Practical analysis for investment professionals
09 May 2013

Take 15: Modern Portfolio Theory and Behavioral Finance: The Mathematics of Turbulence (Video)

Kent Osband, principal at RiskTick, offers that the mathematics of turbulence provides a mathematical framework for bridging modern portfolio theory’s rationalism with behavioral finance’s irrationalism.

This episode of the Take 15 Series was originally released on 3 April 2013.


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About the Author(s)
Jason Voss, CFA

Jason Voss, CFA, tirelessly focuses on improving the ability of investors to better serve end clients. He is the author of the Foreword Reviews Business Book of the Year Finalist, The Intuitive Investor. Previously, Jason was a portfolio manager at Davis Selected Advisers, L.P., where he co-managed the Davis Appreciation and Income Fund to noteworthy returns. He holds a BA in economics and an MBA in finance and accounting from the University of Colorado.

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6 thoughts on “Take 15: Modern Portfolio Theory and Behavioral Finance: The Mathematics of Turbulence (Video)”

  1. Andrew teasdale says:

    Risk is equilibrium specific:

    In a general equilibrium, risk, as in standard deviation, is a standardised measure of the sensitivty of price to new information given the uncertainty of that information. It is a measurable quantity reflecting the stable physical properties of a given relationship.

    Uncertainty is to do with the randomness and independence of each piece of new information, meaning that while you know the average sensitivty and the distribution of price sensitivty points, you never know what part of the distribution is going to hit you at any given point in time.

    But, in a non general equilibrium wold with residual price dependency, risk and certainty become much more closely correlated, and risk and uncertainty less correlated.

    RIsk is no longer wholly a standardised measure of price sensitivity, but a measure of the physical properties of the distance to or from equilibrium and those forces moving pricing points away from or to equilibrium.

    Under a general equilibrium, for a stable physical dynamic, risk and uncertainty are constant, yet at a non general equilibrium point, risk and uncertainty are varying but nevertheless related to the physical characteristics of the dynamic underlying equilibrium at hand.

  2. Hi Andrew,

    Thank you for your thoughts about risk, uncertainty, and equilibrium. It sounds as if you have more to lend to the discussion. Care to?

    With smiles,

    Jason

  3. Gordon says:

    Forget about linking physics with the financial market, human behavior is not simple ups and downs like free air practicals. learn from those brilliant investors like Warren Buffett who proved themselves correct using in-depth study on company fundamentals. while human are irrational sometimes, they will finally back to a rational status and drive stock prices back to what it is worth, it is that so simple but why people keep on linking the financial market with whatever imaginable like astrology, sun spots, biology…..

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