“In financial markets, God can appear, anyway, to play with the dice,” explains Benoit Mandelbrot in his work applying Fractal Geometry to financial markets. As I studied, it became clear that price movements fit with many aspects of quantum mechanics.
I am not the first to equate quantum science with markets. Others have discussed similar theories. However, they always end up being weird-one author dedicated a few paragraphs to his supermodel girlfriend. He seemed to think that quantum meant using lunar phases or some such nonsense. I do not know for sure, as I stopped reading.
As a Software Engineer for over 20 years, my mind immediately associated the behaviors of quantum bits with the price movements of exchange-traded assets. However, I learned long ago that there are no easy answers when it comes to financial markets. The only ones who report complete understanding are trying to sell a trading system.
The concern for many funds today is paying Ph.D. scientists to discover market inefficiencies. However, taking advantage of small anomalies in the market is short-lived. For example, the automated trading strategies I created for a hedge fund did well until the irregularity we were trying to exploit vanished.
My current focus is on looking at the market through the lens of uncertainty. I concluded, “Financial Markets, regardless of the asset, represent the buying and selling of risk.” Yes, I just quoted myself. Now on to something more interesting.
A qubit is a two-state quantum system exhibiting some strange differences from its binary cousin. Instead of “on” and “off” like a light switch, qubits are impossible to measure precisely. They exhibit varying degrees of both “on” and “off” simultaneously.
We all know what a stock is. It is a piece of paper that represents some small fraction of ownership in a company. Before being listed on an exchange, it is priced based upon the companies value. Afterward, that is when things go quantum.
To understand why an exchange-traded asset is moving upward or down, one must determine the cause. French Mathematician Benoit Mandelbrot found, “In the real world, causes are usually obscure.”
Benoit described, “The precise market mechanism that links news to price, cause to effect, is mysterious and seems inconsistent.” Then concluding at the statement that changed my view on markets, “Finance is a black box covered by a veil.”
Prices in Multiple Dimensions
We see market prices in two-dimensions-the x and y-axis of a time-series chart. However, the reality is that prices are muli-dimensional. There are dimensions of time, price, volume, and market capitalization that are universal. Plus, other ones specific to particular assets like crypto, FOREX, and commodities.
The price itself does not tell the whole story. Understanding why the price is at a specific level is the goal. People ask me all the time, “why is the market [up or down] even though [some event happened]?” The reason is their anticipation is not in sync with the news you are reading.
Quantum Aspects of Markets
The first comparison comes from the idea that an exchange-traded vehicle is both an asset and a liability at the same time. Buy it before it moves upward; it is an asset. Purchase it before traveling downward; it becomes a liability. However, there is no way to know for sure what it is before acquiring it.
The same holds for short positions. You cannot buy an exchange-traded asset without guessing as to what it will do in the future. Also, the act of purchasing or selling an asset changes the value. Like the quantum system, taking a measurement alters the behavior.
Third, markets are a black box. We see the inputs of news and outputs of price, but the exact mechanisms at work are never visible. Price movements reflect anticipation. The response of millions of market participants reacting to events as they become known.
Fourth, like the quantum state of a qubit, market prices have multiple dimensions. Knowledge of the quantum state and the rules for the system’s evolution in time are the only things predictable about a quantum system’s behavior.
Risk and market behavior go hand-and-hand. Mandelbrot studied market volatility. In return, he gained a better insight than most professional money managers. The peaceful changes to violent disruptions are all part of the game and almost equally probable.
The idea of applying quantum mechanics to markets came to me while reading Mandelbrot’s The Misbehavior of Markets: A Fractal View of Financial Turbulence. A favorite of mine next to my equally beloved text on trend following The Complete TurtleTrader: How 23 Novice Investors Became Overnight Millionaires by Michael Covel.
Originally published at https://toddmoses.com.