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July 10, 2019 at 02:47 PM
If it snows for six days, must it stop on the seventh? If a coin lands heads nine times, must it land on tails on the 10th? If a kid drinks milk, must he grow tall? If a man prays each night, must he find forgiveness? If a market rises, must it crash?
Entropy is a frightening word… The degree of disorder or uncertainty within a system. Is such chaos an acceptable property of life? What degree of disorder is palatable, or is there a corresponding price and reward for each level of acceptance? Furthermore, can we ask history to repeat itself, and if so how? What is the cost for guaranteeing this planned future?
(Related: How Americans Use IRAs)
Entropy’s existence long ago birthed Game Theory, the study of mathematical models of conflict and cooperation between intelligent rational decision makers. The concept permeates nearly every decision of life, and therefore finds itself often at the center of the business world. It provides a scientific theorem for the timeless human desire for pattern recognition. Unfortunately, if the title “Game” did not repudiate its validity initially, perhaps the gross assumptions within its definition will… mathematical models, conflict, cooperation, intelligent, and rational. Theorists have yet again given the Homo sapiens’ prefrontal cortex far too much credit.
If we agree that all of life is to some extent an assumption, we must then look at which variables are worth assuming and the value each deserves. Since it’s perhaps the greatest communicator of information available, let’s look at the stock market. The most notable figures in target pricing include projected earnings per share (EPS), price/earnings (PE), price/book (PB), and price/sales (PS) ratios. With up to the minute info available on the internet, any investor can achieve a relatively accurate valuation of a publicly traded company using such ratios, further assuming every company is operating with equal and valid accounting principles which could be a topic for another confusing paper. Nevertheless, all these numbers are based off past information, forcing any evaluator to try to predict the future. Enter “Head and Shoulders”, “Triple Bottom/Top”, “Double Bottom/Top”, “Saucers”, and a slew of other nonsensical, but widely utilized trends and patterns hoping to offer insight.
