Contents

The refutation of this one assumption of modern financial theory has in the past twenty-five years created a fertile new field of inquiry, called behavioral economics. It studies how people misinterpret information, how their emotions distort their decisions, and how they miscalculate probabilities. The overall presentation of ideas was lovely and far from the usual stodgy manner of economics books. 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.

Bachelier’s theory stated that prices move up and down randomly, with each variation being completely independent from the last. Additionally, they’re all thought to have the same time horizon, the point at which they re-evaluate their investment decisions. For example, this could mean that they’ll all hold their stocks for five years before deciding what to do with them. For example, if the stocks of one Venezuelan bank perform better than competitors in the past month, then it seems like the best investment that a completely rational, self-interested and informed investor could make. Mainstream theories of finance, like those of the Chicago School, contend that each individual will make the most profitable, obvious rational choice.

With its spectacular cleverness it is more than just gorgeous Mandelbrot set pictures. This book lays lots of groundwork before it finally gets to the point. I would recommend a reader read the first chapter of part III at the start to give yourself a grounding then read the rest of the book.

Distributional tests of the data then showed fairly conclusively that the tail properties of the data differ from those of the Gaussian. What is intimated but not actually a logically valid conclusion from these results is that the formula is therefore no longer valid. The reason this doesn’t work is that the features of the Gaussian that get used in the formula need not be the ones that are tested by the empirical test. And in fact, both Markowitz portfolio formula and CAPM can be and are regularly derived without relying on the exact tail behavior of the Gaussian.

## Tag: The Misbehavior of Markets

He’s also got an ego on him, with constant name dropping . It’s not a good look on anyone, and even less so on someone who is already popularly successful — see Feynman as an example of doing this kind of thing better. Having read his student Taleb’s work first, I was aware of the ideas that Mandelbrot proposes. Reading the teacher’s first-hand account improved my understanding of it. The book ends with notes containing formulas and bibliography listing scientific articles. A thrilling book, that I could not put down, until I read it cover to cover.

I suspect the reason this gets so easily confused is that most people are looking for forecasting models (“what’s the price tomorrow? when can I retire?”) and not accurate models of risk and option pricing . Personally, forecasting models seem stupidly impossible , but an accurate risk model and option pricing would be extraordinarly beneficial to everyone — https://forexanalytics.info/ at the very least, to know how high our dams should be… The exact amount higher is what remains to be understood. That stock prices over time are “fractal” is true, again by definition, of how we measure stock prices; but not all “fractals” are simple, some of them have more than one “fractal dimension”, stock prices unfortunately fall into that category.

### What are the characteristics of a fractal?

A fractal often has the following features:

It is self-similar (at least approximately or stochastically). It has a Hausdorff dimension which is greater than its topological dimension (although this requirement is not met by space-filling curves such as the Hilbert curve). It has a simple and recursive definition.

The real curve is much more violent and the investor’s ride much bumpier. Do we use them only to seek shelter until the passing of financial storms? Contrary to everything we know from modern financial theory, can higher returns actually come as a result of lowering risk? In Safe Haven, hedge fund manager Mark Spitznagel – one of the top practitioners of safe haven investing and portfolio risk mitigation in the world – answers these questions and more.

## The Misbehavior of Markets: A Fractal View of Financial Turbulence

It is the finance equivalent of “A Brief History of Time”. The author refers to characters in the Bible to describe different forms of wild variability. For people familiar with the Bible this is a good example. Out of 4 charts we need to select the ones that are real and the ones that are fake. Pretty much the day I finished this book the whole Gamestop saga began kicking off.

He discovered a power law in the log returns of cotton prices. The evidence pointed at a L-stable probability distribution with features somewhere between a normal and Cauchy distribution. Mandelbrot tries to demolish the house of modern finance starting with shaky assumptions. More evidence is presented, such as the low price earnings and price book anomalies.

But if you’re scared of math, this is a great glimpse into fractals and it starts to show glimpses of how they may be used in the future to assist in market theory . Fractal modeling within the natural sciences is extremely common if not the norm . The name though is a bit of a misnomer, mathematically it means something different than what most people consider a “fractal”. Furthermore, for a given object, if its “fractal dimension” is greater than its “topographical dimension”, then it is, by definition, a fractal.

## Audible com Reviews

It might help to know where he’s going during part I and part II. There’s an important difference between modeling the behavior of a system versus predicting exactly what the system will do several years from now. 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).

Most financial data, such as stock price over time, for example, has a “fractal dimension” greater than 1 . This measurement of “fractal dimension” is stable and well-defined mathematically. Unfortunately, as Mandelbrot points out in The behavior of Markets, the foundation of this new era of economics was rotten.

In practice, this type of work tends to get lost in the body of inarticulate economic theories as well as in the desperately greedy investment practices. More commonly used is equity risk premium, a subset of market risk premium. SourceBeta (βi) is the factor by which a particular stock correlates with the market index.

## new topicDiscuss This Book

And along this Efficient Frontier, select a portfolio based on your risk appetite. Nassim Nicholas Taleb The deepest and most realistic finance book ever published. Now in paperback, “a compelling, accessible, and provocative piece of work that forces us to question many of our assumptions” (Gillian Tett, author of Fool’s Gold). The mathematics in this book is at a higher level, but is still clearer and easier to understand than Mandelbrot’s papers.

But the chasm between theory and reality is strikingly apparent. Markets are not always efficient, price changes are not continuous, volatility itself is volatile, and the list of fallacious assumptions goes on. “Arbitrageur” should be pronounced [ärbəˌträˈZHər] but we get the hard “g” of Spanish. This also tells you the producers were getting paid for nothing. It’s still compelling to question our most comforting financial market assumptions, but it could have been a lot more “listenable.”

That portion was relatively well done, I thought it was a fair and accurate representation of what I had learned in basic finance in college. Mandelbrot also convincingly shows that the normal curve is not a good assumption, and that reliance on it can lead to blow ups. However, Mandelbrot is not as convincing when it comes to proposing fractals as a solution. Perhaps it’s the limits of my technical knowledge, but it just did not seem convincing.

## The Misbehavior of Markets

The behavior of Markets is a readable book and may be satisfying for the intellectual tourist who wants to visit fractals and market behavior. Unfortunately Mandelbrot does not explain clearly how multifractal techniques might be applied to financial data to provide a better estimate for risk and volatility. 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.

Mandelbrot might be largely unknown to the wider world, but for the beautiful pictures that can be produced on a computer using the fractal equations he popularized (including the famous Mandelbrot set, named after it’s discoverer). Commentators may hold positions in securities mentioned on this website. Please do your own work before investing – fundamental, technical, quantitative or whatever your preferred method may be – as any action you take as a result of reading the content of this blog is ultimately your own responsibility.

I thoroughly enjoyed the explanation of how the physics of wind turbulence were used to derive a blueprint for measuring the turbulence or volatility in Markets. The realism of Mandelbrot’s philosophy is very enlightening. The way in which he challenged economists to go back to the drawing board in order to understand the devastating market crashes of 1987 and 1929 was very influential. The most important lesson I took from the book is that the mathematical tools that we currently have, are very limited, especially when it comes to measuring complexity and growth.

On the other hand, I might not be able to understand a comprehensive scholarly defense without a deeper mathematical background. This is one of the biggest debates in economics, and the value or futility of investment management and financial regulation hang on the outcome. In this groundbreaking book, Andrew W. Lo cuts through this debate with a new framework. In these turbulent economy we seem to be victims of the financial markets. Benoit Mandelbrot, famous mathematician and inventor of fractal geometry, joined forces with Richard Hudson, to write a book about financial theory. “The behavior of Markets” falls in the popular science genre.

Risk can be thought of as how wrong you could be about the price when it’s time to sell. Therefore risk, Markowitz thought, depends on price volatility. And the most common way of measuring volatility is variance and standard deviation. ic markets broker review Mandelbrot does mention that markets seem to display regimes. But he does not delve in detail into how this might be reflected in market statistics. Mandelbrot mentions that there are periods where the market acts like a calm sea.

Mandelbrot tries to convince us, that we should be thinking of fractals, when we look at stock charts. Regarding applications in finance, there are some traders out there using fractal strategies, FinTech Software Entwicklung and this book brings some sense to it and a growing interest to continue exploring the area. In short, the odds of financial ruin are a lot higher than what the models assure us of.