Book Review
Book Review: The Misbehavior of Markets: A Fractal View of Financial Turbulence by Benoit Mandelbrot and Richard L. Hudson
The Misbehavior of Markets is a provocative and fascinating book that challenges the conventional wisdom of modern financial theory. The authors, Benoit Mandelbrot and Richard L. Hudson, argue that the markets are not random, normal, or efficient, as most economists and financiers assume, but rather turbulent, wild, and unpredictable. They use fractal geometry, a branch of mathematics that Mandelbrot pioneered, to propose a new way of describing and understanding the behavior of markets.
The book’s plot is a historical and intellectual journey that traces the development and flaws of modern financial theory, from the French mathematician Louis Bachelier in 1900 to the Nobel laureates Harry Markowitz, William Sharpe, and Merton Miller in the 1950s and 1960s. The authors show how these theorists relied on unrealistic assumptions and oversimplified models that failed to capture the complexity and variability of the markets. They also introduce the reader to some of the pioneers and critics of fractal finance, such as Eugene Fama, Nassim Taleb, and Mandelbrot himself, who have challenged the status quo and offered alternative perspectives.
The book’s character development is mainly focused on Mandelbrot, who is both the narrator and the protagonist of the book. He shares his personal and professional experiences, anecdotes, and insights, as well as his struggles and frustrations with the academic and financial establishment. He portrays himself as a maverick and a visionary, who has been ahead of his time and often misunderstood or ignored by his peers. He also reveals his passion and curiosity for mathematics, nature, and markets, and his quest for finding order and beauty in chaos.
The book’s writing style is clear, engaging, and accessible, even for readers who are not familiar with mathematics or finance. The authors use vivid examples, metaphors, and illustrations to explain complex concepts and phenomena, such as fractals, power laws, scaling, and multifractals. They also use humor, irony, and sarcasm to expose the absurdity and inconsistency of some of the mainstream theories and practices. The book is well-structured and well-paced, with each chapter building on the previous one and leading to the next one. The book also includes a glossary, a bibliography, and an index for further reference.
The book’s overall impact is significant and stimulating, as it offers a fresh and original perspective on the nature and dynamics of the markets. The authors challenge the reader to rethink and question the assumptions and models that underlie the financial system and the investment decisions. They also provide a new framework and a new language for analyzing and forecasting the markets, based on fractal geometry and empirical evidence. The book is not only informative and insightful, but also entertaining and inspiring, as it shows the beauty and mystery of mathematics, nature, and markets.
The book’s main themes are the unpredictability, complexity, and diversity of the markets, and the inadequacy, fragility, and vulnerability of the modern financial theory. The authors convey the message that the markets are not tame or rational, but rather wild and emotional, and that they exhibit patterns and regularities that are not captured by the standard models. They also warn that the reliance on these models can lead to false confidence, complacency, and disaster, as evidenced by the numerous financial crises and crashes that have occurred in the past and present. The authors employ various literary techniques, such as contrast, comparison, analogy, and irony, to highlight the differences and similarities between the conventional and the fractal views of the markets, and to expose the flaws and fallacies of the former and the merits and advantages of the latter.
The book’s evaluation is positive and favorable, as it demonstrates the authors’ expertise, originality, and creativity in the field of finance. The book is well-researched, well-argued, and well-written, and it provides a compelling and convincing case for the fractal view of the markets. The book is also relevant and timely, as it addresses some of the most important and pressing issues and challenges that face the financial system and the society today. The book’s only drawback is that it does not provide much practical guidance or advice for investors or practitioners, as it is more focused on the theoretical and conceptual aspects of the markets. However, the book does offer some general principles and suggestions, such as diversifying, hedging, and being humble and cautious, that can be useful and helpful for anyone who is interested or involved in the markets.
The book’s recommendation is strong and enthusiastic, as it is a must-read for anyone who wants to learn more about the markets and the financial system, and to gain a deeper and broader understanding of the forces and factors that shape and influence them. The book is not only informative and educational, but also enjoyable and entertaining, as it combines mathematics, history, and storytelling in a captivating and captivating way. The book is suitable and appealing for a wide range of readers, from students and scholars to investors and policymakers, and from beginners and amateurs to experts and professionals. The book is a rare and valuable gem that will enrich and enlighten anyone who reads it.