Why didn’t people in finance pay attention to Benoit Mandelbrot?
blogs.reuters.com
Why didn’t people in finance pay attention to Benoit Mandelbrot?
1–10 of 52 posts
Re: Why didn’t people in finance pay attention to Benoit Mandelbrot?
#2Oh, a lot of them did. Many of those can only be described as religious cult followers - practitioners of Elliott Wave "Theory".
Some even went as far as accusing Mandelbrot of plagiarizing Elliott's work: http://www.math.utah.edu/vigre/reu/reports/harris_fall2005.p...
Re: Why didn’t people in finance pay attention to Benoit Mandelbrot?
#3Recommended Mandlebrot read: 'Fractals and Scaling In Finance' from 1997. http://www.amazon.com/Fractals-Scaling-Finance-Benoit-Mandel...
Re: Why didn’t people in finance pay attention to Benoit Mandelbrot?
#4Oh, a lot of them did. Many of those can only be described as religious cult followers - practitioners of Elliott Wave "Theory". Some even went as far as accusing Mandelbrot of plagiarizing Elliott's work: http://www.math.utah.edu/vigre/reu/reports/harris_fall2005.p...
I've read some of Mandelbrot's works on finance and I would never put him in the same category as the "technicians". It's hocus pocus mumbo jumbo that I don't think he would subscribe to (e.g. Elliot Wave's "5 up, 3 down" principle).
Re: Why didn’t people in finance pay attention to Benoit Mandelbrot?
#5I used to explain this with Upton Sinclare's great quote: "It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"
Now, older and perhaps a bit more jaded, I would modify that to "Do not assume that someone doesn't understand something. Assume that he is assuming someone else doesn't understand that something."
Or, more succinctly, "There's a sucker born every minute."
Re: Why didn’t people in finance pay attention to Benoit Mandelbrot?
#6The most important take-away from Mandelbrot / fractals as it applies to finance should be the realization that fractals can represent better ways of presenting or simulating financial data than brownian motion / random walks / Black-Scholes. As to why this hasn't been accepted more broadly - well, as the article briefly mentions, there are powerful individual incentives for people to continue to play along in the charade.
If this has not been proved EXTREMELY WELL by events in recent history, I don't know when it would be - but whether from LTCM, or more recently seeing so many CDS etc blow up, it is obvious that many "once in a million" probability events exist than are considered in a proper normal distribution.
Mandelbrot was once asked whether he had any particularly successful strategies for dealing with the market. He said, well, I don't discuss those things - because if I was correct, everyone would follow my lead, and the strategies would no longer work; and if I was wrong, people would discredit the thinking behind it!
Re: Why didn’t people in finance pay attention to Benoit Mandelbrot?
#7I used to explain this with Upton Sinclare's great quote: "It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" Now, older and perhaps a bit more jaded, I would modify that to "Do not assume that someone doesn't understand something. Assume that he is assuming someone else doesn't understand that something." Or, more succinctly, "There's a sucker born every min…
Sinclare's quotation describes a self-actuated internal lack of awareness while yours does not.
Re: Why didn’t people in finance pay attention to Benoit Mandelbrot?
#8I really wouldn't take an article seriously if it partially blames the '87 stock market crash on Black-Scholes (basic model for pricing European options). That makes literally zero sense.
Re: Why didn’t people in finance pay attention to Benoit Mandelbrot?
#9Because what his theory boils down to is that you can't predict the market. Pointing out that the market is describable by a self-similar fractal froth is an interesting thought, but it basically means that if true, you can't predict anything with any effectiveness. (Oh, you might be able to use that idea to tune yourself up something that might work slightly better on a small time scale, but as the market has sped up that small time scale has gotten awfully small....)
Who wants to listen to a party pooper like that?
I've found a similar problem at work. It is my belief after studying the problem for years, reading the work of many other of our smartest people trying to solve it, and over a decade of experience, that estimating software times are simply impossible except in the grossest of terms on any significantly-sized project, especially as you get into the multi-month estimates. Once you accept that, you can actually deal with it; Agile is in some sense a response to this problem. But try convincing other people of that fact. They'll tell you marketing needs some idea of when features go out, that management needs some ability to plan on things, that sales needs some concept of when to sell features. Well, too bad! None of that makes it possible. That is simply an extended explanation of why it sucks that we can't have these accurate estimates. And yeah, I'll play the game because it's still better than nothing.
I'm somewhat less sure that's true in the financial world. Shall we say, the evidence somewhat suggests that pervasive underestimation of risk can potentially have slightly negative effects on the global economy.
Re: Why didn’t people in finance pay attention to Benoit Mandelbrot?
#10Benoit wrote a scathing critique of modern economic theory and the assumptions upon which it rests. Attacks on fundamental belief systems are generally impolitic.