Hidden Risk of a More Connected World

So last week the Dow closed over 25,000, but people everywhere are still scratching their heads, unsure whether this surge in stock prices represents an unsustainable bubble or an economically rational set of expectations. Is the bottom about to drop out from under us, or might this constitute just the first act of an even more robust boom?

It’s a well-established fact that properly functioning markets are remarkably capable predictors of the future. The collective prediction made by a market will often be uncannily accurate – significantly more prescient than even the smartest, best-informed individuals in the group. The financial market for orange-crop futures, for instance, has been shown to provide a more accurate Florida weather prediction than can be rendered by professional meteorologists using the most advanced tools and instruments.

An important key to a “properly functioning” market, however, is that individual participants’ expectations about the future must be independent of each other. When investors rely too much on others’ views, rather than their own, it can lead to a cascade of opinion, as in a market bubble or a sudden panic. 

Harnessing the power of people’s many conflicting expectations is one reason your investment adviser suggests diversification in your holdings. A more diverse portfolio is one that consists of “uncorrelated” holdings – investments, that is, that have been shown to behave truly independently of one another. If all you want to do is speculate, then feel free to bet all your money on some particular security’s random walk. But if you want to invest, then you need to spread your money across a number of uncorrelated random walks.

And therein lies the danger I’m referring to, because in our ever-more interconnected world diversification is no longer as easy as it used to be. It’s more difficult for investors to find assets that aren’t correlated. Global commerce and competition, electronically synchronized financial systems, and social media have all combined to ensure that our opinions and expectations–including financial ones–are now much more highly visible to everyone.

As a result, while the speed and efficiency of global markets might be increasing, the long-term risk of catastrophic fluctuations might also be increasing. The more robust and ubiquitous connections between our various world economies has led investors to try to seek out assets with values that are correlated with entirely random and unpredictable events – the break out of war in the Middle East, for instance, or the legal outcome of a bankruptcy hearing already in adjudication.

But enough of high finance. Diverse perspectives are important not just for how markets function, but for how creativity flourishes, how innovation takes place, how wisdom increases, and even how social justice is rendered.

Consider the social media landscape of today, for instance. The interactive echo chambers that most of us willingly inhabit allow each of us to bask comfortably among those opinions and views we already find the most compatible with our own. But when your own ideas are seasoned solely by this sort of “highly correlated” wisdom, it undermines rational dialogue in much the same way a stock market bubble undermines rational investment.

We are still in the very early days of our technologically interconnected future, but we can already see that the increasing relatedness of everything and everybody is stamping out the diversity in our thinking, and it’s not just political dialogue I’m talking about. By 2050, according to one study, 90% of the 7000+ languages that are spoken somewhere in the world today will be extinct. Anyone who has ever learned a second language knows full well that even moderate fluency requires embracing significantly different thinking and perspectives. So language extinction represents another big blow to the human “intellectual gene pool” of diverse ideas and perspectives.

Diverse perspectives are vital to the future of our species. You can do your part by thinking more carefully about how to use your own new-found technological connectedness. Don’t settle for the oxytocin rush of listening to someone who already agrees with you. Instead, why not embrace the intellectual and emotional challenge of trying to empathize with someone who doesn’t?

Think of it as a fitness regimen for your mind.

Embrace intellectual friction. Our world will benefit.