Mandelbrot describes some problems with financial models that are designed to provide approximations of things that can't be perfectly modeled. He pretends that pointing out the dangers of relying too much on imperfect approximations shows some brilliant insight. But mostly he's just translating ideas that are understood by many experts into language that can be understood by laymen who are unlikely to get much value out of studying those ideas.
His list of "ten heresies" is arrogantly misnamed. Sure, there are some prestigious people whose overconfidence in financial models leads them to beliefs that are different from his "heresies", but those "heresies" are closer to orthodoxies than they are to heresies.
His denial of the equity premium puzzle is fairly heretical, but his argument there is fairly cryptic, and relies on suspicious and poorly specified claims about risk.
He says market timing works, but the strategy he vaguely hints at requires faster reaction times than are likely to be achieved by the kind of investor this book seems aimed at.
His use of fractals doesn't have any apparent value.
Mandelbrot is primarily a mathematician with limited interest in understanding how markets work. One clear example is his mention of a time when Magellan "was still a small fund, too small for any detractors to argue that its size alone gave it a competitive edge". Any informed person should know that's completely backward - larger funds have a clear disadvantage because they are limited to trading the most liquid investments.
Another example of a careless mistake is when he claims the evidence suggests basketball players have hot streaks, seemingly unaware that Tversky and others have largely debunked that idea.

To begin, I am not a mathematician or investor, however, this book opened the world of those topics to me in an understandable way. The author is an out-of-thebox thinker who clearly explained the topic well, causing me to investigate the ideas more.

First, a warning. This is not a book that's going to teach you how to predict the markets. If you're looking for that kind of book, look elsewhere. In fact, if you're looking to learn about trading or investing in the markets, this is probably not a good book for you. This is not an overly practical book in terms of providing any methods or techniques for use in your day to day trading.

The (Mis)Behavior of Markets is much more along the lines of a scholarly discussion of prices. For those with a desire to understand how prices move, this is a good book. In particular, it's great for understanding why it is that even the supposedly best and brightest (like Long-Term Capital Management - LTCM) could get it so wrong. In short, much of what university economics and finance departments have been teaching for years is at best misleading and at worst dangerous.

I must state for the record that I have long held a less than aggreeable view toward efficient market theory, Black-Scholes, random walk, and all of that stuff. It goes back to my days as an undergraduate finance student when I just intuitively didn't believe what I was being told and often saw the major flaws. When I started working in the markets I saw first hand how ridiculous many of the underlying assumptions behind classic financial theory really are.

In The (Mis)Behavior of Markets Mandebrot takes on classic financial theory in a very straightfoward manner. He is extremely critical of the way economic (and by extension financial) theory has been developed and moved forward. He spends a fair amount of time explaining how the now classic theories of price movements came about, which I found interesting since I'm a bit of a history buff.

From what I understand, many of the things that I used to gripe about with my professors as being major problems with classic finance have finally been recognized in recent years by academia as just that. This from a professor friend of mine. I don't know whether or not things have changed in what's being taught, though. My impression is not so much, which to me seems a major disservice.

The thing I found most interesting in the book was how all these theories have been torn apart, not just recently, but for decades. Mandelbrot and others figured out very early on that price changes do not conform to a normal bell shaped distribution. They also figured out that price changes are not independent (among other things). Those are two major capstones underlying efficient market and random walk theories and the pricing of options using Black-Scholes.

The thing that really irks me is that none of these critiques were ever presented to me in the classroom. We were just taught the same stuff that had been taught for years and years with no perspective on how research was showing major problems.

The biggest thing Mandelbrot focuses on in terms of the implications of all the errorenous assumptions is the implied risk. He points out that things like the Crash in 1987 and other market shocks in recent years were also so improbable as to be beyond any reasonable expectation of classical theory. Given how many securities are priced using models based on that classical foundation, and how the commonly employed Value at Risk (VAR) calculations are similarly based, you can see how this is a major problem. Investors and institutions have been taking much more risk than they thought. This is something which once again became readily apparent last summer as the credit crises exploded.

Mandlebrot, naturally, presents a different way of looking at price movement - one founded in his fractal theories. He readily admits, however, that it is still early in its development. Much more work and research needs to be done. One cannot use anything he presents in the book to help forecast prices, though it can help to understand better how prices move, and thus by extension the risk of financial assets, which is a benefit of potentially enormous value on its own.

To be honest, the discussion of the fractals and such was the least interesting part of the book for me. That could just be my practitioner's perspective, though. Others might be much more facinated. I personally am far from convinced that mathematics is ever going to be suitably useful in price forecasting the way people seem to think it will.

All in all, I would call The (Mis)Behavior of Markets a good read. It's informative and thought provoking, but doesn't bog the reader down in a gread deal of math and complexity (there's an appendix for those inclined in that direction). If you are at all intellectually curious about the financial markets, this is definitely a book worth reading.

Mandelbrot is quite a character. I admire the guy's independence, his creativity, his chutzpah and all his achievements in the world of mathematics. However, this book is an intellectual rat hole. This is the type of book you could read and immediately feel smarter than those silly practitioners who have to make do with bad models, like the Gaussian and the CAPM. But the fact of the matter is, Gaussians and CAPM are a good way to go. A good fraction of modern life is based on these models. Anyone who has worked with the actual financial data for a few seconds will realize they're baloney (at least compared to models like Maxwells Equations), but they still are quite useful. Mandelbrot makes it sound as if some lone genius might some day come up with a mathematically perfect distribution which works better than a Gaussian and steal all the MBA's money. This is not a useful way of thinking about things, to say the least. Mandelbrot doesn't point us towards the useful ways of thinking about such things.

While Mandelbrot stands at one fat tail of his statistical distribution, this book is somewhere in the opposite tail. Don't waste your time.

Mandelbrot & Hudson attack some popular thoughts on how financial markets work and try to set up a model to replace them.

There are two main focuses of attacks: that returns follow a normal or Gaussian distribution and that future returns are independent of past returns. The attacks are effective - the authors show that these are false and therefore any existing model based on them is doomed.

Next, the authors try to argue that returns follow a "multifractal" - a fractal both in value and a fractal in time. Using this model, they can create pictures of financial returns that are difficult for people to differentiate from real financial returns.

If the pictures were easily distinguishable, it would disprove their model. However, the converse is not true. Just because the pictures are indistinguishable, it does not mean that the model is correct. In fact, the authors are hard pressed to tell the reader how to build a model for a particular financial market and show zero results in using the model to predict a financial market (which is the true measure of the value of a model).

To conclude, the book does a good job of dispelling some myths. However, it's argument for multifractals is that they are worthy of consideration of future research. And given that they cannot even show how to build a multifractal to model a particular market, it is doubtful that they are worth considering at all.

the author claims that the book will not make you rich but would make you understand the market behaviour better and thus avoid loss, he's right on the first part and wrong on the second part, he may be a genious but if he does not improve his presentation 100 times, this book will achieve one thing only - waste your time and money

I am a risk manager. The challenges that Mandelbrot has undertaken both politically, socially and intellectually are breathtaking and highly relevant. I am routinely found plodding through dense math texts, trying to remember my greek alphabet and often hoplessly lost in teh terminology. Mandelbrot does a great service to us all when he keeps the language understandable for the laity and eschews the complex formulas. You can tell that he does not need to sound overly smart because he is overly smart.

This book toes together so much history and so many concepts in such an elegant style that it is very hard to oversell the work. I have a hard time imagining a field in which this knowledge is not applicable in some way. And anyone who has even a baseline sense of curiosity will find the interweaving of the many great stories compelling.

I would imagine that some math majors will find that the information is somewhat basic, but only if they are exposed to a lox on non linear problems in a complexity theory or econophysics field. For everyone else, this is a masterpiece, an entertaining, accessible masterpiece.

Oh, and for any of you who like Nassim Taleb's work, this is absolutely essential reading. I also suggest diving into network and sync theories which fill in the gaps left by Mandelbrot. Much good work has been done since he wrote this. "Linked" and "sync" are especially good and accessible.

I'm doing research for a lecture about non-normal distributions, difficulties in prediction, etc. My colleague recommended The Black Swan, which he loved. I was plodding through it with difficulty when I found this book. Both are written by mathematical types, and both deal with the economics as the subject matter. But this book is by the founder of fractal geometry, and is much more lively, informative, well-documented and fun to read than the Black Swan, IMHO.

(Mis)Behavior of Markets is a wonderful book for people looking to understand why modern financial modelling does not adequately explain real market prices and their fluctuations. The authors are quite good at pointing out the shortcomings of current models that can be easily verified by the reader with web access. They also give a decent overview of how an alternate mathematical view shows promise in improving our understand of market volatility. I took away from it that markets are far more chaotic than we currently appreciate (their view) and short-term investors will suffer the costs of this (my view).

There are two points where the book falls short. While it makes generous use of graphs to explain mathematical relationships, it could stand a fair bit more formalism in explaining the math. This isn't supposed to be an academic treatise, to be sure, but the informality made it hard for a skeptic to follow every logical step in the reasoning.

The book may be light on math but it sure isn't light on self-esteem. The author (I'm assuming these parts are chiefly written by Mandelbrot) feels the need to end most of his paragraphs with a reminder of how his contemporaries have underappreciated his groundbreaking research. I'm sure he's smart dude but I kind of assumed that whe

Mandelbrot is, of course, a genius. In this book Mandelbot attacks orthodox financial theory and substitutes a fractal view of how markets everywhere behave. It's all interesting and Mandelbrot writes in a very accessible style. The conclusions he draws are non-controversial (markets are turbulent, markets are far riskier than we think, etc). An alternative to evaluating risk and reward is offered and might be of interest to theoretical finance people and perhaps some people who trade as a hobby or for a living and like to ponder ways to avoid severe financial loss or ruin. Having known a few traders in complex financial derivatives who did experience ruin, the topic is of great interest to me. As a long term investor who relies mainly on index stock and bond funds and real estate for my investments, I'm happy to see Dr. Mandelbrot's wild graphs in a book and not on my financial statements (fingers crossed!).

I found Mandelbrots piece is fairly easy to read given the material he is attempting to cover. It points out the errors of many of the modeling techniques which exist. I always find this helpful as possibly the most important part of any modeling exercise is to know where your model falls short and what it might not be able to predict.

This book should be required reading for all of Wall Street's money managers. It would have saved billions of their clients' money.

Let's look at the Long Term Capital disaster. Intelligent people, Nobel laureates, so what went wrong? The answer is simple: fat tails! (The concept that supposedly one-in-a-billion events are, in fact, not unusual). Clearly, it was not lack of intelligence that caused their downfall, but a childish reliance on flawed financial theories.

Mandelbrot identifies and explains the flaws. True, he does not provide an alternative theory, but perhaps the whole point is that financial markets, being chaotic systems, are not predictable.

Let's look at another chaotic system, the weather. Here the parameters such as temperature, wind speed, humidity, are easily measurable. Yet, we still cannot predict the weather accurately for more than a day or two. How then can the stock market, which is far more complex than the weather, be predictable, when most of the parameters that affect it are not measurable, and some are not even known?

Perhaps the weakest part of the book is the beginning of a theory that Mandelbrot tries to found. He suggests that fractal equations produce charts that look and feel like real stock price charts, and that there might be some connection that can be exploited to predict or describe financial markets. He does not, however, go beyond this suggestion and hopes that someone else would develop his theory.

Bottom line: Mandelbrot's "fat tail" theory explains the financial disasters suffered by many "brilliant" money managers. It does not predict the market, but explains the risks of conventional capital market theories. It saves you money, and after all a penny saved is a dollar earned.

As the growing evidence mounts that the foundation of CAPM, MPT and Black-Scholes' use of the Gaussian model (i.e. Bell Curve) for market fluctuations are false, what is one to do? The author attempts to warn us of these false models, not to specifically take aim at the authors, or to specifically make us money, but in an attempt to not lose it.

The 1st part of the book "The Old Way", the author provides ample background on how the most widely used finance models came about and the genesis of their theories (read as Gaussian). The second part "The New Way" provides additional background and reasons we should find alternatives, as we don't want to fall into the "man with the hammer" syndrome. The last section "The Way Ahead" is highlighted with Chapter XII in describing the ten heresies of finance so you can avoid them.

Whether you believe in fractals, or not, it is at least worth knowing their implications as power-laws, or scaling factors, do occur very frequently in nature. Some other worthy books on the subject that may be deserving of shelf space are The Black Swan, Ubiquity, and Deep Simplicity.

Of note, let us not forget, to quote Mr. Mandelbrot, "The origin of Gaussian analysis in astronomy conditioned scientists to assume that, in a messy world, there would always be a few anomalous bits of information, to be later ignored before the data crunching". Take for example that during the `80s, 40% of the positive returns from the S&P 500 came during just ten (10) days.

The book has an interesting idea, explaining about fractal geometry and randomness, including in financial markets. It's probably handy if you're trader, or if you want to explain market behaviour. Still, i find the book is very repetitive so it's boring and very hard for me to keep reading the book. i had to force myself to finish it. It's the only book that took me to finish in 2 weeks. ever!!!

Certainly much easier to read then a Financial Analyst's Journal article. Asks the questions although does not necessarily provide the answers. A must read for anyone talking to their financial advisors about portfolio construction based on the efficient markets hypothesis.

I bought this book for a presentation for a course on chaos theory. I read the book, hoping to find some way of tying economics and chaos theory together. Mandelbrot did not disappoint. He carefully explained the flaws in modern financial theory, the research that he had done, and his final model of markets. From this standpoint, the book was very interesting and educational.

It was, however, not for those with little to no mathematical or economical background. Mandelbrot made it understandable, but there were times where it was obvious that someone with no experience in the field would not understand. It is a good book for those interested in understanding financial markets and applications of chaos theory.

My only wish is that Mandelbrot had explained how he made his multifractal model more than what he did. The "binomial bending of time" was the foundation for why his model worked over all the others, but he devoted less than a page explaining it. Aside from that, it was informative and intriguing, and presented some ideas for further research. It was, all things considered, a good buy.

This book aptly points out flaws in the common methodologies for modeling the dynamics of markets. (In fact, it points them out, over, and over again throughout the book.) However, the book offers no solutions. Rather, its goal is to bring these flaws to the attention of readers who, presumably, will then be motivated to develop improved methodologies if they are researchers or, if they are practitioners, at least be made aware of the limitations. That goal is sufficient, I suppose, to warrant the writing of the book; it is indeed important to know the limitations of the models one is using to make decisions. However, I found the many re-iterations of the problem with no solution offered to be slightly frustrating. Among solutions, most notably absent was a solution from the field of fractals, which I was somewhat expecting given that the main author is given credit with inventing that field.

Occasionally I come across a book, article, or other publication that makes me think "I wish I'd read this when I first started trading". The (Mis)behavior of Markets is a good example of this kind of book, although I suspect that if it did exist when I started trading I would not have properly understood the implications of what Mandelbrot was saying.

Now I do understand, and it was a confirmation of some of the conclusions I had already come to by trial, error, losing money, and a lot of research and deep thinking. Reading this book has helped me formulate my own "Stochastic Price Change Model" which will be the subject of a future eBook or article and has helped me reach a different perspective on how to more effectively test the robustness of trading methods.

You may have heard of Mandelbrot from his work on fractals, and in this book he applies that mathematical model to explain exactly why all the existing financial models (the Black Scholes Option Pricing and the Capital Asset Pricing Model to name but two) are not as useful as they are touted to be, or just plain dangerous.

"Prices are normally distributed", "fat tails are simply anomalies", "prices are independent of each other". These are all fundamental assumptions of the mainstream models of the market and of risk taking. Mandelbrot challenges all these assumptions and presents a more useful (or at least accurate) fractal view of markets which may change your perception on how much risk you are really taking and how likely "unprecedented" events may actually be.

I immediately put this book on my trading "must read" list. The implications of what it discusses will continue to be influential in my own trading and my trading beliefs in the future. Read it with an open mind and see what happens.

Having really enjoyed Taleb's "Fooled by Randomness", I thought that Mandelbrot may fill in the gaps that were in that book. The most galring gap being that given more extreme events tend to happen than predicted by the normal (or Gaussian) distrubution, what can one use instead. Disappointly, Mandelbrot only proves a hint of answer.

He spends much of the book talking about his great achievements (against the odds, of course, )and critiquing the classical tenets of finance theory. The latter is an easy target and most market participants are aware of the critiques. His discussions on fractals was interesting, but the proof of the pudding would whether it works. In the end, he gives some now dated examples of non-classical approaches to trading markets (such as an FX bank using flow information to forecast currencies), though in many cases these approaches do not use fractals or anything he has proposed.

Bottom line, a useful summary of the critiques of classical finance theory, but don't expect to find anything one case use investing/trading in markets.

This guy who invented the design for tie-dye tshirts makes a comeback righting about money. It's a cool book - turbulence, chaos, trippy!