Why Mandelbrot matters

by jurvetson

It is more than because of pretty pictures.

The death of Benoit Mandelbrot this week has spawned a lot of reflection on his work. Here is an interesting video that explains some of it.

And here is a great TED talk from just this year:

His work opened up the world of fractals and of chaos theory. But, one of his last books was prescient. The Misbehavior of Markets, published in 2004, demonstrates that the market is not rational at all and that it is much riskier than many would like to believe.

From an article written in 2004, with a subheading stating “The founding father of fractal theory warns that another Great Crash is a real threat. Martin Baker meets him” has these nice quotes:

“The financiers and investors of the world are, at the moment, like mariners who heed no weather warnings.”

“A few fund managers have experimented with these concepts [of price dependence, whatever that is, and volatility]. They often call it chaos theory – though strictly speaking that is marketing language riding on the coat-tails of a popular scientific trend. In reality, the mathematics is still young, the research barely begun, and reliable applications still distant.”

“My purpose is always to observe the symptoms and have a model of what is being seen. In the case of markets, it is frightening because there are so many people of great brilliance and extraordinary greed who work there. They don’t understand the market, but they understand the numbers.”

He has continued to discuss these topics with some very interesting videos recently about the crisis and the failure of efficient market theory:

The Black Swan, one of the more influential books written in the last decade, was strongly influenced by Mandelbrot’s work. The author knew things were going to get bad and said so. He and Mandelbrot discussed why they are so worried about the current crisis:

“The most serious situation we have been in since the American Revolution” might be hyperbole but perhaps not by much. The problem they discussed was that while failure is rarer, when it does happen it is much larger and more damaging.

Here is a nice description explaining why Mandelbrot felt , back in 2005, that those guys on Wall Street were doing it all wrong. It seems current events have overtaken his theories:

And wherever you put your money, understand that conventional measures of risk severely underestimate potential losses —and gains. For better or worse, your exposure is larger than you think.

Someone to remember for more than just a pretty picture.

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