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.
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