In Mandelbrot illustrative commodity model, extrapolation of a persistent run can drive market prices beyond a gradually changing underlying value, with a discontinuous correction when the run ends.

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Whether in a broad market index like the Dow, or in individual assets like a municipal bond, conventional economics tells us they are aberrations, irrational deviations from the norm, caused by a rapacious speculator, mass greed, or some other unpleasant factor. But under certain circumstances they can be entirely rational, and flow from the entwined effects of long-term dependence and discontinuity. Consider the blowing bubbles diagram following. Imagine we are following the price of an agricultural commodity, say wheat. Now build a simple two-part model. The first part calculates the theoretical real value of the coming harvest per bushel. If the weather is good for a day, the theoretical value should drop slightly. After all, good weather presages an abundant harvest and low prices. Say one good day reduces the value by one cent a bushel. In bad weather, the value should rise a cent. In indifferent weather, no change. Now the second part. The actual price in the marketplace.

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They saw the company growing, and simply extrapolated that it would continue growing. They knew it would stumble eventually, but when? No way of knowing in a financial market, where long-term dependence and discontinuity combine. The future is shrouded in mist and doubt. Chapter 11 The Multifractal Nature of Trading Time Imagine a currency trader. hunched over a Reuters terminal. The yen and dollar quotes buck up and down, turning green or red. On occasion, trading is fast. Scores of news items are flitting across the electronic crawl on the bottom of the screen. Colleagues are waving and shouting all around. Phones are ringing. Customers are zapping electronic orders.