46 ATaleofTwoMarkets
turned out to be fractals. Japan’s was 3.05; Germany’s, 2.41; and the
United Kingdom’s, 2.94. That is strong proof indeed that stoc kmar-
kets are not best described by EMT.
COMPLEXITY
Thin kabout the 1987 crash (and other roller coaster mar ket epi-
sodes) in terms of Einstein’s point that time operates in different
ways in different contexts. An intuitive case that market crashes ex-
hibit chaotic behavior starts to emerge. The intuitive case begins by
taking a nonlinear perspective of market time, under which market
time expands (speeds up) when trading is heavy and compresses
(slows down) when trading is thin. The speed of market time—called
intrinsic time—evidences itself in pricing persistence and pricing
discontinuity.
Pricing persistence is described in chaos theory as the Joseph
effect, drawn from the familiar biblical story of Joseph interpreting
the pharaoh’s dream to mean seven years of feast followed by seven
years of famine. The presence of this phenomenon in public capital
markets is exhibited by bull markets and bear markets in that iden-
tifiable trends emerge and endure for significant time periods.
Pricing discontinuity is described in chaos theory as the Noah
effect, taken from the biblical story of the Flood. Public capital mar-
kets exhibit the Noah effect in price changes. For example, suppose
IBM opens at 50 and closes at 30. That does not necessarily mean
that during some point in the trading day an investor could have
traded IBM at 40 (or any other price between 50 and 30). Rather,
the price of a stoc kmoves discontinuously in the sense that at one
moment it may be trading at 45 and at the next it cannot be sold
for more than 35 (something that day traders see a lot of and that
is discussed further in the next chapter).
The alternating presence of price persistence (the Joseph effect)
and price discontinuity (the Noah effect) shows that chronological
time—a linear concept—is not the most precise temporal measure
of public capital market phenomena. When discontinuous pricing—
the Noah effect—dominates a market, wide swings occur and mar-
ket pricing is relatively unstable because intrinsic time and trading
activity outpace chronological time and information gathering.
When price persistence—the Joseph effect—dominates a market,
pricing is relatively stable because intrinsic time is approximately
equal to or slower than chronological time.