Reading the leaves

Mystics claim they can predict the future by “reading” tea leaves. They might be on to something after all. Stock-pickers wanting advance warning of the next financial downturn could learn a lot from plants, a new study suggests. There are a lot of similarities in the way that plants and stock markets – and people, too – react to crises, according to a team of academics. They analysed biological and financial data and found that systems under stress exhibit common symptoms, whether they be polluted forests, cancer patients or the FTSE 100 index of leading companies.

There is an uncanny parallel between the way that humans, animals and plants adapt to harsh living conditions and the behaviour under stress of stock market prices and the banking sector, the academics argue. Warning signs can be detected – even before obvious symptoms occur – by charting the interdependence and volatility of key factors, they claim.

The team, led by Alexander Gorban, a Professor of Applied Mathematics at the University of Leicester, call their “order in chaos” theory the “Anna Karenina Principle”. That’s a reference to the Tolstoy novel which opens with the words: “Happy families are all alike; every unhappy family is unhappy in its own way.”

Professor Gorban explains that people, plants or stock markets function in a similar way until things go wrong. At that point, they start to react differently.

Studying how systems facing stress react in terms of becoming more interdependent and volatile reveals patterns. These can help to predict when a crisis may occur and the likelihood of death or recovery, he says. A key finding is that as the crisis approaches, systems become more dependent on each other but at the same time more likely to react differently.

A study of Scots pine trees near a power station confirmed the theory. The average compositions of the needles was similar to those outside the polluted area, but the variance and interdependence of individual components were far greater. The report says stocks and shares showed a similar pattern during the financial crisis. Stocks became more interdependent and volatile as the FTSE100 fell. But by the end of the year the system became less connected and even more volatile. This, says Professor Gorban, suggests a crash was due. Financial systems were failing to adapt to the new market conditions.  If only we’d watched the trees.•