Get ready for a punch.What follows is most recent and controversial example which is currently in news.Perfect case of positive feedback system and it can not get better than this.
SAGA OF ANGLO IRISH BANK SCANDAL
Sean Quinn had a very large interest, through Contracts for Difference, in Anglo’s shareholding. We’re talking about tens of millions, maybe hundreds of millions. In March 2008, when US bank Bear Stearns collapsed, Anglo shares fell from €17 per share to €6.50. On March 27, 2008, during another meeting between Anglo and the Quinns, an agreement was made for a certain amount of Mr Quinn’s shareholding to be placed on the market.The bank later got full power of attorney over Mr Quinn’s CFD position in order to unwind it.Sometime around July 8th, The bank decided they would put together a scheme where the Quinns did buy a shareholding in Anglo Irish Bank directly and others were to take a shareholding directly, and there would be a market announcement saying that the Quinn CFD position and the Quinns had ‘gone long’ on their shareholding.
The bank dealt with six Quinn family members and assembled a group of 10 other “supposedly high net worth” people, he continued.This involved lending enormous amounts of money to what became known as the Maple Ten.The scheme involved lending more than €700 million to individuals for the purpose of buying shares in the bank. told the jurors that in October 2008 Mr Whelan allegedly decided to send a new loan facility letter backdated to July of that year which would drop the personal recourse on the loans from 25 per cent to nothing.
This is manipulation process and a positive feed back system not a random process.This example perfectly demonstrate that blanket assumption of randomness is a grievous mistake but to be taken with pinch of salt.
What is a positive feedback system?
Positive feed back belongs to domain of statistical physics.Outcome is result of coupling.amplification,inflation ,zooming,buildups as they are commonly understood.In technical form which approximate our common experience is pumping of water into a vessel which result in pressure shooting up in the vessel which ruptures finally.Pressure or the level in tank which is observable variable at any instant is impacting next future value.In metallurgy ,we have examples of melting ,or drawing of wires which eventually snaps,.In chemistry it is boiling and eventual vapourisation.Rupturing of vessels on application of stress.Coupling and interaction of successive events is fundamental and nonexistence of independence or heterogeneity as found in Randomness is evidenced in Positive feedback system.
Bubbles as its manifestation
Inflation process is manipulated and controlled.Price action then becomes a product of a control process not a random process.It is subject of statistical physics not statistics.Price behaves a control parameter which has direction not order parameter which has a built in pattern.Tecnical analysis tools as well as fundamental analysis tool does find objective application for forecasting the future.TA is certainly a valid diagnostic method during period of inflation or coupling.Inflation process happens due to cartelization,portfolio insurance,Hedge fund enterprise,herding ,leveraging ,irrationality and exuberance, euphoria ,self fulfilling activism,hyperconnectivity and insider trading .This is build up process not random actions of multiple heterogeneous agents acting out independently .Zooming to 300 or 400 % of real size- is a Bubble.People have ingenious curiousity to discover the real sizes ultimately as it intrigues .This is when the grand alliance or coalition cracks like wide rupture of pressure vessel.Bubble so formed crashes when any one link breaks away and other links swiftly follow.Phase change, a phenomenon well-known in statistical physics and it throws up as surprises at critical points or at tipping points.
Perpetual machine an illusion
Second law of thermodynamics states that perpetual motion machine of second kind does not exists because the entropy tends to be maximum. Maximum entropy means systems ultimately tends to have many possibilities.It has to alternate between entropy extremes by sharing its energy.This helps to achieve an internally a non equilibrium state controlled by one variable with high probability.
To be continued in Part-II.