The time fractal

Will understanding time help us understand economics?

My friend from Reuters Thompson always says that my presentations are more interesting than his, a polite way of saying that I am more animated than him.

At the same time he wonders why I have so many pictures in my slides rather than text. I also keep wondering the same. Pictures just let me express more. It was a similar graphic exercise I did while speaking at the Academy of Economic Studies, Bucharest a few weeks back. I put the picture of a few historical research gurus (who are also known as creators or father of a certain subject) and started querying my shy audience.

The masters
The first slide was a famous painting, ‘The School of Athens’, or ‘Scuola di Atene’ in Italian, by the Italian Renaissance artist Raphael. It was painted between 1510 and 1511 as a part of Raphael’s commission to decorate with frescoes the rooms now known as the Stanze di Raffaello, in the Apostolic Palace in the Vatican.

Five hundred years back technology was poor, so one of the Fathers from the ten thinkers on my slides was portrayed there. Raphael, considered as one of the trinity with Michelangelo and Leonardo da Vinci, is believed to have portrayed Euclid, the father of geometry in his heavenly fresco.

The second slide was easy. The hands raised were confident. It was Adam Smith, the father of economics. The third slide saw silence, there were no hands raised this time. It was Pareto. Vilfred Pareto was the father of micro-economics and the one behind the Pareto principle. His legacy as an economist was profound. Partly because of him, economics evolved from a branch of social philosophy as practiced by Adam Smith into a data intensive field of scientific research and mathematical equations. His books look more like modern economics than most other texts of that day.

The 80-20 rule
The Pareto principle (also known as the 80-20 rule), the law of the vital few and the principle of factor sparsity states that, for many events, roughly 80 per cent of the effects come from 20 per cent of the causes. He observed that 80 per cent of the land in Italy was owned by 20 per cent of the population or 80 per cent of a business’s sales will come from 20 per cent of the clients etc.

Though Pareto gave a mathematical impetus to economics as early as 1848, he is faintly remembered compared to Adam Smith.

Pareto’s own principle worked against him, as the father of economics Smith took most of the 80 per cent available attention, leaving 20 per cent limelight for the rest of great economic minds to share. The 80-20 attention span works for everything else, the attention span is skewed. It works for news, for aspects in our life, in psychology and everything else.

From markets to fractals
Even though Charles Dow, father of technical analysis or even the father of modern finance, contributed significantly to modern finance by constructing the Dow Jones index, Elliott redefined Dow’s work. It is a textbook saying that for the ten people who know Dow theory, only one high priest knows Elliott’s concepts.

Though Elliott improved and extended Dow’s work, he did not get the deserved attention. Charles Dow was there on the slide as a revered father, while Elliott did not make it. Elliott introduced market fractals in 1938, but it was scientific evidence that got the father of fractals title to Benoit Mandelbrot, who coined the term in 1970 and proved that nature and markets were fractalled.

According to Wikipedia, a fractal is generally a rough or fragmented geometric shape that can be split into parts, each of which is (at least approximately) a reduced-size copy of the whole, a property called self-similarity.

The overlap of ideas
In the slide that followed, I had illustrated the father of efficient market hypothesis Eugene Fama; founding father of econophysics Eugene Stanley; the father of socionomics Robert Prechter and the father of behavioural finance Daniel Kahneman.

Apart from the fun with the 80-20 attention our mind plays with our memory, I was making another significant observation in the session. History of research is replete with examples how mathematicians, scientists, economists, linguists, historians, cyclists, market technicians and behaviourologists have witnessed overlaps in research thought and work.

Across the centuries, mathematicians like Euclid (350 BCE) said similar aspects of divine ratio like Georg Ohm (1789). We had economists like Thomas Malthus (1766) seeing their work extended first by mathematicians like Pierre Verhulst (1804) and in current times by scientists like Theodore Modis. Even Pareto principle is quoted simultaneously with a famous linguist Kingsley Zipf (1902) of Zipf law and power law fame.

We even saw historians like Karl Lamprecht (1915) and J M Draper (1811) talking about mathematical nature of history. This same idea has been widely written by well quoted cyclists like William Strauss and Neil Howe. The overlap of ideas is everywhere.

The question of cycles
Mathematicians talked about patterns, scientists talked about proportions and economists have created statistical curves. There is a thin line between historians and cyclists. Historians talked about cyclicality, while cyclists talked about repeating history. Market technicians talked about fractals and psychologists talked about human irrationality.

In essence the history of research boils down to three aspects: psychology, fractals and time. If one could connect time and fractals, we can challenge the psychologists as mathematical time is something psychologists can’t contest.

The time fractal is a subject that not only explains the connection between overlapping research of a few thousand years, but also answers a question bothering Edward R Dewey, when he started the Foundation of Cycles in 1940. Why do cycles seem to work in different phenomenon with uncanny precision all the time? The repetitive activity, which our mind registers 20 per cent of the time happens 80 per cent of the time around us.

It happens because time is non-linear, it pulses, breaks, multiplies in the same fractal form, again and again. How true is this? How scientific is it? What is the pattern of time? Will the clock work?

The author is CEO, Orpheus Capitals, a global alternative research company