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Why it’s impossible to predict the future of the stock market and such things  

by William McGaughey

 

If you could predict the future of the stock market, you could quickly become a billionaire. The best, well-paid minds have been working on this problem, but all have failed. Why? Is not stock-market performance subject to causality? Yes, of course. The problem is not that stock prices do not have causal explanations but that our knowledge of the required elements is imperfect.

One can never have perfect knowledge of such things because that would require that we know the content of another person’s mind. Does that person intend to buy or sell a particular stock? In regards to stock-market prices, we would have to know the content of thousands of individual and institutional investors’ minds for it is the cumulative balance of buy or sell decisions which determines whether the price of a stock will rise. We would have to know this instantaneously - in the moment before the stock order is placed - which effectively means that we would have to be able to predict thoughts before we have time to observe them.

So much in this world is predictable. The world described by the natural sciences obeys regular laws which scientists have identified. Persons equipped with such knowledge have sometimes been seen as ones possessing miraculous powers of prediction. For example, western missionaries would predict an eclipse of the moon and produce awe in savages ignorant of astronomy. Modern engineering can arrange for a series of explosions next to a building’s structural supports causing it suddenly to implode. What a miracle it seems that someone could predict that this building would collapse into its own space and not topple some adjacent structure. But in this realm of the physical sciences, nature does follow predictable patterns. We trust that the demolition expert knows what he is doing when he pushes the button to set off the explosions.

What we are saying, then, is that there are really two different worlds. One is the causally knowable world of lifeless objects. The other is the world of living creatures. Such creatures live according to a cycle of events which is partially known. Its life cycle includes the processes of birth, growth, maturity, decay, and death. Within that framework, however, much can happen. Therefore, predictions based on the life cycle of living organisms - including civilizations - lack the certainty of predictions based on knowledge of the physical sciences. They offer only a rough indication of what might happen in the future.

Living organisms have a peculiar characteristic not shared by inert objects. They tend to attract antagonistic organisms. A certain plant becomes food for a grazing animal. The smaller species of animals become food for larger animals. Those which graze on plants become food for carnivores. Wolves prey on herds of deer. And so the world of plants and animals is organized vertically in a food chain. This means that one must have knowledge both of the wolf and deer populations to know how either will fare in the future. A swelling population of deer becomes a feast for the wolf pack causing its population to increase. As the wolf herd expands, it eats more deer causing the deer population to decrease. Nature thus remains in ecological balance between two opposing forces. The wolf needs to eat the deer but not too many of them lest its own food supply disappear.

There is another kind of antagonistic being within the species itself. Human beings, having no natural predator, are nevertheless host to unwelcome viruses and germs. These minute organisms attach themselves to other living creatures sapping their resources, even to the point of death. To sustain itself, the germ needs a healthy body which it can infect. Either the body dies or it develops resistance to the infection that can eventually restore health. Thus germs must travel from body to body to perpetuate their species.

Computer software has a structure that resembles that of living creatures. Not surprisingly, it can also be attacked by viruses. In this case, there must be a human being with malevolent intentions who invents the virus and deliberately spreads it. But computer geeks can be an ornery bunch who do such things because they can. Again, the spread of a particular computer virus causes researchers at software companies to create “anti-virus software” that can prevent or counteract a particular type of infection. A balance between these two contradictory forces is maintained.

Philosophical Implications

Plato assumed that the world of human society could be known in much the same way as the physical world. It would follow certain regular patterns that with certainty could be known. The salient elements in the world were what Plato called “ideas” or “ideals” - for instance, the concept of “justice”. These ideals were timeless patterns (or logical possibilities) to which specific worldly objects conformed. The idea of a “cow”, for instance, encompassed all living cows. Plato believed it was critical to find the proper definition of an idea. That known, true knowledge of the specifics would follow.

Plato’s philosophy works quite well in the engineering field. The natural sciences establish general patterns of knowledge which become a technology. Technically competent persons possess both the knowledge of theory and the practical experience to apply it successfully to particular situations. However, Plato aspired to use his type of philosophy to govern states. He thought that the conjunction of philosophy and political power would create the perfect society. He did not reckon with the fact that state craft must take into account the diverse motivations of people. Invited to Syracuse to advise its young king, Plato proved inept as an administrator.

Hegel, the German philosopher, had a better sense of how the real world works. He recognized that ideas are not static entities existing in eternity but influences existing in a particular historical context. Hegel believed that history was a dynamic process of creating society through ideas. Particular institutions arose as these ideas were realized. In a famous formulation, Hegel conceived that each “thesis”, or idea that was originally expressed, gave rise to its opposite, the “antithesis”, and that the two opposing forces had to be resolved in a third idea, the “synthesis”, which was more complex. Society as a whole developed into an ever more complex and pluralistic set of institutions.

Hegel often wrote of “realizing” ideas or making ideas “concrete”. This means that an idea which originates in someone’s mind becomes a pattern by which certain things are accomplished in the world. These ideas become “concrete” when we can see their patterns in the world or, in other words, the consequences of activities based on the ideas. People who have ideas work to make them a reality. At first invisible, the ideas “materialize”. Certain purposes become visible to others (than those working on them) when their project is achieved. The world now contains something new.

The significance of this is that ideas which are successfully pursued change the world. (In contrast, ideas that advance no further than being in a person’s mind do not change the world because nothing is done to realize them.) The very success of an idea undermines its existence. That is because an idea is formed when a person looks at the world in a particular way and sees the world as it then is. When the idea is realized, however, the world is not the same place as before because it now contains the product of the fulfilled idea. The person cannot maintain the original idea because thought is focused on a different world. So the Hegelian dynamic drives history.

This is the process: Looking at the world, a person has a particular thought or idea which creates a purpose. The person works to fulfill the purpose which means to make it a reality in the world. Once the purpose is realized, the world is changed in that way. The person now looks at the world again and must take into account the new situation. The content of thought will be different. A new purpose will be created which will change the world in still another way. To understand the world as a whole, one must perceive the various purposes and see how each was realized. It is a more complex kind of understanding than that when the original idea was conceived.

I call this “self-conscious” thought as opposed to “conscious” thought. The latter is a simple perception of the world. The former is a juxtaposition of two thoughts - the world as it originally was and the change created by a previous thought one had or might have had. To reconnoiter in this world, one needs to bring a more sophisticated awareness to the situation. One needs to be aware not only of present expressions but of additional layers of meaning contributed by past experience. What we call “context” consists of elements introduced in the past that need also be recognized to understand the full meaning of a situation. It’s a kind of double awareness one brings to the situation.

We can see this quite clearly where two people are engaged in an adversarial relationship that requires guessing the other person’s thoughts or state of mind. A unique kind of logic is created which I call a dialectical shuttle.

Dialectical shuttles: Situation One

Consider this incident discussed in Mary Cheney’s book, “Now it’s my turn: A daughter’s chronicle of political life.” Mary Cheney is the daughter of U.S. Vice President Dick Cheney. She is also a lesbian. Catering to the religious right, the Bush administration has taken a stance against gay marriage and other positions generally favored by gays and lesbians. So a certain tension existed here that could be politically explosive.

During the 2004 presidential campaign, Vice President Cheney debated the Democrat’s Vice Presidential candidate John Edwards. As I recall, each candidate was asked to say something good about his opponent. When it came his turn, John Edwards complimented Cheney and his wife for the way they had “embraced” their daughter upon hearing that she was a lesbian. Mary Cheney, sitting in the audience, responded audibly to that comment with “a four-letter expletive,” it was reported. Logically the situation can be analyzed in the following way:

(1) At the simplest level, Edwards was trying to be kind to Mary Cheney, as well as to the Vice President and his wife, by complimenting the Vice President on his tolerance of his daughter’s sexual preference. Mary was showing a mistaken reaction by responding with curse words. Only a simpleton would believe this, however.

(2) At a deeper level, as Mary Cheney herself interpreted the situation, John Edwards was trying to score some debating points against her father by bringing up the subject of her sexual orientation. First, he was saying that he, Edwards, shared an ethic of tolerance towards gays and lesbians and other socially disadvantaged groups. That is, of course, a core attitude among Democrats, sure to appeal to the party’s base. Conversely, it would trouble her father’s Republican base, especially its fundamentalist Christian constituency, to be reminded that the Vice President had a lesbian daughter. So the smiling Mr. Edwards was trying to hurt Vice President Cheney politically by bringing up a potentially controversial aspect of his daughter’s personal life. Mary Cheney was right to take offense in having her name thus dragged through the mud.

(3) In defense, John Edwards might argue that he was only responding to a question. His reference to Mary Cheney and her sexual preference might have been a spontaneous answer given under pressure. Edwards was sincere in admiring the Vice President for his tolerance of gays and lesbians since many Republicans take a different view.

(4) In response to this, someone might point out that John Edwards was a seasoned trial lawyer and politician on the campaign trail. He did not “innocently” bring up the subject of Mary Cheney’s lesbian status. As someone who badly wanted to win, he knew what he was doing. He knew that steering the discussion in that direction could hurt Vice President Cheney in the debate.

It’s possible to go round and round on a question like this. It can be definitively settled only by asking John Edwards what his intention was in making that remark; and then only if Edwards gives a candid answer. Maybe Edwards himself had mixed motives. Maybe the remark was a sincere compliment to the Vice President but also a conscious attempt to hurt him politically. The point is: Life is complex. One cannot always explain everything through simple logic.

Postscript:

In her book, Mary Cheney criticized candidate John Edwards for bringing up her sexual orientation in a debate with her father, Vice President Dick Cheney. Recently (March 2007) Dick Cheney made the same criticism when CNN reporter Wolf Blitzer asked a question about his daughter. I think this is a case of an argument being right in one situation and wrong in another.

I think Mary Cheney was right to criticize Edwards. His remark was made in the context of a vice-presidential debate where candidates are expected to score points at the other’s expense. In saying that he approved of the Cheney family’s tolerance of their daughter, Edwards was both patting himself on the back for his own tolerance and reminding voters, especially the religious right, that Vice President Cheney had a lesbian daughter. This was both self-serving and creepy.

On the other hand, Wolf Blitzer raised the same subject in the context of a press interview. By then, the sexual orientation of Dick Cheney’s daughter was a matter of public record. How so? For one thing, Mary Cheney herself put this subject into the public domain by mentioning it in her book. On a personal level, the contradiction between values of the Republican base and the situation of the Cheney family is quite interesting. Blitzer was not out of line in asking this question.

So the dialectical wheel turns.

 

Dialectical Shuttles: Situation Two:

In early 1976, Richard M. Nixon was the pariah of American politics, having resigned the Presidency of the United States under pressure two years earlier. Yet, the former president was a man never content to sit on the sidelines of political campaigns. He was a man of devious thinking, called “Tricky Dick” by his detractors. Is it possible that Richard Nixon, despite his unpopularity, tried to influence the 1976 Presidential election campaign?

In February 1976, Nixon’s handpicked successor, Gerald Ford, was engaged with Ronald Reagan in a tough fight for the Republican Presidential nomination. The polls showed Reagan slightly ahead in New Hampshire, scene of the first primary in early March. Gerald Ford had been widely criticized for pardoning Nixon in the previous year. Therefore, it came as a shock to many of Ford’s supporters to learn that Richard Nixon had accepted an invitation from Hua Kuo-feng to visit the People’s Republic of China on the fourth anniversary on his initial visit, beginning on February the newspapers would be full of stories about Nixon’s trip to China, reminding voters of Gerald Ford’s close association with this unpopular man.

What were Nixon’s motives? Was the timing of his trip strictly coincidental? Even so, Nixon, the astute politician, must have realized that the resulting publicity would have an impact, one way or the other, upon Gerald Ford’s chances to win the New Hampshire primary. He must have decided to go ahead with the trip deliberately intending to help or hurt his successor in the White House. Which was it?

(1) Richard Nixon was out to hurt President Ford. In early 1976, Nixon was a bitter man. He was angry both with Gerald Ford and Henry Kissinger, who had disassociated themselves from him politically. He, Nixon, had made them what they were, and now, in his darkest hour, these two men were turning their backs on him in public. The trip to China offered Nixon a way to get even.

(2) Being an experienced politician, Nixon recognized the “backlash” potential which he might have in this campaign. The primary voters in New Hampshire would be too smart to allow him to “interfere” with Gerald Ford’s campaign. If they did not see through his mischief, then the media commentators would explain it to them. The voters would resent Nixon’s ungracious slap at Gerald Ford - who, after all, had pardoned him of criminal wrongdoing - and vote for Ford rather than Reagan. Actually, Nixon was grateful to Gerald Ford for the pardon, he wished his chosen successor well, and he realized that Ford had to disavow him publicly to remain a viable candidate. Therefore, the trip to China was a backhanded way to help Ford, letting his hated media critics create the necessary climate of opinion. Ah, sweet revenge!

(3) “Tricky Dick” may have outsmarted himself. There could be a “backlash against the backlash” which would bring public sentiment back to its original position. If the voters in New Hampshire perceived that Nixon was trying to trick them into voting for Gerald Ford, they might vote for Reagan instead. Maybe Nixon himself realized this. He really did want to get back at Ford and Kissinger and help his fellow Californian, Ronald Reagan, who, like him, was facing an uphill battle.

(Historical note: Gerald Ford won the 1976 Republican presidential primary in New Hampshire. Reagan had been expected to win, but in the last few days most of the undecided vote swung to Ford. When reporters asked Richard Nixon in Kweilin province to comment on criticisms of his China trip from Ford supporters, the former president smiled.)

Dialectical Shuttles: Situation Three

The German army was expecting Allied forces from Britain to land on the coast of northern France in late May or early June 1944 in order to open a second front in World War II. General Rommel was charged with defending Germany’s Festung Europa against the expected attack. The element of surprise may play a crucial part in the outcome. It would help Rommel to know where the Allies will land so that he can concentrate his defenses at that point instead of spreading them out along the entire coastline. Where should he expect the attack? Rommel thinks to himself:

1. The most logical place for Eisenhower’s forces to land would be in the vicinity of Calais. Here the distance between England and France is about twenty-five miles. The Allies could transport their troops quickly across the English Channel and strike a damaging blow before we realized what was happening.

2. No, General Eisenhower surely knows that we would be expecting the invasion to take place near Calais. Therefore, it is likely that the Allies will pick another location along the French (or Belgian or Dutch) coast which is somewhat more distant from England but not so much as to increase transport time significantly if our defenses are light. We can foil this strategy if we position our troops in several places besides Calais. How about Cherbourg, Le Havre, Boulogne, and Oostende?

3. Actually, it is reasonable to expect the Allies to know that we would not station the bulk of our troops at Calais. Also, their spies and reconnaissance flights could easily detect the scattering of our troops among these various other locations. In that case, they might decide to strike at Calais. Not only Better play it safe and choose the most logical place to invade, which is Calais.

4. No, no, no, we do not win battles by playing it safe but by throwing the enemy off balance. Have the courage to go with your gut feeling that the Allies will strike some place else than at Calais. Back to scattering our defenses between Calais, Oostende, Boulogne, Le Havre, and Cherbourg.

Back and forth the reasoning goes, never reaching a firm conclusion. General Rommel does not know what his counterpart, Eisenhower, has in mind for the invasion; and Eisenhower does not know Rommel’s defensive plans. To predict the future in this type of situation, you need to know the content of another person’s mind. Especially in an adversarial situation, that person isn’t telling. Logic and causality have reached their limit.

(Historical note: The Allied troops struck on the beaches of Normandy while the Germans believed that the invasion would take place at Calais. So Eisenhower did gain the element of surprise. )

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