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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
...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

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

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

*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

"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, as always, looks at the world differently. Thats how he developed fractal geometry and how chaos theory evolved from that. When he took a look at cotton prices over 100 years he immediately realized that the data doesn't fit the current then nor now rules of evaluating risk.

He has been writin ...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

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

Oct 18, 2016
Viktor Nilsson
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Shelves:
trading-and-investing

This book examines what ways there are to project financial risk (in the form of asset-price changes) that reflects reality better than the so-called normal distribution (used in Black-Scholes, VAR, and many other models). The book follows a few parallel tracks:

-Mandelbrot's personal story

-The history of math and probabilities as it relates to projecting price movements

-The development of Mandelbrot's own mathematical models

-Bashing of everything and everyone

The first 3 tracks I all appreciated ...more

-Mandelbrot's personal story

-The history of math and probabilities as it relates to projecting price movements

-The development of Mandelbrot's own mathematical models

-Bashing of everything and everyone

The first 3 tracks I all appreciated ...more

The first part of the book is a biography. Bachelier views the financial market as a fair game, which developed the theory of efficient market. By using his coin-tossing view, Markowitz, Sharpe and Black and Scholes later on developed the portfolio theory, CAPM and the B-S model.

“Many a grand theory has died under the onslaught of real data”

The following part of the book ...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

However, if you already know fractals and have read something from Mandelbrot earlier, this book might be too slow and self-bragging. At the end of the book, even though I enjoyed reading it, I don't have anything to show for the 3-4 hrs I spent with it.

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

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

Mandelbrot does not propose his fascinating multi-fractal theory as a money-machine, nor does he hide the need to research much deeply, as his approach to financial theory has just been established.

The meat of the ...more

In the (Mis)behavoir of Markets, Mandelbrot attempts to apply theories of fractals onto economic phenomenon like the ups and downs of the stock market. If you look closely, he argues, the charts of stocks and indices is very much a continuous fractal and has bearings that can predicted by the diligent ob ...more

I stumbled upon this book after reading The Black Swan. Like me, if you don't know much about fractals, this could be a good introduction: straight from the horse's mouth.

However, while reading the book, I kept getting a feeling that in order the text make more accessible to the lay person, it seems to have lost some edge. The author does try to make up for it by providing some more technical stuff at the end of the book as chapter notes though.

Being an amateur interested in fin ...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

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

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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
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“For a complex natural shape, dimension is relative. It varies with the observer. The same object can have more than one dimension, depending on how you measure it and what you want to do with it. And dimension need not be a whole number; it can be fractional. Now an ancient concept, dimension, becomes thoroughly modern.”
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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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