Mandelbrot and the quant jockeys

Why didn’t people in finance pay attention to Benoit Mandelbrot?

Justin Fox’s obituary for the father of fractals talks about his contribution to finance – being a champion of the random walk and the efficient market hypothesis.

As long as quantitative finance was mostly exploratory in nature, Mandelbrot and the economists and finance professors got along fine. But as soon as the latter groups started trying to develop tools for understanding and managing risk in financial markets, there were tensions. The tool builders wanted to shoehorn market-price behavior into a bell-curve statistical model. That is, they wanted to believe that while price movements couldn’t be predicted, price volatility could. Mandelbrot thought volatility was far harder to capture than that.

Of course, ERM wrestles with that dichotomy almost daily: We try to quantify tail risk but at the same time warrant that the quantification is a bit leaky.

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