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**The (Mis)behavior of Markets

A Fractal View of Risk, Ruin, and Reward

by Benoit Mandelbrot and Richard L. Hudson

Reviewed November 18, 2004.
Basic Books, New York, 2004.  328 pages.

I was a math major in college, so I’ve heard of fractals, and I’d heard the name Mandelbrot.  Those two things on the cover of the book were enough to make me curious enough to read it, even though I’m not terribly interested in the stock market.

From the outset, Mandelbrot claims that standard financial theories about the stock market are wrong.  He claims that models based on the bell curve simply don’t match reality and are seriously underestimating the risk involved.  In this book, he presents his theory.  He makes no claims that it is fully developed and can make you money.  But he does provide a nice foundation for further work.

He makes the following disclaimer in his introductory chapter:  “This book will not make you rich. . . .  If it fits any genre, it is that of popular science.  It explains a new, and important, way of looking at the world—in this case, the financial world.  It attempts to do so using common English, with as few formulae and as little mathematical jargon as possible—or at least, with no jargon unexplained.  That is because I aim to stimulate broader debate about financial-market modeling.”

I can’t really tell you if the authors succeeded in writing a popular science book.  I like mathematics, especially statistics, so I found the explanations of current financial theory and how fractals can make a new theory very interesting.  I think that if you don’t like math, a strong interest in the stock market might get you through this book.

He does present some conclusions at the end, in the form of “Ten Heresies of Finance.”  Although knowing these principles won’t make you rich, they should make you a wiser investor.  He also talks about areas where more work is being done.

I think of a popular science book as something almost anyone would enjoy reading.  I think this book is better for those with an interest in math or an interest in finance or both.  However, those people will find a well-written, new approach to an important topic.

Copyright © 2004 Sondra Eklund.  All rights reserved.

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