“The Misbehavior of Markets: A Fractal View of Financial Turbulence” by Benoit Mandelbrot

I was reading “The Black Swan” by Nassim Taleb — one of the best books I’ve read in years — and he dedicated the book to a mathematician by the name of Benoit Mandelbrot. He mentions Mandelbrot several times in the book – particularly about his theories on market volatility and his library of book he hasn’t read. Taleb also credits Mandelbrot with being the first mathematician to correctly describe the financial markets as truly random, claiming: “it was Mandelbrot who a) connected the dots, b) linked randomness to geometry (and a special brand at that) and c) took the subject to its natural conclusion.”

Mandelbrot invented a type of geometry called “Fractal” Geometry. It is based on the theory that the smallest part echoes the whole, and shapes/movements/price changes of securities are random, violent and the opposite of what many traditional finance theorems teach.

After completing Taleb’s book and reading all of his other works, it was time for me to dig deeper and explore the source of many of his theories. So I bought “The Misbehavior of Markets.”

I do not pretend to be a mathematician. I was a math major in college until I took “Enhanced Multivariable Calculus” my sophomore year, taught by a nice German man with an inaudible German accent. Between the accent and the fourth dimension, I was thoroughly lost in space and time. Luckily that same semester I took Professor Dick Kochanek’s Accounting 101 class, and I became an accounting major and was saved the humiliation of completing my studies in a math club to which I did not belong.

All that said, I am still interested in the intersection of math and finance, and reading about Mandlbrot’s theories and stories and idiosyncrasies was an absolute joy. He was a quirky guy, and it comes across in his writing. His humor is dry and pithy and he’s got a wonderful way of praising and critiquing someone at the same time. He does this with great skill with folks like Sharpe, Gauss, and Brown.

If you’re a math geek or enjoy digging into financial portfolio and risk theory, this book would be right up your alley. I do not recommend it for the casual reader. Try reading “The Black Swan” first – if you’re still curious, then perhaps pick up this book.

Vocabulary Words

Usually I cull interesting quotes out of the books I read but today I wanted to share some words. Mandelbrot was erudite beyond description and his vocabulary was stellar. Between French, British and American (probably less American) intellectual exposure, he developed a deep grasp of language which pervades his prose. Below are a few gems (with definitions) I spotted:

• Orthogonal: at right angles
• Variegated: exhibiting different colors, especially as irregular patches or streaks
• Fractal (term coined by Mandelbrot): “from the Latin for “broken”, a geometric shape that can be broken into smaller parts, each a small-scale echo of the whole. The branches of a tree, the florets of a cauliflower, the bifurcations of a river – all are examples of natural fractals.”
• Promontory: point of high land that juts out into a large body of water
• Vertiginous: causing vertigo, especially by being extremely high or steep
• Kurtosis: the sharpness of a peak of a frequency-distribution curve; “from the Greek kyrtos, or curved. But we can think of it as how much ‘spice’ is in the statistical broth.”
• Frond: the leaf or leaflike part of a palm, fern or similar plant
• Vellum: fine parchment made originally from the skin of a calf
• Penury: extreme poverty
• Boffin (Brit): a person engaged in scientific or technical research
• Rococo: of or characterized by an elaborately ornamental late baroque style of decoration prevalent in 18th century Continental Europe
• Invidious (of an action or situation): likely to arouse or incur resentment or anger in others

And one quote to drive home Mandelbrot’s genius:

• “All models by necessity distort reality in one way or another.”

While this book is not for everyone, if you have the curiosity of a scientist or a mathematician, you will love this book. Mandelbrot is a welcomed break from the usual drab financial and economic books.

Have you ever heard of any of the above vocabulary words? If so use one in a sentence for me below in the comment section. Best sentence gets a prize. And if you like my review please like it and follow me on twitter @markleyjr. Thanks!

Name(required)

Email(required)

Website

Comment(required)

Submit

Δ

“Antifragile” by Nassim Taleb

“Antifragile: Things that Gain from Disorder” by Nassim Taleb is perhaps the most fascinating book I’ve read this year, and maybe this decade. It was that good.

Amazing world view

A warning: this is a dense book. It is thoughtful, provocative and extremely controversial. If you’re used to reading a nice novella or a Danielle Steel tome, this book is not for you. It will make you think and it is at times difficult to read. Some of his theories and concepts infuriated me. But his intense study of our society and his methodical approach to describing his points, using stories from ancient times as well as modern examples, shows his intellect and his uncompromising level of conviction in his beliefs. If I took one thing away from this book, it was that if I was to have an opinion about something important, I need to understand what I’m talking about. Otherwise I’m a fraud. 

I saw this book appear in my Amazon recommendations late in 2013, and I added it to my Wish List. However, it just sat there languishing on my List for months and months, like a lame duck. The poor digital copy probably felt like Bud Black.

About 6 months ago, I was listening to a Tim Ferriss podcast starring Pavel Tsatsouline, which spurred me to read his book “Simple & Sinister.” Three separate times during “S&S” Pavel quoted “Antifragile” and I realized it was time to dust this Wish List flunky off and give it a go.

Boy am I glad I pulled the trigger and bought this book! Taleb is a former equities trader who made “F you” money betting against the market during the financial crisis. His outlook on the markets and for life is that we as a society do not consider the “long tail” of potential outcomes when we think about the future, whether it’s planning for a city, state, or nation. He especially loathes folks who essentially provide no utilitarian benefit besides their opinions: economists, some in academia, and consultants.

(Yes I was a bit perturbed by his lack of appreciation for consultants since that was/is my profession. However, I have convinced myself that he’s really talking about people working at strategic consultants like McKinsey and management consultants like Bain. Not me. I’m an implementation consultant, which means I’m building software. I’m a builder. He’s not talking about me.)

“Antifragile” specifically refers to something that goes through some sort of crisis or shock and comes out the other side better than it was previously. Fragile, obviously, is something that ends up worse – think big banks in 2008. Robust is something that is unaffected by crisis or shock. Taleb’s definition: “And we can almost always detect antifragility (and fragility) using a simple test of asymmetry: anything that has more upside than downside from random events (or certain shocks) is antifragile; the reverse is fragile.”

Taleb goes on to make the very compelling argument that people cannot predict these random events and that you are better off not trying to predict outcomes in dynamic systems where there are too many variables, e.g. the economy. Instead, you should make yourself antifragile. He gets into lots of details and has many examples of how to alleviate yourself from living your life in a state of fragility, which sadly is the norm in today’s society.

He uses the term “modernity” to describe the sad state of affairs in society today: “This is the tragedy of modernity: as with neurotically overprotective parents, those trying to help are often hurting us the most.”

Some other interesting Taleb observations (paraphrased unless in quotes):

• He has a visceral reaction to modern medical practices (hurting more than helping):
  • “Had Prozac been available last century, Baudelaire’s ‘spleen,’ Edgar Allan Poe’s moods, the poetry of Sylvia Plath, the lamentations of so many other poets, everything with a soul would have been silenced.”
  • “iatrogenics, literally, ’caused by the healer,’ iatros being a healer in Greek.
• He opposes the central nation state and feels central planning is causing a great deal of fragility in society.
• He prescribes to the theory “via negativa”, which means gain from subtraction. Instead of adding medication, you should take some away. Instead of taking back pain relief medication, go for a walk barefoot on an uneven surface.
• “So a certain system of tinkering and trial and error would have attributes of antifragility. If you want to become antifragile, put yourself in the situation ‘loves mistakes’ – to the right of ‘hates mistakes’ – by making these numerous and small in harm.”
• He believes in what he calls “the barbell theory”, where you are ultra conservative on one side of the barbell (think: cash); and you are super risky on the other side of the barbell (think: early stage venture capital). He feels that using the barbell theory (he has many other excellent examples in the book), you can make yourself antifragile.
• “Artisans are more antifragile than small businesses, but a rock star will be more antifragile than any artisan. Debt always puts you on the left, fragilizes economic systems.” (bold emphasis is mine)
• “In the complex world, the notion of ’cause’ itself is suspect; it is either nearly impossible to detect or not really defined – another reason to ignore newspapers, with their constant supply of causes for things.”
• “In business and economic decision making, reliance on data causes severe side effects – data is now plentiful thanks to connectivity, and the proportion of spuriousness in the data increases as one gets more immersed in it. A very rarely discussed property of data: it is toxic in large quantities – even in moderate quantities.” (bold emphasis is mine)

There are many more pithy and insightful theories and observations (backed by research and examples) where Taleb shares his thoughts to make you squirm, think, and react.

Bottom line: if you want to challenge yourself and immerse your brain in thought-provoking theories and heuristics, this is the book for you. If you’re not excited about reading the entire book, check out this Taleb on youtube interview where Taleb describes the book and some of his ideas.

If you have any questions about the book or would like to get into some more details about any of the topics I discussed above, please add a comment to this post or find me on twitter @markleyjr.

To read any of my other book reviews, please visit Uncle Joe’s Book Review.

Name(required)

Email(required)

Website

Comment(required)

Submit

Δ