About chaos theory, fuzzy logic and emotions

Guesses made by securities analysts and investment advisors represent fuzzy estimates we aim to distill. This can be done through defuzzification. Taking an analogy from physics, what defuzzification essentially does is to establish boundary conditions. This is a subjective process but also very important because it permits us to better define the area within which we make our guesses. It is quite vital to underline that uncertainty (possibility) and randomness (probability) should not be confused. Whether in science or in the arcane arts of financial and economic analysis. The strength of fuzzy engineering lies in its ability to handle subjective judgments and emotions. The Monte Carlo Method is a very good tool to handle "noisy" data or better fuzzy data. And because the world is very uncertain and more chaotic than we think, we have to stress test our strategies more often, think in scenarios and do some Monte Carlo simulations which is a standard tool in portfolio construction, especially in a non-Gaussian world. Guesstimating the fair value of securities is indeed a fuzzy concept and the tail risks are mostly underestimated, because the bell curve is a myth and tomorrow's prices are not independent of past prices. By the way, our world would be very boring, if we had the algorithm to predict the future and without volatility you would not find any investment opportunities.

Market conditions, along with weather patterns, across most continents have been anything but stable over the past several years. Thats why we aim to produce consistent risk-adjusted returns over time by managing risk, volatility and enhancing diversification. So investors can remove emotion from the equation and stay invested to achieve long-term goals. Do not try to time the market, stick to your strategy and process to meet your financial goals. Traditional finance theory is bad at predicting what people really do. The mass oscillates between euphoria and panic. Are you a rational investor? What's your investment style, finance behaviour and market conviction?

 www.sautterinvest.ch

 

We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

Warren Buffett

 

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