Well it's certainly an intriguing thread Sir Osis.....
On my understanding of chaos theory it works through non linear equations with feedback loops that create multiple answers rather than a single clear result. The fascinating parts about it are :-
1) Inside these seeming random answers there is a repeated picture/result that comes up as the equation is continued into millions of repetitions. These are described as fractals. This is represented pictorially by the Mandelbrot set.
2) The mathematical basis of chaos theory is represented across almost all natural processes. It is seen in the shapes of trees, landforms, human organs. Because it is such an excellent descripter of our physical reality many scientists see it as a major advance in understanding the world.
In relation to using chaos theory to understand and describe the stock markets....
Frankly I haven't yet understood what you have discussed.
In my mind however I have several parallel almost schizophrenic ideas on what is happening.
1)
Traditional rational view . We have an informed market where investors analyze stocks according to information gained and the shares rise or fall according to their success in the real world. (
This model seems to be favoured by stockbrokers and analysts who want to persuade us to invest on the basis of their extensive, incisive and totally professional analysis......)
2)
Significantly shonky story telling What actually happens far too often in the market is that many companies are floated purely to make money
on the float and the trading of the shares. The actual enterprise is quite secondary to creating a story that will attract investors and allow initial directors and promoters to churn profits regardless of the economic activity undertaken by the company.
This is the world of ramps, bubbles, takeovers, deals, hyper activity. It can make far more quick money than actually running business so it is favoured by most players in the market even though they know it is shonky .. as long as they think they are on the right side of the deal. (
For example many people in Bernard Madoffs scheme believed he was front running or undertaking some other form of illegal activity. But they were happy to be part of it while it was seemingly profitable. Similarly we are seeing the many investment funds that made enormous profits by insider trading being exposed.
3)
A surreal market that pointedly ignores physical realities. The premise of our capitalist system is continuing exponential growth. We know (or should know ?) that this is impossible in a finite physical system but we still accept it as the basis for our economic system. Similarly all companies are attempting to grow bigger and bigger but we know for certain that most cannot achieve their objectives given the limitations of the market. For example it is totally impossible for more than a very small proportion of people to build up the massive property or share portfolios that advisors deem essential for an adequate retirement. It just physically can't be done. But that doesn't stop all the "advisors" sagely trying to convince everyone that if people give them their money to invest they can achieve this financial independence.
In the end of course the most successful retirement plan becomes the advisors.
4)
The inevitable clash of conflicting realities. This is probably where we are now. Consider for example companies with sound businesses, excellent management, great technology and plenty of capital. On paper holding those shares could make you feel like you are sitting with 4 Aces in a poker game and the certainty that you will clean up every other player in the game.
But what if your playing in the gaming rooms of the Titanic ? Yes you end up with a pocket full of gold sovereigns but you also end up at the bottom of the sea because you didn't recognise that the ship was sinking and that the long game was folding your unbeatable hand and finding a lifeboat.
In my mind it is very, very, hard to see how the current financial indebtedness can be resolved without major financial collapse/restructuring. On a slightly longer time scale the issues of resource failure (energy, minerals, soil, water) seem self evident as factors that will crash our economies and crush the markets.
And finally the impact of climate change on the physical conditions of our world
(unless recognised and addressed immediately) seem certain to send us back to pre-civilization conditions.
(To deny the last 2 points you have to take the view that the vast majority of the science community is incompetent and/or corrupt. I feel that the accusation of incompetence and corruption is a more accurate reflection of the investment and business community as we see it today)
Anyway that's my 2 cents worth in this discussion.
http://www.tnellen.com/alt/chaos.html