Chaos and Chance

Are markets just random?

It’s easy to think so. One day they’re up 100 points, then they’re down 200, then up 400. What comes next? The market appears to move to its own inaudible beat, uncertain as to time, place, and level. When the economy is good is often a bad time to invest, and when the economy is bad appears to be a good time to invest. What to do?

All living systems–biological, sociological, economic–are immersed in a sea of randomness. The most basic biochemical processes depend on the random thermal motion of the proteins, enzymes, and DNA. The mechanism of evolution depends on random mutations. Life progresses because of the balance between rigid, formal structures and flexible, adaptive processes.

Economies and markets do the same thing: they balance the stability of what’s familiar with the innovation of something new. But they aren’t perfectly random; they have a decidedly upward bias over the long run. That’s because knowledge (and capital) accumulate over time. We’re more significantly more productive now than we were 50 years ago because we work smarter than we did then.

Still, short-term wiggles and jiggles can upset even the most patient investor. We just have to be sure that we don’t get fooled by randomness into doing something stupid.

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