Fooled by Randomness

Fooled by Randomness

June 12, 2005

Received the following comment from Barry Ritholtz, Chief Market Strategist, Maxim Group, today.

Two quick points on the book, which I read some time ago and enjoyed:
1) The key takeway is that we Humans specialize in pattern recognition even where there’s none And that impacts our own selective perceptions — i.e. Don’t confuse a bull market for genius.
2) Surprisingly, the assumption of total randomness is a false pattern — shorter term trends have a persistency unexplainable by pure randomness.

Barry also has an interest in chaos theory, or nonlinear dynamical sustems, which basically say that when a real world system encounters even a small disturbance (policy), we don’t know what the hell is going to happen.

I have been interested in nonlinear dynamic systems for some time and, as you may know, when I start digging on an idea I keep going til I find the bottom. In this case the bottom is the work of a brilliant Belgian chemist named Ilya Prigogine whom I have written about before. Prigogine won a Nobel Prize for his work a field now known as far-from-equilibrium physics. His Professor, Theophile de Donder is the fellow at the upper left in the famous photograph of the 1925 Solvay meeting where Niels Bohr and Einstein argued about quantum physics. Bohr won and set the study of physics back for 70 years.) De Donder’s career was damaged when he met extreme resistance within the Bohr-dominated physics profession for wasting his time studying nonequilibrium situations. They wanted to concentrate on the properties near equilibrium where behavior is smooth and predictable. As Prigogine later showed, however, everything interesting in the world, happens far from equilibrium. This includes life itself.

If the world were formed by stable dynamical systems, it would be radically different from the one we observe around us. It would be a static, predicable world, but we would not be here to make the predictions. (p. 55)

Last month I was able to give a lecture in the same room at the same hotel where the Solvay debates were held long ago. Humbling to say the least. Read Prigogine’s book, The End of Certainty. I guarantee you will never think about the world the same way again.

JR

John Rutledge

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