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GOAL: TO GAIN A BETTER UNDERSTANDING OF CHAOS AND FRACTAL GEOMETRY
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The word paradigm comes from the Greek root paradeigma, which means " model or pattern." Adam Smith, in his book, Powers of the Mind (1975), defines a paradigm as "a shared set of assumptions." Smith continues, "The paradigm is the way we perceive the world; it is water to the fish. The paradigm explains the world to us and helps us to predict its behavior" (p. 20).

Social paradigms determine our behavior and values. Medical paradigms determine how we think about our bodies. Our paradigms about the market both determine and limit our interaction with the market. A paradigm is the filter through which we view the world. It is our view of "reality." And because it determines our reality, we rarely notice it and even more rarely question it. Our personal paradigms determine our personal reality and our assumptions about our world. We do not think about these assumptions, we think from them.

We never see the world directly; we always see it through these paradigm filters. We never see the world in its entirety; we see only pieces. The same is true with the market. We never see it all; we see only pieces of it. And our mental frameworks naturally bias us toward seeing only those parts of the world (market) that support our paradigms.

Paradigms also filter incoming information, which tends to reinforce comfortable preexisting paradigms (belief systems and mental programs). That's why the market is like the Grand Canyon. If you shout into it, "Technical analysis!/' the echo you get back is "Technical analysis/' If you shout, ''Astrology!," you hear "Astrology." If you shout "Chaos!/' you hear "Chaos."

This calls into question the notion of a fixed objective uni­verse (market). Just as an object appears differently in infrared light, in ordinary daylight, or on an X-ray negative, how reality (the market) appears to us has less to do with what is actually there than with how we perceive it.

Adam Smith pointed out: "When we are in the middle of a paradigm it is hard to imagine any other paradigm" (p. 20). For example, suppose it is 1968 and you are asked to predict the world leader in watch manufacturing in the 1980s. You say the Swiss, because they have dominated the watch market for so many years. However, a paradigm shift occurs, from mechanical watches to electronic watches. The Japanese, because they recognize the new paradigm, capture most of the world's watch market. The Swiss, by clinging to the old paradigm, steadily lose their market share of more than 90 percent in 1968 and hit a low of below 10 percent during the 1980s. Ironically, the Swiss invented the quartz watch in the first place. Whenever there is a paradigm shift, all the rules change. In a wrong paradigm, even the right actions don't work.

Our personal paradigms control the way we process and respond to information. Your feelings or paradigms of viewing the markets are very different after you pick ten consecutive losers as Opposed to ten consecutive winners. The following story illustrates how drastically and quickly our paradigms may change.

There is a Hollywood actor who likes to get away to his cabin in the mountains each weekend. He drives there over curvy, mountainous dirt roads. He usually drives his Porsche convertible and enjoys seeing how fast he can take the curves. He rarely meets anyone on these roads because there are few cabins in the area and even fewer visitors.

One Friday afternoon as he zooms through these curves, he meets an oncoming car that has careened over into his lane. There is a substantial cliff to his right, so he brakes his Porsche as hard as he can and stops just before a head-on collision.

The other car is also a convertible. The driver pulls around his stopped Porsche, she guns her engine, points, and shouts "PIG." This puzzles him. He was in his lane, it certainly wasn't his fault, and he was not "hogging" the road. As she drives off in a cloud of dust, he turns and shouts loudly, "SOW!"

Now he is fuming. He floors the accelerator, gains speed around the next curve, and collides with a large hog standing in the middle of the road. His interpretation of the other driver's motives and behavior changes immediately. His response had come not from what she said but from his personal paradigm.

The particular paradigm through which we view the mar­ket determines our feelings and our behavior. The science of chaos gives us a new and more appropriate paradigm (map) to view the world, the markets, and our personal behavior.

Let's look at this new paradigm, try to understand it better, and begin to make the connection of how we can use it to get a more accurate picture of market behavior.

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