Inspired by the book<The market (Mis)behavior of Markets> which adopts a new theory — fractal geometry — to explain the financial markets and how things work in nature visually and mathematically. Here I just want to share my thoughts with you regarding the reason and mysteries behind financial crisis and here is what I summarized:
VERTICALLY(following the timeline):
Certain events and markets have a long-term dependence on others( you can interpret as the long memory- certain events not just happen they will also leave the trace and gradually pass its impact in the future(some of them may last for years)). Their memories provide a practical form of long-term dependence in the financial markets.
It also partially explains the reason why Trend-following strategies work. But, it undercuts the Efficient Market Hypothesis that prices fully reflect all relevant information and in modeling markets, all that matters is today’s news and the expectation of tomorrow’s news.
Horizontally, chaos Theory plays a role — it’s the mechanism behind the financial crisis: every small movement in the market is like any human acts which are not without consequence for others (like no one is alone in this world no event exists individually) that is say it would be like<a href = https://en.wikipedia.org/wiki/Butterfly_effect target="_blank"> butterfly effect which will gradually accumulate its impact and interact with other events, as a result, they will create a whole new scenario one after one… They come together turns into the ‘flow’ which you cannot even find the start point.
It amazes me because I have never imagined that it is possible that these trivial events happen one after one following a specific order and with their unique scales will eventually work mutually and in turn cause a crisis.
Below is a simple example of how fractal geometry works:
If you pay attention there are plenty of ‘fractal geometry’ examples in our daily life such as the snow flake: