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This review is from: The (Mis)Behaviour of Markets: A Fractal View of Risk, Ruin and Reward (Paperback)
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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Showing 1-3 of 3 posts in this discussion
Initial post: 24 Feb 2009 19:14:02 GMT
S. Hemingway says:
This is a wonderful review. It explains the what the book is about, what its strengths and weaknesses are; it gives an idea of the style of writing in the book, and is funny at the same time. And all in five paragraphs.
In reply to an earlier post on 26 Jan 2013 16:53:33 GMT
G. Hendrie says:
Excellent review. Thank you.
Posted on 27 Jun 2014 18:16:45 BDT
"Mandelbrot is trouble, and if you're in finance, he's coming your way." Anthony given you this review in 2006, very prophetic. Good luck with the glowing plants!
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