We live in uncertain times. How should we invest when confronted with AI risk and global disorder? Systematic investing provides one answer. At its most basic level, systematic investing requires historical data on prices and signals. Using the history of all prices and signals, we can predict future prices, assuming that historical data is informative about future events.
Do you know who else lived in uncertain times? The ancient Babylonians. They didn’t need to worry about AI, but they did need to worry about war, famine, and assorted disasters of Biblical proportions.[1] Investors in ancient Babylon could trade storable commodities such as wool, sesame, and barley. Then, as now, commodity prices were volatile and driven by macro events. Then, as now, “Middle East war causes inflation” was a recurring phenomenon.[2]
The Babylonians probably didn’t have any systematic macro funds, but they did have all the prerequisites for systematic investing. First, they had money, math, calendars, writing, and many important financial concepts (such as compound interest) as described in Goetzmann (2017). Second, they had detailed historical records on commodity prices. Third, they had detailed historical records on signals, such as lunar eclipses. Here, I use the word signal to mean “something you use to predict future prices.”
The Babylonian price database is amazing; for example, Temin (2002) uses it to study monthly prices on six commodities from 464 to 72 BC. The prices were collected by the scholar-priests and learned scribes of the Temple of Marduk and recorded in cuneiform on clay tablets. Many of these tablets, now called the astronomical diaries, reside in the British Museum. They include prices along with signals such as the water level of the Euphrates River, astronomical phenomena, and political events.
The astronomical diaries are history’s first financial database. They have been used by modern scholars to analyze various economic issues, such as the impact of Alexander the Great on commodity prices, the autocorrelation of prices, and seasonal price fluctuations.
Science begins with measurement.[3] The Babylonians didn’t have modern science, but they totally nailed measurement. Unfortunately, while their price data was awesome, their predictive signals were worthless. Let me give you some examples from Ossendrijver (2019). The first prediction is about the general level of commodity prices:
If a white partridge is seen in the city, the market rate will diminish ...
Forget the Hindenburg Omen or Bollinger Bands; what really matters is the presence or absence of partridges in major urban areas.[4] While today we have many crazy and stupid financial products, to my knowledge we have no partridge-based commodity ETFs, so in that limited sense humanity has progressed in the past two millennia.
Sometimes the Babylonian signals were deterministic astrological events with specific quantitative implications:
If Jupiter reaches the head of the Scorpion; in Akkad the existing market rate will be divided by 2.
The signals also produced relative price predictions:
If … a lunar eclipse occurs on the 14th day, and it looks like a rainbow, there will be a deluge; barley will be sold in the market like sesame.
Since sesame is normally 4x more expensive than barley, here we want to go long barley and go short sesame after observing the signal (or alternatively, long beer / short tahini).
How did the Babylonians arrive at their predictions? We don’t know. They certainly had specific causal theories that told them that partridges and eclipses were relevant signals. There certainly would have been some instances in which the signals seemingly worked: a scholar-priest saw a white partridge and subsequently the market rate fell. Perhaps they looked at their meticulously collected historical data and were led astray by spurious correlations.[5]
In any event, the Babylonians developed something that looked a lot like systematic investing. They collated evidence, used math, and made specific quantitative predictions about relative prices. Sadly, their predictions were total nonsense. The scholar-priests of the Temple of Marduk were unaware of the basic forecasting principle of “Garbage in, garbage out.”
Today, instead of scholar-priests peering into the sky, systematic investing features scholar-investors with eyes focused on terrestrial signals such as earnings and valuations. But we, the systematic investors of the 21st century, owe a debt to the ancient Babylonians, who knew that careful data collection is the beginning of wisdom.
One last thing. I mentioned the prediction about prices in the city of Akkad. Akkad was the home of Sargon the Great, founder of the Akkadian Empire; the cuneiform tablets of the astronomical diaries were written in its language. Thus, history’s oldest financial database is in Akkadian. Akkadian … that sounds familiar, doesn’t it?
Endnotes
[1] “And Babylon shall become heaps, a dwelling place for dragons, an astonishment, and an hissing, without an inhabitant … The sea is come up upon Babylon: she is covered with the multitude of the waves thereof. Her cities are a desolation, a dry land, and a wilderness, a land wherein no man dwelleth, neither doth any son of man pass thereby.” Jeremiah 51:37.
[2] “And there was a great famine in Samaria: and, behold, they besieged it, until an ass's head was sold for fourscore pieces of silver …” 2 Kings 6:25.
[3] Galileo: "It is necessary to measure everything that can be measured, and to try making measurable what isn't yet.”
[4] The surviving records make no mention of a partridge in a pear tree.
[5] If so, the ancient Babylonians also invented p-hacking (partridge-hacking).
References
Goetzmann, William. Money changes everything: How finance made civilization possible. Princeton University Press, 2017.
Ossendrijver, Mathieu. "Babylonian market predictions." Keeping Watch in Babylon. The Astronomical Diaries in Context (2019): 53-78.
Temin, Peter. "Price behavior in ancient Babylon." Explorations in Economic History 39, no. 1 (2002): 46-60.
