Continuing from my last post where I had left the juicy part of the book for this post, here I go :
The last topic contains ideas which I find fascinating. Markets are complex adaptive systems and one can understand it better if you have systems thinking. Peter Senge’s Book “The Fifth discipline” had a great impact on my way of thinking and each essay in the last part of the book is a suggestion towards developing such a kind of thinking.
The author points out to the need for diversity in thinking. Reading about how stats is used in baseball to improve a team’s performance can teach you a lot than trying to look for cases in your own domain. A healthy discussion with a ecologist can give you more insights about speculation in financial markets than trying to look at indicators from the same field. Google’s search engine and the way it used eigen value decomposition can provide you with a far more insight in to the usual factor analysis of stock returns. Research evidence from study of ants, bee-hives can give clues about how markets aggregate information.
Decision markets, and readings like “Wisdom of Crowds”, ” Wikinomics” can give you insight in to taking positions on a stock or a derivative.
Study of fractals is more meaningful than studying and working on the same old academic finance theories which are based on normal and log normal distributions. Power laws and the ways Power laws are used in fields like economics, psephology and like can help one understand markets better.
The entire point of the essays under this section is to urge you to keep your mind active and open to things happening in fields which might not seem related at the outset. Markets as a system can be understood better by applying ideas and thoughts from other fields.
Take any branch of finance in today’s date..It is crying for contributions from other fields..It is being flooded by sociologists, ecologists , psychologists, who know that finance as a discipline can grow only by fusion of ideas from various fields. Case in point , Mandelbrot’s fractal finance. Finance literature has virtually nothing on fractal finance as compared to the other kinds of literature. I had a chance meeting with the Mr.Barone Adesi , the person behind closed form solution for american option. I asked him whether he would consider research in fractal finance a viable option for a budding researcher. He said, he had himself worked on it for 2 years and was hopeful that research will pick up in this area.
I remember another faculty giving an analogy of ants in research literature. If you place something that attracts ants and you see to it that there are only 2 possible ways, inevitable one of the ways gets used by ants and the whole path is jam packed, even though an alternate path is available. This is similar to academic literature where it is only by getting references and citations from similar research initiatives , can one publish papers. Coming back to the analogy of Ants, once in a while , a few ants move from the pack and explore new paths and that is how ants as a community survive. Finance has reached a stage where it needs such diverse thinking and one can only hope a few people from academia or a few practitioners will actively stray from the usual path and help us answer some of our questions on
How do markets aggregate information ?
What does aggregation mean from market efficiency ?
Concept of risk remains incomplete
We don’t know how our brains work ?…………………….and many more such questions that need to be looked at.
This book reminds me of a set of essays I read a few years ago, “Essays on Derivatives” by Don Chance. Each of the essays revolved around a simple but powerful idea. I get the same feeling after reading this book.This book provides a lot of food for thought. If you want to think on the areas where finance concepts have to be worked on, read this book..Out of 30 ideas, I am certain that atleast a few will interest you.