Via Dennis Wilkinson & Katrina.Tuliao
Today is Pi Day across the globe, and more than ever, there’s reason to celebrate. That’s because math and analytics are more important to business today than ever before.
Pi is more than just the ratio of a circle’s circumference to its diameter. Pi is a mathematical infinity made tangible – a transcendental number that stretches forever with seemingly no pattern (mathematicians have computed trillions of digits). However, what makes Pi so intriguing to business is its connection to cyclical events and probability.
Pi as Controversy
Since Pi’s definition relates to a circle, it is used as a core concept in cyclical analysis. Traders and trading algorithms can employ ? when approaching trend analysis and understanding price action – charting the distance between highs and lows. Cyclical analysis and its concepts present market trading models that analyze the probabilities of a future trend or cycle. Pi Cycle Theory, or the Economic Confidence Model, supposedly allows traders to see a single long-term market trend in the midst of short-term rallies. The theory was developed by Martin Armstrong back in 1987. Armstrong used the Pi Cycle theory to predict the famous crash of that year and the long-term swing in 2011. The model holds that every 8.6 years, there are shifts in market sentiment, with public confidence waxing or waning in response to world events. The theory is not widely regarded because of the reputation of its founder. Armstrong was jailed in 1999 after being accused of running a Ponzi scheme. He was released in 2011.
Pi in the Flip of a Coin
Imagine if you flipped a coin over and over, calling “heads” each time. If you charted your successes, you would start to see a normal distribution curve. In a Bell Curve and other probability equations, Pi pops up as a constant of normalization. In other words, dividing by an expression involving pi allows us to say that the area under the curve is truly equal to one. Pi also occurs in an ancient experiment by Georges-Louis Leclerc, Comte de Buffon commonly called “Buffon’s Needle.” Buffon determined that you can approximate pi by dropping needles on a grid of parallel lines (whose spacing is greater than the length of a needle) and calculating the probability that they will cross a line. The probability is directly related to Pi. It turns out, the probability that the needle does land on a line between two planks is (twice the length of needle)/ (length between the planks times pi). Yet again, an unforeseen pi appears. Economic theorists use Pi to stabilize their market evaluations with equations directly linked to Buffon’s Needle.
Pi is significant to humankind because of its ancient roots and how it can speak about the recurring cycles of our lives. Pi is ubiquitous, and mathematicians are often surprised where they find it. The number appears in the natural world, too. The disk of the sun, the spiral of the DNA double helix, the pupil of the eye, the concentric rings that travel outward from splashes in ponds. Pi also appears in the physics that describes waves, such as ripples of light and sound. With these myriad manifestations, there’s little doubt that theorists will continue to use Pi in their attempts to lay bare the market’s patterns.
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