Thursday, 14 July 2016

Markets. Where physics meets psychology

I wish I was clever enough to work out the real detail in things I have hunches upon. Or rich enough to have a retinue of turtles, as Lord Brown did at BP, or Richard Branson, to throw ideas at and for them to work out if it would actually work financially or physically. It would save me a lot of time. Perhaps that’s what crowd-funding is all about. You have an idea, post it on a crowd -funding site, everyone votes by throwing their money at you, you then spend it until it's all gone and if, as a passing coincidence you happened to make something that worked then it was proof that it worked and if you didn’t it was proof of the greater fool theory, where you were not the greatest fool. A poor man's version is twitter, where every now and again you can throw 140 characters out there and see what happens. 

I have a mind that likes to see everything in visual representations, it was always a struggle for me to cope with maths once I couldn’t visualise the mathematical world as a rolling landscape of curves and lines. I would cope with multidimensional maths by picturing series of slices of lower dimensional representations, but basically, if I couldn’t picture it I slowed right down in a morass of squiggly greek things. It has been the same for markets. I visualise a seething firmament of probability curves and prices, as multidimensional as my feeble brain can manage, yet nothing as powerful as the algorithmic chips buried in correlation models, but it has sufficed. 

This vision is something that I have tried to drum into my children. Nothing is certain and every decision you make will have been formed from a summation of all of your experience, to derive a probability curve on which to make your decision. There’s a car coming down the road. It looks miles away and a second later it still looks miles away. Therefore it is most likely not to be moving very fast so you have a high probability of not being killed if you cross the road. Though do watch out for the Tesla on auto-drive, with no lights on, coming the other way. Smaller probability, but there none the less. A infintesimal probability if you were to ask Tesla. 

So, markets are a hotch-potch of probability curves all zapping around and interacting with each other influencing the things we see that are called prices. A Brownian motion where the cloud of probability is the air molecules and the price is the lycopodium powder. My point is that the market analogies to physics are copious, yet the inputs are psychological. Perhaps it does make sense because at their very core both physics and psychology are built on probability curves. A particle is only a waveform of probability as is our decision-making process. 

I am going to digress a little here to touch upon another long-held hunch that if we are looking for quantum computing then we should look further than our own brains. A hum of probability clouds kicking up abilities that really shouldn’t be possible. Behaviour and physics. But this leads to a paradox hunch of mine that we will never be able to work out how we work because we can never be cleverer than the system that makes us clever. 

But back to the physics of behaviour and the hunch that I threw into twitter. It was this 

It's a damped oscillation and very mathematical it is too. But for me, it represents price actions after news events, political responses to emotional issues and media responses to just about everything (Brexit is covered by all three). 

I had a nice reply back from a follower (@financeinottawa) who noted it looked exactly like a Cauchy distribution, which had me thinking back to the Witch of Agnesi, which preceded Cauchy but none the less produced a nice swooping line I could visualise (Wiki it, There’s a nice gif that draws it).  I am now on the lookout for Witches of Agnesi in market patterns, much as a new breed of nutter is looking for Poke’things in the fast lanes of the motorways as they test the behavioural response of drivers and the theories I expanded to my kids about crossing roads. Nintendo is doing nothing more than accelerating gene selection. Genes - more physics and behavioural overlap. 

How the heck do animals inherit behaviour? Wilderbeast know how to run from birth and humans are able to believe, from birth, that they are cleverer than all other humans. I know this because I had an online chat with an old non-markets friend asking about binary FX options. That always sets off alarm bells. Much as Homer Simpson walking into the room holding a lump of glowing plutonium asking if it would be a good way to warm the baby would. "Just put it down and run away". Some firm was trying to sell him short time frame binary options, which MUST be a sure-fire way to lose money because why else would a spivvy firm be spinning them to him? I am amazed at the disconnect between regulated bank behaviour and bookies. The regulators should make up their minds. If banks are really just casino’s then let them be run as casinos. If not then put casino’s, sorry spread betting firms, under the same regulations as banks. But they are. No, they are NOT. Once you have tried to have a triple A sovereign wealth fund cleared through a bank’s credit and compliance department and seen it take 3 months and even then with no trades allowed that could be considered leveraged (such as selling options even if they had bought them already from another bank) then you’ll appreciate that your friend being allowed to punt 5 minute binary FX options after putting his grandmother's passport details into an online account, is NOT the same thing. 

Unlike this which is obviously exactly the same thing. 

It is both the tracks left from subatomic particle collisions in a magnetic field and the price action of my friend's 5 minute binary FX option portfolio. 


  1. Next time we're in the Waggonload of Monkeys for el swifto I'll bring some books for you-remind me.

  2. 'How the heck do animals inherit behaviour?'

    I suggest genetic coding and the universal consciousness ( collective memory) is the starting point for our behaviour, then combine it with our environment.

    I maintain that memories are passed down through generations

  3. Hi Polemic,

    Great post!

  4. This was a great post!


  5. Cauchy. I've always just called it a coil :(

  6. Otherwise know has too much then too little resulting it a we can't make up our minds what the f..k is going to happen next.