitable. Our problem in this regard is, of course, the narrative fallacy.
But a less obvious lesson is at least equally important. We tend to think that big consequences demand big causes. But they don’t necessarily. Causes can be minor and even random. A wrong turn by the Archduke’s driver precipitated the First World War. The enormous wildfires that plague us here in southern California can explode from a single spark. Much of our world is poised on the edge on instability This critical state makes us potentially susceptible to disaster from even a minor disruption. Chaos and complexity reign.
Markets also exhibit the kinds of behaviors that might be predicted by chaos theory — dynamic, non-linear, sensitive to initial conditions. Even a tiny difference in initial conditions or an infinitesimal change to current, seemingly stable conditions, can result in monumentally different results (remind the economists that equilibrium theory is dead dead dead). Thus markets respond like systems ordered along the lines of self-organizing criticality – unstable, fragile and largely unpredictable – at the border of stability and chaos. As shown below, a single grain of sand dropped on a big sandpile can (but won’t predictably or necessarily) cause a catastrophic avalanche.
A spark on a hillside can lead to a raging inferno. A small nudge to a single molecule inside a balloon will result in every molecule inside that balloon reacting in well less than a minute. A piece of straw can break a camel’s back. A wrong turn in Sarajevo can lead to world war. Ninety-nine years ago today, it did.