30 October 2010

Comments on Mandelbrot

I won't repeat here my modest obit for Benoit Mandelbrot.

But I was struck by a fascinating discussion of Mandelbrot, and of his significance in or for the world of finance, catalyzed by Justin Fox. Fox, a guest blogger for Felix Salmon, said that once upon a time, Mandelbrot was part of the "random walk gang," and considered Eugene Fama to be a protégé.

But Mandelbrot moved away from the sort of efficieny capital markets theory associated with Fama. This drifting-away dates to the 1960s, before the Black-Scholes option pricing model, or the various developments and arguments that have arisen from same.

Mandelbrot became interested in the subject again after the 1987 crash, which came about in large part due to portfolio insurance. But, Fox says, he didn't make the impact one might expect by this comeback.

Congrats to Fox for the fine blog entry, but more especially congrats to his commenters for inciting some fascinating comments.

I think DaggaRoosta has a lot of value to say there, including this observatrion (which is quite Mandelbrotian): "I do suspect that quants have spent a little too much time learning complex models and not enough time understanding the fragile philosophy behind the methods."

1 comment:

Blogger said...

eToro is the ultimate forex broker for beginning and established traders.

Knowledge is warranted belief -- it is the body of belief that we build up because, while living in this world, we've developed good reasons for believing it. What we know, then, is what works -- and it is, necessarily, what has worked for us, each of us individually, as a first approximation. For my other blog, on the struggles for control in the corporate suites, see www.proxypartisans.blogspot.com.