You may have heard of a concept in chaos theory called ‘the butterfly effect’. The mathematician and meteorologist Lorenz famously described how a butterfly flapping its wings in Brazil could set off a tornado in Texas.
It might also describe how a politician moving his lips in the US (talking about tariffs, say, or job cuts) can set off … well, potentially, a whole host of complex economic, social and geopolitical outcomes.
Tariffs – or taxes on foreign imports – have been in the news a lot lately.
Tariffs can come in many different shapes and sizes and can affect a wide range of imports. (Examples include steel and aluminium tariffs, car levies and import taxes on pharmaceuticals, just to name a few.)
But I’m not here to delve into the (no doubt complex) subject of tariffs. I’m talking about the talk of tariffs – even those which are yet to be enacted – and that makes people speculate on what might happen next.
It’s the underlying uncertainty and disruption that can drive investors to react. As a result, market volatility increases as large numbers of investors move their money about trying to predict the future.
News reports and social media often explain complex events in terms that help us feel like we have a deeper understanding of events and their causes and effects. But they can also give us a false sense of being in the know if we base our financial decisions on the news of the day.
We live in a complex, interconnected world. The systems we live in are far from simple and mechanistic. Causes and effects aren’t so straight forward, obvious, or predictable, even to the experts.
Lorenz used the butterfly effect to illustrate the complexity of natural systems, but it’s a helpful concept to remind us of the ways it may apply to financial markets and our complicated world.
So a butterfly flaps its wings and … what happens next could be anyone’s guess.
That doesn’t mean you have to leave your finances up to chance.
For professional advice, call me on (02) 9913 9995.
