What is the true nature of randomness and its implications in finance?

[apeiron]

Rubbish. Completely different statistics would result if traders were highly correlated in their actions.

The very fact that all the traders are forced to make decisions at the same moment means there is no time for the communication that would create long scale correlations. The speed of trading is what isolates them. Disappointing that you are not thinking any of this through for yourself.

Check out Wisdom of the Crowds for a pop primer on these kinds of issues. Or Strogatz's Sync.

You've got to get in behind the textbook models to discover what the models presume (what is implicit rather than explicitly represented).

 

[wofsy]

Traders are highly correlated - I was a trader myself. But I think this discussion is fruitless. It has no rigor and I can not sink my teeth into anything that you are saying. I am not smart enough to figure out even the first thing that you are trying to say. I am sorry. I really tried.

 

[apeiron]

Traders are highly correlated - I was a trader myself. But I think this discussion is fruitless. It has no rigor and I can not sink my teeth into anything that you are saying. I am not smart enough to figure out even the first thing that you are trying to say. I am sorry. I really tried.

So you were a quant until the vodoo economics came home to roost? I have had a lot of fun discussing Fama/French, portfolio theory and other such stuff with fund managers over the past few years, watching that good old quadrillion dollar derivatives bubble inflate as they framed their bets in gaussian standard deviation errors. Linear thinking in a non-linear world they were busy creating.

Talk about local independence - as in a lack of suitable intelligent global constraints. No fool would have allowed the derivative markets to operate the way they did if they had a proper systems view. I mean book to market and other idiocies. Not only is market information being incorporated immediately, but also the anticipated profits. What a charade.

Nassim Nicholas Taleb would be an example of how the finance world is waking up to the true nature of randomness - yet also how far people in that world still have to go.

Final word: you protest that traders in life are highly correlated. And indeed they try to be in following the herd (so as to beat the herd). But what we were discussing was the model rather than the reality. Which is a model based on a lack of long range correlations.

You state this yourself in saying the system has no memory and immediately incorporates its future. The long term is erased. Only the shortest possible term exists. And this is "efficient" in that it allows for flocking behaviour with volatility so extreme it models a drunkards walk.

It is "efficient" in the sense that it is exponential growth driving the same way e coli will fill an agar plate. Heaven forbid high finance would model the constraints to growth as well. Let's just create systems that we accelerate as fast as we can until they strike some wall.

 

[wofsy]

So you were a quant until the vodoo economics came home to roost? I have had a lot of fun discussing Fama/French, portfolio theory and other such stuff with fund managers over the past few years, watching that good old quadrillion dollar derivatives bubble inflate as they framed their bets in gaussian standard deviation errors. Linear thinking in a non-linear world they were busy creating.

Talk about local independence - as in a lack of suitable intelligent global constraints. No fool would have allowed the derivative markets to operate the way they did if they had a proper systems view. I mean book to market and other idiocies. Not only is market information being incorporated immediately, but also the anticipated profits. What a charade.

Nassim Nicholas Taleb would be an example of how the finance world is waking up to the true nature of randomness - yet also how far people in that world still have to go.

Final word: you protest that traders in life are highly correlated. And indeed they try to be in following the herd (so as to beat the herd). But what we were discussing was the model rather than the reality. Which is a model based on a lack of long range correlations.

You state this yourself in saying the system has no memory and immediately incorporates its future. The long term is erased. Only the shortest possible term exists. And this is "efficient" in that it allows for flocking behaviour with volatility so extreme it models a drunkards walk.

It is "efficient" in the sense that it is exponential growth driving the same way e coli will fill an agar plate. Heaven forbid high finance would model the constraints to growth as well. Let's just create systems that we accelerate as fast as we can until they strike some wall.

thanks for the try but I do not know what you are talking about. A Martingale does not have to be a random walk and certainly is not in various markets. The distinction of short and long term is irrelevant to the mechanics of the underlying process. I just don't get what you are saying. I'm not sure why you are hammering market participants. I guess they were all stupid. I was not a quant.