Customer Reviews

A Mathematician Plays The Stock Market

5 star:		(26)
4 star:		(23)
3 star:		(9)
2 star:		(16)
1 star:		(15)

 

 

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

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"

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)

I am surprised and delighted that somebody whose sole experience investing in stocks was buying Worldcom and then "averaging down" as the price kept sinking actually chose to write about it, not ashamed to expose his investing prowess (or lack thereof) to the world. Kudos, Paul.

That experience is the running base for a book whose theme stetches out in different directions, which makes for an enjoyable journey with many amusing sidebars along the way. (I just loved the brain-teaser puzzle type stuff sprinkled throughout the text.)

So why only 3 stars? It's a personal thing - the author is a confirmed "random walker" and I take an opposing view. Hey, it's not surprising that his opinion of the stock market is less than enthusiastic. One would hope that somebody of his intellect could rise above the pain from his financial losses and look at things a bit more objectively.

The most significant argument against the random walk theory is the mere existence of consistently successful non-floor traders (and investors such as warren Buffet and Peter Lynch). They exist. They pay commissions, incur slippage, and still succeed. Their number and consistency fall considerably outside of the statistically probable according to randolm walk theory.

Trading is my forte, not investing - and I can tell you that it is simply a game. Not an easy game, a rather challenging one like chess or poker - then again, not like either of those. The consistent winners are those who learn to play the game well. Financial market movements are the result of the collective actions of all the players in the game, so they are hardly random.

Anyway, I liked the book and plan on buying his other one about reading the newspaper. If it's as enjoyable as this one was, it will get 5 stars (I have no bias about the printed media nor harbor any strong political notions, so we should be safe.)

Dr. Paulos' cynical and skeptical view of the equity markets provides for an recalibrating look for any investor. His combination of vignettes and equations do more to entertain than to teach.

It seems Dr. Paulos' thesis, which was far from explicit, was along the same lines as A RANDOM WALK DOWN WALL STREET, by Malkiel. Referencing it several times in the text, Paulos reveals he is Malkiel's follower. The only difference between his book and his inspiration is added humor and removed clarity.

All in all, this shows that brilliant mathematicians fail to see the market as something other than data and figures. Paulos falls into this trap, only model-fitting theoretical illustrations rather than truly analyzing the market and the relevancy of either fundamental or technical analysis.

Dont read it for analytical foresight or because he is a brilliant mathematician. Read it for self-help (i.e. coping with your dot-bomb failures).

Since Professor Paulos delights in paradoxes it is appropriate that a paradox lies at the heart of this very fine book. He does indeed play the stock market, but how well and using what kind of strategy? Ironically Paulos's personal tale is one of obsession and foolhardiness, of buying WCOM at 37 (yes, WCOM), of averaging down again and again and buying calls until in near final desperation our good professor finds himself contemplating with a kind of hopeless hope his WCOM calls at $20 as the stock trades at $1.13! (p. 197)

Interestingly enough, most of what mathematician Paulos writes about here is the psychology of the market and what he learned about himself psychologically as he rode the stallion down, down deep into the valley of despair. Yes, there is some interesting and instructive math included, but how refreshing it is to read a professional academic chronicle his experience while being up-front and personal about the emotional, random, and psychological traps that often guided his decisions. It takes a certain amount of confidence to write a book like this, and it helps a lot to be able to laugh at yourself.

My experience during the period beginning early in 2000 when the market began to tank was similar to Paulos's (which is one reason I found his account so riveting) except (thanking my lucky stars) I did NOT average down as he did, and I certainly did not buy calls. Instead gradually (too gradually of course) I began to take money out of the market. For those of you who lived through those days of shock and despair, Paulos's witty self-examination will be a pleasure to read.

On another level this is a book about market theory. Paulos does not believe in the Efficient Market Hypothesis (EMH), which states that prices in the market accurately reflect the value of the market and that any subsequent deviation (without new information) from those prices is a random walk. His argument (a very persuasive one) is that the market is a self-referential system that depends on how the players view the market. Paradoxically, if they believe in an efficient market they will NOT try to figure out ways to take advantage of anomalies and the market will be inefficient! Conversely, if the players believe that the market is inefficient, that there is some surplus value to be gained, they will indeed look for ways to take advantage of differentials and anomalies, and presto! the market becomes efficient.

Consequently, Paulos' theory is a refinement of the EMH. He sees the market as constantly existing in a dynamic state poised between maximum efficiency and something less than that. He sees the market as a complex system subject to the laws of complexity theory, and like the weather only more so, impossible to predict much in advance.

As for technical versus fundamental analysis, Paulos appropriately hedges. Yes, the trend is your friend, but (e.g.) the full blown Elliot wave theory is "murky" while the fundamentalists suffer from possibly cooked numbers and from the information already being factored into the stock's price. One gets the sense that Paulos is once bitten, twice shy! However, I think he has gotten this exactly right, namely that only a small edge can be had through a lot of work using both approaches.

There are some interesting mathematical paradoxes presented here and some scams. Those of you who have read Paulos's previous books (e.g., Innumeracy: Mathematical Illiteracy and its Consequences, 1988; A Mathematician Reads the Newspaper, 1995, etc.) know he has a gift for making the obtuse and opaque clear, or at least intelligible, and that he can be laugh out loud funny. I thought that he was even funnier here than usual, perhaps because there is a taint of gallows humor infused throughout. For example, in reference to his love affair with WCOM, Paulos writes, "Investing in it had originally seemed like a no-brainer. The realization that doing so had indeed been a no-brainer was glacially slow in arriving." (p. 199)

One paradox is the familiar "All Cretans are liars" upon which Paulos plays a few variations to demonstrate the self-referential aspect which is at the heart of the paradox. Included is this illumination: "The Prosecutor booms, 'You must answer Yes or No. Will your next word be No?'" (p. 187)

One scam is the familiar Ponzi scheme. Paulos thinks of a stock market bubble (as we experienced in the nineties) as a Ponzi scheme in which dot com buyers are hoping to sell to stupider dot com buyers, etc. In another context, Paulos notes perspicaciously, "Even ravaging of the environment may be seen as a kind of global Ponzi scheme, the early 'investors' doing well, later ones less well, until a catastrophe wipes out all gains." (p. 94)

I must warn the reader to beware of many atrocious puns. In one of the "worst," Paulos is explaining the emotional differences between risk adverse people and their opposite and how a stock's beta may be personalized. "A zero beta person would have to be unconscious, perhaps from ingesting too many beta-blockers." (p. 162)

Ouch!

The style of this book is refreshingly different from the typical book on investing. So, I thought I'd give this book to my dad for Father's Day, but I took a peek and found myself reading through it in two nights. The book's very informative, funny, and at times even touching. Not your usual boring stock book. There are unique perspectives on insider trading, psychology, and the efficient market hypothesis. The math is pretty easy and it's illustrated with stories and anecdotes, some at Paulos' own expense. The book is kind of a road map of the market with lots of surprising examples and little nuggets of insight on chaos, power laws, scams, etc. Now I need to buy another copy for my dad.

I read both Innumeracy and Beyond Numeracy, the books for which John Allen Paulos is best known. Beyond Numeracy was presented as sort of a sequal to the first book, but they actually were quite different. Innumeracy, a polemic on our society?s butchery of numerical concepts, was a book with a theme. Beyond Numeracy was simply a collection of essays on mathematical topics.

Paulos has returned to bigger concepts with A Mathematician Plays the Stock Market. Here he dissects financial markets, along with the pundits and stock tips which have blurred the line between analysis and entertainment (...P>The author?s stated motivation for writing this book was to examine the losses he suffered from investing in WorldCom, the once high flying internet services company which in 2002 filed the biggest bankruptcy in U.S. history. Paulos doesn?t wallow in the details of his disastrous flirtation with day-trading, but it appears that as the stock tanked he continued to purchase more and more shares, and eventually lost all of the money that he invested.

Paulos? examples and puzzles are clever and amusing, but unfortunately few of them yield real insight into the workings of financial markets. He aims to examine the conceptual mathematics of the markets to examine qualities such as efficiency and randomness, but most of the vignettes that he presents miss the point. The fact that a mathematical mind like Paulos can get caught in this wave of irrational hysteria shows us that there is a lot more to financial markets than cool-headed logic.

In most cases Paulos? examples are entertaining but simplistic, but unfortunately they occasionally veer into the territory of being incorrect and downright dangerous. The most egregious example that pops to mind is his treatment of insider trading. He treats this phenomenon is being largely harmless, arguing that in a market in which an investor may be either long or short shares he or she is equally likely to profit or lose through an insider?s manipulation. Insider trading, in Paulos? eyes, is simply one of many variables which move the market.

This examination misses the point entirely. Publicly traded companies are run by professional managers who have the specific mandate of maximizing value for the shareholder (individual investors, pension funds, etc.) CEO?s and CFO?s who take profit from manipulations of the stock price are violating the trust that is placed in them, and are destroying value for the shareholder and society at large. It?s not just through moral indignation that we want to see these guys in handcuffs; it?s because a free market economy cannot prosper when the CEO?s to which we entrust our corporations are running them as short term investments designed to fill their bank accounts.

There is a real danger in trying to write a book about an area in which you?re not an expert. What?s next, Paulos on International Affairs?

If you know only a little mathematics and less about the market you too could write a book at this elementry level. Perhaps the title should have been "A mathematician recoups his loss from worldcom by selling his story". A better book that covers much of the same ground is Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life by Nassim Nicholas Taleb

Anyone familiar with mathematician John Allen Paulos wonderful Innumeracy book from the 1980s will be sorely disappointed with his latest effort.

Innumeracy set a standard for clear and relevant explanations related to math literacy. Even the title Mr. Paulos selected became part of the country's every day lexicon, a simple way to refer to the challenge of understanding the way the world is influenced by probabilities, variables, and equations.

A Mathematician Plays the Stock Market, to use a metaphor Mr. Paulos might use, falls short of that level by a degree of magnitude.

Part of the problem, I will admit, is the high standards set by Innumeracy. If it weren't for that effort, the author's humorous and candid accounts of his own investment failures here (no, math geniuses aren't any better at it than the rest of us) and his clear and easy-to-understand explanations of what the stock market numbers actually reflect would result in a better reception for A Mathematician Plays the Stock Market.

Then again, it may have been Innumeracy's success and critical acclaim that allowed A Mathematician Plays the Stock Market to even be published.

The actual text checks in at just over 200 pages, and yet the book spends a great deal of time beating around the bush, promising to come back to certain points in the future in several instances, making the slim volume feel more unwieldy than it should. And it is repetitive, using the same story about a stock scam based on mass mailings on three separate occasions. It even shows poor editing: the author can't seem to settle on a single spelling for the bankrupt consulting firm Arthur Andersen, or is it Arthur Anderson?

Yes, there are lessons to be learned in A Mathematician Plays the Stock Market: investing is complicated, for example, and a strategy of diversification and investment in simple index funds can yield strong results. But a reader doesn't have to delve into A Mathematician Plays the Stock Market to glean these nuggets of wisdom -- they are just as available in the Sunday newspaper's investment columns and from any number more complete investment guides.

In this book, Mr. Paulos warns again and again that he made an error by not judging the financial results of WorldCom, the company whose failure forms the centerpiece of this book, objectively enough. It's an important point; he wanted the company to succeed and so he failed to recognize evidence to the contrary. And it's a lesson that people who buy this book because of the esteem they have for Mr. Paulos after reading Innumeracy and other efforts will wish they applied to their decisions on book buying as well as stock buying.