AuthorTopic: Lies, Damn Lies & STOCHASTICS  (Read 630 times)

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Lies, Damn Lies & STOCHASTICS
« on: August 16, 2014, 02:00:30 AM »

Off the keyboard of John Ward


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Published on The Slog on August 15, 2014


http://aapgbull.geoscienceworld.org/content/91/4/475/F12.large.jpg http://aapgbull.geoscienceworld.org/content/89/2/155/F3.large.jpg


Discuss this article at the Kichen Sink inside the Diner


Taking stock of market stochastics


So here I sit, in my kitchen, at 8.30 pm CET, noting that the sunsets are getting earlier. But the temperature is that normally associated with May – whereas in May, we had the sort of temperatures one expects in July. In late March/early April it was like August. January this year was similar to September. The pool temperature is a chilly 19 degrees. God, isn’t life a bitch?


It could well be that someone on the commodity markets – in league with the Pentagon – is shuffling the weather deck with a view to making vast virtual profits from the physical death of millions. Or, on the other hand, it could just be that weather glitches do not a climate change make, and that weather is a stochastic sort of thing.


There’s a word you’ve heard from time to time, and then forgotten – or looked up, and then forgotten what it means. ‘Stochastic’ is one of those words that comes into vogue now and then among the commentariat: like gestalt, eclectic, tendentious, inchoate, mnemonic and – one of my favourites – systemic. At University, my Liberal Democratic Theory tutor (a Welshman disabled by eccentric pronunciation of English ) used that last word all the time, and for the first two terms of our Fresher year there was much debate in the Arts Lab coffee lounge as to WTF it was.


WTF it was went much deeper than WTF it meant: we didn’t even know how it was spelt. And if you don’t know how something is spelt, you can’t look up what it means. This is the ultimate jean-creaming aim of all those pretentious folks who use such words: to bamboozle, and thus control. (There is a very good US site devoted to PAWS – Pompous Ass Words)


The first time I heard the word stochastic was in a market research meeting about thirty years ago, except it was in the plural – as in, stochastics. Doing this gives any word added scientific credibility, because the addition of the ‘s’ makes it a field of venerable analysis: as in electronics, media studies, aeronautics and so forth. There’s just one problem with the analysis of stochastic stuff: it defies analysis, because it is completely random.


The dictionary definition of stochastic is not at all stochastic. It states that stochastic phenomena have ‘a random probability distribution or pattern that may be analysed statistically but may not be predicted precisely’.


Isn’t that a belter? Not predicted precisely. This is the scientific equivalent of a politician saying “Not as such”. Let’s get real here, stochastic means ‘unpredictable’. Unpredictable means “You can’t f**king predict it”.


And yet, here are all these onanists engaged in applying statistical probability to the unpredictable. Onanism, by the way, is another of those PAWS, and it means wanking.


Let’s jerk off a little more now and get into the stochastic variable - a variable quantity that is random. Financial, commodity and futures markets are full to bursting with people doing what humans always do in the end: try to control that which they cannot control. Thus, in the technical analysis of securities trading, the stochastic oscillator is a momentum indicator that uses support and resistance levels. Dr. George Lane promoted this indicator in the 1950s. It attempts to predict price turning points by comparing the closing price of a security to its price range. The indicator is defined like this:



%K = 100 *(Price-L5)/(H5-L5)



%D  =  100*H3/L3


Well of course it is, for heaven’s sake. Stands to reason, squire. Except, of course, that if a variable quantity is random, it could go up to $1980.35, or down to a dime. Further, if you have the Fed Reserve and the Bank of England pumping not so much unpredictability as directionalised cheating into, say, the Dow Jones Index, then investment in that sector is what we seasoned stochasticians call A Mug’s Game. Had one applied stochastic analysis to the gold market since 2010, for example, by now one would almost certainly have gone blind.


Google the term ‘stochastics’ (2.54m results) and you will find details of stochastic oscillator seminars, conferences about stochastically matching markets, the Infinite Dimensional Stochastic Analysis Perspective René Carmona, stochastic uniform market price formulae, and even a Local Stability Analysis of a Stochastic Evolutionary Financial Market Model with a Risk-free Asset.


FFS guys, get real: stochastic means ‘God knows what’s going to happen’. Applying words like uniform, formula, risk-free and matching is merely another version of the sad bastard gambling his fortune away in Monte Carlo, still convinced that he is but millimetres away from perfecting A System. Or as my tutor at Uni might have said, “The whole point about something stochastic is that it isn’t systemic”.


Two things will, ultimately, render all formulae and process redundant: left-field ideas, and unforeseen events. Homo sapiens has an insatiable desire to control, and to triumph over that of which it doesn’t approve. This is, I suspect, what makes us such a nuisance as a species.



 

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