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Strategies & Market Trends : Waiting for the big Kahuna -- Ignore unavailable to you. Want to Upgrade?

To: William H Huebl who wrote (43261)	8/29/1999 10:49:00 PM
From: paulmcg0	Read Replies (2) \| Respond to of 94695

"The problem with all these mathematical things is that the market is run by people and not mathematics." I agree with you. I tinker around with mathematical models of financial markets, because of an interest in mathematics, and not because I strongly believe in the powers of prognostication that some people give these things. At the risk of offending technical analysts and others who try to model the markets, I see the following problems with these approaches: (1) As you mentioned, they are merely mathematical, and humans are quite complex and unpredictable. Mathematics is better suited to predicting the behavior of inanimate objects and lower life forms. (2) A limited amount of data is used for such models, namely past trading prices and volume. Every other factor, including hard to quantify things like investor sentiment is ignored. In essence, stock market models are attempts to "curve fit" past events. While your model may very closely fit what happened in the past, there is no guarantee that the future will fit the model. Also, this kind of number manipulation is in opposition to the scientific adage that "correlation does not imply causation", i.e., just because events happen together, it does not necessarily mean that one event caused the other event to occur. (3) The price of a stock is a "social construct" (see works by philosopher John Searle). That means that it is whatever a group of people think it should be at a particular time. A stock's price is not based on anything "hard", measurable and tangible, like the law of gravity. There are no guarantees that a stock price will be predictable in the future, because people might think it is worth a lot more or a lot less than the current price. Many investors unknowingly believe in the so-called Greater Fool theory, which says that people pay a particular price for a stock, because someone will be a Greater Fool than they are, and offer them more money for the stock in the future.