This is a weirdly common misreading of Mandelbrot. His main contribution was noting three properties of markets that are not well captured by Brownian motion models — 1. fat tails 2. heteroskedasticity 3. long-range correlations (eg power law decay in acf of absolute returns)https://twitter.com/desgrippes/status/1368389916812533768 …
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This market model has fat tails, heteroskedasticity and long-range dependence, but it is still largely random! Mandelbrot did *not* show that markets are not random. He offered an alternative kind of randomness that matched observed data better than gbm.
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The fractal model of markets never caught on because it was too hard to make it practical for the kind of thing that practitioners cared about — i.e. the pricing and hedging of large derivatives books. We developed more practical models that solved the problem in a different way,
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largely local volatility and later stochastic volatility models which explicitly build in time-varying volatility and hence generate fat tails and heteroskedasticity. Like all models they are wrong, but unlike the fractal model, they are useful.
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That’s all I have to say about it really. Mandelbrot was not wrong, in fact he was ahead of his time — but his research led in an unproductive direction. The fetishisation of his ideas that has cropped up in the last 10-15 years is weird and I attribute it mostly to people who
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have read “fooled by randomness” or “the black swan” once and largely failed to understand them
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I feel like
@EmanuelDerman would have a much better take on this than I do!Show this thread
End of conversation
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Mandelbrot using a fractal to explain market phenomenon reminds me of a phrase I learned the hard way: “when your favorite tool is a hammer, everything looks like a nail.” He was brilliant, and the model is great, but it’s far from perfect (as are all models).
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