Customer Reviews

The Predictors: How a Band of Maverick Physicists Used Chaos Theory to Trade Their Way to a Fortune on Wall Street

5 star:		(7)
4 star:		(9)
3 star:		(4)
2 star:		(10)
1 star:		(9)

 

 

I met Doyne Farmer at his office near the Aztec Cafe in 93 and spent a pleasant hour with him at a nearby park comparing worldviews. At the time I felt the effort to "predict" financial behaviors was, to put it kindly, a misnomer. The book did not change my opinion.

What Farmer and his crew have accomplished is simply finding a set of adequate engineering models which can cut through the emotional fog of human traders and barely come out ahead, sometimes. It isn't chaos theory at all, and I am surprised that none of the critics or reviewers have mentioned this fact: Farmer (admitted) that his methods were simply engineering model-fitting with some trendy glue...they never got to the level of applying truely sophisticated ecological or evolutionary models to the market as a whole....You might say they made a mystery out of playing both ends against the middle, and were able to find someone to pay to see them do it.

The real problem of modelling real world systems was swept under the rug by the author with a throw-away reference to "the monster of dimensionality". The complexity of models increases geometrically or hypergeometrically with the addition of each variable, depending on how richly connected the model is. A model of the financial world running a few hundred variables would not come close to processing in real time--the reason that massively parallel supercomputers can render navier-stokes equations for the weather or hydrodynamic turbulence at all is because the node inputs do not require real world data...they keep riffing on data feed back from neighbors played against fairly simple transfer functions. To do a state space diagram with half a dozen variables defies the capabilities of any visualization method known to science at this time...and it takes more than science to distill the behavior of the world's financial community into fewer than two or three variables. It simply can't be done.

For the technically curious, the technologies that Farmer used were variants of methods that Hebbs set forth in the seventies and eighties which are capable of doing set-theoretical analysis of directed networks state changes using fairly basic logical inference. THe output is given in a few rules of if-then and probabilites, which must be tested against common sense. The book does mention this in some casual comments which can get away from the uninitiated pretty easily.

There are probably 10,000 living engineers with the savvy to adapt some algorithyms Byte Magazine published in the 80s as well as Farmer. Farmer was The Chosen One (with apologies to the Matrix) simply because he was famous, and he was famous because he had no problem taking credit for a field of novelty that dozens or hundreds of others had made viable (and he was the star of a readable book by a familiar author).

Just for fun I went back and found an Omni magazine from 1990 with a big feature article on Chaos theory. It never mentioned the Chaos cabal, but this book leads you to believe that there was no Chaos before, or without, them...only chaos.

Reading the book brought back intense memories of the discomfort I felt in Santa Fe, where the divide between the haves and the have-nots was wide enough to swallow up the whole history of technically advanced invaders scamming their native victims. SOme kind of fractal symmetry here...but since I am asking Doyne for money now don't make me spell it out.

On the plus side, I really enjoyed the story telling ability of the author, his idiosyncratic interests were not too far removed from my own. On the plus plus side, I actually finished the book, which I am not wont to do these days given the chaos of my interests and commitments. I hoped, with many other readers, to find some order in the turbulence, but I only found a good story of a benign scam with colorful casting, something that Redford and Newman would have starred in in their heyday.

I got the book for half price. It was worth the money to me. But maybe you had to be there.

This book is all fluff and no substance. The subtitle, "How a Band of Maverick Physicists Used Chaos Theory to Trade Their Way to a Fortune on Wall Street," is a deceit.

Aside from telling us that the physicists used nonlinear equations with live data streams to build computer models of different markets, e.g., gold prices, oil prices, T-bonds, stocks, and various currency exchange rates, and that these models were then used successfully for trading purposes, the author tells us nothing. There are no specifics, not even any general descriptions, of how the models were built, what data were used, or what refinements were made along the way. There are no specifics on how much money was made and by whom.

The author treats us to much irrelevant minutiae such as who ate what at specific moments during various dinner conversations. But the author made no attempt to explain how these supposedly successful trading models were created.

If the author didn't understand the science well enough to report it, then he shouldn't have written the book. If he did understand the science but the scientists refused to reveal details to him, he should have done some research. He could have read their published papers on chaos and complex systems with respect to topics other than financial markets. He could have interviewed people who would be able to make educated guesses as to how it is done. As it is, he gives us no clues as to how the models were built or what data were used.

After wasting my time reading this book, I felt I had been swindled. There really ought to be a way to get one's money back. All I can do is say to the author (Thomas Bass) and the publisher (Henry Holt), "Fool me once, shame on you. Fool me twice, shame on me." And that's the way markets work.

The main problem with this account of Doyne Farmer and Norman Packard's attempt to predict the price of stock and commodity prices is that there is no meat on the bones. Bass touches only superficially on what it is the Prediction Company is doing out there in Santa Fe and instead choses to focus on the fledgling firm's struggle to become a player in the world of finance.

I understand that this is a complex subject, but perhaps if Bass had embellished his text with some illustrations and examples I would have come away with a better understanding of exactly wht this "new phynance" is all about. Bass makes reference to some of Farmer's work, but never goes any deeper then telling us the title.

Another problem is Bass' portrayl of the main characters. Unfortunately, they don't come across as a very colorful lot. This is no 'predators ball" for the nineties. I learned next to nothing about what is going on. Overall, I was very let down

Fascinating subject and easy to get grabbed by, but as you near the last third of the book, you sense you will be disappointed, feeling you are about to be asked to "leave the theater before you see the end of the movie". 95% of the book builds up to telling you how these guys beat the market, and in the end you never find out if they did. The cliff hanger comes at almost the last page when you are told "the company is starting to make some good money". It's as if the author left out the last 2 solid "what happened" chapters. Also, whats with the fashion commentary? In almost every "scene" each party is described fashionwise...so and so was dressed in blue jeans, a somber black shirt and an oversize big silver buckle...who cares! The books cover promises to tell you how a band of physicists made a fortune on Wall Street, and you never learn if they did. It was a fascinating read, just wish it had an ending.

I am a trader. I traded in the pits for years. I traded over-the-counter. Futures and options, vanilla and exotic. I also hold degrees in physics and electrical engineering from MIT. I was hoping to relate to the characters in this book. I didn't at all.

First, my comments on the book as a story. I was interested at first, but was struggling to get through the last third of the book, as characters were developed that seemed like little more than filler. I tired of the endless descriptions of wardrobe and scenery. And, in the end, we don't really find out what happened. Some reviewers complain about lack of technical detail. The book was obviously not written as a scientific treatise, but as a story, so those readers really have no reason to be disappointed in that aspect.

Secondly, my thoughts about the science and the scientists featured in the book. Nonlinear dynamic systems have been studied by all Wall Street firms, even at the time Prediction Co. was doing it. I actually have a fair amount of distaste for this whole subject. What it amounts to is traders, banks, uber investors, etc. looking for the next quick money making opportunity within the latest development (fad some might say) in informational science. That in and of itself is not a bad thing, but a reasonable quest. The reason most of these kinds of endeavors fail is that unification of Wall Street and academia can only be successful if the researchers or modelers have a firm grasp of BOTH worlds. The models ultimately fail because what is really being modelled is human psychology and reaction. Numbers alone do not tell the tale. There is no (legal) way of knowing that the trader at MS just had a blow up with his risk advisor and is angrily dumping his yen position inefficiently, and that UBS knows MS is also long calls so they begin crushing call volatility since they know MS will liquidate them as well. Sure, a chart may have predicted a squeeze, but the details of the actual trading couldn't have been prophesied. Prediction Co. was running thousands of models? This should be the first tip off that they had no idea what the principal components of the market were. They were shooting in the dark.

This was a perfect example of banker types with no technical prowess whatsoever trying to work with ivory tower types with no street savvy. It doesn't work. "Well, traders and quants work together in most trading firms." True, but this is different because there was no established program or models that the quants were running. This was fly by the seat of the pants almost. While I admire the accomplishments of these researchers in academic realms, they were definitely not cut out to be businessmen with their communistic, hippy, and honestly, somewhat lazy, approach to life. Yes, some succeed, you have your accasional Bill Gates (although I would argue he was extremely business-headed), but not many. Look at the dot-com debacle. Same story.

Lastly, do you really think that anyone who truly tapped into the Holy Grail of trading would actually allow a book to be written about it?

Well I picked up the book as I am interested in complexity science. Most of the reviews here are quite harsh, and probably it was bad expectations management on writer's / publisher's part.

Even though the book sometimes is promoted as an investing book, it is not. It is not meant for day traders who just expect to discover next holy grail of financial markets reading such books. There is no holy grail in markets, but thats another thing. With that said, it may be clear that it is not a TRADING / INVESTIING book.

The book is story of two renowned physicists turning to use their physics, specifically chaos theory, to model financial market. The story part is dealt with great care. I am sure you learn a thing or two reading this book. This book was quite reasy to read and time I spent reading was worth more than had I spent reading a Grisham novel or watching some stupid soap on TV. It is real life here folks.

Bass is not a novelist so I did not expect him write a literary piece here. He has written a true story in a very good way and struggle of Farmer and Packard in estabilshing a company and utilizing their knowldge in a productive way is very cleverly depicted. There are tonnes of other relevant information that come and go, and an intelligent reader would surely pick something here. There is a lot of current history explored here.

With that said, this is NOT a book for the NEXT TRADING SYSTEM, nor does it preach that their system was PERFECT.

Its frustrating to read this book, as it's never clear what Prediction Co has actually achieved in the way of financial success/ROI w.r.t. risk engaged.

Bass kicks off the book with a chapter asserting how easily Prediction's trading system makes "one million dollars" on a given day trading online (with unf. no mention of quantity of capital under management or level of risk undertaken). Heck, give me 50 Million to buy and hold QQQ and i'll make you a million in a day no problem. As a assertion, making X$ by itself on a given day says just about nothing, except that they didn't lose money every single day. But like Dr Evil knows, "One Million Dollars" sounds dramatic to say.

Bass to his credit details early failures of the trading system but seems to need to end the book on a vague high note about ROI he can't back up.

ROI issues are swept under the rug for the rest of the book until the very end when it is stated that Prediction is "well on their way" to being quite profitable.

Hardly a convincing assertion of success. The case is far from clear in the book that Prediction was able to outperform any other equivalent risk neutral humanly managed portfolio.

Bass did a similar sleight of hand in his entertaining book "Eudaemonic Pie" when asserting that Doyne's famous roulette wheel prediction system "worked" and was successful based on an exceedingly small number of trials before the system broke down completely, thus unfortunately (and convieniently for any future film) rendering future testing of the system impossible.

Bass is an engaging writer but much too close to the subject to write more deeply than a glowing hagiography in this case.

Not surprisingly instutional investor reaction to Doynes earlier brushes with Nevada gaming law barring the use of mechanical counting systems and his team's ethical judgement with respect to the interpretation of those laws was not covered. Maybe they didnt read the "Eudamonic Pie".

This book is less about the market and more about the personal relationships and dealings of a business start-up. I'm surprised that the book lists its category as BUSINESS/SCIENCE when truly it lies in the former. I guess mentioning chaos theory, neural networks and genetic algorithms was all that was needed.

Regardless, it was an entertaining story about a group of physicists, being totally ignorant of the market, decide that they can predict the market. The storyline follows what I would consider typical of any start-up; the fights, arguments, doubts, meetings galore, etc... As I said, entertaining but not too much different from any other story about a start-up.

My two biggest complaints:

1) The back cover from the San Francisco Chronicle calls this book "one of the best books ever written about commodities, currency, and derivatives trading." I don't think they even read the book since this book isn't about trading but all about the traders.

2) The over use of descriptive fashion and landscape. I lost track of how many times we needed to be told who was wearing what and how blue the sky was in Santa Fe. It really got annoying after awhile.

The Predictors, by Thomas A. Bass, is a flawed work. This story is about an attempt to design computer algorithms to detect heretofore unknown market patterns and use them for purposes of arbitrage. It provides an historical account of the creation, development and ultimate success of the Prediction Company, Inc. But in doing so, the author presents a confused portrait of what could have been an interesting story- especially to those interested in the dynamics of financial markets. Before describing the flaws in this book, I should say that there are probably some readers who would find this book interesting. Some, like myself, who have a background in physics (Ph.D.) and in finance (financial planner) will see through the mistakes of the author to uncover an interesting tale of greed, pride and long sought success. For most readers, I fear, their account will confuse and misinform. I should start by observing that The Predictors violates several rules of a good non-fiction book: · There is no author's bio and no Foreward written by a recognized authority of any type. · The author is not trained or schooled in either physics or economics and thus handicapped in telling the story. · And the author neglects to provide footnotes and references.

Bass denigrates the profession of economics by portraying these physicists as saviors of the so-called dismal science, when, in fact, economists have long known about and dealt with the criticisms leveled by these supposed wunderkind Ph.D.'s. An impression is left that the discipline of physics somehow plays a role in what happened; it didn't. What these physicists brought to the table was not science but their mathematical skills. They were not interested in understanding market dynamics; rather they were seeking to isolate market price patterns that would offer them predictive powers. He who can predict the market can, of course, profit from it. Of particular distaste to Bass and the physicists in this story is the economic theory of efficient markets. There is hardly any place in the book where the concept of arbitrage theory is presented. And yet the whole thrust of the Predictors was to find arbitrage opportunities. The important missing concept in this book is that of the feedback to the market from arbitrage transactions which tend to wash out the pattern being exploited. It is a self-canceling phenomenon- just as a fire consumes itself, so does arbitrage. If the Prediction Company trades too heavily on these opportunities or if others discover the strategy and trade on it, the advantage is lost. What Bass completely misses, but I think is understood by these physicists turned day-traders, is the fact that the only way the Prediction Company can survive is to continually uncover newer trading patterns not previously known. If they fail at this their fate may be like that of Long Term Capital Management hedge fund which eventually became insolvent- partly because others picked up and emulated their strategies. With too many players in the game the profits declined and the strategies became useless historical relics. Put differently, the Prediction Company based its transactions on technical analysis and not on fundamental analysis in which the component companies are analysed. As with earlier advances in technical analysis, each new idea for making profits only succeeds for a short time. A subtext of this story, barely described in the narrative, is that of political left-wing physicists learning and eventually embracing the benefits of capitalism. It seems that they gradually realize that their attempts to profit from an imperfect market is not anti-social or evil; rather they are providing liquidity and efficiency to a marketplace that would be less liquid and less efficient without them. Thus in their quest to satisfy their altruistic (originally left-wing) sentiments, these characters become adherents of the market in their new realization that altruism is alive and well in the capitalistic world! All this said, it is not clear that any of these physicists changed their political affiliations. So, yes, they were and still are parasites on the market. But in the ecology of capitalism such parasites are good for sellers and buyers alike- perhaps just as with germs we recognize some of them as "good germs." Likewise among books there are good books. The Predictors is not one of them.

This books starts off great as we learn about an intense chaos theory and neural net-based prediction / pattern recognition and forecasting model that has beaten the stock market for a million. Wow, that's cool, let's learn more about it...The book is filled more with details about the Santa Fe landscape at dusk, and what each character did when they were boy geniuses at age 5 than what was most interesting; the models and their learning mechanism. The book does introduce us to some interesting characters that you might hear about in today's tech world, but the lack of focus on either the characters or the model was a bit annoying. There is also no real data about the P/L, ROI, or other tangible results as to whether this or one of the many other systems built by earlier pioneers actually made any real profit.