Norman Packard on Stock Market State Space

A strange attractor is an object in state space just as an ashtray is an object in state space. Except that in a state space the coordinates are not like x,y,z coordinates. They depend on context. Let me give you an example. The state space of the stock market is the value of all the stocks, the money supply, foreign exchange rates, the price of treasury bonds, and so on. These are the state space variables and its coordinates. And just as you can describe the geometrical properties of this ashtray, so too can you describe the geometrical properties of a strange attractor in state space.

A strange attractor is not a force. It doesn’t have the same kind of physical reality as gravity. The state space picture of a dripping faucet shows you a certain kind of structure. The state space data for the stock market may show you the same kind of structure. These structures can be identified as manifestations of a particular kind of strange attractor. The meaning of the variables for each of these state spaces is different, but the attractor is the same. The science of chaos tries to figure out which kinds of attractors are commonly found where.

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One Response

  1. It may be stranger when people always look at the past (historical prices), which is biased since the past has its own context. In my view, chaos starts from this moment when I don’t know where to go. It’s a good to have just an ashtray of brokers’ recommendations with only three values: buy, hold and sell. In fact, CAPM and Beta are already dead because the market proxy never fits the true efficient frontier…

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