July 28, 2004
News & Opinion: Fractal Finance
Yesterday, The Wall Street Journal ran an excerpt [sub. needed] from The (Mis)Behavior of Markets: A Fractal View of Risk, Ruin, and Reward by Benoit Mandelbrot and Richard Hudson (Basic Books). Here is an excerpt from the excerpt:
To [Richard Olsen], a financial transaction is like a small explosion. Conventional financial theory, as taught in business schools around the world, holds that prices change continuously, and that each investor is as unimportant as the next. Their trades are like the collisions of molecules in a gas chamber -- millions of tiny energy exchanges. Nonsense, Mr. Olsen says. His tick-by-tick data show plainly that prices jump. Quotes stutter. And investors vary greatly in importance and impact on the market. A more accurate metaphor is the chamber in an internal combustion engine: Millions of small and large explosions drive the car forward, as the sparkplugs fire and the pistons churn.