Monday, October 5, 2009

Mandelbrot

"What you read in most financial theory textbooks bears almost no resemblance to what you actually see on most trading floors." - Benoit Mandelbrot

The book, "The (Mis)Behavior of Markets", by Benoit Mandelbrot came out 5 years ago. Mandelbrot is best known as the father of fractal geometry but has been interested in coming up with a better model to explain markets.

Here's a link to a review of the book.

The first big breakthrough was made by another Frenchman, Louis Bachelier, at the turn of the twentieth century, but his ideas were never given credit during his lifetime. After the Second World War, his work was rediscovered at a time when mathematical finance was gaining prominence as a field of study. Soon, a variety of tools were developed to help financiers: Portfolio Theory, the Capital Asset Pricing Model, and the Black-Scholes equation.

According to Mandelbrot, all this work is fundamentally flawed...


I have not read the book but am always interested in how other academic disciplines view finance and economics. While skeptical that Mandelbrot has come up with something that can be used in a practical sense by an investor, I think it's worthwhile to try and better understand the flaws that might exist within modern finance theory.

Adam

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
 
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