Monday, March 24, 2008
The (Mis)Behaviour of Markets
Benoit Mandelbrot's The (Mis)behavior of Markets: A Fractal View of Risk, Ruin and Reward (2004) is quite an intriguing read during these days of murderous market volatility. The list of his Ten Heresies in Finance goes a long way in giving a hint of his thinking, which is centred around his claim that the use of normal distributions in financial market modelling is a capital mistake:
Markets are turbulent. Markets are very, very risky - more risky than standard theories imagine. Market timing matters greatly - big gains and losses concentrate into small packages of time. Prices often leap, not glide. That adds to the risk. In markets, time is flexible. Markets in all places and ages work alike. Markets are inherently uncertain, and bubbles are inevitable. Markets are deceptive. Forecasting prices may be perilous, but you can estimate the odds of future volatility. In financial markets, the idea of Value has limited value.