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.
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