Dynamic generation of hypotheses: Mandelbrot, soros and far-from-equilibrium

Abstract

In this paper I argue that the effective way to account for the behavior of stock market prices is to put in use a dynamic approach—bottom-up, local, nonaxiomatic, heuristic. To this end, I provide an analysis of the generation of four main hypotheses used to explain stock market prices (SMP). In particular I show how the means of generating these hypotheses is essential to assessing their efficiency and plausibility. In formulating a hypothesis, a selection of features of SMP is made for incorporation in a theory. This selection may be expressed mathematically in most of the cases. An examination of these means of generation can show us why some of these hypotheses are successful and efficient and some not, and can also shed light on the extent to which a particular hypothesis can be usefully applied. Thus the study of the means of generation of hypotheses will offer us a guide to formulating new hypotheses in a reliable and cogent fashion.