Everything you know (about the Stock Market) is wrong

By John Steinberg | RAW STORY COLUMNIST

By all rights columnists should read far more than they write. Unfortunately, time spent reading is time not spent writing, and my editor has yet to tell me I should write less and read more. Most of my reading material these days is electron-based, but I do digest an actual physical book now and again. And because I have a column to fill, books lead to book reports.

My reading list tends to wander all over the map. I am a sucker for “everything you know is wrong” books – books that challenge assumptions that are so ubiquitous that you didn’t even know you were making them. And boyoboy do I have one of those to share with the class.

My most recent conquest was Benoit Mandelbrot’s The (Mis)Behavior of Financial Markets (Richard Hudson gets a co-author credit). I tend to avoid books on finance, as I get headaches from the fumes given off when watching paint dry, but this one was different.

Mandelbrot is of course the pioneer of the concept of fractals, or the theory of roughness. A “fractal is a rough or fragmented geometric shape that can be subdivided in parts, each of which is (at least approximately) a reduced-size copy of the whole. Fractals are generally self-similar and independent of scale.” That sounds rather imposing, but Mandelbrot manages to give us a pretty good Complete Idiot’s Guide to the concept that underlies such disparate applications as chaos theory and computer animation. The body of the text is formula-free and quite accessible to the mathematically challenged.

Despite the accessibility of the text, Mandelbrot has little trouble making a deeply troubling point – that the fundamental assumptions underlying the workings of every aspect of our financial markets are simply wrong.