Business

Financial Market

Mateusz Stępień

Mateusz Stępień

— 3 min read
Financial Market

Between Predictability and Chaos

Yes—financial markets are an excellent example of what can and cannot be predicted if we think about humans as a form of “energy.”

At first glance, markets seem random, emotional, and irrational. And yet, entire industries exist around forecasting prices, managing risk, and exploiting patterns. This apparent contradiction is not a flaw, it is the very nature of markets.

To understand it, we need to see why markets are partially predictable, why they are simultaneously unpredictable, and why no AI will ever defeat them once and for all.

Why Are Markets Partially Predictable?

Markets are not made up of isolated individuals acting independently. They are composed of large masses of people, and masses behave differently than individuals.

Markets are partially predictable because:

  • They consist of crowds, not single decision-makers
  • Humans react patternically to fear, greed, loss, and hope
  • These emotions leave measurable “energy traces” in price, volume, and volatility

This is why the following tools work (at least to some degree):

  • Statistics and probability
  • Trend analysis
  • Crowd psychology
  • Algorithms and quantitative models

No one predicts the exact decision of a single trader.

Instead, the prediction looks like this:

“Under these conditions, X% of the market is likely to react in this way.”

Why Are Markets Also Unpredictable?

Markets are fundamentally unpredictable because they are:

  • Nonlinear and chaotic systems
  • Extremely sensitive to small impulses (a tweet, a rumor, a single sentence from a central banker)
  • Reflexive, as George Soros described

Reflexivity means that:

  • Forecasts influence the market
  • The market changes the forecast
  • A feedback loop is created

In other words:

The act of prediction alters the reality being predicted.

Energy in Markets

Thinking in terms of “energy” is not scientific in a strict sense, but it is surprisingly precise metaphorically:

  • Trend = ordered flow of energy
  • Volume = intensity of energy
  • Volatility = chaos, tension, instability
  • Bubbles = accumulation and sudden release of emotional energy

That is why the old saying remains true:

“The market can stay irrational longer than you can stay solvent.”

The Key Distinction

  • You cannot predict the exact price tomorrow at 4:20
  • You can assess:
    • Direction
    • Risk
    • Probability of scenarios

The best market participants do not “know what will happen.”

They know what to do if A happens, if B happens, or if C happens.

Why AI Will Never Defeat the Market Forever

AI is powerful. It already dominates certain parts of finance. But it will never become a permanent, unbeatable market oracle. Here is why.

1. The Market Is an Adaptive System

Games like chess can be “solved” because:

  • The rules are fixed
  • The board is closed
  • The opponent does not change the nature of the game

Markets are different:

  • The rules change during play
  • Strategies alter market behavior
  • Any advantage is rewarded only until it becomes widespread

Once an AI discovers an edge:

Others copy it → the edge disappears.

2. Predictions Change the Future

If an AI:

  • Predicts a price increase
  • Starts buying
  • And others observe its behavior

Then:

  • The increase may happen earlier (or not at all)
  • The model invalidates itself
  • The training data becomes obsolete

The market is not a passive object. It is an active participant.

3. Non-Stationary Data

AI excels when:

  • The future statistically resembles the past

Markets do not behave this way:

  • Regimes change (inflation, wars, regulation, technology)
  • “Black swans” occur
  • Entirely new events appear with no historical precedent

You cannot train a model on events that have never happened.

4. The Information Boundary

If an AI existed that:

  • Always predicted the market correctly
  • Did so consistently

Then:

  • Its actions would become the strongest market signal
  • The market would react to the AI, not fundamentals
  • The prediction would destroy itself

This is not a technical limitation, it is a logical contradiction.

5. Chaos and Human Emotion

AI does not experience:

  • Panic
  • Euphoria
  • Political pressure
  • Sudden narrative shifts

One sentence from a politician can:

  • Break a model
  • Collapse correlations
  • Erase years of statistical edge

6. The Law of Diminishing Advantage

AI already dominates locally:

  • Arbitrage
  • High-frequency trading
  • Market making
  • Very short time horizons

But:

  • The longer the horizon
  • The larger the capital
  • The more public the strategy

The faster the market absorbs and neutralizes it.

Final Thought

AI can be an excellent player, but it can never be the final player. The market is not a problem to be solved. It is a process, one in which every advantage is temporary.

💡
“The stock market is a device for transferring money from the impatient to the patient.” — Warren Buffett

Read more