Sorry for my absence last week. I just started a large project reviewing the valuation of a large portfolio of investments for a major bank.
This week I have been reading “The (mis)behavior of Markets by Mandelbrot. Mandelbrot is a famous mathematician well known for his development of fractal geometry. Think fractured structures.
In 2004 he applied his mathematical genius to probability and finance theory in this book. Its an interesting read so far. I had not previously looked at probablity as having different states – much like water can be frozen solid, liquid or vapour, depending on the temperature. Probability, Mandelbrot says, is similar. Sometimes it is mild, sometimes its wild and sometimes slow. He cites some interesting examples.
Much of today’s finance theory is based on the work of Bachelier from around 1900. He basically came up with the idea of a normal distribution or bell curve. The problem with this in finance is that markets do not really follow a normal distribution.
So while present theory suggests that large movements in markets are supposed to be rare, they are in fact not rare at all.
Its worth thinking about because if we are taking calculated risks and playing the odds in our investment and business decisions, it helps to know if we have estimated the odds of wins and losses reasonably well.
I’d love to hear from others who have read the book. Hopefully time will permit me to complete the read of the book this week.
Cheers for now
Tom The Money Man!
