DEFINITION of 'Chaos Theory'
A mathematical concept that explains that it is possible to get random results from normal equations. The main precept behind this theory is the underlying notion of small occurrences significantly affecting the outcomes of seemingly unrelated events.
Also referred to as "nonlinear dynamics".
BREAKING DOWN 'Chaos Theory'
Chaos theory has been applied to many different things, from predicting weather patterns to the stock market. Simply put, chaos theory is an attempt to see and understand the underlying order of complex systems that may appear to be without order at first glance.
Related to financial markets, proponents of chaos theory believe that price is the very last thing to change for a stock, bond, or some other security. Price changes can be determined through stringent mathematical equations predicting the following factors:
1) A trader's own personal motives, needs, desires, hopes, fears and beliefs are complex and nonlinear.
2) Volume changes
3) Acceleration of the changes
4) Momentum behind the changes
Chaos theory is highly controversial and extremely complicated.

Random Walk Theory
The theory that stock price changes have the same distribution ... 
Accelerator Theory
An economic theory that suggests that as demand or income increases ... 
Biased Expectations Theory
A theory that the future value of interest rates is equal to ... 
Expectations Theory
The hypothesis that longterm interest rates contain a prediction ... 
Dow Theory
A theory which says the market is in an upward trend if one of ... 
Demand Theory
A theory relating to the relationship between consumer demand ...

Investing Basics
Understanding the Random Walk Theory
The random walk theory states stock prices are independent of other factors, so their past movements cannot predict their future. 
Investing Basics
Modern Portfolio Theory vs. Behavioral Finance
Modern portfolio theory and behavioral finance represent differing schools of thought that attempt to explain investor behavior. Perhaps the easiest way to think about their arguments and positions ... 
Active Trading
Manipulating Facts to Fit a Theory: A Dangerous Trading Practice
This practice is common with experienced and new traders, and it can lead to huge losses. Find out how to avoid it. 
Term
Interest Rate Predictions With Expectations Theory
The expectations theory uses longterm interest rates to predict future shortterm interest rates. 
Investing News
Globalization and the Butterfly Effect
Discover how the butterfly effect applies to global capital markets and witness how chaos theory can describe market volatility. 
Options & Futures
Financial Concepts: Random Walk Theory
Random walk theory gained popularity in 1973 when Burton Malkiel wrote "A Random Walk Down Wall Street", a book that is now regarded as an investment classic. Random walk is a stock market theory ... 
Economics
Efficient Market Hypothesis
An investment theory that states it is impossible to "beat the market". 
Active Trading Fundamentals
Dow Theory: Introduction
By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.comAny attempt to trace the origins of technical analysis would inevitably lead to Dow theory. While more than 100 years old, ... 
Active Trading Fundamentals
Dow Theory: The Market Discounts Everything
By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.comThe first basic premise of Dow theory suggests that all information  past, current and even future  is discounted into ... 
Active Trading
Viewing The Market As Organized Chaos
Find out how a cat and a ladybug prove markets are both random and efficient.

What is the chaos theory?
The chaos theory is a complicated and disputed mathematical theory that seeks to explain the effect of seemingly insignificant ... Read Answer >> 
What is the "random walk theory" and what does it mean for investors?
The random walk theory is the occurrence of an event determined by a series of random movements  in other words, events ... Read Answer >> 
What are the differences between weak, strong and semistrong versions of the Efficient ...
Discover how the efficient market theory is broken down into three versions, the hallmarks of each and the anomalies that ... Read Answer >> 
Is a good's production cost related to its value?
Learn about the history and debate regarding the metrics used to determine the value of a good and which theories place emphasis ... Read Answer >> 
How does money supply affect inflation?
Learn about two competing economic theories of the role of the money supply and whether money supply necessarily causes inflation ... Read Answer >> 
What is capital structure theory?
Discover capital structure theory as it relates to financial management and the methods in which companies attempt to raise ... Read Answer >>