Fractal Markets Hypothesis (FMH)
Categories: Financial Theory
The Fractal Markets Hypothesis (FMH), like the OG Efficient Market Hypothesis (EMH), is a theory about how the stock market works. The FMH purports that the stock market (and other markets, too) follow a cyclical, repeating pattern of ups and downs.
The Fractal Markets Hypothesis doesn’t have its name just because “fractals” is a cool word. Rather, the conceptual idea behind FMH comes from chaos theory and fractals. Stock market prices move in fractals, eventually repeating themselves relatively closely in different timeframes, just like in the physics lab.
A key part of the FMH is the behavior of short-term vs. long-term investors, and how, when confidence drops, short-term investors (and even some long-term ones) all act at the same time, causing a short-term horizon, amplifying any economic effects that caused the initial movement.
The main problem? Nobody knows when these fractals start repeating themselves. Yep, sad but true: still nobody can really predict the future of the stock market. Except Warren. Always Warren.
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