Entropy (in finance)

In finance, entropy measures the unpredictability or randomness in a set of data, such as asset returns. Higher entropy indicates more uncertainty and less predictable behavior, while lower entropy suggests more consistency and predictability. Think of it as a way to quantify how chaotic or orderly a financial system is. This concept helps investors assess risk and make informed decisions by understanding the degree of disorder within market data or portfolio returns. Essentially, entropy provides a statistical insight into the complexity and reliability of financial patterns.