What is 'Chaos Theory'
Chaos theory is 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.Â Chaos theory is alsoÂ 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.
Chaos theory is highly controversial and extremely complicated.Â 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.Â A trader's own personal motives, needs, desires, hopes, fears and beliefs are complex and nonlinear.
2.Â Volume changes
3.Â Acceleration of the changes
4.Â Momentum behind the changes
Core Factors BehindÂ Chaos Theory
 The Butterfly Effect: According to the Butterfly Effect, a butterflyÂ in CaliforniaÂ canÂ cause a hurricane in China materialize ifÂ the butterfly flapsÂ its wings at just the right point in space andÂ time. While the result isn't immediate,Â the causal connection is real. The hurricane would not have happened if not for the butterfly. Expressed more generically, small changes inÂ initial conditions can lead to drastic changes in finalÂ results. Human civilization is anÂ ongoing demonstration of this principle in action. Who knows, for instance, what the longterm effects of teaching millions of people about chaos theory will be?
 Unpredictability: Because all theÂ initial conditions of a complex system are not fully knowable, it is impossible to predictÂ theÂ fate of a complex system. Even if all the conditions can be measured,Â slight errors in measurements will beÂ amplified dramatically, rendering any prediction useless. This is whyÂ accurate longrange weather prediction will always remain impossible.
 Order / Disorder: Chaos is not simply disorder. Chaos comprises theÂ transitions between order and disorder, which often occur in surprising ways.
 Mixing: Turbulence ensures that, in time, two adjacent points in a complex system will eventually end up in very different positions. For example, two neighboring water molecules may end up in different parts of the ocean or even in different oceans. A group of helium balloons that launch together will eventually land in drastically different places. Mixing is thorough because turbulence is nonlinear andÂ happens at all scales.

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