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# The (Mis)Behavior of Markets

Benoit B. Mandelbrot, one of the century's most influential mathematicians, is world-famous for making mathematical sense of a fact everybody knows but that geometers from Euclid on down had never assimilated: Clouds are not round, mountains are not cones, coastlines are not smooth. To these classic lines we can now add another example: Markets are not the safe bet your br
...more

Hardcover, 352 pages

Published
August 3rd 2004
by Basic Books
(first published September 18th 1997)

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The theory goes that the markets already consolidate all the information available to them, so that price already incorporates all the information available to the market. From there, we get the random walk theory -- that prices will mo ...more

*The Misbehavior of Markets*he turns his attention to the application of fractal concepts to markets. Mandelbrot shows that price fluctuations:

1) are not independent from one time period to the next

2) appear to be the same, regardless of the time scale involved (hours/days/months/years)

3) do no ...more

1. Risk, Ruin and Reward

We start with a brief history of finance. The author asks us to play a game. Out of 4 charts we nee ...more

All in all, some interesting beginnings of theories and comparisons. There is almost no math involved. But if you're scared of math, this is a great glimpse into fractals and it starts to show glimpses ...more

I really can't believe how far this book falls short of what it could have been. I was expecting an in-depth theoretical exploration and practical application of fractal geometry in finance, but instead I got a popular science book written for the general reader.

This book covers the bare minimum about fractal geometry and doesn't advance beyond the superficial discussions (compared to Benoît Mandelbrot's 1982 book

*The Fractal Geometry of Nature*), at least it seems to me.

Fractals are shapes that ...more

*The (Mis)Behavior of Markets*by Mandelbrot and Hudson is a pretty good book about a fascinating topic. Mandelbrot's thesis is that many common beliefs underpinning market modeling software are fundamentally incorrect, and that in using them we are exposing ourselves to massively more risk than we expect. This book was published in 2004.

To describe Mandelbrot as prescient in characterizing the inadequacy of market modeling is to understate the situation. Using very little serious math and very fe ...more

I discovered that the last book of Mandelbrot was precisely devoted to this problem. Mandelbrot proposes to modify the econometric algorythmes used by the banks. Those would be responsible amplify the disorders.

It is a difficult work. I ...more

"Why is he writing about financial markets?" I wondered.

I knew of Mandelbrot in mathematics, computer science, and natural sciences -- I had no idea how deep his obsession with economics was till I read this book.

In a way, it's almost depressing, his biggest contributions were to fields he didn't seem to care about as much as economics (a field that in turn didn't seem to care about his work).

Mandelbrot's ...more

-Benoit Mandelbrot, author

-The Market, the protagonist/antagonist/chorus as per Greek drama

-Benoit Mandelbrot's ego

Maybe it's a side effect of some incident as a child but the author has no reservations about promoting himself. Whole paragraphs are devoted to his "enlightened breakthroughs" and profound understanding of market mechanics. An understanding so deep he proposes no significant market model and merely a direction.

He stands as the most cited author ...more

Mandelbrot is the "father of fractal geometry." He's a mathematician who has spent much of his career looking at prices and markets. He argues pretty forcefully that any of the risk management techniques used by Wall Street are based on false assumptions and have been proven to fail time and again.

Mandelbrot is Nassim Taleb's mentor. I've gotten to the point where I wonder if, as a Christian, I can still teach economic orthodoxy (much less finance classes like risk management) with a clear consc ...more

It's very much like Black Swan, in ways, though it's obviously a precursor. I'd say it's Black Swan without the profanity and vanity. :)

The first half is illuminating. It discusses how exactly modern finance theory is based on flawed assumptions of the market, and how, as a result, risk assessment - the kind done by banks and brokers - is nonsense. He then explains how his sort of math (power laws, fractals, etc.) present a much better mo ...more

Mandelbrot essentially tells his readers that the stock market is even more volatile than people realize, and that the advent of faster ...more

The following quote by Laurence J. Peter (slightly modified to better reflect reality) is one of my favourites:

An economist is an expert who can tell you tomorrow why the things he predicted yesterday didn't happen today.

There are many people who will dismiss such an observation out of hand. "Economists are experts", they say. "Look at the successes of the banks, brokerage firms, investment management companies, etc." When you ask them to ...more

Furhtermore the book explains the markets and why they aren not 'brownian'(suspended particles to the stock market) and how fractals can be used to represent trade/market.

He is also using the terms / sharpe r ...more

The book is divided into 3 sections. First, Mandelbrot gives an account of financial theory and outlines its flaws. Second, he provides his own insights. These were interesting in that I think they gave a more numerically analytic explanation to fat tails, namely he provides a mathematical model that explains fat tails (which have been pointed out by others such as Taleb, who provide a more psychologi ...more

Nov 28, 2015
Robert Karl
rated it
it was amazing
·
review of another edition

Recommends it for:
Anyone who has a 401k or invests in markets of any kind.

Recommended to Robert by:
Nassim Nicholas Taleb

Shelves:
have-hardcopy

In a few words: markets are fractal.

Absolutely a must-read, although Mandle Bro falls victim to the narrative fallacy (he thinks that everything that happens in academia has a cause and effect, see his reverence for Bachelier.

Mandle Bro's ten heresies of finance:

1) Markets Are Turbulent

2) Markets Are Very, Very Risky

3) Market "Timing" Matters Greatly

4) Prices Often Leap, Not Glide

5) In Markets Time Is Flexible

6) Markets in All Places and Ages Work Alike.

7) Markets Are Inherently Uncertain, and B ...more

Absolutely a must-read, although Mandle Bro falls victim to the narrative fallacy (he thinks that everything that happens in academia has a cause and effect, see his reverence for Bachelier.

Mandle Bro's ten heresies of finance:

1) Markets Are Turbulent

2) Markets Are Very, Very Risky

3) Market "Timing" Matters Greatly

4) Prices Often Leap, Not Glide

5) In Markets Time Is Flexible

6) Markets in All Places and Ages Work Alike.

7) Markets Are Inherently Uncertain, and B ...more

The second half of the book is more interesting but there is too much diversion into other stuff (the whole bit about the Nile was I thought unnecessary long) and it probably was simplified a tad too much. No ...more

Mar 13, 2016
Benjamin Scharf
rated it
really liked it
·
review of another edition

Shelves:
read-again

Ein typischer Mandelbrot: Ausgehend vom Gebiet der Fraktale klärt uns Mandelbrot hier darüber auf, was aus seiner Sicht in der Finanzwelt schief lief (das Buch hat seine Ursprünge in den 70igern) und bis heute schief läuft.

Als Mathematiker (ich bin auch einer) ist es natürlich lustig und einfach, sich über Wirtschaftsmathematiker und BWLer mit ihren einfachen, wenig korrekten Modellen lustig zu machen. Der heilige Gral der Normalverteilung, der der gesamten Finanzmathematik zu Grunde lag/liegt, ...more

Als Mathematiker (ich bin auch einer) ist es natürlich lustig und einfach, sich über Wirtschaftsmathematiker und BWLer mit ihren einfachen, wenig korrekten Modellen lustig zu machen. Der heilige Gral der Normalverteilung, der der gesamten Finanzmathematik zu Grunde lag/liegt, ...more

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Benoît B. Mandelbrot was a French mathematician, best known as the father of fractal geometry. He was Sterling Professor of Mathematical Sciences, Emeritus at Yale University; IBM Fellow Emeritus at the Thomas J. Watson Research Center; and Battelle Fellow at the Pacific Northwest National Laboratory. He was born in Poland, but his family moved to France when he was a child; he was a dual French a
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“In the 1960's, some old-timers on Wall Street-the men who remembered the trauma of the 1929 Crash and the Great Depression-gave me a warning: "When we fade from this business, something will be lost. That is the memory of 1929." Because of that personal recollection, they said, they acted with more caution, than they otherwise might. Collectively, their generation provided an in-built brake on the wildest form of speculation, an insurance policy against financial excess and consequent catastrophe. Their memories provided a practical form of long-term dependence in the financial markets. Is it any wonder that in 1987 when most of those men were gone and their wisdom forgotten, the market encountered its first crash in nearly sixty years? Or that, two decades later, we would see the biggest bull market, and the worst bear market, in generations? Yet standard financial theory holds that, in modeling markets, all that matters is today's news and the expectations of tomorrow's news.”
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“If you are going to use probability to model a financial market, then you had better use the right kind of probability. Real markets are wild. Their price fluctuations can be hair-raising-far greater and more damaging than the mild variations of orthodox finance. That means that individual stocks and currencies are riskier than normally assumed. It means that stock portfolios are being put together incorrectly; far from managing risk, they may be magnifying it. It means that some trading strategies are misguided, and options mis-priced. Anywhere the bell-curve assumption enters the financial calculations, an error can come out.”
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