He places sports such as football and basketball closer to the skill side and investing closer to luck. This book takes on one of the biggest questions in investing: How much can we attribute our success to skill versus luck? To explain, Mauboussin introduces the skill-luck continuum, with competitions like chess and running races on one end (total skill) and roulette and slot machines on the other (complete luck). The Success Equation: Untangling Skill from Luck in Business, Sports, and Investing by Michael L. As a result, our firm more readily recognizes the limitations of financial models used by the industry and don’t rely on them in creating all-weather portfolios for our clients.Ģ. Mandelbrot’s work caused me to conclude that the investment markets are more chaotic and unpredictable than the standard mathematics of finance led me to believe. Learning this concept made me question everything I had learned about investing. He proposed that fractal geometry does a better job of modeling price movements because it incorporates the periods of relative calm and stability in the market as well as the extreme movements that occur much more often than standard mathematics suggests. He observed that the mathematical models used to explain and predict market fluctuations were too simple because they are based on the false assumptions that price changes are independent and follow a normal distribution. In the 1980s, Mandelbrot applied this concept to the financial markets. This branch, called “fractal geometry,” recognizes that much of the natural world is a hodgepodge of rough, irregular shapes – not the smooth-edged triangles, circles, and rectangles we studied in high school geometry. Known as the "father of fractals,” Mandelbrot was a mathematician who founded a new branch of geometry in the 1970s. Few people are aware that many of the ideas espoused by Nassim Taleb in his groundbreaking book The Black Swan: The Impact of the Highly Improbable are based on the work of Benoit Mandelbrot.
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