V.7:11 (391-395): Chaos theory and market behavior by Bernd Anders

Chaos theory and market behavior by Bernd Anders

Chaos, in the original Greek, describes the primal condition—a w translation that means "confuwsion" as well as "reality." With this one word, the ancients captured what they intuitively knew about the world; that disorder, unpredictability and randomness are part of the natural order. Yet, since the 1970s, chaos has become the codeword for a revolutionary scientific movement that has revamped ancient notions about complex, irregular phenomena—from commodity prices to the weather—and discovered that, even in chaos, there is order.

Unlike scientists who have striven to break nature down to its finest, atomic details and discover universal laws there, the investigators of chaos theory are looking at objects and systems on an ordinary, human scale to decipher the extraordinarily difficult problems of predictability facing traders, meteorologists, biologists, engineers, economists and others. They have learned that randomness is simply a disguise for order.

For example, economists for decades assumed cotton prices followed two different patterns. On the long term, prices rose and fell, apparently due to changes in the economy such as more competition or new international trade restrictions. Short-term prices seemed to dance randomly. The general viewpoint was small ups and downs had nothing in common with the large, long-term changes determined by macro economic forces.

That was before renowned IBM researcher Benoit Mandelbrot stumbled onto a professor's finding that cotton price changes refused to fit into the standard bell-shaped curve of normal distribution. Price changes simply would not hover around an average and neatly scatter out to either extreme.