everything you were ever taught about finance is a lie! (or maybe not.) "the (mis)behavior of markets" is an excellent introduction to mandelbrot's unorthodox ideas on the house of modern finance. this book was written for a general audience and was written late in mandelbrot's life, after he's had decades to polish his thoughts. if you want an introductory book to read about how the stock market is possibly related to fractals, then this is the book to pick up.
fractals are the by now familiar mathematical objects that display self-similarity when scaled larger or smaller. their progenitors are those weird constructs, such as peano's space-filling curve and the cantor set, that were introduced in the late nineteenth century and subsequently sparked a revolution in logic. all of these animals of pure mathematical fancy were designed to challenge the conventional notions of the time and forced mathematicians to revisit the foundations of their craft. indeed, this line of thought led to the strange notion of non-integer fractional dimensions.
so what does all of this have to do with finance? the dimension of a fractal is given by a power law. a lot of economic and financial data seem to fit power laws as well. fractals are characteristically self-similar. charts of stock prices exhibit self-similarity. yada yada yada and thus, markets are governed by fractals. wait a minute. that's actually not quite logical!
ok, so there are some speculative aspects fueling this enterprise. this is the source of most of the negative criticism mandelbrot receives for this book. in my opinion, laying out some speculative avenues of thought is not a crime. scientists should dare to dream! mandelbrot himself acknowledges that this circle of ideas is merely in its infancy. he hopes others will pursue this path of inquiry and continue his life's work. and just why would anybody pick up that banner? well, because our current understanding of finance is deeply flawed while mandelbrot offers a (very rough) potential alternative.
in the first part of the book, mandelbrot does an outstanding job presenting data contradicting conventional financial theories. the punchline: markets are much riskier than people think. in particular, he attacks the use of the so-called "normal" probability distributions in finance. this foundational attack threatens modern portfolio theory, the capital asset pricing model, the black-scholes formula for pricing options, etc. essentially, all the major developments in finance in the second half of the twentieth century are in jeopardy. some of the creators of these theories have won nobel prizes in economics, so a lot is at stake here. (an understatement!) note that mandelbrot's arguments in part one are valid even if the fractal speculations presented afterward turn out to be unfounded.
mandelbrot uses plain language and analogies in his exposition throughout the book. he purposefully avoided equations, but he partially makes up for it through the use of pictures. mandelbrot was a very visual thinker and it shows in this book. for example, on p.179 mandelbrot offers a diagram of what "removing the trend" means in hurst's research. stare at the picture for a little while and the meaning should become clear to anyone with an interest in math and science. similarly, mandelbrot doesn't really explain how multifractal time works since the given father-mother-child analogy is fuzzy at best. however, the "fractal market cube" diagram on p.214 explains the concept of multifractal time in one picture. anyone familiar with projections should be able to understand this diagram without any problems. this compromise approach of offering analogies for a general audience while providing supplementary mathematical content in the pictures is suitable for an introductory book aimed at a wide audience, in my opinion.
the best feature of this book for me was the autobiographical chronicling of a sharp mathematical mind at work. mandelbrot was able to see patterns and connections between seemingly unrelated fields and then he pursued these links relentlessly over decades of time. his individuality and perseverance allowed him to carry on even when the rest of the establishment were pursuing contrary ideas. mandelbrot also doesn't hide the moments when he was in the dark or when he saw connections that turned out to be trickier than his first instinct suggested. after all, this train of thought spanned a lifetime. and amazingly, some of his greatest insights came from pure serendipity. mandelbrot received a major breakthrough from reading a paper that was pulled out of a garbage can!
in the interest of fairness, there are some relatively minor oversights in this book. this was the only real negative i could think of and it's easily forgivable. for example, mandelbrot incorrectly states that peter lynch's stellar performance as manager of fidelity's magellan fund was most significant when the fund was small. it's actually the opposite: market impact costs become a burden when a mutual fund grows too large, making it much easier to outperform the market when a fund's assets are small, especially with lynch's trading style. in spite of this minor criticism, i found this book to be a page turner written by an obviously extraordinary thinker.
it's always a good idea to read the masters. if you want to understand the spirit of passive investing, read jack bogle. if you want to partake in value investing, read ben graham. and if you want to know why the house of modern finance might stand on shaky foundations, read mandelbrot. read, think, then judge for yourself. lastly, if you were hoping to make a fortune from fractals, read the following quote from p.6 of the book:
"i see a pattern in these price movements -- not a pattern, to be sure, that will make anybody rich; i agree with the orthodox economists that stock prices are probably not predictable in any useful sense of the term."
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Great book. Disruptive finance
Book quality is very good for the price. Mandelbrot highlighs the error behind many financial models and tries to propose their owns views on the topic. 100% recommended
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- Reviewed in the United States on August 21, 2011
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AlessandroReviewed in Italy on October 24, 2024
Testo universitario
Format: PaperbackVerified Purchase - Antonio StaffoniReviewed in Germany on November 17, 2012
A book every economist should read
Format: PaperbackVerified Purchase - M. Lorenzo WarbyReviewed in Australia on October 28, 2022
Fun with fractals and finance
