Sep 19, 2026 · 1h 16m
Markets amplify behavior instead of seeking equilibrium
SI418: Why Markets Are More Alive Than We Think ft. Richard Brennan
Seeing markets as complex adaptive systems changes how investors interpret trends, backtests, outliers, and the risks of relying on historical patterns.
- 1Participant interactions can generate trends and turbulence without a single external cause.
- 2Backtests provide evidence about specified rules, but cannot guarantee future conditions or outlier timing.
- 3Diversification, small losses, trailing exits, and mechanical rules help investors navigate an unmappable future.
Don't miss
Richard Brennan describes simulations where adaptive investors generate calm periods, turbulence, and emergent price-based trend following.
The brief
Richard Brennan and Niels Kaastrup-Larsen argue that trend following’s edge has not vanished: persistent trends and rare outliers remain structural features of markets.
The Santa Fe Institute’s El Farol Bar problem illustrates how diverse forecasts, adaptation, and interacting decisions can create collective behavior without a single correct model.
Reflexivity and increasing returns help explain why beliefs can shape outcomes, while path dependence turns small advantages into persistent trends or abrupt reversals.
Santa Fe simulations produced calm periods interrupted by turbulence, with price-based trend-following rules emerging as successful strategies among adaptive investors.
The practical conclusion is deliberately modest: backtests are evidence, not promises, so investors should diversify, limit losses, and let exceptional trends develop.
What was said on this episode
25 statements · 13 positive · 7 negative · 2 mixed · 3 neutral
Brent crude oil is trading at $108.
“Brent now is at 108.”
Listen at 13:41
The current energy-market surge may continue for longer.
“This could go on for a while longer.”
Listen at 14:20
The Federal Reserve will raise interest rates.
“The Fed... No doubt they will put up interest rates.”
Listen at 14:34
The Federal Reserve will probably raise rates again in December.
“I think also December they probably will put it up again.”
Listen at 14:38
The current challenging economic period will benefit trend following.
“it's going to be beneficial for trend following.”
Listen at 14:47
Taking partial profits converts open gains into redeployable closed equity.
“taking partial profits does convert open profit. into closed equity that can therefore be redeployed.”
Listen at 17:45
Taking partial profits can reduce drawdowns and smooth returns.
“It can also reduce drawdowns and produce a smoother return path.”
Listen at 17:53
Partial profits reduce exposure to exceptional trades driving long-term results.
“we are reducing our exposure to those small number of exceptional trades that might drive much of the long-term result.”
Listen at 18:03
Trend-following outlier trades are infrequent and statistically scarce.
“the outliers we are depending on are so infrequent and few and far between.”
Listen at 18:53
Backtests cannot reliably predict future exceptional-trend frequency or magnitude.
“it can't tell us reliably how many exceptional trends the future will contain or how large they'll become.”
Listen at 19:15
Larger samples inevitably reveal increasingly large positive or adverse events.
“as the sample size increases, we inevitably get these bigger and bigger events, either positive or adverse.”
Listen at 19:42
Future markets will contain both larger drawdowns and larger positive outliers.
“We get bigger drawdowns in the future. We also get bigger outliers, positive beneficial outliers in the future.”
Listen at 19:51
Taking partial profits can compromise the objective of capturing outlier trades.
“if we do do what John suggests, we certainly can compromise that objective.”
Listen at 20:26
Richard Brennan recommends avoiding actions that could miss enormous trend trades.
“I don't want to miss out on that potentially enormous trade”
Listen at 20:48
Increasing returns explain technological improvements and Amazon and Google’s success.
“that explains so much of the tech race. technological improvements, Amazon's success, Google's success.”
Listen at 43:58
VHS achieved broader adoption than Betamax.
“VHS secured far broader adoption.”
Listen at 44:46
VHS adoption attracted content, which further increased user adoption.
“More users attracted more content, and more contact attracted more users.”
Listen at 45:02
Amazon’s success reflects a path-dependent effect.
“the success of Amazon, you know. It's a path-dependent effect”
Listen at 48:22
Modern AI would not have emerged without the internet.
“AI wouldn't have come around today if there wasn't an internet.”
Listen at 48:51
Adoption helps determine which technology becomes the winner.
“adoption helps create the winner.”
Listen at 49:11
Small early advantages can create environments that continue favoring one technology.
“a small early advantage created that environment that continued to favor the same technology.”
Listen at 49:26
Rising prices can attract capital, strengthen collateral, and encourage further buying.
“a rising price improves the performance of existing holders. That may attract fresh capital to those holders of that capital. It strengthens collateral. It encourages further buying.”
Listen at 50:10
Falling prices can trigger stops, margin calls, and forced selling.
“falling prices can trigger stops, margin calls and forced selling.”
Listen at 50:26
Financial markets need not immediately return to equilibrium.
“a market need not return immediately to equilibrium.”
Listen at 50:51
Market movements can persist far beyond their original cause.
“the process can extend far beyond its original cause.”
Listen at 50:58
Statements are attributed to the speaker as said on the episode and reflect their view at the time, not PodLume's. They are not advice.
Books & mentions
Some links are affiliate links — PodLume may earn a commission if you buy.
