Jun

6

 I have just read the first chapter of A Conceptual Introduction to Chemistry by Bauer, Birk, and Marks. The question immediately arises as to what would a chemist who lived on Mars and knew nothing of our financial situation study or do to make a profit in markets when he came down?

He would certainly place much emphasis on the changes in state that the various companies went through and their effect on stock prices. Big mergers and acquisitions would be studied as to their impact. The moves above 100 and below 10 or 5 would be considered. Stocks would be grouped by their digits and volatility. The amount of trading in each range would be considered as a measure of density. And the luster of each stock, relative to publicity and ballyhoo, and its electronegativity would be considered.

Does a stock dissolve in water, and at what temperature? Yes, and of course the ability of a stock to move on its own or the external force would be high on the list. What are the basic elements, the companies from which all others are built? One would think that a whole set of quantitative studies, probably much more useful than the ones usually found in the literature might be sparked by such a consideration.

Allan Millhone replies:

When the chemist came down from Mars in this down market he would see that items containing oil would be a good bet for future products.

He would note a suppressed housing market and might look at roofing and construction materials. Roofing, felt paper, ice guard brand products, tar. Or is it best for him to buy XOM and the like? I note the Golden Boys predict $85 oil. They must have a swami at a crystal ball like the wicked witch had watching Dorothy and her friends to see the future.

T. K. Marks adds:

The chemist would benignly synthesize a powerful new opiate aimed at pain relief and call it "Price Averaging, This Time It Will Definitely Work."

I would experiment with such, thinking that only others could get hooked.

George Parkanyi writes:

He might also look at what properties of a market attract energy (money), or repel it. Can markets be combined into compounds? If markets do form into complex "molecules", what would make them stable or unstable? How would the combinations behave? What would be the tipping points? What would be the solid, liquid, and gaseous states of a market? How much energy does it require to move from state to state? Does change of state happen smoothly, or in quantum increments? Do markets have polarity? Which ones repel; which ones attract each other? If markets don't necessarily interact with other markets, can they still act as catalysts to facilitate interactions between other markets? Does one market orbit around another? Does the state or presence of one market crowd out or starve another? Is the main trend of markets toward entropy (increasing disorder), and how much energy is required to keep markets organized and behaving in their current states? Can markets serving purposes today, be used for other purposes?

And… which markets cause high blood pressure and heart-problems…

Alex Forshaw comments:

The chemist would identify a massive, exploding black hole which the human species alternatively call "the Fed", "the US government", "FDIC", "FHLB", "Fed", Congress", "Obama", "Bush", and many other names, consuming everything else … and he would watch in amazement as market liquidity, entropy, gravity, etc were warped beyond recognition every other week.

He would probably blast off of Mars to a galaxy far far away ASAP before Mars were imminently gobbled up by the same black hole.

Easan Katir adds:

Thank you for this new chapter drawing analogies with your introduction of chemistry, in the service of profitable trading.

Though more hydraulics than chemistry, here is a video demo filmed at Cambridge of how a plumber / economist approached similar questions back in 1949, with his "Phillips Machine ", or "Moniac."

[Ed: if I understood correctly it is a hydraulic simulation of the Keynesian Liquidity Preference model].


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7 Comments so far

  1. Michael F. Martin on June 6, 2009 4:15 pm

    I'm one ofthose aliens except Mars was the Chemistry department and Earth the law school at the University of Chicago. (Only a few blocks apart!)

    From my first intro to economics, I was struck by its conceptual similarity to classical thermodynamics. Having had the benefit of a grad level course in nonequilibrium statistical mechanics, I've been looking for ways to apply its insights to economics ever since. There are many, but to convince the crowd to do economics in a new way requires extraordinary demonstrations. Maybe we will have some soon.

  2. Steve Leslie on June 6, 2009 8:53 pm

    There are instances that in order for a chemical reaction to take place a catalyst must be introduced. http://www.wisegeek.com/what-is-a-catalyst.htm In markets and securities a catalyst is often necessary to initiate the reaction from the players in the market. It would behoove the speculator to learn how a catalyst is introduced and the effect it can have on a chemical reaction. I recall the catalysis of Joe Granville, market maven, who would make a call and the market would respond. Henry Kaufman would make a statement about interest rates and affect the markets. Dan Lundberg would come out and comment on oil pricing and instigate a movement in black gold. Rumors of the Hunt Brothers' cornering the precious gold and silver markets drove prices to insane levels. Chairman wrote in his book on how rumors of Japanese intervention in currencies can cause vast swings in futures. Microsoft Chairman Gates commenting on Mr. Softee earnings. Steve Jobs on new innovations at Apple. Hundreds and hundreds of more examples when you think about it.

  3. jeff watson on June 7, 2009 8:39 am

    The most important correlation between markets and chemistry would be in the area kinetics which in popular terms would be the “Rate of Reaction.” In fact, some of the exact formulas in kinetics can be applied to certain market situations. Without giving up too much, a good start would be right here with this equation. Play around with it and see what journey it takes you on.

    r = k(T)[A]^{n’}[B]^{m’}

    Jeff

  4. Steve Leslie on June 7, 2009 11:09 am

    I would think a chemist would look to the chemical phenomenon of wetting to help explain factors in markets. http://en.wikipedia.org/wiki/Bernoulli%27s_principle Wetting is the ability of a liquid to maintain contact with a solid surface. I can think of one example where this phenomenon can be seen. A stock reports a worse than expected earnings report and the stock drops 30 percent on the open. Or at 8:30 AM the employment numbers come out worse than expected and the market tumbles 2-5% for the day. It is as if the wettability has instantly changed and securities looks their traction or friction. It also explains capillary effects. Perhaps this can be used to explain how 50% of the movement of a stock is attributable to the group it is associated with. Finally one could look to wetting and view it in the context of yield curves.

  5. douglas roberts dimick on June 7, 2009 12:50 pm

    Stocks from Mars / Markets from Venus
    To identify the basic elements of a thing, one would first have to articulate a theory as to the constitution and constituency of the thing itself. Thus, when posing this question as to conceptual understanding of stocks, it appears that one first much choose from one of at least two potential theories of stockmarkets a la stocks and markets.
    When analyzing markets, are we theorizing about the securities being so exchanged or electronic exchange markets?
    As a result of being involved at marginalized investor and consulting levels of private equity as a subset of investment banking, I began research based on the assumption that securities exchanged were not events derived from direct evidence but variations of both objective and subjective information, both relevant and irrelevant to varying degrees among often aggravated and mitigating circumstances.
    Accordingly, causation is the issue. For instance, “changes in state” may or may not be correlated to external factors, such as M&A impact, whereas internal parametrics such as volatility may or may not correlate with proximate causation of a stock valuation or price action.
    During my research, I had not considered potential applications of electronegativity. Now having surmised its application based on the Theory of Quantitative Relativity, I would hypothesize that it may relate to assimilations of stocks exchanged more so than to correlations of electronic exchange markets. Range as density, though, I have measured during construction of related functions and indicators; there are correlations here with density, also displacement.
    Here in China, I am limited to comment on the cited textbook. To me, the authors are encouraging students to think in terms of theorizing – a paradigm certainly not encouraged and usually proscribed here in China.
    From the preface: “This approach places emphasis on conceptual understanding over algorithmic problem solving.” Why?
    Sure, the text is conceptual for purposes of introducing the subject. Regardless, the inverse of that reasoning is that exploring and creating new understanding based on pre-existing knowledge requires a paradigm from which to operate any scientific inquiry – even if the paradigm assumes pre-paradigm domain(s).
    An example of this application may be found at Figure 9.22 of the sample text:
    “The relationship between the velocity (v) and kinetic energy (KE) for a given gas particle is given by the equation (KE = 1 mv2) where m is the mass of a gas particle. In Figure 9.22 look at the line that corresponds to gas particle velocities at low temperature. Notice that it isn’t a single velocity, but a distribution of velocities.”
    This charting matches formulated indicators of directional quantification of an electronic exchange event of a given market security. At least in theory, quantification (or Quantitative Relativity) of the curving distribution here may be said to evince the correlation between a market exchange as so reported and the physics (or here chemical equation) of the correlating systematics.
    How can the authors so correlate this example? Because their opening chapter establishes a rules-based predicate for such subsequent analysis of the data… Matter and Energy.
    In his commentary, George observes how such “properties of a market attract energy (money).” He is so indicating the latter of the two possible theoretical approaches, whereby he then posits markets being “energy from state to state.” He inquires as to smooth or quantum segmentation, polarity, intra-market correlations, and decay (such as I have noted regarding benchmarking): all are worthy of scientific study.
    Therefore, yes, new sets of quantitative studies could provide greater understanding of the existing mass of data related to electronic market exchanges, specifically from which we may further articulate theories to better conceptualize and, therefore, measure direction and rates of correlating events. dr

  6. jeff watson on June 7, 2009 9:42 pm

    Mr. Dimick said,

    "During my research, I had not considered potential applications of electronegativity. Now having surmised its application based on the Theory of Quantitative Relativity, I would hypothesize that it may relate to assimilations of stocks exchanged more so than to correlations of electronic exchange markets."

    My question is, exactly what would electronegativity have to do with "assimilations of stocks exchanged?" I'm kind of lost with this statement — and I do know a little bit about electronegativity — and would appreciate guidance as perhaps I'm missing something important here.

    Jeff

  7. douglas roberts dimick on June 8, 2009 7:50 am

    Hey Jeff, I am sure that you know more than me about it, as I know nothing… V’s article was my introduction.

    I looked up the term and its related subject matter. Hence my saying “I would hypothesize that it may relate to…”

    My thought of “assimilations of stocks exchanged” related to sector and index groupings. As I understand electronegativity, the event concerns how an atom attracts electrons in chemical bonds: see http://www.english-test.net/mcat/vocabulary/words/097/mcat-definitions.php .

    Within markets, industry sectors segregate and demarcate inter- and intra-related securities. Often in trading patterns, you find parallel price action occurring.

    Are there function and indicator formulations of price, volume, and related stochastics that may either explain or even affect this “bonding” of sector related issues? From my limited understanding, I would think it highly probably given the mechanics of market making and program trading systematics.

    Perhaps such a study (as Victor suggests we be more open to) could be analogized based on electronegativity. An example that comes to mind is Microsoft versus Lenox related applications – or close opposed to open sourcing firms with public market listing. Could we quantify the assimilation of price action of such tech issues based on some stochastic correlated polarity in relation to, for example, Microsoft?

    Don’t know as I am not a PhD of electronegativity. A PhD of molecular particles who is a fellow member at Tradestation.com told me that he did not see how E=mc^2 would apply to the markets. After we discussed my issues, I sensed that he was beginning to follow my theory – particularly relative to polynomial time, as he had written a related indicator, which was how I came to contact him in the first place.

    One of the greatest aspects of law school that I so much enjoyed and to this day benefit from is the notion of “analogize and distinguish” in relation to facts, law, and policy. Much of the time, of course, such pursuits as here, where one (like me) ventures well off the reservation of laypersons, may end of at a dead end.

    I learned from my father that most of life is about just having the will and capacity to enjoy and learn from the trip… dr

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