Oct

13

I've been thinking about the concept of 'dynamic potential' in chess and markets. From a chess point of view, when we execute a strong move we are simultaneously expending the energy contained within our position. It is important, therefore, to understand whether the damage inflicted is worth the energy expended. And also whether the potential has a 'sell by' date, i.e. that if we don't use it quickly it will fade into nothingness.

Generally speaking I'd say that weaker players have difficulty restraining themselves when they see a strong move, they just have to play it. Most Grandmasters, on the other hand, will show great restraint, waiting for the optimal moment to strike. Tigran Petrosian had this tendency to an exaggerated degree, as did Salo Flohr and Mikhail Botvinnik.

I believe that this concept is also deeply entwined with markets, but with certain new features which will make it difficult to measure. When someone takes a position they commit much of their own potential (trading capital). If the 'whole world' took a particular position then the 'whole world' would be committed.

But one of the problems with this as a model is that the 'whole world' is never involved, and market participation varies all the time, from relatively few players to vast numbers. The chess equivalent might be to have a variable number of pieces depending on the number of spectators watching the game at a particular time.

For this reason it's going to be a lot harder to assess the 'dynamic potential' of markets than it is with chess, and it's hard enough when there are just 64 squares to deal with! Attempts have been made to create models based on sentiment, but I suspect that there is a major flaw in these because of the above mentioned variable participation. The recent new high in the Dow, for example, may attract new participants and mess up any readings based on the assumption of a stable population. So although 'potential' appears to be at a low ebb, the pool of 'potential' can simultaneously be expanding.


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