The old financial orthodoxy was founded on two critical assumptions in Bachelier’s key model: Price changes are statistically independent, and they are normally distributed. The facts, as I vehemently argued in the 1960s and many economists now acknowledge, show otherwise. (Location 410)
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Research over the past few decades, by me and then by others, shows that many financial price series have a “memory,” of sorts. Today does, in fact, influence tomorrow. (Location 412)
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It is not a well-behaved, predictable pattern of the kind economists prefer—not, say, the periodic up-and-down procession from boom to bust with which textbooks trace the standard business cycle. (Location 414)
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Second, contrary to orthodoxy, price changes are very far from following the bell curve. (Location 425)
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Examine price records more closely, and you typically find a different kind of distribution than the bell curve: (Location 434)
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A power law also applies to positive or negative price movements of many financial instruments. (Location 440)
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It faithfully simulates the “volatile volatility” of the real charts—and, whether in financial modeling or weather forecasting, the proof of any model lies in its results. (Location 500)
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What I know cannot yet be used to pick stocks, trade derivatives, or value options; time, and further research by others, will determine whether it ever can. (Location 507)
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Extreme price swings are the norm in financial markets—not aberrations that can be ignored. (Location 512)
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endogenous effects peculiar to the inner workings of the markets themselves, rather than solely by the exogenous action of outside events. Moreover, (Location 531)
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My mathematical models can generate charts that—purely by the operation of random processes—appear to trend and cycle. They would fool any professional “chartist.” Likewise, bubbles and crashes are inherent to markets. They are the inevitable consequence of the human need to find patterns in the patternless. (Location 540)
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This trading time speeds up the clock in periods of high volatility, and slows it down in periods of stability. (Location 545)
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Market professionals know far more than they even realize. Professional traders often speak of a “fast” market or a “slow” one, depending on how they judge the volatility at that moment. (Location 550)
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one can imagine new scales based on two new variables to be described later in this book: the H exponent of price dependence, and the α parameter characterizing volatility. (Location 562)
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The financiers and investors of the world are, at the moment, like mariners who heed no weather warnings. This book is such a warning. (Location 580)
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We cannot follow the path of every molecule in a gas; but we can work out its average energy and probable behavior, and thereby design a very useful pipeline to transport natural gas across a continent to fuel a city of millions. (Location 626)
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Finance is a black box covered by a veil. Not only are the inner workings hidden, but the inputs are also obscured, by bad economic data, conflicting news reports, or outright deception. (Location 629)
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Anticipation is a feature unique to economics. It is psychology, individual and mass—even harder to fathom than the paradoxes of quantum mechanics. Anticipation is the stuff of dreams and vapors. (Location 632)
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In the language of probability, his errors do not converge to a mean. They have infinite expectation, hence also infinite variance. (Location 776)
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The errors are not distributed as near-uniform grains of sand; they are a composite of grains, pebbles, boulders, and mountains. (Location 778)
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Gaussian math is easy and fits most forms of reality, or so it seems. (Location 791)
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But the difference between the extremes of Gauss and of Cauchy could not be greater. (Location 793)
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This is the Cauchy curve, that gives the distribution of the scores of our blindfolded archer. The intermediate curve will serve later in this book to represent the distribution of price increments of cotton. (Location 811)
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It looks difficult, often requiring elaborate computer simulations rather than a quick punch on a calculator. Unfortunately, the world has not been designed for the convenience of mathematicians. (Location 814)
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Wild price charts will be a hair-raising record, mixing small movements with very, very large dislocations, many computer-generated news items with a few cataclysmic bulletins, many small transactions with large, institutional block trades—all, a mix of the small and routine with the large and rare. (Location 832)
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Still, a by-now substantial body of economics research suggests that there is, indeed, money to be made in such a “trend-following” strategy; (Location 1396)
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