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The (mis)Behavior of Markets, by Benoit Mandelbrot.   Mandelbrot is a well-known mathematics professor and the inventor of fractal geometry.  Perhaps it took someone other than a finance professor to question some of the mathematical assumptions of Modern Portfolio Theory (MPT), which underlies the case for efficient markets, indexing, etc.  Mandelbrot notes that implicit in MPT is the assumption that price changes are normally distributed, and he sets about determining whether this is the case.  After detailed research, he concludes that price changes are not normally distributed--they are "fatter" in the tail ends than the bell-shaped normal distribution curve.  As a result, price changes are much more volatile than predicted by MPT.  For example, the stock market crash of October 19, 1987 shouldn't have happened in a million years, based on MPT assumptions.  Further, quantitatively-oriented investors (like certain hedge funds) periodically blow up (think of the Long-Term Capital Management hedge fund in 1998), because they base their investing strategies on MPT and are unprepared for periodic highly volatile markets.  This is an important work, and it represents yet another nail in the coffin of MPT.

ISBN: 9780465043552
Format: Hardcover, 328pp
Pub. Date: Aug 2004
Perseus Publishing




"On the scroll of great non-economists who advanced economics by quantum leaps, next to John von Neumann we read the name Benoit Mandelbrot."

Paul A. Samuelson