In Part I, I pondered how truly random is a dice throw, and where randomness might come from. In this post, I examine some evidence that true randomness may be rarer than we typically think.
Is true randomness rare? Does it exist? In a previous post, I alluded to the fact that CASTrader is basically a searcher of patterns in apparent randomness, and randomness is not easy to generate:
Given the difficulties of generating truly random (unpredictable) numbers (numbers may not need to be random to be unpredictable), it is absurd to think that a collection of humanity with behavioral biases will produce a market characterized by a random walk, or even an unpredictable one. (Aside: cryptography requires the generation of true random numbers (or at least unpredictable ones) to encrypt information, and people go to great lengths to try to generate them - many think they cannot be generated on classical computers, but others disagree. In a sense cracking the market is like cracking a cipher - trying to find patterns in seemingly random numbers)
Wikipedia says:
Under the cosmological hypothesis of determinism there is no randomness in the universe, only unpredictability.
I've certainly interchanged the terms randomness and unpredictability rather loosely, as have most people if the philosophy of determinism is correct. Randomness, if it exists in the universe, is by definition unpredictable. Just because you view something as unpredictable doesn't make it random, however. What from your viewpoint is unpredictable or even random, may be predictable from someone else's perspective who works at it - like the dice throw.
The struggle against unpredictability. The history of the human race is in a way the story of making sense from apparent unpredictability or apparent randomness. Some think the human brain itself is at heart a prediction machine. No doubt the first humans to experiment with agriculture needed to predict seasonality with calendars. What unpredictable weather-related destruction was once attributed to angry gods is now predictable to some degree in advance by modern weather models. The angry weather gods now are somewhat more predictable, even if unstoppable. It's obvious that advances in our ever-expanding ability to predict have led to increases in our standard of living.
Apply some hard work and effort to the spin of the roulette wheel, an encrypted message, a throw of the dice, and what once seemed unpredictable may not be so unpredictable after all. Why would everyone's favorite prediction market, the stock market, be any different? Is it a fallacy to see randomness in so many things we observe? In Part III, I'll discuss whether the financial markets are random.
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