The Hindu Business Line : <I>A method in the madness </I>

Bangalore is a "Garden City". It is better known these days for its air pollution, traffic congestions and for its software companies. It is amazing how the city thrives amid chaos. There seems to be some pattern in the madness. You could go to malls on weekdays and not find a parking space. Yet, on weekends, you may be fortunate to find one! What has all this got to do with economics? The financial market also has a method to its madness. And Complexity Theory helps us understand the markets and how to get parking space in Bangalore. How?

Complexity Theory studies patterns in non-deterministic systems. These are systems that are not apparently predictable. Natural phenomenon such as earthquakes and hurricanes and social structures such as traffic jams are examples of such systems.

Traffic pattern

Consider car traffic to malls. You need to first dissect the traffic pattern. Do people visit the mall to watch movies or just to hang-out with friends? If you keep drilling into details, you may observe patterns. You may find that only movie-goers visit the mall on Monday afternoons. If you are one of those fortunate ones who do not have a "boss", you can shop at the mall on Monday afternoons and find a parking space.

Researchers have attempted to apply Complexity Theory to understand financial structures and asset prices. Studies have shown that 10 trading days contribute more than 60 per cent of total returns in the market! Similarly, 20 per cent of people possess 80 per cent of the wealth in the market. Whether it is parking space or asset prices, you can find patterns and take advantage of it. That is, if you are a Complexity Theorist.

(The author is a Chennai-based financial analyst.)

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