30 years ago - Black Monday

A little over 30 years ago (before your host didn’t even exist on this earth!...) the terrifying Black Monday happened. The Dow Jones lost 22% in a single day.

According to most theories at the time, this was a once-in-the-history-of-the-universe kind of events.

Yet it happened.  The markets went crazy, everyone started selling. It was a time when computers were dominating the markets like they are today. A lot of what was happening on the markets was still manual, there was no internet and most people outside of Wall Street had to wait until the end of the day, or the next day to learn about what happened.

And we still don't really know what happened that day. People lost their nerves.

Could that happen again? Well, we have no idea. Probability theories tell us we're done for another hundreds of thousands of years. So-called skilled analysts are warning us all day against all sorts of end-of-the-world scenarios.

Which brings me to my point: looking at the markets with a purely physics approach doesn’t work. We can't explain Black Monday with the modern theory of finance that is essentially inspired by physics concepts.

Can we invent a new theory? I believe looking at the biology and ecology worlds could bring some answers. "Adaptive Markets" by Andrew Lo tries to take a different approach with a biology/ecology angle. I found it very interesting.

What if the financial markets work as an ecosystem where each species has a precise function. They thrive under certain conditions. When the conditions change, they disappear, they evolve and become something else.

All the different parts of the financial system can work together for a while, until something goes wrong. That something could be way out of our capacity to analyze and understand it. Yet the conditions change, some small changes reinvent the financial ecosystem.

Something broke down on Monday October 19, 1987. And many players in the market were not fit to deal with these changes. A new paradigm emerged. Or maybe not. The system fought it off, reconfigured. Dinosaurs died, new species emerged.