A Mathematician Plays The Stock Market [Paperback]

John Allen Paulos (Author)

Book Description

Publication Date: May 4, 2004

In A Mathematician Plays the Stock Market best-selling author John Allen Paulos demonstrates what the tools of mathematics can tell us about the vagaries of the stock market. Employing his trademark stories, vignettes, paradoxes, and puzzles (and even a film treatment), Paulos addresses every thinking reader's curiosity about the market: Is it efficient? Is it rational? Is there anything to technical analysis, fundamental analysis, and other supposedly time-tested methods of picking stocks? How can one quantify risk? What are the most common scams? What light do fractals, network theory, and common psychological foibles shed on investor behavior? Are there any approaches to investing that truly outperform the major indexes? Can a deeper knowledge of mathematics help beat the odds?All of these questions are explored with the engaging erudition that made Paulos's A Mathematician Reads the Newspaper and Innumeracy favorites with both armchair mathematicians and readers who want to think like them. Paulos also shares the cautionary tale of his own long and disastrous love affair with WorldCom. In the tradition of Burton Malkiel's A Random Walk Down Wall Street and Jeremy Siegel's Stocks for the Long Run, this wry and illuminating book is for anyone, investor or not, who follows the markets-or knows someone who does.

Editorial Reviews

From Publishers Weekly

We like to think not only that mathematicians are smarter than the rest of us but that by dint of their mastery of numbers, they hold the key to understanding the baffling mysteries of the universe. Alas, Paulos (Innumeracy) says that's not always the case. As the author relates in this funny, insightful little volume about attempts to bring order and science to the free-for-all that is the stock market, he himself was once a big investor (in WorldCom). Despite strong evidence to sell, he desperately hung on to his stock as the price plummeted, proving that a head for numbers doesn't always translate to Wall Street know-how. Through most of this book, Paulos discusses various methods for predicting markets and offers thoughts on why people keep trying to perfect them. Shocking in their obtuseness are the so-called Elliot Wave followers, who believe stocks operate according to an impossibly arcane series of numerical waves and cycles. The efficient-market theorists-many of whom believe the stock market is so inherently efficient that everything one needs to know about a company is reflected in its stock price-get the most thorough joshing from Paulos: never able to resist a joke, he tells one about how many efficient market theorists it takes to change a light bulb. "Answer: None. If the light bulb needed changing the market would have already done it." Playful and informative, Paulos's book will be appreciated by investors with a sense of humor.
Copyright 2003 Reed Business Information, Inc. --This text refers to an out of print or unavailable edition of this title.

Review

"With accustomed humor and apt examples, Paulos tackles complex computations that are vaguely understood and frequently misapplied by Wall Street pros."

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Product Details

• Paperback: 224 pages
• Publisher: Basic Books (May 4, 2004)
• Language: English
• ISBN-10: 0465054811
• ISBN-13: 978-0465054817
• Product Dimensions: 8 x 5.4 x 0.6 inches
• Shipping Weight: 8.8 ounces (View shipping rates and policies)
• Average Customer Review: 3.3 out of 5 stars  See all reviews (89 customer reviews)
• Amazon Best Sellers Rank: #540,173 in Books (See Top 100 in Books)

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Customer Reviews

Most Helpful Customer Reviews

162 of 175 people found the following review helpful:

5.0 out of 5 stars Of Numbers, Odds, Emotions and Crooks!, May 17, 2003

By 

Donald Mitchell "Jesus Loves You!" (Thanks for Providing My Reviews over 110,000 Helpful Votes Globally) - See all my reviews
(VINE VOICE)    (HALL OF FAME REVIEWER)    (TOP 100 REVIEWER)   

This review is from: A Mathematician Plays The Stock Market (Hardcover)

If you would like an objective view of the stock market, are comfortable with math and enjoy a little irreverence in your investment reading, you will love this book. The material is easily accessible for anyone who finds algebra not too taxing. Professor Paulos minimizes the formulas for you by using anecdotes, simple brain teasers and practical examples instead.

What makes the book delightful is his self-effacing sense of humor. I cannot remember reading another book in which a writer is as candid and funny about his own failings as an investor. Only Andy Tobias comes anywhere close. The book's running joke is the professor's disastrous obsession with buying WorldCom stock using borrowed money before it became apparent that the company's reported earnings had more to do with wishful thinking than reality. It is this example that makes the book also insightful for the reader because it shows how easily our emotions and instincts can lead us astray, even when we understand as much about the stock market as Professor Paulos does.

I have read dozens of stock market books that have attempted to explain the "numbers" aspect of stock-market investing. None of them covered as much ground or did so as succinctly as this book does. I was very impressed by the depth of reading that this book reflects. Although it is not an academic book, the rigor is impressive.

The basic point is that the stock market is a lot more complicated than anyone can hope to understand, and likely to be more volatile than almost anyone will be comfortable with. Professor Paulos provides potential remedies for both (index investing, diversifying active portfolios, and using derivatives as insurance against large risks).

One of the many brilliant math examples shows how some games cannot be won with "success" strategies, but if you can combine a certain two "failure" strategies you will be a guaranteed success. With that wonderful point, the idea of being a contrarian was better expressed than in anything else I have read on the subject.

By inserting himself in the book through the WorldCom example, Professor Paulos powerfully introduces the element of individual and market psychology. Although he is neither a psychiatrist nor a psychologist, the book abounds with material about the psychology of how the market works and why investors make mistakes. To me, the ultimate lesson here was that one's stock market approach has to be one that fits emotionally well . . . or you will never execute it successfully.

Ultimately, successful active investing requires you to correctly pick what everyone else will find irresistible not too long before that compulsion hits them. I came away, once again, delighted that index fund investing is available as a sure-fired way to outperform more than 90 percent of all professional portfolio managers while sleeping soundly at night.

After you finish enjoying the book, I suggest that you also think about where else you commit your financial resources in large measure more due to your emotions than to your sense of how to calculate an advantage. How could you change your approach in that other area to be more emotionally and financially rewarding?

Donald Mitchell
Co-author of The 2,000 Percent Solution, The Irresistible Growth Enterprise and The Ultimate Competitive Advantage

59 of 69 people found the following review helpful:

1.0 out of 5 stars A mathematician explains why he is not a trader., February 24, 2004

By A Customer

Amazon Verified Purchase

This review is from: A Mathematician Plays The Stock Market (Hardcover)

This book should have been called " A smart person loses money trading stocks and explains why it can't be his fault, since he is so smart". My fundamental criticism of this book is that it displays terrible understanding of what the business of trading is about. It is not about (primarily) picking a market direction. The primary skill of a trader is risk control. This is a concept not mentioned in this book, any other academic's book I have read, nor in any of the "throw a dart does as well as analysis" books on trading. Let a dart tell you when to take a loss or when to let a profit ride and then I'll believe it. Incidentally a dart would have exercised better risk control then Paulos did in his worldcom trade. Risk control is the heart of trading. I believe that a good trader could be given a position by flipping a coin and he'/she would still make money. This is because traders are good at managing risk.
So the book misses the major point of trading. It has a number of stories and some information- some interesting and some silly. At one point he explains that you can't make money because the market is a random walk(markov property). Later on in the book he explains how you can't make money because of mean regression. These two don't add up. Taleb's book makes all the intelligent points of this book and doesnt' smugly explain how it is impossible to make money since the author didn't. Incidentally my background is in academia (ms in mathematics) and I do trade for a living. I leave you with the words of Chuck Smith on trading- said to a trading crowd, but perhaps of relevance to Paulos et al: "This isn't rocket surgery"

19 of 21 people found the following review helpful:

4.0 out of 5 stars Set the record straight, September 6, 2006

By 

Befragt (Midwest USA) - See all my reviews
(VINE VOICE)   

This review is from: A Mathematician Plays The Stock Market (Paperback)

I have read a number of the reviews of this book, and I feel that some of them give a bit of a mis-impression about what this book is about. It is not about picking stocks, it is first and foremost an overview of various theories of behavioral finance/investment psychology. In particular, it focuses on how human psychological foibles may preclude individuals (individually and in the aggregate) from acting in their own best interests. The book no more supports efficient market theory than it supports technical analysis (e.g., the book takes shots at both).

The book does a good job of reviewing various human psychological foibles and how they may affect stock market investing, including "anchoring effect," "availability error," "confirmation bias," "status quo bias," and "endowment effect." I found the overview of these issues to be quite useful, and since reading the book 5 months ago, have tried to review them periodically to (hopefully) minimize their effect on my own investment decision making.

Paulos does a great job of debunking the notion that a particular formula may lead to stock market success. One quote stands out: "If you look hard enough, you can always find some seemingly effective rule that resulted in large gains over a certain time frame or within a certain sector."

In sum, Paulos' conclusion is that humans are overly-fixated on short-term results, and that people do not have a set of fixed preferences upon which they cooly and rationally base their investment decisions. Rather, because of the prevalence of fads, fashions, imitative behavior, etc., humans often act irrationally. His book provides a nice framework for investors to analyze their own decision-making process to (hopefully) improve their results.

There are a number of other books that readers might find interesting/helpful, including:

Belksy - "Why Smart People Make Big Money Mistakes and How to Correct Them" (more behavioral finance discussion)

Dreman - "Contrarian Investment Strategies: the Next Generation" (author uses behavioral finance theories, including those referenced by Paulos, to improve returns)

Whitman - "Value Investing" and "The Aggressive Conservative Investor" (author supports a fundamental analysis that avoids a focus on short-term earnings)