Can a market be predicted in principle?
Traditional portfolio theory based on the ‘efficient market hypothesis’ believes that returns from market prices follow a random walk and that the statistical mean and variance represent the best available estimate of future behaviour. These views are still widespread among the investment industry and mainstream academia and have not changed much since the 1950s. In recent decades a significant progress has been made in the study and understanding of a mathematical structure called ‘complex dynamical system’. The weather, avalanches, earthquakes and financial markets are examples of such systems. Their overall behavior is a result of interaction and mutual feedback between many small parts. The mutual feedback and resulting complexity makes the overall behavior of such systems look completely random most of the time. Even though a dynamical system (such as the market) appears random — there are a number of important differences between it and a stochastic system. Market returns do not
