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CHAPTER

INTRODUCTION

Over 80 years ago, the physicist Albert Einstein introduced his concept of relativity. At its core, relativity suggested that all things existed only in relation to one another. The inevitable conclusion is that nothing stands alone-there are no absolutes. For there to be black there must be white; fast exists only in relation to slow; a high cannot exist without a low for reference; etc. Einstein applied his theories to physics and in doing so lost a wider audience to whom those theories might have appealed. However, others such as the philosopher Bertrand Russell, were at work extending similar ideas beyond physics.

In a serialized form of his book /The ABC of Relativity] that appeared in The Nation during 1925, Russell expressed the belief that once people had become used to the idea of relativity it would change the way they thought: people would work with greater abstraction and

Part I: In the Beginning

would replace old absolute laws with relative concepts. This has certainly happened in the world of science hut the absorption of relativity into popular culture has done little to change the way most people think, simply because very few have got used to relativity or understand it in the least}

At about the same time Einstein was starting his work, Oliver Wendell Holmes, Jr., a U.S. Supreme Court justice, was engaged in pushing our nations system of justice in the direction of relativity. He suggested that the courts could not determine absolute truth. They could only judge the relative merits of the competing claims before them, and they could not do so in an absolutist framework, but only in a framework relevant to society. Early in his career Holmes stated:

The law embodies the story of a nations development through many centuries, and it cannot be dealt with as if it contained only the axioms and corollaries of a book of mathematics. In order to know what it is, we must know what it has been, and what it tends to become?

The work of Einstein and Holmes didnt stand alone. Their focus was an indication of an emerging trend within society. Since the world was starting to become more complex as the nineteenth century drew to a close, it was widely realized that the absolute truths that had governed the affairs of people would no longer serve, that a relative framework would be needed if progress were to continue-and so it is with the markets.

Such ideas are humble in their essence. They recognize our limits. They reflect Eastern rather than Western philosophy. The goal of the perfect approach to investing is just that, a goal. We may approach it, but it always will elude our grasp. Indeed, there is no perfect system. We can only do as well as we can within our limitations, at the urging of our potential.

Bernard Mandelbrot discovered nonlinear behavior in cotton prices in his early research into chaos. Others have followed who suggested that financial systems are in fact extremely complex, so complex that they exhibit hard-to-predict behavior similar to the best-known complex system, the weather. As systems become more complex, traditional linear analytical tools fail, and it becomes ever harder to understand them. The only tools that serve to help understand complex systems are relative tools.