It is getting close to the end of this week, so I would like to push this thread a bit further. It should give you some food for your weekend thoughts. The next piece is about non-linear or event driven time. Or, in other words, it is about the event-time space. It is important part of IAs and it plays a significant role in building up of our intuition abilities.
One day the temperature outside of my office window suddenly dropped to 30 ºF. âThatâs pretty coldâ, I thought to myself, âI hope it is not an indication of a chilly summer that we have in Toronto once in a whileâ. It is the beginning of May and the normal day temperature for this time of the year should be around 60 ºF. However, it is not the entire reason why I thought it was cold outside. I barely remember what kind of weather we had at this time a year ago. If it wasnât for Google or Weather.com I wouldnât even know what the average temperature is at this time of a year. The reason I have noticed this sudden drop is because we just had a few very warm days with glorious sunshine and the temperatures over 70ºF (also not very normal temperatures for the beginning of May). I vividly remember people wearing shorts and T-shirts just a few days ago and now my neighborâs kids were playing in their backyards wearing hats and warm coats. It appears that more recent events have a far greater influence on our perception than the events that happened a while ago. As the events move further into the Past their significance and impact onto the Future and the Present diminishes exponentially (the actual formula to describe this phenomenon is part of our work but reserved for other papers with greater mathematical underpinnings in their content). Our memory naturally limits the time window of ârelevanceâ to a few days or to a few years depending on the actual significance of the observed events. Talking recently to a few Fund Managers about the events of the October 2008 market crash I have noticed that they talk about it as this crash happened on another planet. They joked about it and described those events as something âinterestingâ but not having any influence on todayâs decisions to load their portfolios with un-hedged Long positions (I bet that on October 10th, 2008 they did not take the situation that lightly). At the same time, the very recent and fairly modest sell-off on April 10th, 2012 made many investment managers worry about their exposure to Europe more so than the fact that exactly three years ago we scrapped the marketâs bottom and the S&P 500 index printed infamous 666 (the âdevilâs number) price level.
Another example of the eventsâ relevant timing could be found when we observe the actions of Day Traders. These market participants couldnât care less about what happened a week or even a few days ago. Their decisions are only influenced by very recent news and price actions. In general, any meaningful decision making process requires a very specific time window to cover all the past significantly relevant events. This time window appears to be directly proportional to the time window of future Intents and Actions. We call this window the âDepth of Perceptionâ.
As the present time of our decisions move toward the future (leaving behind all the current events) the time window of relevance is moving as well. This Sliding Time Window always ends in the present and starts at a certain time interval back in the past. As this window slides towards the future it only contains the most recent events and excludes the events that happened too far in the past.
Let us assume that we measure the significance of every event contained in the Relevant Events Sliding Time Window using the same scale. For example, if we look back at the last month weather conditions we could rate each day of that month by the lowest and the highest temperatures registered during the day. Comparing all the days we can always find the highest and the lowest temperatures registered in the time interval covered by the Sliding Time Window. These temperatures play a very important role â they create the reference points for us to assess the current weather conditions. This scale will constantly evolve because it will always be based on a set of different events; some of them would disappear in the past and some would get added as the Sliding Time Window moves towards the future. Even if the temperatures were not changing at all during the past couple of days our perception of the current weather would change simply because every day we would use a different reference scale to assess the temperature.
One day the temperature outside of my office window suddenly dropped to 30 ºF. âThatâs pretty coldâ, I thought to myself, âI hope it is not an indication of a chilly summer that we have in Toronto once in a whileâ. It is the beginning of May and the normal day temperature for this time of the year should be around 60 ºF. However, it is not the entire reason why I thought it was cold outside. I barely remember what kind of weather we had at this time a year ago. If it wasnât for Google or Weather.com I wouldnât even know what the average temperature is at this time of a year. The reason I have noticed this sudden drop is because we just had a few very warm days with glorious sunshine and the temperatures over 70ºF (also not very normal temperatures for the beginning of May). I vividly remember people wearing shorts and T-shirts just a few days ago and now my neighborâs kids were playing in their backyards wearing hats and warm coats. It appears that more recent events have a far greater influence on our perception than the events that happened a while ago. As the events move further into the Past their significance and impact onto the Future and the Present diminishes exponentially (the actual formula to describe this phenomenon is part of our work but reserved for other papers with greater mathematical underpinnings in their content). Our memory naturally limits the time window of ârelevanceâ to a few days or to a few years depending on the actual significance of the observed events. Talking recently to a few Fund Managers about the events of the October 2008 market crash I have noticed that they talk about it as this crash happened on another planet. They joked about it and described those events as something âinterestingâ but not having any influence on todayâs decisions to load their portfolios with un-hedged Long positions (I bet that on October 10th, 2008 they did not take the situation that lightly). At the same time, the very recent and fairly modest sell-off on April 10th, 2012 made many investment managers worry about their exposure to Europe more so than the fact that exactly three years ago we scrapped the marketâs bottom and the S&P 500 index printed infamous 666 (the âdevilâs number) price level.
Another example of the eventsâ relevant timing could be found when we observe the actions of Day Traders. These market participants couldnât care less about what happened a week or even a few days ago. Their decisions are only influenced by very recent news and price actions. In general, any meaningful decision making process requires a very specific time window to cover all the past significantly relevant events. This time window appears to be directly proportional to the time window of future Intents and Actions. We call this window the âDepth of Perceptionâ.
As the present time of our decisions move toward the future (leaving behind all the current events) the time window of relevance is moving as well. This Sliding Time Window always ends in the present and starts at a certain time interval back in the past. As this window slides towards the future it only contains the most recent events and excludes the events that happened too far in the past.
Let us assume that we measure the significance of every event contained in the Relevant Events Sliding Time Window using the same scale. For example, if we look back at the last month weather conditions we could rate each day of that month by the lowest and the highest temperatures registered during the day. Comparing all the days we can always find the highest and the lowest temperatures registered in the time interval covered by the Sliding Time Window. These temperatures play a very important role â they create the reference points for us to assess the current weather conditions. This scale will constantly evolve because it will always be based on a set of different events; some of them would disappear in the past and some would get added as the Sliding Time Window moves towards the future. Even if the temperatures were not changing at all during the past couple of days our perception of the current weather would change simply because every day we would use a different reference scale to assess the temperature.
