Get Rich Quick By Going On A Nature Hike
Legend has it that Isaac Newton’s groundbreaking work
on the laws of motion was inspired by an apple falling on his head. The
story sounds apocryphal, but the great man’s contemporary biographer dutifully
recorded questions sparked by his friend’s encounter with nature. “Why
should that apple always descend perpendicularly to the ground?” Newton asked.
“Why should it not go sideways, or upwards? But constantly to the Earth’s
center?” The answers to these questions proved powerful enough to calculate to
a useful degree of accuracy the movement of everything from a small apple to
the planets themselves.
There is value, then, in taking a bit of time to appreciate
nature. In fact, it can even be a great way to boost one’s net worth, as the
natural world is as much an inspiration in finance as it is in scientific
pursuits.
The ecology of
banking
That concept was put to the test not so long ago by a pair
of Englishmen inspired by the natural world. The Lord May of Oxford, an
ecologist and former Royal Society president, teamed up with Andy Haldane, the Bank
of England’s chief economist, to see if they could come up with a complex financial
model after observing the world around them.
Though written a decade ago, the paper has extra relevance
today, as the authors wondered whether an understanding of the effects of a
“super spreader” contagion in nature could assist in developing public policies
that would guard against systemic flaws that spread financial contagion.
The idea wasn’t to derive a fully baked financial strategy
simply by standing outside and receiving a bit of inspiration. Rather, the
point is to see whether an analysis of natural effects offers a perspective
that’s useful in a finance, a profession where discoveries are typically made by
individuals staring at spreadsheets on computer monitors.
The
investigation took place in the wake of the 2007-2008 banking system meltdown,
and so it reflects their recent experience with that disaster. They found existing
theories failed to adequately explain the propagation of shocks and instability
within a financial system. With the interaction of the choices of millions of participants
around the world, each operating with their own sets of motivations, the
financial world is a phenomenally complex adaptive system — just like the
natural world, which consists of millions species interacting with one another.
The actions of a single investor or a single financial
institution create a ripple effects that can help or hurt multiple investors
and institutions. No investment takes place in a vacuum. In epidemiology, the
same is true. Someone infected with a disease like Covid-19 can infect friends,
family and random strangers simply by interacting with them. Most epidemics can
be traced back to a “patient zero” who spread the contagion to susceptible
individuals creating a ripple effect throughout society.
Financial shocks propagate through the banking system in a
way that’s similar to how a virus spreads. The banking system relies on a
complex series of interactions between financial institutions. For it to work,
banks must make short-term loans to one another so that everyone always has the
capital reserve needed to operate.
In this highly simplified example, a single failing bank can,
in extreme circumstances, drag down multiple institutions with which it does
business. Imagine you ask for your money back after putting $1,000 in a hypothetical
bank in which you’re the only customer. Your money isn’t put in the vault for
safekeeping. Instead, about $100 is put in reserve so the bank can use the rest
of your funds, $900, to make loans or other investments. When you come in to
reclaim your $1,000, your bank will simply borrow $900 from another bank, Bank
B, through a short-term loan.
Banks flush with cash are happy to oblige since they collect
interest for a…
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