My suggestion why people didn't pay attention? He had no real theory. I've read a couple of his books, here is the general formula: "Look, gaussian's don't fit the market well. Aha, I've made a graph that looks visually correct!"
Now, it's absolutely true that gaussian's don't fit the market well - they only work sometimes. The thing is, everyone knows this, and tacks on additional features to explain the other phenomena. For instance, one might assume movements are normally distributed, except for short term spikes followed by high volatility. A good risk manager will throw non-gaussian volatility at a model during backtesting.
Mandelbrot's fractal story just didn't add much. The black scholes story has some convincing theoretical background (it assumes an "evil" market out to get you [1]). It misses things, but many of the things it misses can be added in, in a more or less convincing way - e.g., I understand the black scholes part of my model handles small movements, and the stochastic jumps handle the big ones.
All Mandelbrot's model gives me is a graph that kind of looks right - it doesn't give me any understanding.
[1] This is not the textbook description, but Bob Kohn convinced me this is the best way to think of it.
What if the understanding you have is fundamentally wrong? That's the point - he wasn't saying that he had a replacement for Black-Scholes. He was saying that anything based on Gaussians is broken beyond any utility, no matter how tempting it is to believe the theoretical story behind it. You don't need to be a tailor to see that the emperor has no clothes.
That's the tragedy, in a way. The portfolio managers were saying that they needed a tool to assess risk, and that any tool was better than nothing. Mandelbrot turned around and proved that a bad tool is worse than nothing, and got ignored because it might take another hundred years of research before his ideas can get turned into a practical tool.
This would be fine, except that the short, rare, unpredictable spikes are overall responsible for as much variation in value as the "predictable" movements, which more or less makes all the exercise quite pointless.
How does the fact that a model has two features make understanding one of them pointless?
If you are seeking a grand unified theory of everything, maybe it's pointless. Black Scholes is just a model. If you are seeking to make money, Black Scholes is one tool that can help you do that. And make no mistake - people do make billions trading models which incorporate elements of Black Scholes.
Now, it's absolutely true that gaussian's don't fit the market well - they only work sometimes. The thing is, everyone knows this, and tacks on additional features to explain the other phenomena. For instance, one might assume movements are normally distributed, except for short term spikes followed by high volatility. A good risk manager will throw non-gaussian volatility at a model during backtesting.
Mandelbrot's fractal story just didn't add much. The black scholes story has some convincing theoretical background (it assumes an "evil" market out to get you [1]). It misses things, but many of the things it misses can be added in, in a more or less convincing way - e.g., I understand the black scholes part of my model handles small movements, and the stochastic jumps handle the big ones.
All Mandelbrot's model gives me is a graph that kind of looks right - it doesn't give me any understanding.
[1] This is not the textbook description, but Bob Kohn convinced me this is the best way to think of it.