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The (Mis)behaviour of Markets: A Fractal View of Risk, Ruin and Reward | 
| Authors: Benoit B. Mandelbrot, Richard L. Hudson
Publisher: Profile Books Ltd
Category: Book
New (4) Used (3) from £16.66
Avg. Customer Rating:  9 reviews
Sales Rank: 104005
Media: Paperback
Pages: 288
Shipping Weight (lbs): 0.7
Dimensions (in): 7.6 x 5.1 x 1
ISBN: 1861977905
Dewey Decimal Number: 332
EAN: 9781861977908
ASIN: 1861977905
Publication Date: July 21, 2005
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| Customer Reviews: Read 4 more reviews...
 Tilting at windmills June 2, 2007
9 out of 9 found this review helpful
In this tome Mr Mandelbrot lambasts the previous century's inadequate financial models but seems unwilling to admit that the field has moved on somewhat, and unable to offer a practical model of his own.
Mr Mandelbrot shows how Bachelierian models fail to account for disastrous market drops which ruined many investors. He rubbishes two conventional assumptions: that each price move is independent of another and that their magnitude follows a Normal distribution. Skillfully constructed charts make plain the reality that a large market move is likely to be followed by another. More charts show just how badly market data fits to a Normal distribution: by this measure dozens of trading days in the 20th century were so unlikely not even one should have occurred in the lifetime of the universe.
The author suggests we discard such woefully unrealistic theory and start again, taking fractals as our base. In a display humility atypical of the rest of the book Mr Mandelbrot admits to having no way to calculate price and risk in his proposed model, or even calibrate its parameters "Alpha" and "H" to the real world.
The tragedy of this foray into fractal finance is in its pointlessness. What made 1960s financial models so unrealistic was the assumption of unchanging volatility. By late 90s anyone with sufficient computing power could drop this assumption and include real "volatile volatility" in their models. In modern theory, October 1987 was not a 22-sigma "not in the lifetime of the universe" event. It was a spike in the volatility process, as the models predict will happen from time to time.
In fairness, the book offers many insights into what drives the markets, the trouble with fundamental valuation, rationality of market agents, flow of information, and more. I could recommend reading it for those insights alone.
 ...with tangerine trees and marmalade skies... July 8, 2006
6 out of 6 found this review helpful
Orthodox economics is very formal using complex models to predict future behaviour. Most economists, like meteorologists, are not held accountable for their predictions.
Within the very wide field of economics there are many conflicting views about the nature of economics and there is much in the way of interesting work going on out there and I would cite the contributions of the Austrian school and the evolutionary school and especially point to the very accessible work of Paul Ormerod who give somewhat different views to those of the standard model.
This book is not aimed at those practitioners of economics or indeed the professionals of the City of London or Wall Street. To my mind, as an interested observer, Mandelbrot and Hudson are doing all of us a service in illuminating the gaps in economic theory that underpins the financial industry. John Maynard Keynes, who's General Theory of Employment, Interest and Money (1936)can be said to lie at the heart of much of contemporary economic theory, once famously compared the financial services industry to gambling, also made his fortune on the stock market.
The book methodically disects each of the pillars of contemporary financial theory and exposes it's weakness then introduces some basic fractal geometry ideas to exhibit their apparent ly better predictive use. As someone who favours the approach of ideas of chaos theory into the economics brew I tend to be more open to the approach that Mandelbrot uses but the proof of the pudding, as we say in England, lies in the eating and this populist text is certainly not the place for complex technical proofs or highly mathematical analysis. It is a difficult path to take but for the purposes for which this book is intended, which I believe is aimed at the educated investor or someone without an economics or financial background, it is about right.
I found the book both accessible and lucid. There are areas with which I would have wished for a more techical exposition but this is something that I will take up when I delve further into this subject matter.
There are many interesting ideas here and I suspect that there are many in the financial services community who are looking into these in greater detail or even have already absorbed them into their toolkit. Given the competitive nature of the financial markets I suspect that this knowledge will quickly be dispesed throughout the community.
All in all this is a nice easy read which will prompt further thought and study upon it's contents. My only, minor reservation, which prevents me awarding five stars is that I think a non-technical appendix, in keeping with the rest of the book, about the basic precepts of fractal geometry would have been helpful for the lay reader.
Well worth a look.
Necessary evil May 16, 2006
21 out of 21 found this review helpful
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.
A solid critique to Modern Finance Theory October 21, 2005
3 out of 3 found this review helpful
Benoit Mandelbrot may sometimes write too much about himself, but his critique of the Modern Finance Theory is very sharp. After exposing why some basic assumptions underlying the Modern Finance Theory and, more importantly, its applications in financial products, are totally nonscientific, Mandelbrot explores his way out of the chaos. Some parts of the book may be redundant, but the insights are bright indeed. After reading the book, one wonders why so much money is invested using evidently mistaken theories. Even many insiders might have an interesting read, as the financial world is well known for its herdfollowers. Mandelbrot does not offer a new Theory and those looking for chaos theory to so solve the problems may be disappointed. However, his final suggestions need a follow-up from the financial world. Very recomendable for people in the money business.
 Best finance layman's book Iyve ever read!! July 11, 2005
5 out of 5 found this review helpful
Mandelbrot, much like Mr. Howard, "say it as it is". Modern finance theory simply does not fit the facts. This is a grave accusation but Mandelbrot makes such a good case against modern finance that one is left wondering upon completing the book how the workhorses of academic ink are still standing! A truly fascinating book that at best will lead you into seriously questioning what you have learned at uni and at worst will enhance your historical understanding of financial theory. Written in eloquent, "user-friendly" manner, this book advocates a completely fresh look at the financial world through the lenses of fractal geometry. This means that the reader will encounter terms like "fractional Brownian motion set in multifractal time", which may sound more like rocket science to some than finance, but Mandelbrot and Hudson do a magnificent job in explaining tough terms in everyday English (not to mention the pictorial essays). In a nutshell, this book is thought-provoking, well-written and personally, i think that for the price that it is selling a true bargain.
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