Stock Market Science

Why stock market is not a science? Today many elements of our life have a degree of predictability, consumption patterns, social behaviour, earthquakes, etc. However the predictive measure is lacking when it comes to stock markets. Behavioural finance highlighted this lacking measure and accountability. Even statisticians limit themselves to prediction of stock market volatility rather than stock market direction.

 

Can scientists include stock market as a part of the scientific framework? If you think scientists have more important things to do than stock markets. Believe me this is not all true, you will be surprised how interested physicists can be in stock markets. It’s just that the stock market science is indeed in its early stages.

 

What will happen if a framework for stock markets is established? Nothing will dramatically change, first the argument between behavioural finance, economists, mathematicians and physicists will get more colourful and then it may take years for some new accepted norms to win over and emerge from the debate. Stock market science just like societal learning is a gradual process.
 

How will stock market science help? Apart from the fact that it could help understand risk (other name for creating and conserving wealth), could stock market science somehow complete science itself? Could understanding stock markets help us understand nature? Well nothing is impossible when you search for universal rules. If stock markets are natural; stock market science could help us understand nature.

 

Was it random? I met Professor János Kertész in Budapest. Though I was connected to the professor through an acquaintance at MSCI Budapest, we found that we were also connected through Boston University top global physicist Hugene Stanley (I have a paper with Prof. Stanley written in the early 2000). Janos had worked with Laszlo Barabasi (another leading physicist) while Laszlo did his doctorate under Eugene Stanley. In crux Bombay Stock Exchange was the reason I got randomly connected to three giants of Physics.

 

Network and knowledge. Laszlo has been featured as the man who could change the world. His work can predict network behaviour, map, comprehend and control a complex system. In his top selling “Bursts” Laszlo explains numerous natural systems. But just like Mlodinow (The Drunkard’s Walk), he does not refer to stock market systems. Networks today are a big data domain issue. Stock market is a database, a network and hence a part of the same big data domain. If there is order within networks starting from Hollywood to proteins to consumer behaviour and today we can treat callers as particles and predict their location with 93 per cent accuracy, then stock market predictably cannot be anathema.

 

In Bursts, Laszlo explains how natural events portray a statistical Poisson distribution but when we assign weights and priorities to events (tasks) the distribution changes to levy flight, which expresses outliers better. 

 

When we create a stock market portfolio consisting of a composite index, a sector, an asset, we are talking about preferences (priorities) leading to weightages (equal or unequal). Even stock market performance, regional performance is owing to the weight global money assigns to the various regions. 

 

This is why stock markets universally exhibit the levy flight or the power law behaviour. If physicists would frame the stock market problem differently, we could understand performance (underperformance), comprehend groups (portfolios), improve our selection systems and end up laying a framework for stock market science.

 

What if? If Pareto would have met Benner, or if Einstein would have met Pareto, interdisciplinary science would be a generation old and the stock market science may already have been in place and space time geometry could look different. Even if we assume to be born in this great time when stock markets could redefine science and vice versa, the network would have to attain critical mass, before we wonder how we did not see it.

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The author is CMT, and Founder, Orpheus CAPITALS, a global alternative research firm