Wake Up Mum and Dad. I have a question. What shape is the market?
Wakey wakey Sunday sleepers, it is time for some exercise.
No…no…no….. not physical exercise. Something far more important than your attempts to sculpt a deity. We are talking about what makes us superhuman. It’s mental exercise. This one is the most important exercise of them all. It’s exercising that stuff that is taken for granted in your skull that helps to separate us as a species and make us fly faster, lift more, think quicker and you know…..save the planet type of stuff…..that is of course ‘if we can be stuffed’?
So are you out of your beds Mum and Dad? I have this nagging question that just won’t go away. “What shape is the market?”.
“The bewildered Mum and Dad turn to each other. Is it that time…..you know that time that we get an appointment with the shrink?”
Don’t worry Mum and Dad. I know it sounds mad….but sometimes it is those cryptic riddles that really make you take stock of yourself as a thinking human being and see if there is a bias lurking there somewhere. I mean there was this guy I read about who used to speak in these riddles….but not in a contrived way, but in a forensic way that shaped a whole community of his children. His name was John Wheeler. One of these riddles was ‘the boundary of a boundary is zero’.
Lurking in that riddle was a very deep intuition. A recognition of the importance of that which lies within and that which lies without. A relationship between the stuff of the universe and it’s manifested geometry. The same lurking persistent riddle that dogged Einstein, Emmy Noether, Alan Watts, Richard Feynman and many of the great thinkers of our days.
Buried within this riddle is the notion of symmetries. What appearance do the parts manifest themselves when you start to subdivide the whole? In other words, how does a simple uniform state get transformed into a complex state? For example, let’s start with an isotropic homogenous universe of stuff of a uniform temperature….for practical purposes we will treat it as a gas at uniform temperature.
Let’s assume that it starts as one thing. but that is probably a hard reach for many that are used to nothing meaning ‘absentia’. What if this nothing is a real something (a one thing), but uniform and isotropic throughout. Let’s take the statement ‘No-things’ quite literally but just leave out the added assumption of absentia or zero. We therefore commence with the most simple of all system states, namely a single system state of uniformity of uniform temperature. Now let’s create a larger volume of space so we can cool things down a bit and see what happens to this former state.
We now have a liquid state, it is ‘nearly’ the same everywhere you look, however there is one major difference between the liquid state and the gaseous state, it now has a surface bounding it and we have a reduced liquid volume with the addition of vacuum space. We now have two things separated by a boundary (aka a more complex state).
If we summate both the energy/information dissipated through cooling plus the bound energy/information of the liquid state itself (the contents) including the energy/information of the surface boundary (the boundary) and the vacuum, we restore the conservation laws of energy and information of the prior gaseous state.
However by simply looking at the liquid content as opposed to that which lies on either side of the boundary (namely that which distinguishes two things) by inserting ourselves as observers into the liquid, we find that the symmetry is not perfectly preserved. There is information missing in that liquid state that creates an asymmetry which can only be cracked if we step outside our limited vantage (perspective) to see what is missing. From this cooling process we now have what is referred to as a broken symmetry (or a portion of the total symmetry). We can restore the total symmetry however if we summate the conditions on either side of the boundary. This obviously requires us to be able to step outside the entire nested system context and examine all from a gods eye view.
In breaking the symmetry we have created a nested subsystem architecture that has given rise to a new structure (the surface boundary) and a plural set of states. We have increased system complexity and entropy (the number of ways you can characterise these states of the broken symmetry) through the emergence of this structure. We are not altering the total energy or information of the entire state but rather re-configuring how this information or energy is packaged.
We then cool the liquid further and it becomes a solid. We have once again broken the symmetry of the liquid (one more symmetry) but gained further complexity, structure and entropy in the ensuing solid state. The conservation laws are still there, however to find them we need to understand how all these broken symmetries can be restored to the original symmetry to calculate them.
So Mum and Dad…..I have been thinking about different perspectives you see in trading these financial markets. There are some that prefer to use statistics to crack puzzles of the stuff within the container to navigate a greater universe using small sample sizes, but there are also some mathematicians that use geometry of the container to crack these puzzles. It dawned on me in my sleep that they are just two different perspectives solving the same puzzle from inside out and outside in. Talk about the Yin Yang of it all.
But I think there may be a problem in the pursuit of both camps towards predictive certainty which a physicist might not overlook. In the real world outside contrived conditions of a laboratory or representative sample, there are no single containers of anything. There is just the universe and it’s conservation laws. The financial markets are an open nested system in a greater hierarchy of systems within systems. The only laws are that which are inscribed thanks to symmetry throughout the entire complex architecture of this single universe and give rise to the perception of cause and effect. That which dictates what is and what is not possible (or certain) within the different available states of each sub system.
Don’t think that those systems that appear to lie outside the financial markets have no impact upon them and are separate universes. It is all connected. A tsunami of the physical world has a very real impact on the financial world. Risk lies within the whole arrangement.
Maybe that is where the fat tail of this story all lies. That which lies outside our controlled laboratory of a financial market.
Now we all know that geometry is just a different way of observing symmetry at work….you know a plurality of different perspectives or shards of a greater unifying symmetry…..so I have been thinking….what shape is the financial markets?……and then it dawned on me. Given that there are no rules specifically relevant to the financial markets……it can be any shape. There is no certainty.
When there is no certainty, then you just know what you gotta do………..just go with all shapes………in other words just go with the flow of it all.
Mum?…..Dad?……are you still there….Mum?, Dad?………
You really need to get out of bed and exercise you two. It is quite liberating.
Here is a great book for those simply interested in gigantic riddles from where these thought processes were borne. Thanks to Amanda Gefter. The thinker of thinkers 🙂
….and the podcast to end all podcasts. Where two investigative minds (Amanda Gefter and Dan Falk) get together and conspire to create something great.
Trade well and prosper