The (Mis)behavior of Markets: a fractal View of Risk, Ruin, and Reward







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SCRAPBOOK OF REVIEWS OF

THE (MIS) BEHAVIOR OF MARKETS

BY B.B. MANDELBROT & R.L. HUDSON

AND ITS TRANSLATIONS
Including print, web, and audio reviews
The (Mis)behavior of Markets: A Fractal View of Risk, Ruin, and Reward, xxvi + 329pp.
(M & Richard L. Hudson). New York: Basic Books, 2004 (paperback, 2006, added Preface, 2009) & London: Profile Books, 2004 (paperback, 2005; added Preface, 2008),
Scrapbook of Reviews of this book and its translations.

Mercados Financeiros Fora de Controle. A teoria dos fractais explicando o
comportamento dos mercados.
xxxiv + 317 pp. Portuguese translation

by Alfonso Celso da Cunha Serra. Sao Paulo, BR: Elsevier & Editora Campus, 2004.
Une approche fractale des marchés. Risquer, perdre et gagner.
361 pp. French translation by Marcel Filoche. Paris, FR: Odile Jacob, 2005.
Fraktale und Finanzen. Märkte zwischen Risiko, Rendite und Ruin.
446 pp. German translation by Helmut Reuter. München, DE: Piper Verlag, 2005.
Il disordine dei mercati. Una visione frattale di rischio, rovina e redditività.
xx + 296 pp. Italian translation by Simonetta Frediani. Torino, IT: Einaudi, 2005.
O (Mau)Comportamento dos Mercados: Uma visão fractal do risco, da ruína e do rendimento. 416 pp. Portuguese translation by Miiguel Marques. Lisbon, PT: Gradiva, 2006.
Fractales y finanzas. Una aproximación matemática a los mercados: arriesgar,
perder y ganar.
322pp. Spanish Translation by Ambrosio García Leal. Barcelona, ES: Tusquets, 2006.
Ο πινακας του χαους. Γιατί καταρρέουν οι αγορές. Μττενουά Μάντελμττροτ

& Ρίσαρντ Λ. Χάντσον. 474pp. Τραυλος, Αθήνα Greek translation. Athens, GR: Travlos, 2006.
Finans Piyasalarinda (sakli) Düzen / Risk, Cöküs ve Kazanca Fraktal Yaklasimlar.

Turkish translation by Gülsah Karadag. Istanbul, TR: Güncel Publishing, 2006.
(Не)послушные рынки: фрактальная революция в финансах. 389 pp.

Russian Translation by I. V. Kornenko. Moscow & St. Petersburg, RU & Kiev, UA: Williams, 2006.


  • The secret code behind stock prices, cotton and the Nile River. 396 pp.

Chinese translation by Jesse Sam. Taipei, TW: Good Morning Press, 2007.
Kindan no Shiro. Fractal de miru Risk and Return. 368+61 pp.

Japanese translation: by Hideki Takayasu. Tokyo, JP: Toyo Keizai Shinpo, 2008.
Translation reportedly underway: Beijing, CN: Renmin University Press.
July 26, 2006
Bloomberg TV Germany
Seitenweise Wirtschaft

2004/10/16 ◊ Rudolf Dobelli (getAbstract)

Click here to listen to the audio of a TV broadcast.




Canadian Business (Toronto CA)
January 31, 2005 ◊ Jeff Sanford, Staff Writer

WHY THE BELL CURVE FALLS FLAT
Investing theory scrutinized.

What if someone told you that the investment advice you get is not just wrong generally, in a way that would allow it to be right sometimes, but that it's wrong at such a deep level that it might never be correct? That would be worrying--especially if your retirement is counting on advice being on the mark at least occasionally. But such is the argument in a new book, The (Mis)behavior of Markets. One of its co-authors, Richard Hudson, former managing editor of the European Wall Street Journal, suggests that theory and practice in the investment industry are leading to assessments of risk that are incorrect--significantly so.
Current market orthodoxy began with a Frenchman named Louis Bachelier, who in 1900 suggested price movements on the French bond market followed a normal probability distribution. That is, 68% of all price movements would be within one standard deviation of the mean, 95% would be within two and 98% would be within three. Graphically represented, that distribution results in the now-familiar bell curve, which has been used to describe many different natural phenomena, from the height of humans to the spread of IQ scores through a population. Why shouldn't it also explain price movements as well?
It sounded good. And the Bachelier model has come to underpin the diversification strategy of modern portfolio theory. Today, when investment advisers put together a portfolio, they use normal distribution to calculate risk by first calculating the beta--a measure of a particular stock's volatility in relation to the overall market--for every investment in the portfolio. That calculation allows your adviser to put together investments in proportions that give you the right level of risk.
That would make sense if stocks really could be considered regular physical phenomena, says Hudson. But that's not the case, he argues. "It's an old (very small) joke in academia that Modern Portfolio Theory, or MPT, is short for 'empty,'" he wrote in an e-mail from his home in Brussels. "It's the old problem: garbage in, garbage out. If the beta values are wrong, then the portfolio will be misshapen. And the standard math underestimates just how volatile asset prices really are. They use mathematical tools designed for nice, well-behaved physical systems to work with the 'misbehaviour' of a very human system."
So how might we better measure risk? The book's other co-author is Benoit Mandelbrot, currently Sterling Professor of Mathematical Sciences at Yale University, and widely recognized as the father of fractal geometry. In 1961, he was one of the first to study market economics using a computer, and he undertook an early study of cotton prices, which provided the largest and most complete data set of prices at the time. What Mandelbrot found was that cotton prices followed a pattern that was far from what we might call a normal distribution. He discovered a few very big and many very small price movements, but not many medium-sized ones. He also found some recurring themes in the pattern. "If the price changes start to cluster, or the prices themselves start to rise, they have a slight tendency to keep doing so for a while--and then, without warning, they stop," writes Mandelbrot in The (Mis)behavior of Markets. "They may even flip to the opposite trend."
Does that sound like the market you know? Mandelbrot also confirmed that power laws, which see spikes in the data ramp up exponentially (as opposed to the orderly dispersion in normal distributions), occurred in the cotton market data. "When you analyze it, you quickly see it does not fit the tidy pattern of the bell curve," writes Mandelbrot, who goes on to make a few suggestions for measuring market risk based on the tools of fractal geometry. Among the more alluring are "H" values, which he suggests give an indication of the "persistence," or trend, that is affecting a stock price. A high "H" could indicate crowd behaviour is at work, while a lower "H" value may indicate a more random "classic" market force.
Such a measure would indeed be useful--if the values for H were reliable in the first place--and the promise of newfangled metrics for the herd mentality is certainly exciting; many traders at big banks and hedge funds already employ some elements of fractal theory. But don't read Hudson and Mandelbrot's book expecting to get rich. After all, it's still early days for fractal finance, says Hudson. "Much more research, by many more people, is required--which is exactly why we wrote the book." For now, the book's greatest value might lie in convincing investors to think twice about what they've been told about how markets should work--but so often don't


Boursorama (Paris FR)
8-1-2005 ◊ ???

POUR JVATKI, LES AUTRES, PPAPI COMPRIS
j'avais presque tout lu de Benoît Mandelbrot, immense mathématicien français toujours en activité, y compris la collatéralité sur la Théorie du Chaos de nombreux autres auteurs, il n'y manquait que la dernière parution "Une Approche Fractale des Marchés" aux Editions Odile Jacob.

Ne manquez pas cela. Pas une formule mathématique. Chaque phrase est jouissive de vérité, d'anti-orthodoxie, de clairvoyance. Bref, vous ne serez plus le même avant qu'après. Petit extrait :
...
Ceux qui suivent mes posts savent que je ne dis modestement rien d'autre et il n'est que de s'y reporter pour s'en assurer. Néanmoins, d'aucuns autres, qui ont une tendance naturelle à avilir, ridiculiser ou décrédibiliser pour poursuivre je ne sais quels intérêts contraires sur ce forum, en seront pour leurs frais. Je ne dis pas ce que je dis parce que je serais un loser vindicatif. Moquer Aragorn est une chose ... il y faudra de la substance, beaucoup de substance et beaucoup de diplômés des meilleurs écoles de commerce pour contredire puissamment Benoît Mandelbrot ... Une première pierre dans le jardin de DBD et de ses analyses astrologiques. Une deuxième dans un autre jardin pour finir. Deuxième extrait.

La suite est du même tonneau. Formidable dépoussiérage de la pensée unique. Je dis cela aussi pour Click qui m'avait renvoyé dans mes buts lorsque je demandais des éclaicissements sur le pricer. Quelques-uns ici se souviendront de la réponse jargonnante au-delà du mépris concernant la loi log-normale et le modèle fondateur de Cox-Ross-Rubinstein. LE MODELE FONDATEUR S'APPUIE SUR UNE HYPOTYHESE FAUSSE !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Je rajoute, au comble de l'émotion que Benoît Gérardin (Ingénieur de l'Ecole Polytechnique de Paris) "a montré qu'en réalité ce sont 86% des cours qui se situent à l'intérieur des bandes de Bollinger (note 31, page 72 de "Comprendre l'Analyse Technique Dynamique" de Philippe Cahen, livre rouge Editions Economica 2002. Ce qui n'empêche l'auteur d'écrire, même page, paragraphe 2.2.1 : "Les trois courbes sont : une moyenne mobile sur 20 périodes - appelée moyenne mobile de Bollinger, une courbe appelée bande supérieure de Bollinger équivalente à la moyenne mobile de Bollinger + deux fois un écart-type, et la troisième courbe appelée bande de Bollinger, équivalente à la moyenne mobile de Bollinger - deux fois un écart-type. Les lois de la statistique (ndlr cette fameuse loi normale terra cognita) indiquent que, historiquement (c'est-à-dire si on analysait un historique très long), on observerait que 95% des cours se situent entre la bande inférieure et la bande supérieure (renvoi à la note 31 ci-dessus susvisée)". CE QUI N'EMPÊCHE PAS LA PRODUCTION D'UNE FUMEUSE THÉORIE DITE ATDMF FONDÉE SUR UNE HYPOTHESE ÉNONCÉE FAUSSE DANS LE MÊME INSTANT !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Mandelbrot réfute la normalité de la loi de distribution des probabilités, Benoît Gérardin calcule l'erreur ... mais le modèle fondateur de Cox-Ross-Rubinstein, la loi log-normale, l'ATDMF, les livres de méthodes qui se vendent, l'intlligentsia financière jargonnante et endimanchée .... l'usine à plumer ! Arghhh j'étouffe !

Ne vous laissez pas embarquer par ces doctes personnes qui, parce qu'il jargonnent avec assurance et élégance, pourraient vous laisser à penser que les choses sont maîtrisées et maîtrisables, qu'en prenant soin de ses trades, qu'en étudiant bien la question, vous pourrez ...

Jouez en Bourse, jouez sur Click, oui c'est particulièrement intéressant et autrement plus fécond que sur les courses de chevaux et le Loto. Plus excitant, plus motivant. Ne croyez jamais les diseurs de bonne aventure, les faiseurs d'opinion, ne croyez jamais jamais que vous avez gagné ici parce que vous aviez compris le truc, ne croyez jamais ceux qui parlent d'un air entendu comme si eux savaient davantage que vous, ne croyez jamais ceux qui ont un intérêt commercial dans ce qu'ils font et ce qu'ils disent comme il s'en trouve quelques-uns sur ce forum ... bref, ne croyez personne qui vous parle de Bourse et qui ne soit pas un ami désintéressé, ne vous croyez pas vous-même. En Bourse, nul ne sait rien !

Que les détracteurs s'adressent directement à Benoît Mandelbrot.

Que ceux qui ont pu croire que j'étais parti se rassurent

Je n'étais pas loin

Je suis de retour

Pour longtemps

... avec ma liberté de parole, ici et ailleurs

Bons trades à tous.

Christian Science Monitor (Boston MA)
September 28, 2004 ◊ Laurent Belsie,

the Monitor’s personal-finance editor.

STOCK MARKETS MOVE LOGICALLY – EXCEPT WHEN THEY DON’T FRACTAL GEOMETRY MAY FINALLY EXPLAIN FINANCIAL RISKS


Don't be surprised while reading "The (Mis)behavior of Markets" if you find yourself asking, "When it comes to risk, does anybody on Wall Street know what they're talking about?"
The answer is a little chilling. Despite decades of research, no one has yet developed a good theory that explains the risks of financial markets. Worse, many investors underestimate those risks, according to Benoit Mandelbrot, a maverick mathematician, and his coauthor Richard Hudson, a financial journalist. Under their analytical microscope, all those traditional and comforting models for reducing investment risk - like "buy for the long term" and "allocate your assets" - suddenly sound hollow.
The reason is that today's accepted models are wrong, Mandelbrot argues.
For example, modern portfolio theory treats price movements much like the average height of a population. Most adults hover around that average. Those who top 7 feet or fall below 4 are too few to change the average much. And there are no 12-foot giants or 6-inch dwarfs. Likewise in the markets, most day-to-day price movements are moderate; a few big ones don't change the averages much, and really huge ups or downs almost never occur.
The problem, Mandelbrot points out, is that giants and dwarfs haunt the market far more frequently than the theory suggests. For example: From 1916 to 2003, according to the conventional mathematical model, there should have been only 58 times when the Dow Jones Industrial Average moved more than 3.4 percent in a single day. But in reality, there were 1,001 such exciting days. In theory, one-day swings of more than 7 percent should come only once every 300,000 years. But so far in the past 87 years, American stock investors have experienced 48 moves like that.
The fallacy extends to other markets. The exchange rate of the dollar vs. the yen once moved 7.9 percent in a single day. Theory suggests that change should never have happened, even if people had been trading currencies everyday since the universe was formed, some 15 billion years ago, Mandelbrot argues.
Such revelations come as no surprise to professional traders. They began tweaking the traditional model long ago to try to account for these anomalies. But for the average investor, trusting retirement savings to conventional asset management, Mandelbrot's conclusions come like a bolt from the blue.
If the markets are riskier than most analysts let on, what's the average investor to do?
Regrettably, that's a question this book never quite answers. For all his potent insight into the fallacies of modern portfolio theory - and the engaging way he traces the historical development of its various mathematical underpinnings - Mandelbrot doesn't offer a convincing replacement.
To be fair, he never claims to have one. Stock prices are probably not predictable in a way that can make people rich, he writes. But the risk of the markets can be modeled so that people can avoid big losses - if someone can figure out how to do it.
Mandelbrot, who has made his reputation with fractal geometry (those elegantly complex figures that repeat themselves no matter what the magnification), thinks fractals offer a way forward.
He makes an intriguing case. Unlike, say, Euclidean geometry, fractals measure roughness, whether it's a jagged coastline or the volatility of financial markets. And fractals have been able to simulate the unpredictability and wild swings of markets fairly convincingly. Some 100 people around the world are seriously working on fractal finance now.
Mandelbrot details a few of the more interesting experiments. But the research hasn't progressed very far, he adds, which leaves ordinary investors in an all-too- familiar gap, where cutting-edge researchers know far more about what's wrong than how to fix it.
Readers of this book will probably take a hard look at their own assumptions about the riskiness of financial markets. That's a good thing. But they'll search these pages in vain for an alternative that
can keep them from losing their shirts.
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