The Misbehavior of Markets A Fractal View of Financial Turbulence

by Mandelbrot, Benoit; Hudson, Richard L.

• ISBN13: 9780465043576
• ISBN10: 0465043577
• Format: Paperback
• Copyright: 2006-03-07
• Publisher: Basic Books

Summary

The (Mis)Behavior of Markets is a revolutionary reevaluation of the standard tools and models of modern financial theory. Mathematical superstar and inventor of fractal geometry Benoit 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 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. Book jacket.

Author Biography

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

Abstract	v
Acknowledgments	xiii
Prelude: Introducing a Maverick in Science	xv
Benoit Mandelbrot, the "father" of fractals, has made a career of going against the prevailing fashions in science.
Part I. The Old Way
Chapter I Risk, Ruin, and Reward	3	(22)
"Modern" financial theory is founded on a few, shaky myths that lead us to underestimate the real risk of financial markets.
Chapter II By the Toss of a Coin or the Flight of an Arrow?	25	(18)
How the operations of mere chance can be used to study a financial market.
Chapter III Bachelier and His Legacy	43	(16)
The study of financial theory began a century ago with a brilliant but undervalued French mathematician, Louis Bachelier.
Chapter IV The House of Modern Finance	59	(20)
How the edifice of modern financial theory—valuing assets, building portfolios and assessing risk—was erected on Bachelier's work.
Chapter V The Case Against the Modern Theory of Finance	79	(9)
Orthodox financial theory is riddled with false assumptions and wrong results. A summary of the evidence against it.
Pictorial Essay: Images of the Abnormal	88	(23)
Part II. The New Way
Chapter VI Turbulent Markets: A Preview	111	(12)
Financial markets are turbulent—like the wind or the flood. An introduction to the fractal view of finance.
Chapter VII Studies in Roughness: A Fractal Primer	123	(9)
How is a stock-price chart like the leaves of a fern? A survey of fractal geometry.
Pictorial Essay: A Fractal Gallery	132	(15)
Chapter VIII The Mystery of Cotton	147	(26)
The first clue to the fractal view of finance came in a study of cotton by Mundelbrot. An account of his scientific journey.
Chapter IX Long Memory, from the Nile to the Marketplace	173	(24)
The second clue to fractal finance came from lifelong study of the Nile River by an English hydrologist, H.E. Hurst.
Chapter X Noah, Joseph, and Market Bubbles	197	(10)
The two critical features of financial markets are wild price swings and long-term dependence—the Noah Effect and the Joseph Effect.
Chapter XI The Multifractal Nature of Trading Time	207	(18)
In financial markets, time speeds up and slows down—as described in the multifractal model of markets.
Part III. The Way Ahead
Chapter XII Ten Heresies of Finance	225	(28)
How do financial markets really work? A list of key insights provided by the fractal view of finance.
Chapter XIII In the Lab	253	(24)
So how can the study of fractals change finance? A program for future research.
Notes	277	(26)
Bibliography	303	(15)
Index	318