Strange Attractors and Mean Reversions

While chaos reigns, rips, and roars all around us, we tend to prefer, both individually and as a group, to simply ignore it.  After all, if nothing was predictable, we couldn’t be sure a floor was there to greet our feet when arising each morning.  Rarely do things get so out of control that we decide they need our attention right now.  Rarer still do things get so chaotic that the results force themselves upon us before we can react.  This latter group takes several forms:  accidents, natural disasters, or good luck to name a few.  What we end up doing is living in a world of average behavior where things tend to cluster around a norm, rarely drifting too far one way or another.  Within most systems this norm is called the mean.  In dynamic, chaotic systems it may be called a strange attractor.  The stock market is often likened to the latter.  Thus we see, when it reaches certain extremes, that it will ultimately tend to return to the norm, toward the centerpoint of a strange attractor.  Hence we must always be vigilant when constructing our portfolios that we don’t accept extremes as the norm since a really mean reversion can wreak havoc with your portfolio, making your interest in investing seem like a strange attraction indeed.