We have all had the fun as kids of going to the beach and playing in the sand. Remember taking your plastic bucket and making sandpiles? Slowly pouring the sand into ever bigger piles, until one side of the pile starts to collapse?

In his very important book Ubiquity, Why Catastrophes Happen, Mark Buchamane wrote about an experiment with sand that three physicists named Per Bak, Chao Tang, and Kurt Wiesenfeld conducted in 1987.

In their lab at Brookhaven National Laboratory in New York, they started building sandpiles, piling up one grain of sand at a time. It’s a slow process, so they wrote a computer program to do it. Not as much fun but a whole lot faster.

During this experiment, they learned some interesting things that can help us understand how all sorts of calamities, including market crashes, unfold.

Critical State

What is the typical size of an avalanche? After a huge number of tests with millions of grains of sand, they found out there is no typical number:

Some involved a single grain; others, ten, a hundred, or a thousand. Still others were pile-wide cataclysms involving millions that brought nearly the whole mountain down. At any time, literally anything, it seemed, might be just about to occur.

The pile was completely chaotic in its unpredictability.

Now, let’s read this next paragraph. It is important, as it creates a mental image that helps us understand the organization of the financial markets and the world economy. (emphasis mine)

To find out why [such unpredictability] should show up in their sandpile game, Bak and colleagues next played a trick with their computer. Imagine peering down on the pile from above and coloring it in according to its steepness.