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The Misbehavior of Markets: A Fractal View of Financial Turbulence: A Fractal View of Risk, Ruin, and Reward Paperback – 31 Oct 2005

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Product details

  • Paperback: 368 pages
  • Publisher: Basic Books; annotated edition edition (31 Oct. 2005)
  • Language: English
  • ISBN-10: 0465043577
  • ISBN-13: 978-0465043576
  • Product Dimensions: 15.5 x 2 x 23.4 cm
  • Average Customer Review: 4.2 out of 5 stars  See all reviews (43 customer reviews)
  • Amazon Bestsellers Rank: 575,856 in Books (See Top 100 in Books)

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Nassim Nicholas Taleb"The deepest and most realistic finance book ever published."

Book Description

Benoit Mandelbrot, father of fractal geometry, revolutionised our understanding of the models of modern financial theory. This new edition includes material on the current market crisis, calling for an end to the tunnel vision of our bankers whose over-confidence in their understanding of markets ended in catastrophe. --This text refers to an alternate Paperback edition.

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73 of 78 people found the following review helpful By ntevanza on 16 May 2006
Format: Paperback Verified Purchase
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.
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31 of 33 people found the following review helpful By anonymous on 13 Oct. 2004
Format: Hardcover Verified Purchase
"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.
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5 of 5 people found the following review helpful By Michael Sean Haffey on 7 Dec. 2004
Format: Hardcover
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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15 of 16 people found the following review helpful By Junglies on 8 July 2006
Format: Paperback
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.
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