Archive for the ‘Divergence’ category

The Fat Tail

Last time we talked about divergence, how life and nature is replete with divergence cases and the debate built around it. The funny part of all this debate is that we are somewhere still living the blind men and the elephant metaphor. We don’t see the big picture. If Herbert Simon is to be believed we may never see the elephant. But then seeing more of an elephant is still better that just seeing its tail. Unfortunately that’s not how it works in society. We love tails, especially fat ones. There is a lot of literature on fat tails in statistics.

Claiming your idea to be better is one thing and suggesting the other idea is wrong is another. But then humans just like the curves they define live and believe in extremes. There are more than a few cases in History of mathematics where researchers trashed their peers or next generation of thinkers. The Bourbaki Secret Society was formed in 1935 because members felt that the older mathematicians were needlessly clinging to old practices. Prehistory of fractals also saw a lot of resistance. Henri Poincare called it as ‘Gallery of monsters’, Charles Hermite quoted them as ‘a lamentable plague of functions with no derivatives’. More recently Jean Dieudonne ‘Some mathematical curves like Peano Curve are totally non intuitive…extravagant’. Now we know how key Peano curve is for relativity and defining the structure of space.

Sometime the polarity does change. Carl Gauss, the prince of mathematics of the 18th century is trashed today by contemporary mathematicians like fractal guru Benoit Mandelbrot, who claims that the Gaussian bell curve is nonsense. Why was Mandelbrot so vocal about large divergences (extremities)? Could Mandelbrot have missed the big picture? Will Mandelbrot’s vision overtake Gaussian mathematics finally relegating bell curve, normal distributions to the annals of history?

We at Orpheus don’t think Gauss was wrong. The law of frequency of error took the shape of a bell curve. The idea first mentioned by Abraham Moivre in 1738 is now a part of societal faith and market modeling. Starting from Fundamental analysis, option pricing, statistics, the normal distribution curve is everywhere. The curve talks about patterns in divergences that revert around the mean. Francis Galton was so impressed with the idea that he wrote a complete theory of mean reversion around it.  Practical applications were built around the idea and it was used as a predictive model.

Time Triads, Time Fractals, Time Arbitrage, Performance Cycles are terms coined by Orpheus Research. Time Triads is our weekly market letter. The report covers various aspects on TIME patterns, TIME forecast, alternative research, emerging markets, behavioral finance, market fractals, econohistory, econostatistics, time cyclicality, investment psychology, socioeconomics, pop cultural trends, macro economics, interest rates, derivatives, money management, Intermarket trends etc.

This article is written for Alrroya


Smith, Pareto and the divergence debate

Life is all about making sense of information. This information could be personal, economic, or societal kind. When we comprehend information, we make a decision, which we assume to be positive. So at a certain level we are trying to understand performance and how to perform as individuals and make performant choices? Performance assumes a kind of order. We try to create order in minds from disorder in the external world. This disorder could also be called divergence.

Divergence is a phenomenon seen in nature and markets. It is something that needs explaining and can be ineffable at times. It is linked with change or rate of change, fast and faster change. How fast can a price asset grow or decay? Divergence is also assumed to have a non normal aspect. It happens less than normal. Normality assumes that markets and 90% of its components move higher together or vice versa. Divergence is different from normality and could indicate change, a potential reversal. Divergence is also known as non confirmation in technical analysis. Divergence also creates news, as something that is non normal is strange and worth talking about. Divergence can be seen in information, data, and patterns. Divergence is studied and researched. It is a system that can be built as a strategy.

Adam smith (1723-1790) talked about the invisible hand, what we don’t know, something unpredictable, a kind of divergence. Vilfredo Pareto (1848-1923) talked about non homogeneous wealth allocation. 80% of the wealth is with 20% of people. This unequal allocation was a divergence.

Read the complete article at Alrroya

Time Triads, Time Fractals, Time Arbitrage, Performance Cycles are terms coined by Orpheus Research. Time Triads is our weekly market letter. The report covers various aspects on TIME patterns, TIME forecast, alternative research, emerging markets, behavioral finance, market fractals, econohistory, econostatistics, time cyclicality, investment psychology, socioeconomics, pop cultural trends, macro economics, interest rates, derivatives, money management, Intermarket trends etc.

This article is written for Alrroya