"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.