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on 16 May 2006
If you invited Benoit Mandelbrot to your party, he'd be the geeky guy dissing people's illogical clothing, drinking too much punch, testing the aerodynamics of different canapes, and pouring food colouring in the pool. In other words, he's a risk and he won't get any girls, but on a balance of probabilities, the party Mandelbrot was at will be the one people will wish they'd been at.

This book is a rant, reflecting the death of editing in favour of celebrity authorship. So it's repetitive. It's also light on theory, and it repeats itself. But that doesn't mean it's wrong. Mandelbrot makes the case early on that the behaviour of market prices, or of any variable not constrained by physics, are not normally distributed. He then goes on to claim that artificial systems are non-Gaussian, putting them outside the reach of statistics - and by extension, outside the reach of CAPM, Black-Scholes, VAR, and GARCH. He proposes power law distributions as an alternative. He's probably right, but he never demonstrates this claim, and the alternative he suggests - multifractals - is, by his own admission, not very useful.

He comprehensively demolishes the random walk model, claiming to have demonstrated that volatility clusters, and that there is memory in all markets. This may be true, but it will have the effect of encouraging snake oil salesmen (see below).

More pertinent and scary is that Mandelbrot does show that the exponents needed to model power law distributions for different markets or instruments are so diverse and intractable as to make general market models meaningless. He does not explain how multifractals address this. He also points to the simple arithmetic inadequacy of using closing prices in hindcasting exercises, which is equally scary for anyone who actually tests their models. He spits on technical analysts, who don't. For this he gets an extra star.

Nassim Taleb is probably more eloquent on the subject of wild randomness, but he's too urbane to punk your party. Mandelbrot is trouble, and if you're in finance, he's coming your way.
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on 13 October 2004
"This volume," writes Richard Hudson in his introduction to The Misbehavior of Markets, "will not make you richer ... but it may prevent you from getting poorer."
Benoit Mandelbrot is universally familiar as the father of fractal geometry and the discoverer of the eponymous Mandelbrot set - "named after me by my colleagues," as he bashfully admits - and in a long and maverick career has turned his attention to just about every subject from turbulent systems to CGI. Now in this, his latest work, he condenses his economics writings into a highly readable form for the layman. Markets, says Mandelbrot, do not obey the simple Gaussian curve (think of a man tossing a coin over and over, each flip independent of the last) which has provided the basis for the most academically respectable models of the last century. Price changes are not continuous. There is no such thing as objective value. Disastrous, impossible, Rosencrantz-and-Guildenstern type runs can, and do, occur. Charts of price changes over the course of a hundred years look very similar to changes over a day, if you remove the indices; the man who tells you to invest your money long-term with a view to reducing risk is doing you no favours. What's more, fund-managers already tacitly acknowledge some of the truth of this, and although they may learn the theory at business school, nobody rigorously applies it for long in practice.
Where Mandelbrot shines is in making a potentially forbidding subject highly accessible; in his discursive, entertaining style, in his constant use of visuals to elucidate price movements and models and the satisfyingly chewy mathematics of fractal dimension. Where he falls slightly short, I think, is in convincing us that fractals or chaos theory are going to provide a significantly better framework for investors than the present state of affairs. (Actually, Mandelbrot himself abstains from saying that markets are chaotic, but is there, really, a better word than 'nonlinear' to describe the madness of crowds?) To anyone who has dabbled in shares, yes, the Brownian forgery of price movement is obviously unrepresentative; but there is also something faintly (though indefinably) unconvincing about the graph generated by the, presumably state-of-the-art, fractal. And surely calling, as he does, for extra research into fractal economic analysis will simply cause the markets to skew off in totally new and unforeseen directions. It would have been interesting to know, too, the typical lifespan of a listed company, since presumably this imposes just as much of a real-life constraint on the self-scaling properties of a share price as does, say, osmotic pressure on the self-scaling growth of a tree. Not everything stays in demand as long as cotton!
Having said that, this book is far more useful and honest than the innumerable guides promising to tell you how to make your first million on the Stock Exchange, because Mandelbrot is a mathematician, and underlines the implacable maths of investment, which is something that few of the get-rich-quick guides trouble to do. Buy this book, take what the "experts" say with a pinch of salt and don't invest more than you can bear to see utterly annihilated overnight.
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on 8 July 2006
Orthodox economics is very formal using complex models to predict future behaviour. Most economists, like meteorologists, are not held accountable for their predictions.

Within the very wide field of economics there are many conflicting views about the nature of economics and there is much in the way of interesting work going on out there and I would cite the contributions of the Austrian school and the evolutionary school and especially point to the very accessible work of Paul Ormerod who give somewhat different views to those of the standard model.

This book is not aimed at those practitioners of economics or indeed the professionals of the City of London or Wall Street. To my mind, as an interested observer, Mandelbrot and Hudson are doing all of us a service in illuminating the gaps in economic theory that underpins the financial industry. John Maynard Keynes, who's General Theory of Employment, Interest and Money (1936)can be said to lie at the heart of much of contemporary economic theory, once famously compared the financial services industry to gambling, also made his fortune on the stock market.

The book methodically disects each of the pillars of contemporary financial theory and exposes it's weakness then introduces some basic fractal geometry ideas to exhibit their apparent ly better predictive use. As someone who favours the approach of ideas of chaos theory into the economics brew I tend to be more open to the approach that Mandelbrot uses but the proof of the pudding, as we say in England, lies in the eating and this populist text is certainly not the place for complex technical proofs or highly mathematical analysis. It is a difficult path to take but for the purposes for which this book is intended, which I believe is aimed at the educated investor or someone without an economics or financial background, it is about right.

I found the book both accessible and lucid. There are areas with which I would have wished for a more techical exposition but this is something that I will take up when I delve further into this subject matter.

There are many interesting ideas here and I suspect that there are many in the financial services community who are looking into these in greater detail or even have already absorbed them into their toolkit. Given the competitive nature of the financial markets I suspect that this knowledge will quickly be dispesed throughout the community.

All in all this is a nice easy read which will prompt further thought and study upon it's contents. My only, minor reservation, which prevents me awarding five stars is that I think a non-technical appendix, in keeping with the rest of the book, about the basic precepts of fractal geometry would have been helpful for the lay reader.

Well worth a look.
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on 7 December 2004
The biggest problem with investing today - which many people intuitively realise - is that big rises and falls occur more often than we overtly expect. As I write this, shares in Sun Microsystems have risen by 20% in the last month and I don't know anyone who can give me a convincing explanation - and I work for the company!
Standard financial models do not allow for the huge swings we see on a daily basis; Mandelbrot's model does. It's clearly still early days for this theory and for its application, but it is obvious that it does a better job of modelling financial markets than anything else. Even if we can't explicitly use this model easily today, the knowledge in this book will make you a better investor because you'll be investing with a better view of how markets move.
Mostly the book is easy reading. However, there are some passages in the second half which could have done with the editor's scissors.
A good read and I'd suggest mandatory for anyone who is serious about investing.
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on 17 December 2011
I was left feeling that the great man, as well as going on a huge ego trip, was rather bitter about, as he saw it, not getting the recognition for work that he did in his life which did not have any particular real world use, particularly when those that did similar things later, or at the same time, did get recognition. He then lambastes, with justification, traditional economic theory but without any suggestion of how his methods may be applied in their place. The issue for me with Mandelbrot is you are left with a sense of "so what, how is this useful and how is it applied?", none of which is put forward. You can't really cover the subject of fractal Chaos without knowing something of Mandelbrot, however I have been left without any greater understanding of the subject and its application having read this book than I did before. I much prefer Chaos: Making a New Science as an introduction that actually tells you something useful and following on from that Against the Gods: The Remarkable Story of Risk as two books that give a far better base from which to develop working market understanding which can be applied.
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on 2 June 2007
In this tome Mr Mandelbrot lambasts the previous century's inadequate financial models but seems unwilling to admit that the field has moved on somewhat, and unable to offer a practical model of his own.

Mr Mandelbrot shows how Bachelierian models fail to account for disastrous market drops which ruined many investors. He rubbishes two conventional assumptions: that each price move is independent of another and that their magnitude follows a Normal distribution. Skillfully constructed charts make plain the reality that a large market move is likely to be followed by another. More charts show just how badly market data fits to a Normal distribution: by this measure dozens of trading days in the 20th century were so unlikely not even one should have occurred in the lifetime of the universe.

The author suggests we discard such woefully unrealistic theory and start again, taking fractals as our base. In a display humility atypical of the rest of the book Mr Mandelbrot admits to having no way to calculate price and risk in his proposed model, or even calibrate its parameters "Alpha" and "H" to the real world.

The tragedy of this foray into fractal finance is in its pointlessness. What made 1960s financial models so unrealistic was the assumption of unchanging volatility. By late 90s anyone with sufficient computing power could drop this assumption and include real "volatile volatility" in their models. In modern theory, October 1987 was not a 22-sigma "not in the lifetime of the universe" event. It was a spike in the volatility process, as the models predict will happen from time to time.

In fairness, the book offers many insights into what drives the markets, the trouble with fundamental valuation, rationality of market agents, flow of information, and more. I could recommend reading it for those insights alone.
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on 11 July 2005
Mandelbrot, much like Mr. Howard, "say it as it is". Modern finance theory simply does not fit the facts. This is a grave accusation but Mandelbrot makes such a good case against modern finance that one is left wondering upon completing the book how the workhorses of academic ink are still standing! A truly fascinating book that at best will lead you into seriously questioning what you have learned at uni and at worst will enhance your historical understanding of financial theory. Written in eloquent, "user-friendly" manner, this book advocates a completely fresh look at the financial world through the lenses of fractal geometry. This means that the reader will encounter terms like "fractional Brownian motion set in multifractal time", which may sound more like rocket science to some than finance, but Mandelbrot and Hudson do a magnificent job in explaining tough terms in everyday English (not to mention the pictorial essays). In a nutshell, this book is thought-provoking, well-written and personally, i think that for the price that it is selling a true bargain.
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on 21 October 2005
Benoit Mandelbrot may sometimes write too much about himself, but his critique of the Modern Finance Theory is very sharp. After exposing why some basic assumptions underlying the Modern Finance Theory and, more importantly, its applications in financial products, are totally nonscientific, Mandelbrot explores his way out of the chaos. Some parts of the book may be redundant, but the insights are bright indeed. After reading the book, one wonders why so much money is invested using evidently mistaken theories. Even many insiders might have an interesting read, as the financial world is well known for its herdfollowers. Mandelbrot does not offer a new Theory and those looking for chaos theory to so solve the problems may be disappointed. However, his final suggestions need a follow-up from the financial world. Very recomendable for people in the money business.
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on 12 March 2014
If you're inclined to find discussion of how economics and markets work interesting then this is definitely worth a read. If you wonder why the world of finance can't consistently avoid crashes, Mandelbrot has some very plausible theories. It's not as dry as it sounds, either - he's a fairly good writer and uses analogies and examples from the "real" world to illustrate the theory as well as financial examples.
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on 27 July 2013
Any finance professional will find much food for thought in this book. Mandelbrot re-frames the topic of risk and points to fundamental flaws in the current standard paradigm. There are a few annoying problems with the book, however, that keep me from giving it five stars: It circles and meanders a bit too much; Mandelbrot keeps telling us how great he is - we've already bought the book, no need to keep selling it; a few concrete applications of how to use his models in a prescriptive sense would have made them more relevant.
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