In this scintillating collection, Holt explores the human mind, the cosmos, and the thinkers who’ve tried to encompass the latter with the former. With his trademark clarity and humor, Holt probes the mysteries of quantum mechanics, the quest for the foundations of mathematics, and the nature of logic and truth. Along the way, he offers intimate biographical sketches of celebrated and neglected thinkers, from the physicist Emmy Noether to the computing pioneer Alan Turing and the discoverer of fractals, Benoit Mandelbrot. They reveal the disruption it promises for industries including finance, tech, legal, and shipping. Professional traders often speak of a “fast” market or a “slow” one, depending on how they judge the volatility at that moment. They would quickly recognize, and affirm, the concept of trading time. The book’s criticism of Modern Portfolio Theory, another idealistic creation of economists that neglects real world data is excellent.

Review The Misbehavior of Markets

The author is somewhat pleased that Extreme value theory is being used by some people for risk management. However he says that Long memory behavior is not being incorporated in to such theories. For centuries, shipbuilders have put care into the design of their hulls and sails. They know that the sea is typically calm but hurricanes do sometimes happen.

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You can exclude books that you have already read in search results. Here’s another blogger’s review of the book, the comments are very insightful. This site uses cookies to deliver our services, improve performance, for analytics, and for advertising.

Review The Misbehavior of Markets

The cotton market, far from being smooth, was extremely rough. In fact, financial records report enormous Review The Misbehavior of Markets surges and plunges in price – far too many to be considered part of a normal distribution.

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Mandelbrot has been publishing papers on this topic for several decades. His earlier book, Fractals and Scaling in Finance (Springer-Verlag 1997) collects a number of these papers.The behavior of Markets provides a readable summary of Mandelbrot’s work in finance. This includes work on long range dependence and the Hurst exponent, fractal scaling in market statistics and the distribution of risk. The change in market prices does not follow a Gaussian distribution in a reliable fashion.

Physicists abandoned that pipedream during the twentieth century after quantum theory and, in a different way, after chaos theory. Instead, they learned to think of the world in the second types of brokers way, as a black box. We can see what goes into the box and what comes out of it, but not what happens inside; we can only draw inferences about the odds of input A producing output Z.

  • For instance, I loved how the author connected seemingly mundane movements in cotton prices to the mysteries of the universe; he takes a step back from the mire of details to marvel at the big picture every now and then.
  • Mandelbrot is the “father of fractal geometry.” He’s a mathematician who has spent much of his career looking at prices and markets.
  • The late legendary mathematician Benoit Mandelbrot possessed an amazing intellectual bandwidth.
  • Perhaps at the behest of his co-author, Richard Hudson, there are no equations in the main body of the book and only a few in the notes at the end.
  • During the same time period, there was a massive wave of CAPM, MPT, BSM that was sweeping through academia and the industry.
  • He states that it is time for more thorough research into financial market patterns and the development of more realistic models that better reflect this market turbulence so as to protect against possible future market crisis.

In the late 80s Mandelbrot used intra-daily tick data supplied by Olsen & Associates in Zurich to apply fractal theory to market microstructure. Mandelbrot’s own research in this area is presented in his books ‘Fractals and Scaling in Finance’ and ‘The behavior of Markets’. The Behavior of Markets offers a revolutionary reevaluation of the tools and models of modern financial theory. Updated with a new preface on the financial crisis of 2008, Mandelbrot’s insights are more valuable than ever. The Behaviorof Markets offers a revolutionary reevaluation of the tools and models of modern financial theory. Through concrete examples he assesses the currently used standard tools and models of modern financial market theory and shows that market behavior is much more turbulent and wild than what these models postulate. By using the existing models risk tends to be grossly understated and market participants subsequently pay the price dearly for inadequate protection against dangers inherent in financial systems.

The authors generalize the Euclidean dimension and introduce fractional dimension. The concept of dimension is based on the shrinking ruler length and the increasing measurement length.


The fund firmly believes in scaling by power law and long-term dependence and hence uses a different kind of portfolio management techniques. They call it “generalized efficient frontier” where they focus only on the odds for a crash and their scaling formula minimizes the assets in a portfolio crashing at the same time. 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. As someone who also likes science and math, I liked The Misbehavior of Markets. It is by Benoit Mandelbrot, who you have probably heard of if you like science and math. He proposes some of his own interesting ideas about market behavior but at the same time he is constrasting them with more standard views.

Review The Misbehavior of Markets

The same kind of turbulence seen in the wind tunnel is visible in financial markets, with sudden and extreme changes in the stock prices. Edger Peters, another asset manager believes in fractals and has written two books on them. However he does not use them in his funds as he says that his conservative clientele were not interested.

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I’ve gotten to the point where I wonder if, as a Christian, I can still teach economic orthodoxy with a clear conscience. The models and systems that modern finance uses to calculate risk are unrealistic and fail. I was tempted to subtitle the above web page Modern Finance Theory on One Web Page. This web page summarizes most of the authors and high points of modern finance theory.

Review The Misbehavior of Markets

He dismantles the efficient market hypothesis, showing how it grew out of a metaphorical understanding of the world as obeying the laws of Newtonian physics. In particular, it applies the Gaussian bell curve/normal distribution to markets which actually have fat-tailed distributions. The book shoes many ways where the received orthodoxy of MPT and the efficient markets hypothesis fails. The only reason these idea hang around is that they are accepted uncritically, almost like a cult. The chapter on the “Heresies of Finance” is particularly good, and poses problems for much of academic finance. In addition, when they plan trades and portfolios, they use mathematical techniques derived from fractal analysis.

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After World War II ended, Mandelbrot studied mathematics, graduating from universities in Paris and the United States and receiving a master’s degree in aeronautics from the California Institute of Technology. He spent most of his career in both the United States and France, having dual French and American citizenship. In 1958, he began a 35-year career at IBM, where he became an IBM Fellow, and periodically took leaves of absence to teach at Harvard University. At Harvard, following the publication of his study of U.S. commodity markets in relation to cotton futures, he taught economics and applied sciences.

Large changes, of more than five standard deviations from the average, happened two thousand times more often than expected. Under Gaussian rules, you should have encountered such drama only once every seven thousand years; platform trading in fact, the data showed, it happened once every three or four years. Discontinuity, far from being an anomaly best ignored, is an essential ingredient of markets that helps set finance apart from the natural sciences.

Pictures do convey a good idea about the model but my understanding as of now is very hazy. It turns out that the slope value for wild randomness is close to -1 and slope value for mild randomness is -2 . Well, one can only wish a dose what types of brokers are there of good luck to all who are trying to make money in such wild markets. The authors make a case for using “turbulence” as a way to study price processes. This chapter gives a few visuals that can be generated via multi fractal geometry.