The (Mis)Behavior of Markets – Mandelbrot (2004)

The (Mis)Behavior of Markets

Benoit Mandelbrot is best known for his work on fractals, but with The (Mis)Behavior of Markets he sums up his work on the application of fractal ideas to economics. Fractals, he says, are in a way the study of ‘roughness’; as opposed to classical geometry which was all about smoothness – lines, planes, etc. Fractals have the property of retaining the roughness at many different scales.

In this book Mandelbrot takes on the classical economics of markets, with regard to the ‘efficient market hypothesis’. He rejects the claims that prices move according to smooth bell curves, and instead follow power laws that make big price changes quite common. Likewise he investigates the notion that prices are dependent on past prices; ie. that a big change today makes a big change tomorrow more likely. Both of these notions mean that markets are much riskier than the efficient market ideas claim it is, and that volatility will vary over time; some patches of time will contain many big changes, while others will be relatively stable. In the fractal sense, the chart of price changes of an asset tends to look the same regardless of the time scale.

Overall this work supports the ideas contained in the excellent Fooled by Randomness.

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