#AncientGreeks #ActiveVsPassive #ETFs #Outliers
This question was asked by many to one of the most eclectic minds mankind has ever known, Thales of Miletus. Thales, an ancient Greek philosopher, is regarded as the father of logical deduction as he was the first to break from the use of mythology to explain the world and the universe. Instead, he proposed theories and hypotheses to explain nature. Thales used his knowledge of astronomy to accurately predict a solar eclipse that helped end a 5-year long war between the armies of the Medes and the Lydians. In the middle of battle, the day suddenly turned to night. Both generals were so frightened that they immediately signed a peace treaty, convinced that the sun returned due to their new found peace.
Despite his many remarkable achievements as a scientist, philosopher and state man, Thales was not a rich man at this point in his life. People often joked about the irony of a wiseman not being wealthy. Thales used his knowledge of astronomy to accurately predict the weather and determined that year’s olive harvest would be a very good one. He then reserved all of the city’s olive presses ahead of time at a considerable discount. When the harvest proved to be bountiful, causing demand for the olive presses to peak, he rented them out at a considerably higher price, thus making a fortune. This was the first historically known use of a derivatives market of sorts. Thales took control of all of the olive presses at a time when demand was low and therefore cheap, betting on good weather to foster a good harvest and ultimately a boom in demand for the olive presses.
Through logical deduction and astronomy, Thales not only was able to amass himself a fortune, but he also found a response for a mankind’s obsession: the future.
From the power of the stars, to praying to the gods and taking advantage of science, our level of civilization has somehow been defined by our ability to predict the future.
Some ancient civilizations developed technologies that allowed them to better forecast the weather, thus increasing the odds of their agricultural success. Other civilizations were based on heuristics encoded in myths and legends that helped them cope with the uncertainty of the future.
Today, the most successful companies are the ones using algorithms with the capability of reducing the uncertainty surrounding human behavior. But is our future dictated by the rules of large numbers? Are we condemned to be represented by an average or other statistical parameters?
In finance, the power of statistics, patterns and the idea of the efficient financial markets have served to “predict” and plan for the future. Today, passively managed funds represent 50% of the equity funds in the US. Active financial managers have to readapt their heuristics to survive the age of algorithms.
Asset Management Industry 2019. Source: Bloomberg.
However, what is most interesting about the future is not the future that we can easily predict, but the future that comes as a surprise. The eclipse prediction from Thales or his forecast of a good harvest were outliers for the majority of the belief systems at that time.
Now, our belief system is highly defined by efficient markets and algorithm-based trading that form the cornerstone of ETFs and passively managed funds as a whole. The next Thales will most likely not come from those following the already written code, but from those studying the failures of the present statistical prediction. The next great idea in finance will be uncovered from the outliers, outside of the normal procedures. These outliers are the fingerprints of the evolution in finance. Large events may arise from very small causes, but their impact will be profound. Companies do not simply go bankrupt because of external shocks, extinction is already built into the system. New ideas and technological disruptions will completely change the architecture of global finance and lay the groundwork for the future. New age wars and revolutions, both physically and digitally, will help redefine the borders of the connected world we know today.
Merry Christmas and Happy New Year,
The Macrowise Team
December 21, 2019
Brazil