Benoit Mandelbrot: The “heretics” are taking over the asylum

Benoît Mandelbrot at the EPFL, on the 14h of M...

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Thankfully the times have changed and, much as they have resisted, institutions are finally getting the message that they can no longer get away with marginalising or burying the theories and other creative contribution of passionate and capable individuals whose work draws conclusions that challenge the very basis of their power and wealth.

Issues that were once buried or “swept under the carpet” are having to be dealt with because thinking citizens have the means to communicate (like never before) with like-minded individuals. Questions have been and will continue to be asked and for as long as Government; Church; Corporation; Financial institutions, are shown to be so deeply flawed and refuse to embrace transparency they are contributing to their own downfall.

So, unless I am a complete idiot(!) the message in this – 11 min – interview is that the whole basis of “efficient market theory” and, therefore dirty big chunks of time and money associated with modelling risk, were obtained by what can only be described as a massive deception? Well, if we are talking about deliberately and knowingly ignoring the the impact of infrequent (random) major “events” – Black Swans – on the basis that the truth was too inconvenient then what other conclusion can there be?

When it comes to interview style he ain’t no firebrand like Nassim Taleb but then again neither was the late Peter L Bernstein. But both men possess the wisdom and presence of another era with enormous relevance for NOW. NOT rebels and NOT heretics.

Benoit Mandelbrot on Risk, Efficient Markets, and Bachelier

Pt 1: In a fascinating in-depth interview with John Authers, investment editor, 85-year old mathematician Benoit Mandelbrot discusses his now 40-year old groundbreaking critique of the “efficient markets” hypothesis and why new theories on price movement discontinuities are needed after the credit crunch. Benoit Mandelbrot is an emeritus professor of mathematics at Yale University.

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One Response to Benoit Mandelbrot: The “heretics” are taking over the asylum

  1. BM R.I.P. Vindicated!

    James Crutchfield, working out of the Complexity Sciences Center at the University of California, has written an article entitled The Hidden Fragility of Complex Systems, which is a very good primer on the dynamics of complex adaptive systems and how they breed instability. He states the following about the most recent financial crisis in our complex global economy (what he terms a “truly complex system”):

    “The Fall 2008 near collapse of the global financial system and its heart-wrenching impacts are empirical evidence that pure-market ideology does not work as a design principle for the world’s economies. Historically, this design principle was justified in terms of the Efficient Market Hypothesis – markets in their collective behavior will find the unique, optimal equilibrium condition that homogeneously maximizes human welfare. Sadly, this view is a theoretical artifact of experimentally ungrounded models. The mismatch between ideology and reality is desperately large.”

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