After reading “The Colour of Infinity“, specifically chapter 7, I went back to the library and grabbed “The (Mis)Behavior of Markets: A Fractal View of Risk, Ruin, and Reward” by Benoît Mandelbrot. I figured that if the “Father of Fractal Geometry” has a book out about the markets, that’d be the authoritative source for fractal market behaviour.
The book at three sections, which are basically: old and broken way, new and shiny way, and finally a summary of points to take away from the book.
I’ve not economics or financial training, so the first chapter was quite educational, pretty much capturing the development of modern practiced financial theory. Along the way, he shows many of the assumptions and estimations that went into each step, and also alludes to studies that show these assumptions are not true.
The second section was also educational, in respect to fractal analysis that’ve been done to financial data. Along with many nifty details about fractals and probability distributions the basic results is to show that:
- price variations at any time-scale are Power Law distributed, not Gaussian distributed as theory assumes.
- price variations at any time-scale are time-dependant or Fractional Brownian Motion, not independent or traditional Brownian Motion as theory assumes.
It goes on to demonstrate a multi-fractional construction that seems to account for these factors. as well as “fractional time” to create a time series that manifests all known anomalous characteristics of market behaviour by traditional analysis.
The book has a rich history, and fascinating contradictions to what I was taught. However, it… wasn’t very moving at the end. It didn’t have a silver bullet. I know this is science, and science’s best discoveries are the new anomalies. Yet, I couldn’t help being disappointed. In a literary sense, this book had a “pathetic” ending.
Despite all the educational aspects, ground-breaking work discussed, I didn’t get as much from it as I had hoped. 2 of 4 possible stars.