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The (Mis)behaviour of Markets: A Fractal View of Risk, Ruin and Reward Paperback – July 21, 2005


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The (Mis)behaviour of Markets: A Fractal View of Risk, Ruin and Reward + Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (Incerto) + Thinking, Fast and Slow
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Product Details

  • Paperback: 352 pages
  • Publisher: Profile Books Ltd (July 21, 2005)
  • Language: English
  • ISBN-10: 1861977905
  • ISBN-13: 978-1861977908
  • Product Dimensions: 5.1 x 0.9 x 7.8 inches
  • Shipping Weight: 11.4 ounces
  • Average Customer Review: 4.0 out of 5 stars  See all reviews (117 customer reviews)
  • Amazon Best Sellers Rank: #3,107,686 in Books (See Top 100 in Books)

Editorial Reviews

Review

'Surprisingly entertaining ... As the founder of fractal geometry and the discoverer of the Mandelbrot set Mandelbrot is acknowledged as the father of chaos theory ... he is, simply, very clever indeed.' Martin Baker, Sunday Telegraph 'The reader gets a clear picture of the history of finance theory ... the best financial read since Nassim Nicholas Taleb's Fooled by Randomness.' Philip Coggan, Financial Times 'One of the 20th century's most celebrated mathematicians ... devastating analysis.' Financial Times

About the Author

Benoit Mandelbrot is Professor of Mathematical Sciences at Yale University. He is the inventor of fractal geometry, he was a leading figure in James Gleick's Chaos and has received the Wolf Prize in Physics, the Japan Prize in science and technology and numerous other awards. Richard Hudson is the former managing editor of Wall Street Journal Europe

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Customer Reviews

Asks the questions although does not necessarily provide the answers.
Gregory D. Walker
Also, if you are a technical reader, this book could help you as a warm up to more sofisticated books on the topic.
Juan Rogelio
Using his fractal tools, Mandelbrot describes how financial markets work.
Craig L. Howe

Most Helpful Customer Reviews

238 of 254 people found the following review helpful By S. Park on August 11, 2004
Format: Hardcover
"...forty years after I started battle on the subject, most economists now acknowledge that prices do not follow the bell curve, and do not move independently. But for many, after acknowledging those points, their next comment is: So what? Independence and normality are, they argue, just assumptions that help simplify the math of modern financial theory. What matters are the results. Do the standard models correctly predict how the market behaves over all? Can an investor use Modern Portfolio Theory to build a safe, profitable investment strategy? Will the Capital Asset Pricing Model help a financial analyst, or a corporate financial officer, make the right decision? If so, then stop arguing about it. This is the so called positivist argument, first advanced by University of Chicago economist Milton Friedman."

Isn't it this positivism that the majority of practitioners of finance exhibit? I myself, though not a practitioner, held such thoughts. My reasoning had been based however more upon majority's acceptance -- if everyone else is acting upon the assumptions of normality and independence, I thought, what good will there be adopting a new theory? Isn't finance more akin to social sciences than to natural sciences after all?

It is these beliefs that Mandelbrot sets out to dispel with this monograph. He does so convincingly with great confidence and tenacity. The book consists of three parts, first the examination of the current theories (CAPM, MPT, Black-Scholes), next explanation of his methodology (fractal analysis), and finally of posing questions that should be answered (Mandelbrot asserts that virtually all the current theories should be reexamined under more realistic assumptions).
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703 of 768 people found the following review helpful By Gaetan Lion on October 4, 2004
Format: Hardcover
The author renders a brilliant critique of modern finance theory. He criticizes all its components, including CAPM, the Efficient Market Hypothesis, and the Black Scholes model as being flawed. All these theories rely on two main assumptions. The first one is that market prices are normally distributed. The author, using price charts, demonstrates that market prices do not follow a normal distribution; but instead a Cauchy distribution. Such a distribution is associated with fatter tails. This means that catastrophic drop in market prices happen more frequently than a normal distribution suggests. The second assumption of modern finance is that market prices are independent of each other. Yesterday's prices have no influence on today's. The author makes a case that even if prices are not correlated, their volatility is correlated over time. Thus, big price swings tend to cluster. If a stock moved by 10% yesterday, it is likely it will move by an above average amount today even if we don't know the direction of that change. He calls this correlation of volatility (instead of price) long-term dependence.

Because the two main assumptions of modern finance are flawed, all related models are flawed as they understate risk. If such models understate risk, they actually overprice stocks and underprice options, and also understate the capital financial institutions should hold to withstand market risk.

If the author had stopped there, I would have given him a 5 rating. However, such a rebuttal of finance theory would make no more than a great essay. Instead, he attempts to build an entirely different edifice of modern finance over 300 pages. And, his theoretical foundation lacks any robustness. That's why I call it a castle of cards.
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106 of 119 people found the following review helpful By Amore Roberto on January 2, 2006
Format: Hardcover
A few months ago, I found almost casually an editorial by Nassim Nicholas Taleb, introducing this essay by Benoit Mandelbrot (you can find it on Wilmot Magazine,2005 pag.50-59 - downloadable from his webpage)
As most readers, I vaguely knew about Mandelbrot and his studies on fractal geometry - but simply it was not my peculiar field of interest, so when I saw the ad of his new book, it went ignored.
*
Taleb's editorial aroused my curiosity.
He was stressing the significance of this essay in challenging the current orthodoxies on finance and in recommending new tools for risk management.
*
In a sense Taleb's recommendation represents a guarantee.
He is a famous edge fund manager and the author of "Fooled by Randomness - The hidden role of chance in the Markets and in life", a book that impressed me with the wide culture, multi-disciplinary approach and the sheer acumen.
*
"The (mis)Behavior of the Market" was up to my expectations.
The book is interesting, and not just for the economic views it advances. Mandelbrot is extremely learned - not just in his field of expertise - and his approach is challenging while retaining great plainness of exposition.
*
The book is organized in three parts.
The first part deals with the old theories of finance and with the state of the art, to show how all of the old tools are mostly inadequate to control investment risk and how they leave investors with a false sense of safety.
In the second part - the most specific and technical - Mandelbrot proposes his view of how the markets behave, suggesting a multi-fractal approach as a substitute for the random walk/efficient market theory.
The third part proposes some conclusion based both on Mandelbrot's views and common sense.
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