Today we explore a fascinating theory known as the Adjacent Possible and examine its application through an analyst’s approach to evaluating a potential stock investment. As you’ll see, this concept extends far beyond financial markets. It carries implications for many aspects of innovation, decision-making, and problem-solving.
Theoretical biologist Stuart Kauffman introduced the Theory of the Adjacent Possible (TAP), which proposes that at any given moment, a finite set of possibilities exists, and new discoveries emerge by recombining what is already known. Simple, right?
A compelling example comes from early human history. The first tools emerged by combining existing materials—tying a stone to a stick created a rudimentary hammer, a pointed stone affixed to a stick became a spear, and a taut string between the ends of a curved stick transformed into a bow. Each innovation expanded the realm of possibilities, creating a foundation for further advancements.
Fast forward to today, and we apply the same principle to stock analysis. The stock we’re considering is Acme Corp. You may know Acme for its outlandish products that are sometimes used to catch roadrunners. Suppose we wish to determine if Acme is a better investment than the others on my list, including Buy n Large, Vault-Tec, Wayne Enterprises, Dunder Mifflin, and Saul Goodman Productions. As a professional money manager, I use a weighted-evidence approach, piecing together a mosaic of data points to form a comprehensive investment thesis.
The Adjacent Possible represents all that is presently available—public financial reports, executive-leadership insights, competitive positioning, and market trends. Fundamental analysis involves studying Acme’s products, corporate strategy, and financial health through statements like 10-Ks, 10-Qs, and earnings reports. Technical analysis examines historical price movements, momentum indicators, moving averages, and relative strength indices to assess market sentiment. Quantitative analysis incorporates historical volatility, returns, and beta correlations to measure risk and performance. If I have enough time, I’ll build a model that predicts the likelihood Acme will outperform the other stocks.
At this stage, I possess the necessary information, expertise, and time to synthesize these elements into an actionable investment recommendation: buy, sell, or hold. This conclusion, once reached, becomes part of the known, expanding the Adjacent Possible and enabling further refinements in decision-making.
If you look closely, you’ll see there are actually three related ideas folded into the Adjacent Possible.
Idea 1: Expanding the boundaries of knowledge. Progress occurs through iterative expansion. The bow-and-arrow led to the crossbow, then to firearms, and so forth. Similarly, financial models evolve, integrating new variables and methodologies to refine predictions. Each step forward expands the area encompassed by the Adjacent Possible.
Idea 2: Recognizing the limits of the present. The Adjacent Possible is bounded by what exists today. Just as Tom Hanks’ character on the deserted island of Cast Away could not conjure a jet ski from thin air, innovation is constrained by available resources and knowledge. Investors, too, face limits—I could assess Acme using various analytical methods, but I don’t have a crystal ball (still working on that invention).
Idea 3: Innovation as a combinatory process. Groundbreaking discoveries arise from recombining known elements in novel ways. Gutenberg’s printing press was a recombination of two prior inventions: movable type and the wine press. The Wright Brothers’ 1903 Flyer was a recombination of four inventions: an airfoil, a gas engine, a propeller, and bicycle wheels. These are singular links. In financial analysis, integrating fundamental, technical, and quantitative perspectives yields a more robust investment framework than any one of those channels alone.
Kauffman quantified TAP’s combinatory process with a simple equation. He said, the entire set of what is possible today is equal to everything that’s available today plus all the possible combinations of what’s available today. This encompasses the totality of human knowledge—every tool, idea, and piece of information, both documented and undiscovered. E-ve-ry-thing. Everything.
Reflecting on this concept reveals an awe-inspiring truth: all human innovation, from primitive tools to space exploration, represents a continuous expansion through the Adjacent Possible. It is a vast, ever-growing blob of ingenuity.
In the film 2001: A Space Odyssey, a monkey flings a bone into the air and then, a moment later, it becomes a spaceship. This iconic scene encapsulates the essence of progress—the direct lineage between past discoveries and future breakthroughs.
I like to think of the Adjacent Possible in the context of the old game show Let’s Make a Deal. The show’s host, Monty Hall, would ask contestants, “Do you want door number one, number two, or number three?” For each contestant, the adjacent possible represented all the potential items hidden behind the doors. This could include cars, cash, or jewelry if you were lucky, or pigs, goats, or donkeys if you weren’t. Before opening the door, you wouldn’t know what it concealed. The prize only becomes real through the act of opening the door, like the cat in Schrödinger’s box or the tasty filling in Forrest Gump’s box of chocolates.
We often view innovators as the people who create new ideas, concepts, or inventions. But a different perspective shows innovators as the people who remove the veils that limit our perspective, thereby allowing discoveries to be seen.
The Adjacent Possible is like a foggy view of the near future that becomes clearer as it is explored. The process of exploring new possibilities actually creates new possibilities. Exploring increases the availability of what is possible.
This process mirrors mind-mapping, as we discussed here, a brainstorming technique that generates an expanding web of interconnected ideas. Each revelation sparks new connections, much like opening doors leading to rooms with yet more doors beyond them. It’s like the genie in the lamp granting you a wish, and you wish for three more wishes.
So what’s the lesson? The lesson is, you do not need to know your destination before embarking on the journey. Innovation thrives in uncertainty. Hunches, intuition, and iterative exploration pave the way to breakthroughs that were previously unimagined.
Each of us encounters our own Adjacent Possible. It’s not just about world-changing inventions but about pushing the edges of our knowledge, challenging constraints, combining things we already know, and discovering new avenues forward.
It’s about exploring the edges of our limitations, about probing, and brainstorming new ways to move beyond them. As said in a recent post about divergent thinking, the best way to generate great ideas is to generate many ideas. Keep questioning, keep exploring, keep iterating—this is the engine of discovery.
As for Acme Corporation? My analysis concludes it is a dubious investment, primarily due to the spectacular unreliability of its products. Still, you’ve got to hand it to the company’s most loyal customer, Wile E. Coyote, for his dogged determination and relentless commitment to innovation.
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