| Main Entry: | chaos theory |
| Part of Speech: | n |
| Definition: | the study of unpredictable and complex dynamic systems that are highly sensitive to small changes in external conditions |
Chaos Theory
Also referred to as non-linear dynamics, chaos theory is a mathematical concept explaining that it is possible to get random results from normal equations. The main precept behind this theory is the underlying notion of small occurrences significantly affecting the outcomes of seemingly unrelated events.
Investopedia Commentary
Chaos theory has been applied to many different things, from predicting weather patterns to the stock market. Simply put, chaos theory is an attempt to see and understand the underlying order of complex systems that may appear to be without order at first glance.
Related to financial markets, proponents of chaos theory believe that price is the very last thing to change for a stock, bond, or some other security. Price changes can be determined through stringent mathematical equations predicting the following factors:
1) A trader's own personal motives, needs, desires, hopes, fears, and beliefs, are complex and nonlinear.
2) Volume changes
3) Acceleration of the changes
4) Momentum behind the changes
Chaos theory is highly controversial and extremely complicated.
See also: Random Walk