On Topic: Physics and the stock market

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If we lose a bunch of money in the stock market, apparently it’s because we’re not as smart as think we are.

Or, to put it another way, the markets and all the cosmic factors that come into play — the economic speculations and prognostications from more sources than there are stars in the heavens, Fed Chairman Ben Bernanke’s latest hints and pronouncements, trouble in Greece, trouble in Spain, trouble in Portugal, trouble in France, still more trouble in Greece — well, it’s just all too much.

That seems to be one of the morals of the story from James Owen Weatherall, a mathematician, philosopher and assistant professor of logic and philosophy of science at the University of California-Irvine. He’s also author of “The Physics of Wall Street: A Brief History of Predicting the Unpredictable,” to be published in January by Houghton Mifflin Harcourt.

See, here’s the problem, as he sees it:

Imagine you are trying to putt a golf ball. The hole you are aiming for is only slightly larger than the ball itself. And yet, if you miscalculate by a fraction of an inch, and you hit the ball a little too hard or a little too softly, or you aim a little to one side, you would still expect the ball to get close to the hole, even if it doesn’t go in.

That’s because we imagine that the world is an ordered place.

But you’d be wrong.

Here Weatherall brings in Edward Lorenz, a meteorologist and author of what’s come to be called the Chaos Theory. You know, the idea that one little occurrence can lead to more significant events.

It goes something like this: You can’t find your car keys, so you’re late for work, therefore your major presentation isn’t given that morning to an important client, who angrily drops your company as a vendor, thereby forcing your employer to trigger huge layoffs, pulling down its stock price, which in turn signals an industrywide decline that affects world markets, and so on until the extinction of life on Earth as we know it.

The plots of countless sitcoms are based on this notion, as well as a recent series of commercials for satellite TV reception.

Lorenz’s 1972 conference paper in which he put forth his theory carried the title, “Predictability: Does the Flap of a Butterfly’s wings in Brazil Set Off a Tornado in Texas?”

As Weatherall notes in his discussion of how we try to chart the whimwams of the markets, “You can never account for all the flaps of all the butterflies across the globe.”

Of course, stock market analysts admit what they do isn’t for the faint of heart. But they aren’t going to concede it’s impossible, either.

So they continue to consult quarterly statements, annual reports, financial models, dowsing rods and tea leaves, all in hopes of wisely guiding their clients. Or aid those loyal customers enough for them to still be able to pay their fees.

Weatherall suggests adding more science into the process would help. But even he admits that, in the end, we simply don’t know enough about butterflies.

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