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By Bill Altreuter

People ask me, when people read Outside Counsel what were they actually looking for? (Actually Dave asked me. Once. And it was years ago.) Sometimes what they are looking for is me-- I have lately been back in communication with a friend from college days, a nice surprise, who found me by way of this toy. Owing to his reclusive ways I'll not name him here, but I will mention that he sent me a book about Elliot Wave Theory that I've been reading with genuine interest. The Elliott Wave principle is a form of technical analysis that attempts to forecast trends in the financial markets-- and social trends. It has been around since the late 30's, and it is pretty widely accepted by market technicians-- it is one of the methods included on the exam that analysts must pass to earn the professional accreditation developed by the Market Technicians Association, so people who do that sort of thing for a living obviously think there is something to it.

I'm certainly not equipped to debunk it. It seems to me that if applying the Fibonacci sequence to the operation of markets worked, the system would collapse on itself, since investors would be able to predict when the market would move, and then invest, at that moment, causing the market to move exactly as predicted, and eliminating their profit. I also think that it has a flaw as a model in that it relies on the notion that mathematics is capable of more than describing things outside of its own system. Sure, you can apply mathematical models to describe anything, but since mathematics can't explain itself it is flawed as a predictive descriptor. I've seen black swans, you know? On the other hand, I have always been a "buy high, sell low" kind of investor, so what do I know? (Actually, that's not completely true-- sometimes we buy in, and then hold as the investment totally craters.) I wish it worked, because then if I had money, I would have a cool tool to help me invest it. One of the reasons I don't have money (apart from our investment strategy) is that what I think is really interesting about the Elliott Wave theory is that it is supposed to work to predict social trends. Indeed, that's why it works with markets, they say-- markets are a type of social trend, and therefore operate in a Fibonacci sequence just like human history.

This puts me in mind of two things. Certainly one is tempted to say, Hegel and Marx, here's your hat. Ralph Nelson Elliott has stolen your dialectical analysis and turned it into a straightforward mathematical proposition, complete with graphs.

That would be an interesting topic for an Economics term paper, and I have no doubt that they abound. The other thing that the Elliott Wave puts me in mind of is Isaac Asimov's Foundation Trilogy. See, this is where my mind goes. A friend tells me, Here's a system for making dough, and immediately my mind goes to political philosophy and trashy science fiction. I re-read the Foundation Trilogy a while back when I was home with the flu and was struck by how really dreadful they are-- it's talk talk talk, all exposition and funny names. The MacGuffin is that the Galactic Empire is collapsing, and a scientist has developed a scientific method of analyzing history to predict the future. It is literally a series constructed around deus ex machina, and as you read it it is difficult to keep from exclaiming, "Oh come on!" It would be interesting to know if Asimov had heard of Elliott Wave Theory.

How come nobody ever calls me with a tip on a horse?

Full post as published by Outside Counsel on October 29, 2008 (boomark / email).