Markets and Life Are Chaotic

Cause and effect is a concept we all carry around with us, without having thought it through.  There are three aspects to consider.

For a given input, (cause) the outcome, (effect) can be deterministic, probabilistic, or random.  Most people think deterministic first. 

Deterministic sometimes happens.  If I hit my thumb with a hammer, I can reliably estimate that pain will appear.  The same level of predeterminable outcome is less easy with things in the financial markets.  Market operators can play on your error prone ways.

Consider the idea that if governments print a lot of money, inflation will happen.  That seems logical at first glance, but at later glances you will find that it is not certain.  It depends on what they do with the money.  The massive 2009 printing has not yet hit the numbers. Why?  Someday maybe, but seven years seems like too long a lag.

Probabilistic outcomes range from usually to sometimes.  When making decisions, most people assess the probability based on what they want to have happen.  This is the realm of reasonable expectation and most people are deficient.  Surprises ensue and surprises are seldom helpful.  The Russian military tactical manual makes a big point of knowing, understanding and acting upon, “Objective Reality.”  While we might all think we do just that, we do not. We are easily confused by too much information, biased information, too many pundits and too many special interests that promote unreal situations.  Critical thinking is a near lost art.

To us, randomness means there is no discernible pattern.  That speaks primarily to our inability to assess complex information not to its randomness.  We see some complications and assume things to be random, but they are just complex.

Chaos theory is a useful addition to the tool bag, but few understand it or use it.

Most chaotic yet organized outcomes are of very long duration.  So we don’t notice the ordering.   Our time envelope is about today plus or minus three years.  Anything outside that is unnoticed.  We can do better. 

Benoit Mandelbrot was the seminal thinker in the area of chaos.  Mandelbrot claims order, but at a very high level of complexity.  We don’t see it because nuance matters.  Missing information a matters.  We are incapable of perfectly weighing what we know. Absent those we guess. 

Alejandro Nadel published a short piece not long after Mandelbrot’s death in 2010.  It may give you some insight.  You can see it here.  Understanding Instability.

That we do not understand randomness is perhaps acceptable.  We can take comfort in a thought a statistics professor once told my class.  “Only God can make a random selection.”  Maybe there is no random. 

Rethink your ideas of cause and effect and try to assess what rules you carry around that are little more than folk wisdom.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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