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The Misbehavior of Markets: A Fractal View of Financial Turbulence |  | Authors: Benoit Mandelbrot, Richard L. Hudson
Publisher: Basic Books
List Price: $17.95
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Rating:  65 reviews
Sales Rank: 13194
Media: Paperback
Edition: annotated edition
Pages: 368
Number Of Items: 1
Shipping Weight (lbs): 1.1
Dimensions (in): 9.1 x 6.1 x 0.9
ISBN: 0465043577
Dewey Decimal Number: 332.01
EAN: 9780465043576
ASIN: 0465043577
Publication Date: March 6, 2006
Availability: Usually ships in 1-2 business days
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Product Description
From the inventor/founder of fractal geometry, the award-winning book that turns modern financial theory on its head 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.
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Showing reviews 1-5 of 65
 Not There Yet November 1, 2009
K. Comaskey (Honolulu HI)
0 out of 1 found this review helpful
Intereting....but not fleshed out and since the individual buyers of stock are the turblance when turbulance occurs....well can there be a corrective?
More math please October 17, 2009
D. Hoffman
Understanding that it is a book written with an unsophisticated audience (myself included) in mind, I would still like to have seen a little more in the way of math, i.e., examples or derivations, when appropriate, to go along with the cartoons. As is, both sides of the argument have to be taken on faith which is exactly what he is arguing against. Still a good read.
Interesting but short on practical applications of theory. September 22, 2009
D. W. Strout (Pennsylvania)
The topic is interesting and useful in the explanation of the unexpected. Did not seem to explain how fractals and "fat tails" could be used to predict or forecast. Essentially it comes across as an warning that the world is much more dangerous than most people assume.
 Non-Practical Advice by an Arrogant Author August 22, 2009
Dale C. Maley (Fairbury, IL United States)
2 out of 4 found this review helpful
In several places, I saw this book touted as revolutionizing the investment world. I decided to get it and check it out. Having read over 200 books on investing, I was a little doubtful Mandelbrot had found the secret of investment success.
As many other reviewers have already pointed out, Mandelbrot is a unique individual who comes across as extremely arrogant in this book.
The whole premise of this book is since modern financial engineering is built upon the two key assumptions of normal distribution and independence of returns........the whole field of financial engineering is wrong because in the short term......returns are not normally distributed and are not independent.
Investing is a lot about predicting the future. Mandelbrot might have been well served by reading Sherden's book, The Fortune Sellers. Sherden points out that forecasting or predicting the future is the 2nd oldest profession. It is now a multi billion dollar business.
Sherden examined about every major field where forecasting is used:
1. Weather
2. Economics
3. Stock market
4. Population sustainability
5. Scientific advances
6. Futurists
7. Corporate predictions
Interestingly enough, the largest number of people in any of these 7 forecasting groups is the 200,000 people who do financial advising....involving trillions in assets. Weather forecasting only has about 6,000 people......but it is a $5B business. Sherden concludes the only area where the future can be forecasted accurately is weather predictions......and their accuracy is only good for a couple of days into the future.
Mandelbrot correctly points out that many phenomena in nature are based on the power law compared to normal distributions. He correctly identified Pareto as one of the pioneers in power law research. Pareto found that 80% of the income or wealth is typically owned by 20% of the population. Pareto found this phenomenon to be true in several different countries. It is true today in the U.S. as well. Mandelbrot forgot to mention that most people can utilize Pareto's results by applying the 80:20 rule to many areas of business and their lives [80% of the effect is usually caused by only 20% of the inputs]. For a much better and thorough review of power laws and their practical application see The 80:20 Principle by Koch. If you want to stretch your brain a little thinking about power laws, read Mauboussin's More Than You Know.
Mandelbrot points out that short term price changes (daily) are not normally distributed and they are not independent. Mandelbrot argues that daily price changes might be better explained and predicted using power law math versus normal distributions. I don't have an argument about this suggestion. Then Mandelbrot makes a big leap and says that fractals can explain and predict short term price changes. Although fractals are interesting.....I really don't see the evidence that using fractal mathematics truly explains and predicts short term price changes. I don't know what the answer is to predicting daily price changes.....but I'm sure many people continue to try to find out this answer.
As a long term passive investor, I am only interested in annual returns, not daily returns. From all the annual historical return data I have seen, annual returns do fit normal distributions relatively well compared to short term daily returns.
The Sub-Prime Crash of 2008 is not a Black Swan event from my perspective of focusing on annual versus daily returns. The long term average return of US large cap stocks is around 10% with a standard deviation of 20%. Assuming a normal distribution for annualized returns, one would predict that 99.97% of future annual returns would fall between the average plus or minus 3 standard deviations........or -50% to +70%. Since the S&P 500 with dividends reinvested fell 37% in 2008........it falls within the predicted band.
I could buy the argument the Sub-Prime Crash of 2008 was a systemic Black Swan event. It was caused by at least 10 different parties all playing the right role to have a financial crash.
1. Federal Reserve left interest rates too low too long
2. Congress encouraging lenders to give loans to people who couldn't afford them
3. Borrowers taking out loans they could not repay
4. Real estate agents encouraging higher prices to increase their commissions
5. Mortgage brokers who lowered lending standards
6. Banks who gave loans with no traditional rules for safe loans
7. Investment banks who packaged loans and sold them as safe investments
8. Rating agencies which assigned low risk grades to high risk investments
9. Investors who bought these mortgage investments
10. Regulators asleep at the wheel with respect to loan practices and institutional risk
If any one of these 10 parties had raised a red flag, the real estate bubble would have stopped.
All in all, I was disappointed with this book. Besides having to put up with the arrogance of Mandelbrot, he repeats known phenomena (daily prices are not normally distributed and not independent).....and suggests that maybe power laws or fractals can explain short term price movements. Of course, if one could figure out how to accurately predict short term price movements using a combination of power laws and fractals, there is a Nobel Prize waiting for you...as well as a beach in the Caribbean to enjoy spending all the money you could make on short term price changes!
Instead of this book, I would suggest you read Sherden's book on forecasting, Koch's book on Pareto's Rule, and Mauboussin's book More than You Know.
In this age of full disclosure, it can be noted that I am the author and publisher of the book INDEX MUTUAL FUNDS: HOW TO SIMPLIFY YOUR LIFE AND BEAT THE PROS. This book is an introduction to the concept of index funds is and is sold on Amazon. I am also a contributing author to the book THE BOGLEHEADS GUIDE TO RETIREMENT PLANNING available from Amazon with an estimated release date of October 2009. I have also written 21 short stories on investing which are also available on Amazon.
If you want practical ideas on long term passive investing, read some of the books below:
The Richest Man in Babylon
Bogle on Mutual Funds: New Perspectives for the Intelligent Investor
The Millionaire Next Door
The Four Pillars of Investing: Lessons for Building a Winning Portfolio
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, Ninth Edition
The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On With Your Life
The Bogleheads' Guide to Investing
 Still relevant five years later August 22, 2009
Aaron C. Brown (New York, New York United States)
I had occasion to reread this book and wanted to offer my thoughts about how the ideas have held up. I'm a huge Mandelbrot fan, I consider him one of the great living geniuses who has changed thinking in many fields. Plus he's enormously fun to read, even when he's wrong (and co-author Hudson polished him up as well). However I also think he does not appreciate the full depth of financial questions and therefore gives too little credit to other views. In 2004, I thought this book was an excellent critique and filled with useful inspiration, but had a tunnel vision focus on price data as opposed to the living practice of finance.
Looking again in 2009, after the upheavals of the last two years, and also after reading works like The Black Swan, A Demon of Our Own Design and Plight of the Fortune Tellers, I would say time has been kind to Mandelbrot. The book is not dated in the least, it's more important to read today than five years ago. When you apply these ideas to price charts from 2007 to 2009 the ideas gain weight. And although many of his ideas have been incorporated into modern theories of risk, including the three books listed above, Misbehavior of Markets has additional ideas and insights you won't get from other sources.
That's not to say the book has all the answers, but it had more of them than I thought five years ago, and I liked it then. Anyone serious about quantitative finance should read this book, and anyone interested in fun math as well.
Showing reviews 1-5 of 65
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