AVALANCHE-LIKE BEHAVIOR

By Karl Arnold Belser
29 June 2013




An avalanche is a metaphor for a
chain reaction in which a few stones or snowballs cause other stones or snowballs to start rolling, each of which, in turn, cause other stones or snowballs to move such that in a short time a landslide or snow slide occurs. The avalanche will only occur if the existing conditions are right.

The rhetorical question to be explored here is: What are some of the avalanche situations in society and how will they influence the uncertain future?


POTENTIAL ENERGY

Potential energy  is the name given to a situation or chemical process that is capable of  doing work. For example, if I jack up my car, get under it to make a repair, and the jack fails because something bumps it, I will probably be squashed. The raised car has potential energy that can do the work of squashing me when it falls. Similarly, the battery in my car has a lot of potential electrical energy that I can discharge quickly if my wrench slips to short out the terminals when I try to release the cable clamp bolt. The wrench will probably become red hot and do the work of cutting off my hand.

These are examples of potential energy, not of a chain reaction involving potential energy.

Collapse Chain Reactions

Certainly, avalanches are examples of potential energy chain reactions. There are others. Consider the collapse of the World Trade Towers. This collapse was a chain reaction in which an airplane caused the collapse of one floor, whose falling force caused the collapse of the next in a domino effect until the whole building collapsed. Hence, every sky scraper has the potential for collapse, but the trigger events are improbable to generally nonexistent.

Building codes are usually implemented so that the probability of a structural collapse is small. So building collapse chain reactions will seldom happen. However, if one builds on the side of a hill or visits a snowy mountain terrain, chain reaction slips might occur. 

Moving Body Chain Reactions

There are other potential energy, chain reactions that one regularly sees. For example the energy in a moving object, such as a car. In heavy traffic it is usual for cars to follow closer than a 2 to 3 second distance from the car ahead. If one car slams on its brakes to avoid an animal a chain reaction collision might occur. The remedial action here is to maintain more than a safe distance from the car ahead.

Chemical Chain Reactions

Clearly, if one stores a lot of containers of flammable fluids like paint or solvents, an ignition of a fire in one part of the storage building with probably result in an tremendous explosion. Houses have been destroyed if vapors of a flammable fluid ignite in a garage full of flammable paint.

Wild fires are another example of a chain reaction. when a huge amount of chemical energy in the form of dry trees and brush  accumulates, the probability of fire rises if the average temperature increases because of climate change.  The South West US has been experiencing severe fires in recent years. 

A more subtle type of chain reaction  can occur with lithium ion batteries. If one battery overheats it catches fire and ignites the next. The Boeing 787 seemed to be at risk of this type of disaster, and I don't know how Boeing solved the problem. I do no that the Tesla electric car company has spent a lot of development dollars to develop a system to keep their lithium ion batteries cool and safe even, if one cell overheats and fails.

Nuclear Chain Reaction

Everyone knows that there is a critical mass above which radioactive material can sustain an uncontrolled chain reaction due to neutron bombardment of adjacent atoms. This is called an atomic bomb.

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There are, of course, many other types of potential energy chain reactions that I have not listed. My intent is to illustrate what to look for, which is a large cache of potential energy that might be accidentally activated. 


DEBT

A person can take on a lot of debt with the assumption that the person will continue working, or that a business with be successful or that interest rates will not rise to high.  I have a real estate investor friend who lost property after property in a chain reaction after the 2008 debt crisis hit.

A nation can also overextend itself with debt with similar optimistic assumptions. Reinhardt and Rogoff talked about too much debt in This Time Is Different and later tried to determine a critical mass of debt, which latter attempt was apparently incorrect and caused a great deal of trouble for society at large.

A mountain of debt is more analogous to a pile of sand rising to its angle of repose above which a slide might occur, and this fact is supported by the book This Time Is Different. The conclusion here is that when one takes on debt, one is taking of risk that some trigger event might cause problems. The easiest way to avoid this type of risk is to have a clean balance sheet, which means that one has no liabilities and that owner's equity equals assets.

However, it is also true that one might get little reward if one takes no risk. So business judgement is required when assuming debt.  An older person would be well-advised to avoid debt because an older person has a short life span and probably too little energy to recover from a failure.

I would say that the over-indebtedness of the developed countries in the world as of 2013 are a definite future risk. It is apparent that the public senses this risk because they are cutting back on their debt to be safer, like an old person might do.


BEHAVIORAL ECONOMICS

The real risk of avalanche-like behavior is that of human beings, namely irrational exuberance and panic. Irrational exuberance is like the pile of sand that rises higher and higher. Panic is like the avalanche that might follow.

One usually watches asset prices to determine if irrational exuberance is happening. Today one cannot assess the risk with high reliability because the Federal Reserve (Fed) has distorted the market price feedback mechanism for stocks, bonds and housing to the point that price trends contain little information. There will certainly be some sort of transient in the fnancial markets when and if the Fed interference stops.  

The Fed apparently is aware of the possibility of panic when they change policy.  Hence, the Fed governors are proceeding cautiously by using talk to assess the market's fragility and in turn prepare the markets for what will ultimately happen.

The real uncertain future is in economics.  I suggest that a reasonable strategy long term is to first make sure that the bottom levels of Maslow's Hierarchy of Needs are met, namely physiological and safety needs.  Having these needs met might mitigate emotional irrationality or even panic in a time of crisis.

Next, if there are assets left over to invest, I suggest assigning probabilities to several future scenarios that one thinks might happen. Then one might diversely invest assets in these areas.   For example, bonds might be good if there is going to be deflation, large capitalization, multinational stocks might be good if there is inflation, and cash might be good if the future of the economy seems uncertain.


MOB BEHAVIOR

Human beings are apparently susceptible to forming mobs, that is, a chain reaction assembly of people. The classic movie,
The Ox-Bow incident illustrates what awful things can happen with a lynch mob.

As I am writing this, people communicating by social media like Twitter and Facebook are facilitating mob-like behavior in Egypt. Hence, I feel obligated to mention this as a systemic risk for any society even though I have little interest in politics.

My recommendation here is to recognize the risk and keep a low profile.  in other words one has to control one's self to not get sucked in to any controversy. To this end I recommend NOT posting anything controversial on the Internet, This includes websites and email as well as Twitter and Facebook.


Last updated July 2, 2013
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