Mandelbrot again

and now that he’s dead, I know who he is.

old too soon. Smart too late. Me not him.

That’s life, isn’t that the truth?

In his fractal research, he saw that as you had better tools to measure the coastline in more detail, the coastline became longer and longer. For the whole story, go here. For the short version, keep reading…

Mandelbrot tips off the markets

By Christopher Caldwell

Published: October 22 2010 21:39 | Last updated: October 22 2010 21:39.

“Economics is a science of fashions – Keynes and ‘pump-priming’ at one time, Friedman and monetarism at another,” the Franco-American mathematician, Benoît Mandelbrot, who died last week at 85, wrote in The (Mis)behaviour of Markets, a book he co-authored with Richard L. Hudson in 2004. “The profession burns through new theories the way a teenager hops from one new date to another: it meets them, spends some time with them, examines them, finds what it thinks are flaws, and then drops them for a newer face.” If the condescension and intellectual vanity are typical of Mandelbrot’s writing, so is the fearlessness and general good sense.

When Mandelbrot began writing about markets half a century ago, he was struck by the similarity between his studies of the coastline and how markets worked. Markets “scaled,” he said.

Studying the history of cotton prices, he formed an impression, shared with many physicists and economists, that “all charts look alike”. Without the legends, you can’t tell whether you are looking at a century’s worth of data or a day’s. If anything, scalability was more pronounced in money than in science. All such charts were hard to read, because of the way chance creates “spurious patterns and pseudo-cycles.”

From here, he went on to study math that financial analysts use to build their positions, but as time went on, he became less impressed with the theories.

Analytical models, he found, underestimated risk. There were “Joseph” effects – seven fat years here, seven lean years. And the “Noah” effects, when the floods hit. And there were many more floods that do not actually get calculated into the formulas.

It’s the cataclysms that unmake the investor, he said.

“Wild price swings, business failures, windfall trading profits – these are key phenomena. In all their drama and power, they should matter most to bankers, regulators and investors.”

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