Tuesday, April 22, 2008

Against the FRACTAL!!

It always amuses me when traders and investment professionals start talking about "Chaos Theory" and "FRACTALS". (I always capitalize the word FRACTAL to enhance its aura of mystery and magic...very complicated and wondrous things, these FRACTALS)

FRACTALS are self-similar groupings of scale invariant objects. Got that? Good...now what? Going from power laws to deriving a probability distribution that accurately reflects asset returns or risks is impossible. It's intellectual window dressing.

BUT, even if it were possible, had I found the keys of the kingdom, I would never, ever give them away. I assume anyone motivated by economic gain would do the same. So, when I read the following excerpt from an article (read: press release from a publicist) about a "new FRACTAL system", I silently nod and say "the spectrum of human behavior is a narrow one" and file it to the recycle bin in my head.

"In addition to managing money for others, Mr. XXXXX also is willing to teach others how to use the XXXXX Fractal forecasting and trading models. So far he’s trained two proprietary traders and he’s open to sharing it with institutions, but it doesn’t come cheap—1 Fractal charges individuals $500,000 plus expenses, and the price is $2.5 million plus expenses for institutions. The training takes about a week, Mr. XXXXX said, and his teachings are subject to a non-disclosure and confidentiality agreement."

So,I pay this person $500,000 for a week of training...and off I go with my newfound FRACTAL knowledge, confident that I have mastered this technique as applied to trading. Sign me up!

I'll end this post with a quote from Von Mises:

"In the third quarter of the 19th century, the biological analogy was very popular with positivistic economists and sociologists. Serious men then wrote treatises like “what is the intercellular substance of the “social body”. Nobody any longer denies that these studies…were a meaningless toying with words. Today men prefer the mechanical analogy. But this fashion too will pass without leaving a trace.”

...and so it is the same with "FRACTALS"

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