Wednesday, March 16, 2005

Life is not linear

Great news,

The next 5 years will not be a rerun of the prior 5 years.

A scientist came to a horse handicapper and said he had found a perfect way to predict the winner in horse races. The gambler became excited; no more reading stats, comparing jockeys, watching the weather, etc. In other words winning would no longer be hard work and risk. The bookie took the scientist off to the side and asked for a hint to the process. The scientist said " well, first we assume the horses are all ellipses."

Look around you. How many natural shapes do you see that fit Euclidean Geometry? There is a reason we have the phrase, organic shapes. Math must force life into unnatural shapes to work with it. Unfortunately the results, while solid and comforting, have no resemblance to reality. Economists generally use linear models to predict, algebra to the fore. Algebra is great at lines, life is great at sudden huge surprises.

Some think economists exist to make weathermen look good.

An old economist saw is, "If you can't guess right, guess often." They can then point back to the closest guess and say, "I told you so." Most financial gurus fall into this camp. Be wary of anyone who claims to know the future, no matter how vague the claim. Unforeseen circumstances always surprise, that's why they are called unforeseen.

For math to be predictive or of value as a model it has to resemble reality. Reality is very messy, math is beautiful in it's symmetry. Short term all is chaos, and we all live in the short term. As Yogi Berra is supposed to have said, "In the long run, there may be no long run."

Chaos is most dangerous when we believe we have found order in it. That is when the surprise comes. I'm not talking about chaos theory and Strange Attractors, I'm talking about. ...

Finance, a poker game, sports scores, investment cycles, weather, economics; Yeppers, I'm talkin' 'bout life.

In the short term that we all live in, the danger of the unforeseen large event is the reality.

Suck out happens.

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