Friday, September 29, 2017

Is finance derived or discovered?

I've been on some rambling musings on the math/psychology/econ/finance and thus trading universe, so here's a bit of an incoherent glimpse:

I try to think of all these topics 3 dimensionally so these paragraphs can go in any order, and probably should be side by side and simultaneous, although we don't read like that.

Math: Derived or Discovered?
Before even getting into trading I think on this issue here and there, why do patterns in math reappear everywhere? Are pi and e just curve fit numbers or a core ratio in nature?  I think about back testing and overfitting to curves as that comes up most in trading, but is there a pi or e equivalent in finance such as a golden ratio for risk premium?

Finance/Econ =  Psychology
This is where you will probably leave me rambling in my cave, but entertain the idea:  Is econ and finance math, psychology, or both?  I firmly think that all econ is small or large scale psychological interaction between people.  Its about fear, trust, heard mentalities, and everything else in Tversky and Kahneman.  But what about the computers? What about servers trading with each other a million times a second, there is no fear there! The point I've brought up before and stick by is that all trading algorithms are built by people and firms who have risk tolerance and requirements, and embed all that human fear into their code.  The computer just executes what a human would if they could see, click, and calculate that fast.

Psychology as physics
Here is another point to write off, and it goes towards the final mystery that is the mind and its rooting in the real world and physics.  Our thoughts are just atoms flying around through the brain which is truly rooted in the real world.  Additionally some will say that all of your past experience, bias, anchoring, etc contribute to decisions you make without you knowing at all, so are those decisions free will?  From this many argue if free will exists because atoms can work predictably thus the basics in physics for our thoughts and soul should be theoretically measurable (although that technology for that is far away).  If you agree with this mind as atoms concept, then all the ideas we have collectively as people (fear, risk, greed) are somewhat rooted in physics and part of that real world out their waiting to be discovered, rather than invented or derived.

Finance as Nature
Ok now bringing it all together, if you agree with the previous points-  If psychology is an extension of physics, with human emotions rooted in the atoms that make up those thoughts, and finance is an extension of psychology because this is ultimately human decision making, then by our wonderful transitive property- finance is physics.  This is all probably the worst kind of underpass rambling but I think about it all the time when adding the short vol positions.  I'm taking on the fear and risk of others, was this avoidable in nature? Just like some fish latch onto others or insects have complex ecosystems with each other, was it inevitable in the human condition that people would naturally come up with similar risk and credit/debt models simultaneously?  Was this truly invented or just waiting in the potential of our brain structure to be found?  As I'm typing this I'm doing the Werner Herzog narration voice in my head.

I already know as I post this I'm instantly going to lose 5 twitter followers but that is the cost of staying true to real psychotic rambling and not just retweeting 10 #hashtags!

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