Butterfly Effect in Economics: How Chaos Theory Brings Order to Financial Markets

Here is another video on Physics and Finance. This time, we will try to understand the relationship between chaos theory and financial markets.

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Have you ever heard of the butterfly effect? What implications does it have for the financial market? And how do investors make money in such a seemingly chaotic market?

A widely accepted belief in financial theory is that time evolution of asset prices is unpredictable. Of course, this cannot be completely true, otherwise there would not be so many investors that are able to consistently make profits. In fact, chaotic and random are not synonymous.

Chaos does not mean random! But it does not mean predictable either. Chaos is something suspended somewhere between random and deterministic. Understanding how a small event can change the entire history of the market can be the winning strategy for successful investments.
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Other videos you might like:
How Physics Predicts Financial Crashes:    • From Earthquakes to Financial Bubbles...  
The Physics of Wall Street:    • The Physics of Financial Markets: Why...  
Four Physics Topics in Finance:    • How Physics is used in Finance: 4 Topics  

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Sources: The (Mis)behaviour of Markets, by B.M. Mandelbrot