Financial Sense Home l Broadcast l WrapUp l Storm Watch l About Us l Contact Us
BRILLIANT
MINDS
by Robert B. Gordon,
Sc. D.
November 22, 2002
PREFACE
In
this essay, I have set a difficult task for myself. I am going to discuss
the contributions to society of two very brilliant Americans. John Forbes Nash, Jr., a truly great mathematician, received a Nobel
Prize for Economics in 1994. He was born in 1928 and made many
original contributions early in life to the advancement of the important
field of game theory. In 1959, he experienced a severe mental disability
from schizophrenia that lasted 25 years. His Nobel award occurred after he
had recovered his health and was working at Princeton University.
In
contrast, Ralph Nelson Elliott, born in1871, was an accomplished
accountant in his early career and later held management positions in
Central American companies. His years in that climate led to a health
problem that forced his early retirement in 1929 at age 58. Seeking an
outlet for his intellect, he began an exhaustive study of the stock market
at a very interesting time in its history. He searched for common chart
patterns in the prices of market indices over the previous 75 years,
examining charts using data with short to long time intervals.
Elliott's long and detailed studies bore fruit in 1934 and he wrote down a set of general principles that applied to all degrees of wave movements in the stock index prices. Using his discoveries, he found that he could predict future price movements from the wave patterns. By sending his predictions to an experienced financial analyst, Charles J. Collins, he found a co-author for his epoch-making publication titled The Wave Principle published in August 1938.
JOHN NASH'S CONTRIBUTIONS
I have read the autobiography that John Nash furnished to the Nobel Committee in 1994 at the time of his award. It was truly awe-inspiring. I have no idea why the author of his recent biography chose the title "A Beautiful Mind". When I typed these three word titles into the Google search engine, the results returned 2,360,000 items for "beautiful" versus only 1,040,000 when "brilliant" replaced "beautiful". As an experienced author, his biographer, Sylvia Nasar, obviously picked the sexiest title.
Among the items I read about John Nash in preparing for this essay, was a very revealing report of the internal wrangling that occurred within the Nobel award committee in Sweden for several years leading up to his 1994 award. One member of the prestigious committee objected right to the final vote against the award to Nash because of his long illness. Two other Nobel prizes were awarded in Economics in 1994 to individuals whose memory has faded compared to that of Nash.
I have no expertise in the advanced fields of Economics or Mathematics, so I will present my version of an expert opinion on John Nash's contributions generously offered by Hernán Cortés Douglas, Ph.D., whose brilliant essay on "Forecasting Crashes and Recessions" was published by Gold-Eagle.com in January 2002.
Mathematicians have been working in the field of Game Theory for at least several centuries. A game is a social situation in which more than two people are making decisions. What each person does affects other people's welfare, behavior or both. A game is described by (1) the players (people) in the situation, (2) what each player can do, their options and opportunities and (3) the payoffs, how each person ranks the plausible outcomes in the order of what is best for him.
A "solution" of a game is a prediction of what each person is likely to do in that particular situation. What Nash did was (1) to define a solution concept now called "Nash equilibria" for arbitrary games and (2) to prove that every game has at least one such equilibrium. Before Nash, many solution concepts had been defined but were limited to particular situations and no solutions were available for a vast array of situations.
Nash proposed what amounted to a general theory of equilibrium. His concept was simple and intuitive and provided the researcher assurance that, for every situation at hand, there would be one such equilibrium to analyze it. His work had a wide influence on workers in this field by teaching them how to analyze games.
Nash's advances in Game Theory were of considerable use and benefit to many newer branches in the field of Economics and some could not even exist without his contributions. Game theory is crucial to analyze imperfect competition, contracts, bargaining and information. These issues are important in Industrial Organization, Labor Economics, International Economics, Macroeconomics, Corporate Finance and others.
Summarizing the above, we can say that John Nash made a very important contribution in a specialized branch of mathematics known as Game Theory which is highly useful to a number of modern branches of Economics. If I were to attempt a biography on this great mathematics genius, I would probably choose as the title "A Brilliant Mind".
RALPH ELLIOTT'S CONTRIBUTIONS
Whereas Nash's genius developed early in life as is often true in the field of mathematics, Elliott's brilliant pioneering work came at the mature age of 58 and in a very dark period in our country's history - the Great Depression.
I have a close personal feeling for his difficult self-appointed task of unraveling the mysteries of stock charts using only his eyes and brain as the primary tools. By an interesting coincidence, in 1973 at the same 58 years, I was charting market indices and computing moving price averages by hand at the start of the 1973 bear market. See my essay on "Education of an Investor" for the details. Unfortunately, I did not have my introduction to Elliott's masterwork until 1995.
Elliott's first book "The Wave Principle" published in August 1938 included these perceptive words in the first chapter:
"No truth meets more general acceptance, than that the universe is ruled by law. Without law, it is self-evident there would be chaos, and where chaos is, nothing is. Very extensive research in connection with human activities indicates that practically all developments which result from our social-economic processes follow a law that causes them to repeat themselves in similar and consistently recurring serials of waves or impulses of definite number and pattern. The stock market illustrates the wave impulse common to socio-economic activity. It has its law, just as is true of other things throughout the universe."
These profound conclusions of his 9-year study are just as true today as when they were written. In fact, Elliott's Principles remain almost unchanged today despite six decades of further development by those who followed in his steps. Only minor changes and corrections have been made to his carefully defined rules.
I am not going to give further details here on Elliott's tremendous contributions. I refer readers to the many sections in my other essays which describe its basics and how to apply them viz. "A Foggy Day in Uncharted Waters."
Today, a relatively small group of loyal supporters and followers of Elliott's work exist in this and other countries. Sixty years after his revolutionary findings, his work is unknown and unused by society at large and, tragically, is scorned by those segments that could use it to greatest advantage. There is also a small group of people who persist in criticizing Elliott's work through misunderstanding or misapplication. Their efforts simply reflect their inability to understand his message and do not hinder further broader understanding and use of his Wave Principles.
COMPARING THE ACHIEVEMENTS
One thing can be said at the outset, both of these men were blessed with unusually brilliant minds. Nash's pioneering work in a special branch of mathematics will live and be used for many years by both mathematicians and economists. Because of his Nobel Prize and best selling biography and movie, his fame will persist for several generations among the general population.
I do not have any specific information about the value of Nash's game theory work to the overall field of Economics, usually referred to as the "dismal science". But in the important field of Macroeconomics, perhaps the large number of Ph.D. economists playing complex what-if games with Nash's math may account for their persistent failure to understand our major boom and bust cycles in the real world.
Despite Elliott's lack of general approval and acceptance of his work in the decades since his death, I am guardedly optimistic that this will eventually change. The slow buildup of a massive amount of evidence of its effectiveness, not only in the financial world but in all areas of society will eventually win major support. It is quite obvious that this change will not come fast enough to help our nation and world in the current bear market and its aftermath. So I have set a more reasonable goal for myself to do everything in my power to help our readers understand what this great tool can and cannot do to improve their investing skills.
THE COLOSSAL PROBLEMS IN ACADEMIA
My main purpose in writing this essay was to highlight one of the truly great ongoing crises in our country. I wanted to provide a background to discuss the major tragedy in our universities who, instead of leading our nation, are dragging it down by their closed minds. When, in the year 2002, we see our leading economists writing and speaking words that sound just like Yale professor Irving Fisher's optimism just before the 1929 Crash, our struggling economy is in serious trouble.
I have yet to see one single sign of recognition from leading economists in academia, Wall Street or our Government that the Elliott Wave Principle even exists after its great worth has now been proven by 60 years of use in all types of financial markets. As a case in point, lets discuss our two well-known TV spokesmen, Robert Shiller and Jeremy Siegel, both with Ph.D.' s from MIT and teaching in prestigious universities. When they come on CNBC to discuss the stock market, I have yet to hear a statement that could withstand the critique of an Elliott Wave analysis. Dr. Siegel in particular is still preaching "stocks for the long run" with no change from his book, despite our being 3 years into a vicious bear market. And although Dr. Shiller has recognized the existence of a bubble, his guidance for the future has no more value than that of his fellow economist. I watch them only to sharpen my own thinking and am disgusted at their lack of understanding of our current and projected financial environment.
Since no advisor who understands the Elliott Wave Principle, is available to President Bush, it is no wonder that we hear words coming from his lips that are almost identical to those uttered by Herbert Hoover seventy years ago. Unless we can manage to start some enlightenment soon in academia, we are doomed to repeat our boom and bust scenarios indefinitely into the future.
A GLIMMER OF HOPE FOR THE FUTURE
Among the many thousands of highly educated economists in this and other countries, I know only one who has demonstrated in writing a clear understanding of the existence and power of the Elliott Wave Principle, Hernán Cortés Douglas Ph.D. a Chilean professor of economics. His scholarly, heavily referenced essay entitled "Forecasting Crashes and Recessions" was published in January 2002 and can be read in the Gold-Eagle archives. To my knowledge, it is the only sign of recognition of Elliott's work among our economics educators.
Since I discovered this paper some months ago, I have enjoyed a thoroughly delightful e-mail correspondence with this scholar who has recently won a prestigious award providing a year's residence at Harvard University. Some weeks ago, he sent me a draft copy of another significant paper, just published in the August 31 issue of New Scientist magazine. The author is John Casti, Ph.D. a brilliant mathematician who is a university professor and a Fellow at the Santa Fe Institute, a New Mexico think tank.
I have reviewed Casti's resume and it is replete with scholarly papers in mathematics and others whose titles connote the objective of explaining difficult subjects to lay readers. His new paper is obviously of the second type and is given the unusual title of "I know what you'll do next summer". This article can be viewed in the archives of the New Scientist magazine by means of a free registration at http://archive.newscientist.com. To whet your interest, I reproduce the opening paragraphs, starting with the introductory headline:
"What do galaxies, stockbrokers and style gurus have in common? A set of numbers describing everything they do. Does nature's hidden program mean we're all deeply predictable, asks John Casti
WHEN was the last time you bucked a trend? Really swam against the tide? Chances are, you never really have - at least, not for long. But it's not your fault. You may not have as much free will as you think.
Most of us are aware of our tendency to go with the herd. We tag along with fashions: our hemlines rise and fall, our trouser legs widen and narrow, or we buy technology stocks when others are doing the same. We accept that, much of the time, we're not being "individual". What we're not aware of is why.
There are evolutionary arguments, of course: if you haven't enough information on which to base a judgment, the next best thing is to assume that the herd knows where it's going. But a mathematical analysis of our activities indicates that there may be something deeper going on. We seem to be fated to act in a way that mimics patterns found elsewhere in nature.
We already know that some actions of society appear to follow laws that often apply to otherwise completely unrelated phenomena in the Universe. The numbers behind the fractal shape of a snowflake can also describe our society's financial activities, for instance. Financial data is one thing, but why should the maths that describes a seashell's spiral also underlie our technological progress? Why can our shopping habits be described by the same rules that dictate how galaxies are spread through the cosmos? It's as though we are somehow programmed by mathematics. Seashell, galaxy, snowflake or human: we're all bound by the same order."
Our comments to readers: Go to the magazine archive, print out this brilliant paper and send it to your family and friends. It is a great companion to the Douglas Gold-Eagle.com essay. Now for the first time we have strong Elliott Wave arguments from brilliant members of two great professions, mathematics and economics. It is a small but important start on a long and difficult job of overcoming apathy and ignorance, first in academia, and eventually in every segment of our society.
ELLIOTT AND A MONK NAMED COPERNICUS
While writing this essay, an interesting question came to my mind. Elliott's profound declaration of his Wave Principle is relatively unknown and unused 60 years after his death. There are two possible explanations for this delay. Either his work was wrong and had no significance or deeply held disbeliefs were delaying its recognition. Has a similar situation occurred in earlier times? The answer is a resounding yes. I looked up another case in which the world was slow to change its view. It took several centuries for the world to decide that the sun did not revolve around the earth. Now, five centuries later, the world believes that external events move the stock market while Elliott's Wave Principle prove just the opposite.
For
many hundreds of years, Aristotle's view of Astronomy prevailed, namely
that the earth was central and the sun and planets revolved around it.
Finally, a Catholic monk Copernicus (1473-1543) concluded that Aristotle
was wrong and that the earth and planets actually revolved around the sun.
Fearing punishment, he postponed publication of his findings in
"Revolution of Heavenly Spheres" to just before his death.
But the standard view was so entrenched in the secular and religious world that even the telescopic evidence of Galileo (1564-1642) was not enough. He first viewed the four moons of Jupiter on Jan 7,1610 but, twenty two years later, he was forced to make a public apology for his views and he spent the last ten years of his life in house arrest. So, a full century after Copernicus had published his revolutionary paper, Galileo who proved he was correct was denied respect and recognition for his great discoveries.
Discovery and information flow are supposed to move faster now than 5 centuries ago, but the glacial speed for recognition of Elliott's work appears to refute this claim. I conclude that the analogy in the time of acceptance for the breakthroughs of Elliott and Copernicus is valid and operative today. When an entire society, including its schools of higher learning, its business community and its government leaders are blind to a new truth, the process of change will be very slow. But I have supreme confidence that truth will eventually prevail. In the meantime, individual and professional investors will continue to benefit greatly from peace of mind and investment gains made possible by using the Elliott Wave Principle.
Go Top
© 2002 Robert B. Gordon, Sc.
D.
Bio and Editorial Archive
Robert
B. Gordon, Sc. D.
Sun City West, Arizona
Email