24 July 2010

Structural Models

The recovery does seem to be in the market, does it not. It was perhaps being masked by the floods of cheap dollar, which now must be ebbing even faster. A real company driven growth, which surely the great financial engineers in Obama's team must want, will be such a rocket.

Science is perhaps about interpreting data. One has a set of data, one looks for underlying structure and then one extracts a model. From this one can make predictions. The idea of science is this process gets more and more accurate as time goes on (or at least changes).

Let us just assume that models have issues predicting the future behavior of the Dow, for example because it may be hard to model it, or to capture what that structure is, in ways which predictions can be made.

If this is the case, how on earth do some become rich investing ? Perhaps because they do not try and predict anything.

What they may do is look at the components of the Dow, companies, and make this intriguing assumption, that the structure of a company, evidenced in certain interpretations of its financial statements over time (computational structures within statements awaiting activation, made by good management), is effectively a computer program when it interfaces with the market. This program will bring the value of the companies shares to values commensurate with this structure.

So structures again. That is what I mean by a computational structure, which I would imagine sits somewhere on the fat tails and high peaks which the graph are showing. My feeling is it is something as well to do with the way the brain makes computations (those in the market and those making the company, for example).

In all events this process is perhaps highly non-linear (like the underlying computational structure itself), thus you wait and it seems like nothing is happening or things are going down and then suddenly the rush upwards happens. It is like magic, but it is perhaps highly advanced computations, given time.

(edited 7/6/14 9:28pm)

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