Reddit reviews The Misbehavior of Markets: A Fractal View of Financial Turbulence

This is great so far. Thanks for sharing. Mandelbrot has a book about this, called "The Misbehavior of Markets: A Fractal View of Financial Turbulence."

Bit of a tall order.

Long term dependence. With brownian motion each change is independent of the past, like tossing a fair coin. With FBM the past matters, and this is the case with time series such as prices (e.g. stock markets), weather, power usage, vehicle/computer network traffic, etc. The long price series of bear and bull markets don't fit the statistical pattern of pure random walk.

With weather you see it as N concurrent years of drought or floods, where a drought one year is predictive of a drought the following year. It's been years since I've thought about this, but the best introduction I know of is:

The Misbehavior of Markets: A Fractal View of Financial Turbulence

Oh, also the price change distribution (e.g. daily, weekly, whichever) is not gaussian for price series, which it obviously would be for gaussian random noise. The distributions are spiky with fat tails, mathematically it's an alpha levy I think.

Some good links here:

http://en.wikipedia.org/wiki/Fractional_Brownian_motion

See the Dieker, T. paper.

Back in the day the Black-Scholes formulae for option pricing ignored all of this, which is why it didn't work and was later adjusted, but Mandelbrot was fairly critical of the 'hacks' made if memory serves.

Good advice, good website recommendations. I'd add a book to that: What I Learned Losing a Million Dollars

To OP - don't invest until you've educated yourself enough that you have some ability to judge any advice you're given. That may take months or a year or whatever, but just do it. Besides the four sites threadbarren mentioned for that, here are a few more:

Tickerforum

Bogleheads

Motley Fool

Charlie Munger: Psychology of Human Misjudgement

You'll find many investing sites and investors are permeated w/ some idealolgy or bull/bear bias. Some is rational, some isn't. Keep that in mind, always try to identify the underlying biases in any source of information you study. Expose yourself to all of it, don't shut out any source of info b/c it's outlook disagrees with yours. Keep an open mind.

Also, develop a statistical/probabilistic perspective. Taleb and Mandelbrot do really good stuff with that.

Finally, develop a truly historical perspective. Those who do not learn from the past are doomed to repeat it. Reinhardt and Rogoff are worth studying in that respect.

• Hull's Derivatives is the bible
  
• Stigum's Money Market is a legitimately enjoyable read and taught me SO MUCH
  
• Fabozzi's Fixed Income Handbook is a good general overview of the FI market. (More widely known than, but not as good as Stigum's.)
  
• I don't know where your programming skills are, but try to model out anything that you find interesting in the books above using Jupyter. This will help a great deal with internalizing what's happening mechanically underneath the concepts you're learning.
  
• How I Became A Quant for easy train/bed reading.
  
• Mandlebrot for a dose of realism. Models are always wrong.
  
• The Medium of Contingency for a glimpse into the mind of a practitioner. It's... weird.
  
• Cliff's blog because he's humble (and also my idol). His chapter in How I Became A Quant is the best, imo.
  
  disclaimer: Not a quant, never went to school for it nor worked in finance. I just like reading. This list is more than enough for the summer, but let me know if you want material focused on anything in particular. (Structured products, history, etc.)

> For example, statistically, chances are that I'm making the same decision as the "average trader" which would inherently mean the market is going to respond in the opposite direction as we the average traders thought. Is it is simple as that?

There's a lot of truth to this, and it's actually not simple at all. The economist Keynes gives us the concept of the "Keynesian beauty contest":

> Keynes described the action of rational agents in a market using an analogy based on a fictional newspaper contest, in which entrants are asked to choose the six most attractive faces from a hundred photographs. Those who picked the most popular faces are then eligible for a prize.

> A naive strategy would be to choose the face that, in the opinion of the entrant, is the most handsome. A more sophisticated contest entrant, wishing to maximize the chances of winning a prize, would think about what the majority perception of attractive is, and then make a selection based on some inference from his knowledge of public perceptions. This can be carried one step further to take into account the fact that other entrants would each have their own opinion of what public perceptions are. Thus the strategy can be extended to the next order and the next and so on, at each level attempting to predict the eventual outcome of the process based on the reasoning of other rational agents.

So at any given moment in the market, you have traders who are thinking "the price is going to do this", then you have others thinking "a lot of newbs are thinking the price is going to do this", and still others are at the level of "some of the traders are thinking that there are a lot of newbs who think the price is going to do this", etc.

In general, the two emotions that will lose you the most money are panic and FOMO. Once the stampede starts, you're already too late to take advantage of the situation, but that won't stop people from panicking and FOMOing into the market at the worst possible time.

Finally, the mathematician Benoit Mandelbrot (the creator of fractal geometry) studied price movements, as price charts have many fractal qualities. Mandelbrot's opinion is that charting is astrology and his research has made a strong argument that there is no reliable method for determining the future price of an asset: the mathematical properties of price movement are essentially indistinguishable from random events. His book, the Misbehavior of Markets, is written for a general audience and expands on this idea and shows how economists have started to come around to that fact after numerous crashes and financial crises have shown that the major financial institutions are grossly underestimating their risk.

Benoit Mandelbrot used a form of very long term TA using fractal analysis to some success in his experiments that led to the book "The (Mis)behavior of Markets". Modern finance with it's bell curves can't explain things like the 1987 stock market crash or the 2008 financial crisis. It fails at identifying kurtosis risk. TA isn't perfect, but neither is modern finance.

So, yes. There is nothing empirical on a long enough time scale for TA. But there is also nothing empirical about modern finance on a long enough time scale, either. It's really as simple as that.

The volatility in the marketplace has been fairly predicted in the previous months. Interest rates rose from the Fed, temporary trading restrictions overseas in China had been lifted, oil prices are plunging, etc. In general, sticking with an index like the S&P is a sound investment for longterm growth and sustainability.

I work in finance, and one of the very best books on investment is hands down A Random Walk Down Wall Street. I highly recommend it. I also recommend The Black Swan and The Misbehavior of Markets.

You should read

"The misbehaviour of markets: A Fractal View of Risk, Ruin and Reward" By Mandelbrot.

A dead cat bounce would normally be something you expect on a 1-3 month timescale, rather than day to day or less. Mandelbrot did suggest the market is fractal ( http://www.amazon.com/Misbehavior-Markets-Fractal-Financial-Turbulence/dp/0465043577/ ) but the guy is a liiiiiitle fractal-obessed, and personally I think it's more fractal-esque.

What I'm going for here is that I wouldn't trade dead cat bounces on anything less than a month or more. Personally I would also not trade until after the second dip, rather than meddling mid-bounce.

OTOH, most important rule of trading; if it works, don't stop doing it.

I'm assuming by your title you have read Mandelbrot's book "The (Mis)behavior of Markets" but in the event that was a coincidence. His book covers almost that exact topic.

http://www.amazon.com/The-Misbehavior-Markets-Financial-Turbulence/dp/0465043577

That's the extent of my knowledge, good luck.

I'd recommend following up with Mandelbrot's The Misbehavior of Markets, if you somehow have the impression that major financial crashes are unlikely.

I enjoyed The Misbehavior of Markets as a more general topic less so to do with options.

I read The (mis)behavior of markets by Madelbrot in my senior seminar... excellent read for anyone who is interested in modeling financial markets

http://www.amazon.com/The-Misbehavior-Markets-Financial-Turbulence/dp/0465043577

The Misbehavior of Markets: A Fractal View of Financial Turbulence by Benoit Mandelbrot. Economics by mathematician. :D

As someone who also likes science and math, I liked The Misbehavior of Markets. It is by Benoit Mandelbrot, who you have probably heard of if you like science and math. He proposes some of his own interesting ideas about market behavior but at the same time he is constrasting them with more standard views. I think the net effect is that it can actually function as a good introduction to more standard ideas because he explains their origins and how he thinks they are flawed etc. If you understand the basic principles behind making a model of a system and using it to make predictions, the explanations are not very hard to follow, no advanced math or anything.

I'll also plug two books I just finished on the commute - In a House of Lies by Rankin and The Misbehavior of Markets by Mandelbrot, both of which were brilliant!