THE MISBEHAVIOR OF MARKETS PDF
CHAPTER X - Noah, Joseph, and Market Bubbles standard, real prices “ misbehave” very badly. A . provides a scientific perspective on markets that is. 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. (Mis)Behavior of Markets by Nassim. Nicholas Taleb classroom, may be beautiful and pure notions; but they seem more present in the mind of mathemati-.
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But the mysterious behavior of financial markets attracts academics http://www. myavr.info The Misbehavior of Markets by Richard L. Hudson, , available at Book Depository with free delivery worldwide. The Misbehavior Of Markets A Fractal View Of Financial Turbulence - [Free] The. Misbehavior Of Markets A Fractal View Of Financial Turbulence [PDF] [EPUB] -.
He has invented fractal geometry. Richard L. He first tells the story of his father, and how he, as a prisoner in France during the WWI I, managed to escape his demise. Mandelbrot also presents how these past situations link to not so distant events, connected to his profession. To be more precise, his past has made him so intuitive, that he could see relations between things that everyone else saw as unrelated.
For example, he could easily compare the floods of the Nile River with the stock-prices on Wall Street. As a young fellow, Mandelbrot decided to drop out of the elite Ecole Normale Superiore and enlisted into the Ecole Polytechnique.
At last, he ended up working at IBM Research. Additionally, he took an interest in researching business sectors, the appropriation of wealth , stock markets, bubbles, cotton prices and other monetary phenomena. An interesting fact about Mandelbrot is that he was anything but conventional.
Second: Financial theories are not able to capture the full scope of market risk. Fourth: Prices do not move gradually and consistently, on the contrary, they frequently jump. Hence, markets are much riskier than one can assume. Fifth: Market time expands, and contracts and prices mount with time.
Sixth: All markets are the same. Seventh: Bubbles will continue to happen. Eighth: Markets delude. This would be the best drilling into the weaknesses of the Efficient Markets Hypothesis price changes are not independent, are not normally distributed, and are not stationary that I've read and it is valuable both for the knowledge imparted and the stories told to help make it stick.
It's part biographical and really enjoyable for its coverage of such I thought I knew what this book was about, having read some reviews some years ago. It's part biographical and really enjoyable for its coverage of such things as the colonial-era engineer working out the maths of Nile River flows in order to reliably size dams. Mandelbrot's perspectives on volatility and scaling are useful and bound to stick with me for a long time.
But there were no actionable takeaways for better investing or trading beyond a strengthened awareness that it is all too easy to underestimate risk.
Of course, the fundamental cause of the crash was purely human: We have long had precise measurements and elaborate physical theories for such basic sensations as heat, sound, color, and motion. Until Mandelbrot, we never had a proper theory of the irregular, the rough—all the Of course, the fundamental cause of the crash was purely human: Until Mandelbrot, we never had a proper theory of the irregular, the rough—all the annoying imperfections that we normally try to ignore in life.
Roughness is in the jagged edge of a metal fracture, the rugged coastline of Britain, the static on a phone line, the gusts of the wind—even the irregular charts of a stock index or exchange rate. The fundamental concept: Prices are not predictable, but their fluctuations can be described by the mathematical laws of chance.
Therefore, their risk is measurable, and manageable. This is now orthodoxy to which I subscribe—up to a point. Price changes are statistically independent, and they are normally distributed.
About Benoit Mandelbrot & Richard L. Hudson
The facts, as I vehemently argued in the s and many economists now acknowledge, show otherwise. First, price changes are not independent of each other. Today does, in fact, influence tomorrow. If prices take a big leap up or down now, there is a measurably greater likelihood that they will move just as violently the next day. The financial dislocations convinced many professional financiers that something was wrong. Warren E. Buffett, the famously successful investor and industrialist, jested that he would like to fund university chairs in the Efficient Market Hypothesis, so that the professors would train even more misguided financiers whose money he could win.
Extreme price swings are the norm in financial markets—not aberrations that can be ignored. The power of chance suffices to create spurious patterns and pseudo-cycles that, for all the world, appear predictable and bankable. But a financial market is especially prone to such statistical mirages. My mathematical models can generate charts that—purely by the operation of random processes—appear to trend and cycle. They are the inevitable consequence of the human need to find patterns in the patternless.
This trading time speeds up the clock in periods of high volatility, and slows it down in periods of stability. I am, of course, a true believer in the power of probability. Seeing nature through the lens of probability theory is what mathematicians call the stochastic view. Finance is a black box covered by a veil. Anticipation is a feature unique to economics. It is psychology, individual and mass—even harder to fathom than the paradoxes of quantum mechanics.
Anticipation is the stuff of dreams and vapors. Still, the idea of chance in markets is difficult to grasp, perhaps because, unlike the anonymous particles in a magnet or molecules in a gas, the millions of people who buy and sell securities are real individuals, complex and familiar.
By contrast, traditionalists, now coming back into fashion, contend that history was shaped and dominated by a few great men, Caesar or Napoleon, Newton or Einstein, for example. There were problems, of course. First, as Markowitz himself pointed out, it is not certain that using the bell curve is the best way to measure stock-market risk; it is easy, but not necessarily right. Second, to build efficient portfolios you need good forecasts of earnings, share prices, and volatility for thousands of stocks.
Otherwise, garbage in, garbage out. So the market, itself, was doing the Markowitz calculations. It was the most powerful computer of all, producing tick-by-tick the optimum investment fund. All models by necessity distort reality in one way or another. There is a rich vein of jokes about economists and their assumptions. Take the old one about the engineer, the physicist, and the economist.
They find themselves shipwrecked on a desert island with nothing to eat but a sealed can of beans. How to get at them? The engineer proposes breaking the can open with a rock. The physicist suggests heating the can in the sun, until it bursts.
Consider a few: People are rational and aim only to get rich. People simply do not think in terms of some theoretical utility measurable in dollars and cents, and are not always rational and self-interested. The refutation of this one assumption of modern financial theory has in the past twenty-five years created a fertile new field of inquiry, called behavioral economics.
It studies how people misinterpret information, how their emotions distort their decisions, and how they miscalculate probabilities. All investors are alike.
Patently, people are not alike—even if differences in wealth are disregarded. Some buy and hold stocks for twenty years, for a pension fund; others flip stocks daily, speculating on the Internet.
Once you drop the assumption of homogeneity, new and complicated things happen in your mathematical models of the market. Price change is practically continuous. Price changes follow a Brownian motion. The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight—as the only remedy for the unfortunate collisions which are occurring.
Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required today in economics. Simple rules build complex structures, and complex structures deconstruct into simple rules. As described earlier, the most widely known formula was published in by Fischer Black and Myron Scholes, and it has been known for years that it is simply wrong. It makes unrealistic assumptions.
It asserts that prices vary by the bell curve; volatility does not change through the life of the option; prices do not jump; taxes and commissions do not exist; and so on.
A fundamental problem is the Black-Scholes assumption of constant volatility—in essence, that the world does not change. Mandelbrot's novel "The Misbehavior of Markets" is truly a hidden gem. The deeper into the book I went, the more it spoke directly to my darkest intuitions.
I actually started to get the feeling that no one else has actually bothered to read the book cover to cover.. Indeed even the jacket reviews are not very convincing. Paraphrasing the Financial Times "[a famous math guy wrote a book.. At its core the book is a Mandelbrot's presentation of "modern" financial theory b why and how that body of tools is not a complete failure, but because I discovered fractal geometry back in the s it actually sort of is a complete and utter failure and c how the market can be better approximated using fractal patterns and analysis.
To keep this review incredibly straightforward, "modern" financial theory EMH, CAPM, Black Scholes is built on extensions and patchwork of academic work that is based on faulty assumptions.
The idea that prices change are independent and move according to a random walk is bullshit. Price changes are not smooth and stocks exhibit long term dependence.
At it's fundamental core the market is fractal, not Euclidean, as are many phenomena in real life.
Therefore, price changes should be more closely approximated ie: As a result: And because everyone seems content with keeping the basic foundation of the formulas for the foreseeable future since the math is easy and the approximations "good enough".. Risk will be higher than confidence dictates.. Feb 13, Bob Perry rated it it was amazing.
This is probably the most important and insightful book on the stock market that I've ever read. I had no idea the economists base their whole dogma on mathematics that hsa been proven to be wrong. Benoit, as always, looks at the world differently.
Thats how he developed fractal geometry and how chaos theory evolved from that. When he took a look at cotton prices over years he immediately realized that the data doesn't fit the current then nor now rules of evaluating risk. He has been writin This is probably the most important and insightful book on the stock market that I've ever read. He has been writing on this for 50 years and was ignored for a majority of this time.
Only now in the last couple of decades, and I can imagine even more since , has his academic papers found their way into the major producers of economists who pretend to know whats going on. He makes a valid point that I had never thought of before. We treat the people of the Federal Reserve and the Central Banks like High Priests, who come to us in times of trouble and fix things via on high.
That is total bull shit and even they know it. As the author of "Black Swan" wrote, the worst thing to happen to economists was when they were awarded the Nobel Prize. It legitimized a profession that is based on nonsense math and a thousand tools duct-taped together to fit the data after the fact.
Much like astronomers did for astrology years ago. Just admit that the earth isn't the center of the universe and get on with it Great book and easy to understand even for us non-mathematicians who just want to understand what is wrong with the system and how silly and catastrophic it is to the everyday person that the world's markets are crashing because of some statistical models that doesn't fit the data.
As many reviewers have noted, Mandelbrot invented fractal geometry. He has also been on the cutting edge some would say fringe, but he's thinking and questioning in multiple disciplines, as his curiosity seem to know no bounds.
Mandelbrot does a good job of describing the inadequacies of the efficient market hypothesis and CAPM and other sacrosanct theories in finance, and he offers for our consideration Benoit Mandelbrot's The Mis Behavior of Markets is a splendid read and very informative.
Mandelbrot does a good job of describing the inadequacies of the efficient market hypothesis and CAPM and other sacrosanct theories in finance, and he offers for our consideration an alternative view.
His view is based on his assertion of reality; namely that the world of finance is turbulent as indeed, the world is turbulent , and linear tools relying on reliability and rational man will never tell the full story. Mandelbrot, to his credit, warns the reader early on that his is not an investment guide. He simply offers his ideas, and admits that some don't offer as much insight currently as he wishes.
He is, however, optimistic that his philosophies and his alternative edge-type thinking will prevail in some form. Truly wish I read this before b-school, as he explains why I scratched my head through a good portion because the theories didn't look "right.
All that said, this is a valuable contribution and highly recommended. This book has three characters in it: Whole paragraphs are devoted to his "enlightened breakthroughs" and profound understanding of market mechanics. An understanding so deep he proposes no significant market model and merely a direction. He stands as the most cited author This book has three characters in it: He stands as the most cited author in the book and many of the references by other authors are sources that largely cite him.
Anyone with a whiff of exposure to authors who lambaste the GARCH and GCF will be familiar with the arguments waged here and there is little reason to read it unless you want to supplicate totally to the church of Mandelbrot.
The one area that was interesting was the description of the Cauchy distribution and "long memory". The former a distribution with no finite mean or variance and the latter a phenomenon where correlation is exhibited over long centuries periods of time. I can't stand self-aggrandizing authors, yet I made it through the book. I don't know if that's merely my weakness as a completist or a testament to the author's otherwise clarion writing. View 2 comments.
I wish I could give this book four stars. But Mandelbrot's slightly tiring writing style prevents me from doing so. The main author obviously thinks remarkably highly of his own work which is not a bad thing in itself--he is, after all, a revolutionary mathematician--but does he have to express it ad infinitum?
It's probably worth noting I have a very low tolerance for self-congratulatio I wish I could give this book four stars. It's probably worth noting I have a very low tolerance for self-congratulation in formal writing. Ah well. Those qualms aside, this book seems to be a good introduction to the recent "hey let's play with fractal math" trends in economics and finance.
I feel I've gotten a good overview of the sub-field; the notes and bibliography are excellent, and have given me lots of other great material to check out. Some actual math in the main text would have also pushed this review up to four stars, but as the authors explicitly point out, they intended this book to fall in the popular science category. Jan 12, Justin Tapp rated it really liked it Shelves: Mandelbrot is the "father of fractal geometry. He argues pretty forcefully that any of the risk management techniques used by Wall Street are based on false assumptions and have been proven to fail time and again.
The Misbehavior of Markets : A Fractal View of Financial Turbulence
Mandelbrot is Nassim Taleb's mentor. I've gotten to the point where I wonder if, as a Christian, I can still teach economic orthodoxy much less finance classes like risk management with a clear consc Mandelbrot is the "father of fractal geometry. I've gotten to the point where I wonder if, as a Christian, I can still teach economic orthodoxy much less finance classes like risk management with a clear conscience. The models and systems that modern finance uses to calculate risk are unrealistic and fail.
Econometric modeling is guilty of the same sins. It shakes the foundations of my learning to the core. Here's another blogger's review of the book, the comments are very insightful. View all 5 comments.
Book: The Misbehavior of Markets
Feb 27, Philippe Malzieu rated it it was amazing. Mandelbrot is one of the fathers of the theory of chaos. It is attractive intellectually but also by its possible applications. In medicine the lung for example is a fractal object. After the crisis of , I wondered why one could not envisage occurred to them. I discovered that the last book of Mandelbrot was precisely devoted to this problem. Mandelbrot proposes to modify the econometric algorythmes used by the banks. Those would be responsible amplify the disorders.
It is a difficult work. I Mandelbrot is one of the fathers of the theory of chaos. I asked to a friend, economist at thr University which advised me to read the book of Taleb, more accessible. This book is for what I can consider important. It created a debate between economists, but I do not see the practical applications.
Oct 08, Pelle rated it it was amazing. A very interesting book which content is much in line with the books of Nicholas Taleb "Black Swan", etc. Unlike Taleb, Mandelbrot describes the problems in a more scientific and calmer way which makes him much more likeable than the aggressive style of Taleb. I highly recommend this book!
I was amazed by this second reading. Mandelbrot quite brilliantly describes what's wrong with everything and quite humbly explains whatever he can. Such a brilliant book to read. Feb 13, Ecoute Sauvage rated it liked it. A good introduction for those who don't know much about the subject. There are no discussion topics on this book yet. Readers Also Enjoyed.
Mandelbrot , O. Mathematical Sciences, University of Paris, ; M. Mandelbrot was born in Poland, but his family moved to France when he was a child; he was a dual French and American citizen and was educated in France.
He has been awarded with numerous honors, including induction into the Legion d'honneur , as well as the Franklin Medal for Physics, the Wolf Prize for Physics, the Lewis Fry Richardson Medal of the European Geophysical Society, and the Japan Prize "for the creation of universal concepts in complex systems.
Trivia About The Mis Behavior No trivia or quizzes yet. Quotes from The Mis Behavior Most people, researchers have found, will take the sure thing.
Book: The Misbehavior of Markets
Wall Street adopted these economic theories. They were relatively easy to use. They have an air of scientific knowledge to them.
There are nobel prizes awarded to the developers of them. But, they don't fit the data at all. They grossly underestimate risk, largely because they insist that data should fit a bell curve, when it simply doesn't fit. And they then took risks, this time with their own money, based on these false economic engineering ideas. The result was the near collapse and the jury may still be out on this of the entire world financial system.
Mandelbrot, the author of this book, is a mathematician. He invented the field of fractal geometry, and is probably most notable for the Mandelbrot set, which yields incredibly intricate and beautiful fractal designs. As far back as the early s, Mandelbrot did extensive study on Cotton markets. For some reason, there is good data on daily cotton prices going back to the mid s. As a result of his studies, Mandelbrot concluded that markets are more fractal than continuous, and that the assumptions that economists used were simply wrong.
He started complaining about this 40 years ago, and as recent history shows, people still are not listening.They grossly underestimate risk, largely because they insist that data should fit a bell curve, when it simply doesn't fit. No trivia or quizzes yet. Whole paragraphs are devoted to his "enlightened breakthroughs" and profound understanding of market mechanics. Great book and easy to understand even for us non-mathematicians who just want to understand what is wrong with the system and how silly and catastrophic it is to the everyday person that the world's markets are crashing because of some statistical models that doesn't fit the data.
Some aspects of the book will not be unknown to most financial experts, but even common information is stated interestingly. The theory goes that the markets already consolidate all the information available to them, so that price already incorporates all the information available to the market.