SI418: Why Markets Are More Alive Than We Think ft. Richard Brennan

Niels Kaastrup-Larsen and Richard Brennan explore what the science of complex adaptive systems can teach us about markets and trend following. Drawing on research from the Santa Fe Institute, they examine why markets may be better understood as evolving systems shaped by the participants within them rather than machines moving toward equilibrium. They discuss reflexivity, increasing returns and how trends can begin to reinforce themselves, before asking what this means for systematic investors. Along the way, Richard explains why backtests are evidence rather than promises, why taking profits too early can be costly, and why responding to markets may ultimately matter more than predicting them.
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Episode TimeStamps:
00:00 - Why trend following’s edge may have moved rather than disappeared
03:26 - What three years of research revealed about trend following
06:50 - Why big trends and outliers are structural features of markets
11:35 - Trend following performance and what’s moving markets
16:49 - Should trend followers ever take profits early?
21:03 - What the Santa Fe Institute can teach us about markets
25:51 - Why markets are complex adaptive systems
29:46 - Reflexivity and how investors help create market outcomes
35:18 - Why equilibrium may be the wrong way to think about markets
40:22 - Mean reversion, positive feedback and why trends persist
42:55 - Increasing returns and the lessons of VHS versus Betamax
50:01 - How market movements begin to feed on themselves
54:11 - Why trend following emerged inside an artificial stock market
58:20 - How every system eventually gets gamed
01:01:47 - What backtests can and cannot tell us about the future
01:08:31 - How trend followers prepare for a future they cannot predict
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