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November 19, 2004

The only business book I'll buy this year


It's pictured above.

Business books are more or less futile: they purport to tell you how to succeed if you do this, that, and the other.

Doing exactly as Peter Lynch does will indeed make you rich - if you're Peter Lynch.

Otherwise, you might as well buy a pair of Air Jordans, put them on, and suddenly believe you can dunk.

Ain't gonna happen.

But when Benoit Mandelbrot, the father of fractals, casts his original eye on market behavior, I sit up and listen.

The problem with most stock market models is that they don't bother much with the real data; they assume, based on faulty evidence, that prices typically vary by so much - and not an iota more.

In mathematical terms, they rely on the bell curve.

In fact, financial prices behave much more wildly than the bell curve would imply.

If the standard models were correct, the odds of a one-day drop of 13% - as happened to the Dow Jones Average on Black Tuesday, October 29, 1929 - would have been 1 in 10 to the 26th power, virtually impossible.

When, in 1998, Russia defaulted on its debt and markets swooned, the official odds were 1 in 20 million.

As for the worst crash in recent times - on October 19, 1987 - the chances of its happening were less than 1 in 10 to the 50th.

Says Mandelbrot: "Either we live in an improbably improbable era or the bell curve is an inappropriate yardstick for financial prices - and the standard financial models built with it are faulty."

"Let us understand the true odds of financial ruin, so we can enter the markets prepared."


I won't enter the markets even after I read his book, which is en route as we speak (I just ordered it from amazon, where it's $18.70); I'm much too risk-averse for such pursuits.

But I will enjoy learning how to look at things in a fractal light.

I've always been amused by the concept of stock brokers and investment counselors and their ilk; if they were as good as they say they are, they wouldn't be working trying to sell you stuff.

They'd be out there cruising the Caribbean in their tricked-out boats, a la Peter Lynch and George Soros.

If you'd like more insight into financial markets from a decidedly unconventional, brilliant thinker, spend a little time at the website of Nassim Nicholas Taleb, author of "Fooled by Randomness."


[Full disclosure: Nassim Nicholas Taleb has been a joehead since the beginning]

[via Benoit Mandelbrot and The Financial Times]

November 19, 2004 at 12:01 PM | Permalink


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did you see the Taleb video interview at www.wallstreetreporter.com ?

Posted by: johnny deeper | Nov 20, 2004 7:37:54 AM

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