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B. Venkatesh

STOCK market research has never been so esoteric. There are research papers that use high-level physics, such as quantum mechanics, to explain price patterns in the stock market. In this regard, there seems to be some confusion among readers between chaos theory and complexity theory. What is the difference between the two?

Chaos theory basically studies deterministic systems. That is systems that follow classical physics, for instance, the study of the pendulum. If you push the pendulum, you know that it will move in a particular direction, and then retrace that path.

Now, suppose you nudge the pendulum so as to disturb its movement. You can no longer predict which way it will move. Technically, this nudge is called perturbation. To continue with the example, chaos theory is the study that attempts to read the path of the pendulum after it has been perturbed.

The popular understanding of this theory is the "butterfly flapping in Brazil causing a tornado in the far-east". The phrase is used to capture the large impact of a small change brought to the system. This is referred to as a non-linear effect meaning the cause and effect are not proportional.

Now, complexity theory is complementary to chaos theory. Take a system that is highly uncertain such as an earthquake. Research studies have shown there is some pattern to earthquake occurring in a particular region. So it is with other complex systems of which the stock market is considered one.

So, chaos theory essentially studies non-linear effects on deterministic systems, while complexity theory studies definite patterns on non-deterministic systems.

If you want to know more about complexity theory, you can read the eloquently written book by Mark Buchanan Ubiquity. A more advanced knowledge on the subject can be gathered from the Santa Fe Institute Web site.

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