The Misbehavior of Markets: A Fractal View of Financial Turbulence

The Misbehavior of Markets: A Fractal View of Financial Turbulence

by Benoit Mandelbrot, Richard L. Hudson

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Overview

Mathematical superstar and inventor of fractal geometry, Benoit Mandelbrot, has spent the past forty years studying the underlying mathematics of space and natural patterns. What many of his followers don't realize is that he has also been watching patterns of market change. In The (Mis)Behavior of Markets, Mandelbrot joins with science journalist and former Wall Street Journal editor Richard L. Hudson to reveal what a fractal view of the world of finance looks like. The result is a revolutionary reevaluation of the standard tools and models of modern financial theory. Markets, we learn, are far riskier than we have wanted to believe. From the gyrations of IBM's stock price and the Dow, to cotton trading, and the dollar-Euro exchange rate--Mandelbrot shows that the world of finance can be understood in more accurate, and volatile, terms than the tired theories of yesteryear.The ability to simplify the complex has made Mandelbrot one of the century's most influential mathematicians. With The (Mis)Behavior of Markets, he puts the tools of higher mathematics into the hands of every person involved with markets, from financial analysts to economists to 401(k) holders. Markets will never be seen as "safe bets" again.

Product Details

ISBN-13: 9780465004683
Publisher: Basic Books
Publication date: 03/22/2007
Sold by: Hachette Digital, Inc.
Format: NOOK Book
Pages: 368
Sales rank: 306,179
File size: 2 MB

About the Author

Benoit B. Mandelbrot is Sterling Professor of Mathematical Sciences at Yale University and a Fellow Emeritus at IBM's Thomas J. Watson Laboratory. He is the inventor of fractal geometry, whose most famous example, the Mandelbrot Set, has been replicated on millions of posters, T-shirts, and record albums. 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 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, which has sold more than 200,000 copies. This is his first book for lay readers on finance, a subject he has studied since the 1960s. He lives in Scarsdale, New York. 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. He lives in Brussels, Belgium.

Table of Contents

Abstractv
Acknowledgmentsxiii
Prelude: Introducing a Maverick in Sciencexv
Part IThe Old Way
Chapter IRisk, Ruin, and Reward3
Chapter IIBy the Toss of a Coin or the Flight of an Arrow?25
Chapter IIIBachelier and His Legacy43
Chapter IVThe House of Modern Finance59
Chapter VThe Case Against the Modern Theory of Finance79
Pictorial Essay: Images of the Abnormal88
Part IIThe New Way
Chapter VITurbulent Markets: A Preview111
Chapter VIIStudies in Roughness: A Fractal Primer123
Pictorial Essay: A Fractal Gallery132
Chapter VIIIThe Mystery of Cotton147
Chapter IXLong Memory, from the Nile to the Marketplace173
Chapter XNoah, Joseph, and Market Bubbles197
Chapter XIThe Multifractal Nature of Trading Time207
Part IIIThe Way Ahead
Chapter XIITen Heresies of Finance225
Chapter XIIIIn the Lab253
Notes277
Bibliography303
Index318

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The Misbehavior of Markets: A Fractal View of Risk, Ruin and Reward 4.1 out of 5 based on 0 ratings. 13 reviews.
PointedPundit on LibraryThing More than 1 year ago
A Fresh Look at Financial OrthodoxyThis book details one of this generation¿s finest mathematical minds offers ¿obvious¿ observations he calls his ¿Ten Heresies of Finance.¿Benoit Mandelbrot is known for making mathematical sense of facts everybody accepts but that geometers never assimilated. Clouds are not round. Mountains are not cones. Coastlines are not smooth. Add another: financial markets are not the safe bet your broker claims. In his first general audience book, Mandelbrot, with co-author Richard L. Hudson, reveal today¿s assumptions about the behavior of markets simply do not work.¿What passes for orthodoxy in economics and finance,¿ the authors conclude, ¿proves on closer examination to be shaky business.¿Among the book¿s observations:1. Markets are turbulent. After spending a lifetime studying wind and ocean currents, he applies his multi-fractal math to analyze financial markets. ¿The tell-tale traces of turbulence are plainly there, in the price charts,¿ he writes. The bell curve does not capture its changes. 2. Markets are inherently risky. Turbulence is dangerous. Market swings are wild and sudden. They are difficult to predict, more difficult to hedge and even more difficult from which to profit.3. Marketing timing matters. Big gains and losses are concentrated into small time periods. News events such as earnings or economic announcements drive stock market prices. 4. Prices leap suddenly. This adds to risk. News announcements compel investors to act simultaneously and instantaneously.Using his fractal tools, Mandelbrot describes how financial markets work. He describes the volatile, dangerous and in a unique way, strangely beautiful properties that for which few financial experts account. This book is a must read for any serious investor. By pin-pointing flaws in accepted market wisdom, it provides a platform for a serious re-consideration of finance.
dvf1976 on LibraryThing More than 1 year ago
I understood a lot more of this book than I thought I would... Which is to say, I followed it about 3/4's of the way.The way that markets work don't follow a "Random Walk" model and their changes do not follow a bell curve. If investors believe either of the above two aren't right, then they're exposing themselves to more risk than they think.
vpfluke on LibraryThing More than 1 year ago
For me, an up-to-date introduction to the financial theory of market behavior. It shows where typical Bell Curve analysis has mislead investors, by not acknowledging the trmendous turbulence markets may have. Dealing with power law distributions must be added into normal statistical analysis to really understand the temendous spikes in prices that sometimes occur and which are not predictable. The book does not give answers for everything.
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Guest More than 1 year ago
The fundamental fractal concept applied to the behavior of markets offers most promising insights. This book takes you on the right track because as you may see from Savov¿s theory of interaction the texture of reality is made of multiscale fractal like 3D-spiral swirls of basic matter that contract and expand, i.e. show ups and downs like everything around us, including prices. Therefore Mandelbrot¿s fractal eye on the dynamics of the markets has its much deeper justification in theory of interaction terms.
Guest More than 1 year ago
Finance is a difficult and recondite subject, perhaps second only to mathematics in its inability to inspire excitement in most readers. Yet Benoit Mandelbrot and Richard L. Hudson, co-authors of this book, manage to turn financial math into a great yarn, full of interesting characters and dramatic events. Some of what the book actually says will be old news to market professionals, but it says it quite interestingly. Mandelbrot did some of his most important financial work in the 1960s, but his ideas about leptokurtosis (which deals with the shape of probability functions), fractals (which deal with repetitive patterns) and such have received quite a bit of subsequent attention in trading rooms and in the finance departments of major universities. So, perhaps, it is merely a dramatic device that this book presents Mandelbrot as a solitary, clear-thinking prophet struggling against a blind and hostile economic orthodoxy. That presentation certainly succeeds as drama ¿ the story races along and the reader keeps rooting harder and harder for Mandelbrot to win. The co-authors have spun an excellent saga that says important things in a new way. We think every investor, every business journalist and every financial professional ought to read this book.