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The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal (Bloomberg) [Kindle Edition]

Ludwig B. Chincarini
4.8 out of 5 stars  See all reviews (26 customer reviews)

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Book Description

A rare analytical look at the financial crisis using simple analysis

The economic crisis that began in 2008 revealed the numerous problems in our financial system, from the way mortgage loans were produced to the way Wall Street banks leveraged themselves. Curiously enough, however, most of the reasons for the banking collapse are very similar to the reasons that Long-Term Capital Management (LTCM), the largest hedge fund to date, collapsed in 1998. The Crisis of Crowding looks at LTCM in greater detail, with new information, for a more accurate perspective, examining how the subsequent hedge funds started by Meriwether and former partners were destroyed again by the lapse of judgement in allowing Lehman Brothers to fail.

Covering the lessons that were ignored during LTCM's collapse but eventually connected to the financial crisis of 2008, the book presents a series of lessons for hedge funds and financial markets, including touching upon the circle of greed from homeowners to real estate agents to politicians to Wall Street.

  • Guides the reader through the real story of Long-Term Capital Management with accurate descriptions, previously unpublished data, and interviews
  • Describes the lessons that hedge funds, as well as the market, should have learned from LTCM's collapse
  • Explores how the financial crisis and LTCM are a global phenomena rooted in failures to account for risk in crowded spaces with leverage
  • Explains why quantitative finance is essential for every financial institution from risk management to valuation modeling to algorithmic trading
  • Is filled with simple quantitative analysis about the financial crisis, from the Quant Crisis of 2007 to the failure of Lehman Brothers to the Flash Crash of 2010

A unique blend of storytelling and sound quantitative analysis, The Crisis of Crowding is one of the first books to offer an analytical look at the financial crisis rather than just an account of what happened. Also included are a layman's guide to the Dodd-Frank rules and what it means for the future, as well as an evaluation of the Fed's reaction to the crisis, QE1, QE2, and QE3.

Editorial Reviews

From the Inside Flap

The financial markets are dangerously over-crowded. Investors follow popular trends or latch onto profitable new strategies with herd-like single-mindedness, and an increasingly globalized and interconnected world has only exacerbated the problem. The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal explores how the dramatic overcrowding we've seen over the last quarter century has yielded terrifying results, including the 2008 financial crisis that continues to reverberate around the globe.

The story of overcrowding as we know it now began in 1998, with the failure of the profoundly successful Long-Term Capital Management (LTCM) hedge fund. Exploring how this seemingly isolated event signaled a much larger problem within the financial industry, The Crisis of Crowding traces the story of LTCM and the subsequent hedge funds started by its founder, John Meriwether and his former partners, through the events of 2008, and up to the ongoing European debt crisis.

Part narrative, part quantitative analysis, the book is filled with firsthand recollections from those on the front lines of the crowding crisis, including several LTCM partners. Featuring insights from key banking and hedge fund authorities, it brings the events that led to the current crisis vividly to life, showing how and why the market has evolved in new and dangerous ways, and what can be done about it.

Much that should have been obvious after the fall of LTCM could have prevented the crises that followed. Instead, the problems of overcrowding went unchecked so that when the next economic disaster hit, increased leverage, policy mishaps, and an even more crowded trading space resulted in a far bigger collapse. We failed to learn our lesson the first time around, but that doesn't mean it's too late. Future economic crises are all but guaranteed, and The Crisis of Crowding reveals exactly what we need to know so we're prepared for next time.

From the Back Cover

"One of the lessons from the crisis, rarely discussed, are the problems caused by a crowded trading place. Chincarini takes the reader down a path not looked at by many analysts. An excellent read."

—JIMMY CAYNE, former CEO and Chairman of the Board of Bear Stearns

"The Crisis of Crowding is an excellent account of the financial crisis of 2008. This book has everything: an analysis of the trades, interviews with key players, and, most importantly, a simple, entertaining explanation of how we got into this mess. It stretches from the LTCM crisis in 1998 to the Greek crisis of 2012. Anyone who wants to know how our financial system works and how we can improve it should read this book."

—FRANK FABOZZI, Professor at EDHEC Business School and former Professor at the Yale School of Management

"Dr. Chincarini gives an engaging description of the various crises over the last decade and how they are connected. It's as if Chincarini were in the trading room taking notes as the crisis unfolded."

—KEN KRONER, Chief Investment Officer and head of the firm's scientific active equity business, BlackRock

"Do we need yet another book on the financial crisis? Yes, we do. Some books are fun to read, but leave you confused about what the actors actually did. Others give you a great deal of technical information, but can be a hard slog. This book by Ludwig Chincarini fills the middle. It is fun to read, and it tells you exactly who did what and how. Read, enjoy, and learn."

—OLIVIER BLANCHARD, Chief Economist at the IMF

"Chincarini's book, which combines a narrative style with an overview of economic fundamentals, should be on the reading list of anyone interested in the roots of our financial meltdown."

—AUSTAN GOOLSBEE, former Chairman of the Council of Economic Advisors to the President, Professor of Economics, University of Chicago

"Chincarini looks at the financial crises of the last fifteen years—starting with a comprehensive analysis of the LTCM crisis in 1998 and ending with the Euro-debt crisis of 2012—and argues convincingly that the central risk in these crises was accentuated from within the financial system rather than from external economic forces (it includes the best analysis I have read on the LTCM crisis). This bold new theory has important implications for both industry practices as well as for new regulations. This book should be required reading for anyone who wants to understand and help prevent future financial crises."

—ERIC ROSENFELD, cofounder of Long-Term Capital Management and JWMP

Product Details

  • File Size: 4735 KB
  • Print Length: 478 pages
  • Publisher: Bloomberg Press; 1 edition (July 30, 2012)
  • Sold by: Amazon Digital Services, Inc.
  • Language: English
  • ASIN: B008RO8Z8A
  • Text-to-Speech: Enabled
  • X-Ray:
  • Word Wise: Enabled
  • Lending: Enabled
  • Amazon Best Sellers Rank: #228,426 Paid in Kindle Store (See Top 100 Paid in Kindle Store)
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Customer Reviews

Most Helpful Customer Reviews
18 of 22 people found the following review helpful
5.0 out of 5 stars Another Book Review from the Aleph Blog August 28, 2012
I am going to say something that I rarely say: I am grateful that this book was written. Why am I grateful?

* It highlights the idea that people, even really bright people, do not behave rationally, but imitatively -- they follow recent price action -- they mimic.
* It validates the concept of a "crowded trade," one that offered high returns in the past, may presently offer low returns to a "buy and hold" investor, but will deliver negative returns in the near future, because the holders of the trade are relying on the trade to deliver positive returns in the short run, and will bail if it doesn't happen.
* It points up the nonlinearity of markets, and invalidates the efficient markets hypothesis; it validates the concept of the boom-bust cycle both in micro and macro.
* It teaches us to not take on too much debt, even if we are really, really smart. We aren't as smart as we think we are.
* In short, it sums up a lot of my philosophy at The Aleph Blog. Real risk control thinks long term, and considers what will happen if liquidity dries up. Real risk control knows that large positions in any asset relative to the market must be regarded to be "Buy-and-hold" regardless of what your trading intentions are. False risk control assumes that markets always function, and that your relative size versus the market does not matter.

The author of the book has led a storied life. He was a quantitative analyst hired to work in risk control for Long Term Capital Management [LTCM] near its inception, and continued with them through the failure. After that, he worked for Rydex, built FOLIOfn, and worked for the Bank of International Settlements, and Schroders.
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3 of 3 people found the following review helpful
5.0 out of 5 stars Insights to what really happens in Finance February 28, 2013
Format:Kindle Edition|Verified Purchase
Good and detailed into the workings of the financial world.

The content is great, however be aware that the layout and reading experience is very different in the Kindle and the Hardcover versions.

I bought the Kindle version and that was the first time I have regretted the Kindle version.
I do not know how they could mishandle the layout so badly.

However I bought the hardcover as a gift for a friend and that lives up to the content.
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2 of 2 people found the following review helpful
5.0 out of 5 stars A great insightful book about financial market August 26, 2013
Format:Hardcover|Verified Purchase
The author tells an excellent story about financial crisis from its background to its aftermath while educating readers about important knowledges of finance. Many details are covered, yet the concepts are straight forward. The book is nice for people who know some finance to have a good time walking through what was going on during 2008 financial crisis, and it is excellent for those who have moderate financial background to learn, improve and be surprised by how the market reacts with the crowd.

The book does not simply show readers facts of the crisis or provide shallow opinions, however, it analyzes the reasons behind incidents and makes you think deeply about the market.

Human behaviors are hard to predict and the crisis of crowds has not been eliminated. However, we will definitely know much more about it after reading this book and hopefully we can avoid most of the losses if similar situation happens again.

I'm happy that I bought the book.
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2 of 2 people found the following review helpful
4.0 out of 5 stars Good read on a complex topic December 27, 2012
Format:Hardcover|Verified Purchase
Ludwig does a good job catering to a variety of readers with this book. While it certainly covers financial complexities deeper than I, someone not in the industry, can appreciate, he writes with a simple and structured style that allows one to skim past the overly-knotty parts and intersperses the book with material that the layperson can both comprehend as well as enjoy. Ludwig poses some interesting questions for thoughtful readers to mull over, and I enjoyed the book so much I enthusiastically lent it to a friend.
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2 of 2 people found the following review helpful
5.0 out of 5 stars Good book April 23, 2013
By Dong An
Format:Hardcover|Verified Purchase
A book you must read if you are working in financial industry or you are a student majoring in finance.
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1 of 1 people found the following review helpful
5.0 out of 5 stars Must READ December 12, 2013
This book opens your eyes to financial markets beyond theories. Many attempted to explain what happened during the most recent financial crisis. But, none could get access to insiders like this book to reveal the inner workings and the minds involved in the process. This book provides not only insights but also the framework to start thinking about where we are heading. Great book!
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1 of 1 people found the following review helpful
5.0 out of 5 stars Recommend March 31, 2014
Format:Hardcover|Verified Purchase
Excellent presentation of all the players and their roles. Highly recommended reading. Chincarini understands the bigger picture well and conveys the same with ease and readability.
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Format:Kindle Edition|Verified Purchase
Since 2008, I have felt really stupid any time conversations about the 2008 Financial Crisis popped up. I knew in general what happened, but I never knew enough to contribute to a conversation. What I read in this book not only helped explain it in a language I understood, but it explained it in a way that I enjoyed reading. The book is actually pretty entertaining. He paints the financial crisis as a story, instead of really boring points. And Ludwig inserts his opinion in a very humorous light.

In addition, this book saved my grade in one of my classes. The book wasn't required for my International Finance class, but when I was assigned a project on Basel III, I found a couple chapters regarding the Basel Committee in this book. It was more helpful than any other website I looked at... including wikipedia! ( Wikipedia is not a legitimate source, I know. But undeniably a helpful source.) Anyways, I think I will use this book for a long time, as my primary reference for any 2008 questions that pop up.
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Most Recent Customer Reviews
5.0 out of 5 stars Five Stars
It is really a good book. Data and interview all from real world ,really help u understand the crowded.
Published 7 months ago by zhengpei
5.0 out of 5 stars Interesting Read.
A colleague of mine suggested I read this book to understand crowding better. I loved it. The author uses does a great job of explaining it all.
Published 13 months ago by CollegeStudent
5.0 out of 5 stars Easy read to complex situations!
A complicated subject made simple. The author has significant insight behind the stories. He gives insight into the 2008 financial crisis and possible solutions. Read more
Published 16 months ago by Albertina Hurst Dorffler
5.0 out of 5 stars A look at the financial meltdown from an insider's view
this is not a book for bed time reading, because once you pick it up, it will be hard to put down until you have read its every word. Read more
Published 19 months ago by winnie
5.0 out of 5 stars Critical analysis of recent financial crises and the issue of crowding...
There are many books on the 2008 financial crisis, 'The Big Short' and 'Too Big to Fail,' to name a few. Read more
Published 19 months ago by C.Lockhart
5.0 out of 5 stars Top-Shelf Reading for Both the Professional and Layman
Truly fascinating topics of discussion.

Although some financial background will certainly help, any interested individual can pick this book up and understand exactly... Read more
Published on March 23, 2013 by Andrew S.
5.0 out of 5 stars Great book to learn what happened around financial crisis
This book has an excellent view of the financial crisis, it discusses what exactly happend in 2008 and serveral keyplayers in a professional perspective. Read more
Published on March 15, 2013 by Jimmy Zhou
5.0 out of 5 stars Excellent!!!
This is a excellent book with good insight. Recommend to read. Good to know the stories and reasons of financial crisis.
Published on March 12, 2013 by Zhou
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More About the Author

Ludwig B. Chincarini, CFA, PhD, is an Associate Professor of Finance in the School of Management at the University of San Francisco and a member of the academic council of IndexIQ, with over fifteen years of experience in the financial industry specializing in portfolio management, quantitative equity management, and derivatives. He was Director of Research at Rydex Global Advisors, where he co-developed the S&P 500 equal-weight index and helped launch the Rydex ETF program. He helped build an internet brokerage firm, FOLIOfn, designing its innovative basket trading and portfolio management platform. He also worked at the Bank for International Settlements (BIS) and Schroders. He is the coauthor of Quantitative Equity Portfolio Management. He received a PhD from the Massachusetts Institute of Technology and a BA from the University of California at Berkeley.


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