The (mis)Behavior of Markets

The (mis)Behavior of Markets: A Fractal View of Risk, Ruin, and Reward presents a non-conventional way of understanding the stock market and other financial exchanges. Benoit Mandelbrot, the primary author, developed the concept of fractals, a mathematical constructs that he and others have found useful in many fields. His co-author, Richard Hudson, was an editor and writer of the Wall Street Journal for decades.

They start by describing the established financial concepts: the efficient market, Capital Asset Pricing Model, Modern Portfolio Theory, and Black-Scholes formula for option pricing. They then point out the weaknesses of those theories. The most significant weakness is that large price fluctuations, such as the stock market drop in 1987, happen far more frequently than the standard theories would predict. Real financial markets don’t have bell curve statistical variations, which underlies the techniques people learn in business school.

The book outlines a non-standard approach based on fractals. The authors avoid mathematical formulism, and instead illustrate those ideas with descriptions and graphs. They focus on the lives of the major innovators and a high-level description of their research. That approach keeps the book accessible, though I can’t judge what a less mathematically inclined reader would think.

The (mis)Behavior of Markets would appeal to people who are interested in both finance and mathematics. Mandelbrot and Hudson did a good job of popularizing a complex topic. I would have appreciated a more mathematical treatment, but doing so would have lost most of the potential audience.