Friday, May 13, 2005


That’s right, investing in the stock market is a gamble. Look! I play the stock market too. Well... no I don’t “play the stock market”, but I have dough in mutual funds because my company offered a 401k and the owner matched my dollars with his dollars up to three percent of my income. How could I lose on that? Then, come retirement, I rolled my does eat oats over into an IRA account so I didn’t have to come up with income taxes all in one bite. But, read the following, if you think of being a day trader. Not that it’ll stop anyone, but it’s sure interesting what a couple of scientists and a calculator can come up with.

[Open quote] Assume that City slickers are dumb and their effects on markets can be reproduced, according to complexity theory.

Roger Highfield reports (Filed: 16/03/2005)

“You might be forgiven for wondering if the best way to invest in stock markets is to consult a chimpanzee first - it has long been suspected that City hotshots are just lucky, overpaid fools who work in an industry where chance rules.

“Now science is beginning to support the idea that randomness, not rationality, exerts surprising sway over the markets. The insights have come from researchers who are interested in complexity, where the simple behaviour of many traders in a market governed by various rules can produce highly complex "emergent" behaviour (the waxing and the waning of share prices)....

“... another pioneer [Prof. Benoit Mandelbrot of Yale University, New Haven] in complexity science has gone so far as to claim that the edifice of financial theory that has been erected by economists over the past century rests on faulty foundations, placing investors at much greater risk of ruin than they realise....

“One of the leading exponents of applying complexity theory to the markets is Prof. Doyne Farmer of the Santa Fe Institute in New Mexico.... The prevailing view in economics about how markets function is that you have a rational investor rationally processing all the information that arrives," said Prof. Farmer. "Our analysis challenges that view by saying that maybe a lot of price movement is more or less mechanical...."

“Sharp price swings - crashes and booms - are far more common than the standard models assume. And price changes in the past affect markets today; they are not "independent" from one another, as standard models also assume.” [Close quote]

The Whole Story Here

Speaking of the stock market: “Work is for cowards.” —Pool hustler, U.J.Pucket

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