The author shows how modern financial theory underestimates risk in financial markets. Famous as "the father of fractal geometry," Mandelbrot is less well-known for his contributions to financial market theory. He is the tour de force behind Taleb's "Black Swan" writings.
"Misbehavior" is more of an introduction to fractal finance than a textbook about how to implement Mandelbrot's ideas into trading systems. Nevertheless, it provides a foundation and introduction to new methods that many may find useful, with enough detail to begin incorporating same into quantitative models. Other works by Mandelbrot go much deeper into the "how to" side of fractal finance.
Benoît (pronounced "ben-wah") Mandelbrot writes in a clear, conversational style. The text avoids mathematical formulas, using instead a combination of written descriptions and entertaining analogies to explain. Chapter notes in an appendix present the mathematical formulas behind his descriptions, along with further (clear, simple) explanations.
The book divides into three parts: The Old Way, The New Way, and The Way Ahead. The first part describes the history leading up to modern finance as still taught in most business schools. It describes contributions by key figures such as Louis Bachelier, Paul Samuelson, William Sharpe, Harry Markowitz, Myron Scholes, and Fischer Black. I found this summary quite interesting, a valuable lesson history. Although we learned MPT (modern portfolio theory) in my MBA finance classes, it's background and potential shortfalls were not addressed.
The second part steps back to examine the nature of markets (turbulent, not Gaussian), identify contradictions between observation and modern theory (extreme events way more common than predicted), and then develop a better, multi-fractal (i.e. scalable) view of finance. Here Mandelbrot excels. Illustrations ("cartoons") help get points across while entertaining analogies (e.g. "Noah, Joseph, and Market Bubbles") and a true story of engineering genius (H.E. Hurst's analysis of Nile River floods) lead to insight into market trends useful to trend-followers.
The third part looks to the future. It summarizes the previous material in "Ten Heresies of Finance" and points the way for future research.
Overall, I loved this book. Obviously, Nassim Nicholas Taleb did too ("...the first book in economics that spoke directly to me.") It contains valuable information for every investor, professional or amateur, experienced or novice. Rather than something for advanced-level traders, I think it is the first book for anyone interested in investing or trading. It will open your eyes like no other, and inject a dose of realism and humility about money and markets that otherwise might cost a lot more than this book's price.
The Misbehavior of Markets: A Fractal View of Financial Turbulence Annotated Edition
by
Benoit Mandelbrot
(Author),
Richard L Hudson
(Author)
| Benoit Mandelbrot (Author) Find all the books, read about the author, and more. See search results for this author |
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ISBN-13: 978-0465043576
ISBN-10: 0465043577
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A groundbreaking mathematician presents a new model for understanding financial markets
Benoit B. Mandelbrot is world-famous for inventing fractal geometry, making mathematical sense of a fact everybody knows but that geometers from Euclid on down had never assimilated: Clouds are not round, mountains are not cones, coastlines are not smooth. To these insights we can now add another example: Markets are not the safe bet your broker may claim.
Mandelbrot, with co-author Richard L. Hudson, shows how the dominant way of thinking about the behavior of markets--a set of mathematical assumptions a century old and still learned by every MBA and financier in the world--simply does not work. He uses fractal geometry to propose a new, more accurate way of describing market behavior. From the gyrations of the Dow to the dollar-euro exchange rate, Mandlebrot shows how to understand the volatility of markets in far more accurate terms than the failed theories that have repeatedly brought the financial system to the brink of disaster. The result is no less than the foundation for a new science of finance.
Benoit B. Mandelbrot is world-famous for inventing fractal geometry, making mathematical sense of a fact everybody knows but that geometers from Euclid on down had never assimilated: Clouds are not round, mountains are not cones, coastlines are not smooth. To these insights we can now add another example: Markets are not the safe bet your broker may claim.
Mandelbrot, with co-author Richard L. Hudson, shows how the dominant way of thinking about the behavior of markets--a set of mathematical assumptions a century old and still learned by every MBA and financier in the world--simply does not work. He uses fractal geometry to propose a new, more accurate way of describing market behavior. From the gyrations of the Dow to the dollar-euro exchange rate, Mandlebrot shows how to understand the volatility of markets in far more accurate terms than the failed theories that have repeatedly brought the financial system to the brink of disaster. The result is no less than the foundation for a new science of finance.
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Editorial Reviews
Review
“The deepest and most realistic finance book ever published.”―Nassim Nicholas Taleb
About the Author
Benoit B. Mandelbrot was the inventor of fractal geometry, whose most famous example, the Mandlebrot Set, is one of the most iconic images in mathematics. He was Sterling Professor Emeritus of Mathematical Sciences at Yale University and a Fellow Emeritus at IBM's Thomas J. Watson Laboratory and the recipient of the Wolf Prize in Physics and the Japan Prize in science and technology, as well as awards from the U.S. National Academy of Sciences, the IEEE, and numerous universities in the U.S. and abroad.
His books include Fractals: Form, Chance and Dimension, which was later expanded into the classic The Fractal Geometry of Nature, and a memoir, The Fractalist, which was published posthumously.
Richard L. Hudson was the managing editor of the Wall Street Journal's European edition for six years, and a Journal reporter and editor for twenty-five years. He is a 1978 graduate of Harvard University and a 1991 Knight Fellow of MIT. Now the CEO and editor of Science Publishing Ltd., he lives in Brussels, Belgium.
His books include Fractals: Form, Chance and Dimension, which was later expanded into the classic The Fractal Geometry of Nature, and a memoir, The Fractalist, which was published posthumously.
Richard L. Hudson was the managing editor of the Wall Street Journal's European edition for six years, and a Journal reporter and editor for twenty-five years. He is a 1978 graduate of Harvard University and a 1991 Knight Fellow of MIT. Now the CEO and editor of Science Publishing Ltd., he lives in Brussels, Belgium.
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Product details
- Publisher : Basic Books; Annotated edition (March 7, 2006)
- Language : English
- Paperback : 368 pages
- ISBN-10 : 0465043577
- ISBN-13 : 978-0465043576
- Item Weight : 13.4 ounces
- Dimensions : 6 x 1 x 9.25 inches
- Best Sellers Rank: #99,119 in Books (See Top 100 in Books)
- #13 in Fractal Mathematics
- #151 in Business Statistics
- #303 in Statistics (Books)
- Customer Reviews:
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Customer reviews
4.6 out of 5 stars
4.6 out of 5
665 global ratings
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Top reviews from the United States
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Reviewed in the United States on September 2, 2018
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62 people found this helpful
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Reviewed in the United States on May 24, 2019
Verified Purchase
I've traded futures and options for 20 years, written for major financial publications, and worked for an exchange and advisory firm as an analyst. My charts and market calls have been used by traders at the prop desks of many leading banks and funds. And I worked for a while in marketing to retail traders including newbies. So I am familiar with the conventional wisdom that goes into technical and fundamental analysis, the ways in which people are advised on buy-and-hold portfolio strategies, and the often-contradictory statements regularly made on CNBC. Much of that thinking is what left us vulnerable to the 2008 crisis and it's what will lead us into the next one.
Mandelbrot's descriptions of what really happens will take a little time to process. Some of the ideas are contrary to what we've been told and what gets taught in Econ 101. The bell curve is not the norm, but the exception. Wild fluctuations are the real norm. If the market is well-behaved at one moment, it won't be for long. But within the seeming chaos are some reliable truths if we're willing to look. This is the future. And while it won't spell out a new way to "beat the market" (hate that expression) it might save you from the grief of chasing some holy grails that don't exist but are well advertised.
Also, he writes beautifully. You could read it just for the fun of watching a great mind.
Mandelbrot's descriptions of what really happens will take a little time to process. Some of the ideas are contrary to what we've been told and what gets taught in Econ 101. The bell curve is not the norm, but the exception. Wild fluctuations are the real norm. If the market is well-behaved at one moment, it won't be for long. But within the seeming chaos are some reliable truths if we're willing to look. This is the future. And while it won't spell out a new way to "beat the market" (hate that expression) it might save you from the grief of chasing some holy grails that don't exist but are well advertised.
Also, he writes beautifully. You could read it just for the fun of watching a great mind.
41 people found this helpful
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Reviewed in the United States on July 27, 2020
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I'm very impressed by M and the work he did in Fractal Geometry with it's application to physics and engineering -
and geography and biologic systems - the application to finance is actually less important, in real life, once you take out games that investment firms might use with Fractal modelling
The book is interesting largely in how science is done and how ideas get across in academia and
to understand M's life and works. For that it is a 5 star book
Not so interesting for someone looking to think about their own portfolio of stocks / bonds / real estate
If you've read "The Black Swan" than the material in this book is not new - and between the two books
I think "The Black Swan" is a more interesting and useful book - I don't think this book will change your individual investment strategy once you learn about "fat tails" - and if you've read Malkiel's book plus maybe "The Black Swan" and Andrew Tobias's book you're done learning what an individual needs to know about investing
and geography and biologic systems - the application to finance is actually less important, in real life, once you take out games that investment firms might use with Fractal modelling
The book is interesting largely in how science is done and how ideas get across in academia and
to understand M's life and works. For that it is a 5 star book
Not so interesting for someone looking to think about their own portfolio of stocks / bonds / real estate
If you've read "The Black Swan" than the material in this book is not new - and between the two books
I think "The Black Swan" is a more interesting and useful book - I don't think this book will change your individual investment strategy once you learn about "fat tails" - and if you've read Malkiel's book plus maybe "The Black Swan" and Andrew Tobias's book you're done learning what an individual needs to know about investing
21 people found this helpful
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Reviewed in the United States on March 14, 2017
Verified Purchase
Great book (albeit incomplete if you're looking for definitive answers) that discusses the shortcomings of risk assessments for financial products and portfolios. As others have said, the author has posed several questions regarding the validity of financial practitioners' existing tools in corporate finance (valuation), options, and portfolio theory. One answer: multifractal theory; which the author posits could be the foundation for the next class of financial economists (best case).
My key takeaway from this book is that market participants' tools underassess risk and thus market participants should be wary of becoming model-dependent.
Additionally, supporting research and proofs are in the appendix or on the book's designated website for the more curious readers.
My key takeaway from this book is that market participants' tools underassess risk and thus market participants should be wary of becoming model-dependent.
Additionally, supporting research and proofs are in the appendix or on the book's designated website for the more curious readers.
16 people found this helpful
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Reviewed in the United States on February 23, 2020
Verified Purchase
Mandelbrot’s genius plows a wide row. This particular adventure, when read carefully, explains, shatters a number of myths which have misguided investors for an entire century +. He demonstrates that when an individual accepts at warm, cuddly assumption, tasty but wrong, that results ‘just don’t turn out, as expected!
Mandelbrot demonstrates the weaknesses frequently accepted as well as explains why reality is much more complicated.
It’s a ‘feel good’ book. It feels good to know the truth- unlike so many Walstreet legends profess!!
Mandelbrot demonstrates the weaknesses frequently accepted as well as explains why reality is much more complicated.
It’s a ‘feel good’ book. It feels good to know the truth- unlike so many Walstreet legends profess!!
3 people found this helpful
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Top reviews from other countries
James Rivington
2.0 out of 5 stars
Another book for purist mathematicians to refer to when asserting their intellectual superiority complex.
Reviewed in the United Kingdom on August 18, 2018Verified Purchase
The book is simply an observation of prices in financial time series’ and a discussion in how to generate ‘pretty charts’ that somewhat mimic these series.
Meldebrot initially states that technical analysis of prices and ‘charting’ is redundent as the technique is basically useseless (which I agree with) then proceeds to back up all his ideas with charts himself which is exactly the technique he dismisses initially. If your theories and arguments don’t hold in logic, since they need ficticious charts to back them up, do they actually hold in practice?
The financial knowledge is basic and nothing of any actual use really gets discussed.
Meldebrot initially states that technical analysis of prices and ‘charting’ is redundent as the technique is basically useseless (which I agree with) then proceeds to back up all his ideas with charts himself which is exactly the technique he dismisses initially. If your theories and arguments don’t hold in logic, since they need ficticious charts to back them up, do they actually hold in practice?
The financial knowledge is basic and nothing of any actual use really gets discussed.
5 people found this helpful
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Amazon Customer
2.0 out of 5 stars
Not so great and far too long
Reviewed in the United Kingdom on February 21, 2016Verified Purchase
The contents of the book could be summarized on a A4 or less: 1) stock price changes dont follow a normal/gaussian distribution 2) stock prices show significant autocorrelation, which is incompatible with EMH 3) a lot of random obscure history facts. There, saved you from buying the book.
24 people found this helpful
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Echogolf
3.0 out of 5 stars
Large ego, chip on his shoulder, no application
Reviewed in the United Kingdom on December 16, 2011Verified Purchase
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.
5 people found this helpful
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Ben
4.0 out of 5 stars
Accessible and entertaining read
Reviewed in the United Kingdom on September 21, 2012Verified Purchase
Mandelbrot lends his name to this pop sci title which elaborates on how fractal theory can be applied to modelling financial markets. As someone with no background in economics, I found this book really interesting and thankfully it provides just about enough explanation to make sense of the technical jargon. Don't be put off if you can't tell a stock option from a swap, no prior knowledge is needed to enjoy this book. Mandelbrot stresses that much of the existing economic theory is based on models using over-simplified assumptions, with the overuse of the normal distribution seeming to particularly grind the author's gears.
While I expect most of the typing was done by RL Hudson, there is enough personal history and (at times) unadulterated bitterness to convince me that Mandelbrot played a strong hand in the writing of the book. He is honest about the controversy and mistrust of his pet theories, but also presents strong arguments of how and why they can be applied (wasting no time on modesty).
Overall, I'd recommend this book for outsiders interested in economics theory. Mandelbrot stresses that this is no investment guide and will not make you rich, but it's an enjoyable insight and if you own or would like to own any Mandelbrot set merchandise, this is probably the book for you.
While I expect most of the typing was done by RL Hudson, there is enough personal history and (at times) unadulterated bitterness to convince me that Mandelbrot played a strong hand in the writing of the book. He is honest about the controversy and mistrust of his pet theories, but also presents strong arguments of how and why they can be applied (wasting no time on modesty).
Overall, I'd recommend this book for outsiders interested in economics theory. Mandelbrot stresses that this is no investment guide and will not make you rich, but it's an enjoyable insight and if you own or would like to own any Mandelbrot set merchandise, this is probably the book for you.
One person found this helpful
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M. R. Rocca
4.0 out of 5 stars
Mind blowing
Reviewed in the United Kingdom on April 10, 2018Verified Purchase
Mandelbrot is not an easy scientist to admire. Lack of peer support mean he is still on the list of outliers, although that’s probably apt, given his findings. That said, he defies accepted knowledge and challenges literally every economic concept in this book. While giving examples of how his thinking applies in other fields. Totally engrossing and utterly challenging.
2 people found this helpful
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