Sunday, November 16, 2008

The Math of Markets

Markets are epiphenomena derived from individual acts of discovery and exchange. In the modern world, markets are described by quantitative expressions. We call these expressions prices.

Prices are also themselves drivers of human behavior. They play the roles of both cause and effect. This duality makes the math of markets very different from the math of the physical world.

In the physical world, math conveys predictability. In markets, math conveys no such thing. In fact, it creates the illusion of a certainty that we do not possess. The probabilities are different. Rocks don't decide where they will go or how fast they will get there. People do.

People often ask, when will prices stop going down? The answer is, when the underlying phenomenon, i.e. human behavior, makes that happen. Predicting the behavior of falling stones is easy. Predicting the behavior of falling markets is as difficult as predicting the next thought that will flicker across your mind.

No comments: