The Predictors. T.A.Bass

Tuesday, 15 April 2008 16:52

The Predictors : How a Band of Maverick Physicists Used Chaos Theory to Trade Their Way to a Fortune on Wall Street. T.A.Bass

This is a non-fiction book. The physicists are chaos theorists Doyne Farmer and Norman Packard -- but this is not a chaos text. In fact, there is little technical information in the book. It's more about the business side of starting a financial prediction company. To quote: "They begin an animated discussion about some of the basic ideas that will later be used at Prediction Company. The technique involves fitting functions to time series. Imagine a stream of data, a record of daily sunspot activity, for example. The sunspot activity on two successive days is two numbers, which can be represented as points in a plane. The sunspot activity on the next day can be thought of as a point suspended above this plane. The picture of sunspot activity for a year will be a cloud of points in three dimensional space. To make a forecasting model, one fits a surface, like a rumpled sheet, through this cloud of data. If the sheet fits in close proximity to all the data points, it will be a good model. Forecasts are made by stretching the sheet into regions where additional data points will be recorded when the future rolls into the present". The idea is in the air... This description is recognisable to someone who has independently arrived at something similar -- but probably not informative to the rest. What you want to do is data compression of some sort, and there are more conservative compression tools than a fit. One may  object to the business model of striking an exclusive deal with a single large client, as opposed to marketing the service to thousands of individual traders. Overall, valuable historic reading to someone with similar interests.

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