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Sunday, December 27, 2009

Taleb and Mandelbrot on the unpredictability of economies and markets

I’ve been influenced by a number of thinkers about the unpredictability of economies and markets. A couple of my favorites would be Nassim Taleb, author of Fooled by Randomness, and Benoit Mandelbrot, author of The (Mis)behavior of Markets. Another useful book on these ideas is Mauboussin’s More Than You Know. Mandelbrot writes a lot of highbrow stuff, but in this book he teamed up with Richard Hudson, a former Wall Street Journal editor, to reach a broader audience. Mandelbrot is a critically important thinker in finance. But he is not revered by academics.

As Paul Cootner, an MIT economist, put it: “If [Mandelbrot] is right, almost all of our statistical tools are obsolete. Almost without exception, past econometric work is meaningless.” So there you go. Academics ignore him because if he’s right, academia is pretty much a farce. Academics won’t embrace Mandelbrot’s ideas because their salaries depend on them not embracing those ideas.

So if you think that academia might be promoting a farce – for the first time ever, of course – you might want to examine Mandelbrot’s ideas in more detail.

-- from "The Yellowstone Syndrome" by Chris Mayer.

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