Head of Zeus
This one’s all about physics and mathematics.
The three-body problem belongs to a broader group of problems called “n-body problems”, seeking to predict the individual motions of a group of point masses (or celestial objects) as a result of their gravitational interaction.
In a throwback to high school physics, the solution to the two-body problem will bring back memories (or nightmares) for some. The two bodies are usually the Earth and the Sun, with the masses and vector positions of one relative to the other given by a well-defined set of formulae:
Credit: Wikipedia (https://en.wikipedia.org/wiki/N-body_problem)
The key takeaway here is not that n-body systems for n ≥ 3 are stochastic, random and unpredictable. This is, in fact, a common misunderstanding of the three-body problem.
Stochastic systems are unpredictable and completely random, with past information having little to no bearing on what happens in the future. On the contrary, n-body systems for n ≥ 3 are chaotic, meaning that while these systems are apparently random, there are “underlying patterns, constant feedback loops, repetition, self-similarity, fractals, self-organisation, and reliance on programming at the initial point known as sensitive dependence on initial conditions.” This is more commonly known as the “butterfly effect”, where a hypothetical butterfly flapping its wings in Brazil can cause a hurricane in Texas. You might have seen the confusing but nonetheless entertaining film back in the day.
Here at Three Body Capital, this is how we view the world. We are already seeing butterfly effects resulting from events that took place a long time ago. Climate change, technological development, political fracture, the reconfiguration of the global order… these events weren’t triggered by a specific event that we can point to. There wasn’t an “archduke moment”, even if people insist on post-rationalise complexity by manufacturing them.
We believe that markets, and the real world they represent, are chaotic systems that are extremely sensitive to changes in their initial conditions, just like three-body systems. They have the ability to magnify the impact of decisions into unpredictable outcomes.
By default, we are wired to think with heuristics and rules of thumb, relying on past information to quickly process what comes in the future. That method worked well for our hunter-gatherer ancestors, but the human race has developed technology much more quickly than our bodies have advanced in physiology, particularly our brains and cognitive processes. To uncover opportunities and generate returns, we need to break our programming and think different.
That’s why we write extensively on unintended consequences, and why we’re advocates of second-order, non-linear, exponential thinking”.
Our underlying assumption is the opposite of most. Whereas the majority believe the future will look like the past, we believe the future will look different. Too many new factors are being introduced into the chaotic system that is our environment for that system to remain stable. We live in world where a misspelt tweet written by a guy sitting on the toilet in his pyjamas has the ability to move markets and change economic policy with global consequences - who would’ve imagined that?
So why should you care about the three-body problem? Because it’s the closest approximation of what a roadmap for the future looks like.
After all, the only way to get anywhere close to making sense of chaotic systems is to step back and look at the big picture. Only then do things start making a little bit more sense.