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Applying Chaos Theory principles to financial markets
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We live in a world that we can consider, for the most part, fairly predictable. For example, I can say with confidence, that if someone does not study for a test, they will not do as well on the test than if they had studied. But what if that wasn’t always the case? What if nothing had a set outcome and every possible outcome was ‘fair game’? This is Chaos Theory. Chaos Theory is the study of dynamic systems that are highly dependent on their initial conditions (abarim). There are several systems so dependent on their initial conditions that even a rounding error in an equation will send it spiraling out of control – they are considered part of the Butterfly Effect (stsci). Systems that fall under the category of Chaos Theory and The Butterfly Effect are used to determine the behavior of a system over time. To create a model of the system we must know the exact initial conditions; however, if the values are even slightly off, the Butterfly Effect will occur and cause the system to go awry. Unfortunately, Mother Nature doesn’t work in whole, or even real numbers. This makes determining the exact initial conditions impossible. So then how can Chaos Theory use a principle that is entirely dependent on its initial conditions, when we cannot even determine said conditions? Chaos Theory itself is a relatively new term, however the ideas behind it date back to the 1800s. In the 1880s, Henri Poincaré was the first to come across chaotic systems during his research on the three-body problem (earthlink). The three-body problem is the problem of taking an initial set of data points, and then determining their motion over time. At the time, this three-body problem was being used to plot the motion of the planets, and other celestial bodies... ... middle of paper ... ...ttp://www.stsci.edu/~lbradley/seminar/butterfly.html>. "HENRI POINCARE." United States Naval Academy | Home Page. USA Naval Academy, 10 Apr. 2011. Web. 08 Dec. 2011. . Heresiarch, Wile E. "Chaos Theory." Wikipedia, the Free Encyclopedia. Wikipedia, 09 Sept. 2009. Web. 09 Dec. 2011. . Maudlin, Tim, and Frank Artnzenius. "Time Travel and Modern Physics (Stanford Encyclopedia of Philosophy)." Stanford Encyclopedia of Philosophy. Standford University, 01 Jan. 2009. Web. 08 Dec. 2011. . Uittenbogaard, Arie. "Chaos Theory for Beginners; An Introduction." Quantum Mechanics, Chaos Theory and the Reliability of the Bible. Abarim, 05 June 2010. Web. 08 Dec. 2011. .
“Chaos theory proves that unpredictability is built into our daily lives.”(Crichton 313). Ian Malcolm’s words resolve the book, Jurassic Park, in a very absolute way. Throughout the book, Malcolm, spoke about chaos theory and his self proclaimed “Malcolm Effect” to explain his reasoning in his predictions. Ian Malcolm had predicted the demise of Jurassic Park even before its opening, as well as its multiple problems and difficulties. Malcolm’s theory is evidenced countless times throughout the story of Jurassic Park; dinosaurs are breeding, dinosaurs are escaping, and systems fail.
Indirectly through out his novel, Camus compares people who rely too much on their logic and rationality, versus those who accept that our world is confusing and unpredictable. Similar to his thinking, in “Crickets, Bats, Cats and Chaos” Lewis Thomas suggests that chaos stimulates the brain and actually suggests that even crickets or cats have thoughts during chaotic or unpredictable situations. Even though I have always seen chaos as a total lack of order, a desperate situation in which an individual loses control, Thomas gave me a new concept for chaos. He says that it emerges when a system is altered by a small change or small uncertainty in its interior; chaos is then the
According to Edward Lorenz (founder of the Chaos Theory) chaos is the science of surprises, of the nonlinear and the unpredictable. It teaches us to expect the unexpected. Chaos Theory deals with nonlinear things that are effectively impossible to predict or control, like turbulence, weather, the stock market, our brain states, and so on. (Lorenz 1995: 187)
Chaos theory is viewed as deterministic system behavior that often results in the nonlinear situation and often centered on the
Throughout the modern era scientists and mathematicians have believed the world and it’s various systems follow a linear order. Much like a clock ticking second by second, minute by minute, hour by hour, day by day. The belief was predictable in nature, following a simple order. However, there are many unexplainable events that occur every second across the world that do not fit this model. The opposite theory by natural law is chaos. Ancient Greek philosophers believed Chaos was evil, it dwelled in the underworld among the dead, it was opposite of Gaia, the goddess of the earth that was seen as good and orderly. In 1961 scientist began to study the idea that they may have missed something big and that was ideas of chaos and how it related to weather, science and especially ecology.
but in principle they might one day be able to. When that day came there would be no chaos, everything in existence would be perfectly predictable, no surprises,
Quantum Mechanics This chapter compares the theory of general relativity and quantum mechanics. It shows that relativity mainly concerns that microscopic world, while quantum mechanics deals with the microscopic world.
Randomization, in the form of mutations, provides genetic variation. Evolution itself is not entirely a random process, but the mutations that have appeared throughout history are. Because of this, one would argue that with the summation of many mutations over time, evolution would inevitably create more randomization within the system resulting in an increase in disorder. In an isolated system, the overall entropy would undoubtedly increase following a series of mutations. Because of natural selection (the idea that an organism that is better suited to its environment will survive and produce more offspring than those organisms who are not), it can be said that chance mutations are not the only driving force behind evolution, thus evolution is not entirely a spontaneous process (Williams,
Our world is filled with complex systems which defy reductionist understanding. Systems ranging from the self-organization of life and emergent intelligence to the chaos of fluid dynamics and dripping faucets. Just as surely as these systems exhibit a synergistic process of generating information they share some analogous processes on their most basic levels.
Unpredictability cannot be measured, nor can the unpredictability be removed, as that would violate Heisenberg’s uncertainty principle. Humans generally fall under this principle, for although humans might seem to violate Heisenberg’s principle, there is a general unpredictability to the causality of intentional human action. The same goes for divine action, and science cannot forbid either of these
Weinberg, Steven. 1992. Dreams of a Final Theory: The Search for the Fundamental Laws of Nature. New York: Pantheon Books.
Most people live in a state of semi-chaos. Isn't your cluttered desk an example of the chaos in the world? The words chaos and pattern seem to be a dichotomy, but fractals are both of these things. Basic definitions of fractals include the words self-similar, chaotic, and infinitely complex. Before I go on, let me first define the previous terms in order that the reader will understand their meanings as I will use them.
3) “Temporal Paradox – Harmony Theory.” Wikipedia, The Free Encyclopedia. Wikimedia Foundation, Inc. 22 July 2004. Web. 05:51, 11 October 2010
According to Wendy H. Mason(referenceforbusiness.com), “Chaos theory is a scientific principle describing the unpredictability of the systems. This theory was explored and recognized during the mid-to-late 1980. Its premise is that systems sometimes reside in chaos, generating energy, demand etc. without any predictability or direction. These complex systems may be weather patterns, ecosystems, water flows, anatomical functions, managerial functions, cooperations or organizations. While these systems's chaotic behavior may appear random at first, chaotic systems can be defined by a mathematical formulas, and they are not without order or
...t. The Chaos Game can be applied to create other fractals and shapes, and is a major part of an entirely separate area of study: chaos theory. The fact that the Sierpinski Triangle transcends the boundaries of fractal and number theory proves that it is an important part of mathematics. Perhaps the Sierpinski Triangle still holds secrets that, if discovered, will change the way we think about mathematics forever.