What is Your Financial Tipping Point?

It was 1949 and Fred Charles Iklé wanted to know why some European cities had been abandoned during World War II while others survived.  While traveling through war-torn Germany, Iklé discovered that the city of Hamburg was still inhabited despite losing 3.3% of its population and half of its homes to Allied bombing raids.  Iklé realized that Hamburg, and other cities, were able to persevere because its residents crowded together as they faced waves of destruction.  However, this only worked…to a point.  Command and Control tells of Iklé’s startling revelation:

Iklé was impressed by the amount of urban hardship and overcrowding that people could endure.  But there were limits.  The tipping point seemed to be reached when 70 percent of a city’s homes were destroyed.  That’s when people began to leave en masse and seek shelter in the countryside.

Iklé’s research illustrates how systems can exhibit radical changes in behavior from seemingly small changes in environmental conditions.  When 65% of local homes were in ruins, people clung to hope.  By 70%, they fled.

This phenomenon, known as a tipping point, has been documented in biological and non-biological systems throughout the world.  For example, zoologists discovered that the aggressiveness of certain spiders is dependent on environmental temperature and Science magazine recently published a study showing how at least 25% of people need to take action for social change to occur.  Malcolm Gladwell’s book by the same name, describes the defining characteristics of tipping points:

These three characteristics—one, contagiousness; two, the fact that little causes can have big effects; and three, that change happens not gradually but at one dramatic moment—are the same three principles that define how measles moves through a grade-school classroom or the flu attacks every winter.

We can find these same principles at work within financial markets as well.  Just consider how Bitcoin rose from $10,000 to nearly $20,000 a coin in less than 3 weeks or how the Dow Jones lost 22.6% in a single day

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