Chaos Theory


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 "non-linear 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.

  1. Kappa

    One of the "Greeks," kappa is the ratio of the dollar price change ...
  2. Darvas Box Theory

    A trading strategy that was developed in 1956 by former ballroom ...
  3. Residual Standard Deviation

    A statistical term used to describe the standard deviation of ...
  4. Random Walk Theory

    The theory that stock price changes have the same distribution ...
  5. Error Term

    A variable in a statistical and/or mathematical model, which ...
  6. Regression

    A statistical measure that attempts to determine the strength ...
Related Articles
  1. Stock Analysis

    Analyzing Porter's 5 Forces on Facebook

    Read about how you can use Porter's five forces to analyze Facebook's competition. This simple methodology looks at several different factors or forces.
  2. Personal Finance

    10 Tips for Conducting Effective Meetings

    Sometimes meetings are necessary, but they're often a waste of time. These ten tips can help you conduct effective, productive meetings.
  3. Personal Finance

    Overlooked Skills You Need to Succeed at Work

    To succeed at work, you need to master a variety of soft skills.
  4. Economics

    Explaining Efficiency

    Efficiency refers to the ability to make something with the fewest resources possible.
  5. Economics

    What is a Code of Ethics?

    A code of ethics is a collection of principles and guidelines an organization expects its employees to follow.
  6. Economics

    Explaining the Balanced Scorecard

    A balanced scorecard is a metric that measures a business’ performance.
  7. Professionals

    How Agile Principles Are Used in Holacracy

    Holacracy itself has been an actively utilized management system since 2007 with its framework rooted in agile methodology.
  8. Personal Finance

    The Top 5 Most Unionized Industries

    Unions don't have the membership numbers that they once did, but they are still a vital part of several different important industries.
  9. Investing

    Has Nepotism Ever Worked?

    It may very well be that hiring a relative is the right course of action for you. But before you do, carefully consider how hiring family could hurt your business.
  10. Investing

    The Right Mindset for CEO Success

    Owning the role of CEO is no simple task so it is imperative that CEOs have the correct mindset to ensure the success of their organization.
  1. 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 Full Answer >>
  2. How does the market share of a few companies affect the Herfindahl-Hirschman Index ...

    In economics and commercial law, the Herfindahl-Hirschman Index (HHI) is a widely used measure that indicates the amount ... Read Full Answer >>
  3. How does automated work affect structural unemployment rates?

    One of the main causes of structural unemployment is the automation of work. If jobs become increasingly automated, more ... Read Full Answer >>
  4. What is the difference between economies of scope and economies of scale?

    Economies of scope and economies of scale are two different economic concepts used to help cut a company's cost. Economies ... Read Full Answer >>
  5. How is productivity calculated?

    Productivity measures the efficiency of a company's production process. It is calculated by dividing the outputs produced ... Read Full Answer >>
  6. What is the role of agency theory in corporate governance?

    Agency theory is used to understand the relationships between agents and principals. The agent represents the principal in ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  2. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  3. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  4. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  5. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  6. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
Trading Center