Blog: Predictability, Chaos and Complexity in Markets
The Nature of Uncertainty Changes over the Market Cycle.
I've spent 45 working years creating and using investment models. A while back (1999), I came up with a simple 2x2 matrix for defining our prediction problem, and how we might go about dealing with it. In addition I floated the idea that markets change over time and pass through different cycles and regimes. Predictability varied over the cycle from short- to long-term as the investment horizon of investors changed. The nature of uncertainty also changed with the cycle.
These days we're seeing numerous headlines declaring how "chaotic" things are, and how high uncertainty has become. "Chaos" here is the vernacular definition: "a state of total confusion with no order" as defined by the Cambridge dictionary, for instance. But now that we actually have a science referred to as Chaos Theory, and I've spent most of the last 40 years working on it, I thought the relationship between predictability and the nature of uncertainty as we go through the market cycle might be of interest to many of you as we live through these interesting times.