The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It Audio CD – Audiobook, February 2, 2010
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--Nassim Nicholas Taleb, New York Times bestselling author of Fooled by Randomness and The Black Swan
“Fascinating and deeply disturbing…Patterson gives faces and personalities to the quants, making their saga accessible and intriguing…[he’s] onto a big story that begs follow-up.”
--New York Times
“Valuable…makes [the quants’] secretive world comprehensible…the story radiates with hubris, high stakes and expensive toys.”
“A riveting account…there are many dramatic moments and a good dose of schadenfreude in Scott Patterson’s THE QUANTS.”
“Read this book if you want to understand how the collapse of the global financial system was at its core a failure of modern financial theory and its most ardent disciples. Patterson is able to gracefully explain the complex ideas underpinning our financial system through an extraordinarily engaging and insightful story.”
--Mark Zandi, Chief Economist of Moody’s Economy.com and author of Financial Shock
"Enlightening and enjoyable...Patterson masterfully recounts how brilliant mathematicians and technologists ignored the human element...If you're serious about understanding the financial meltdown, you need to read this book."
--David Vise, Pulitzer Prize Winner, author of The Google Story, and Senior Advisor, New Mountain Capital
"A compelling tale of greed and conceit, The Quants tells the inside story of the Wall Street rocket scientists who could couldn’t resist playing with numbers and nearly blew themselves up.”
--Michael J. Panzner, author of Financial Armageddon and When Giants Fail
"The Quants will keep hedge fund managers on the edge of their Aeron chairs, while the rest of us read in horror about their greed and their impact on the wider economy. A gripping tale right until the last page...but I fear this is perhaps not yet the end of the story."
--Paul Wilmott, Oxford Ph.D., founding partner of Caissa Capital, and author of Paul Wilmott Introduces Quantitative Finance
“A character-rich tale of how quirky geniuses cut their teeth on gambling, then moved on to the biggest casino of all, Wall Street. From blackjack to black swans, The Quants tells how we got where we are today.”
--William Poundstone, author of Fortune’s Formula
From the Hardcover edition.
About the Author
- Publisher : Random House Audio; Abridged edition (February 2, 2010)
- Language : English
- ISBN-10 : 0739385062
- ISBN-13 : 978-0739385067
- Item Weight : 9.6 ounces
- Dimensions : 5.09 x 1.17 x 5.95 inches
- Best Sellers Rank: #3,531,834 in Books (See Top 100 in Books)
- Customer Reviews:
Top reviews from the United States
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He starts with the development of the 'random walk' or Brownian motion. He notes that this concept is based originally on the findings of Robert Brown, a botanist in the early 19th century. His initial discovery was the seemingly random movement of pollen particles in water under a microscope. Oddly enough, it was actually Einstein in the early 20th century who later realized that the random motion was due to individual water particles interacting with the pollen particles. This concept was eventually adopted in the finance field to describe movement in market prices of securities. Ed Thorpe, an early user of the concept, developed a volatility-based model as a means to value options contracts...a precursor to the Black-Scholes-Merton option pricing model.
He goes over the LTCM strategy in detail. At a high level, the fund bet on return spreads for particular securities reverting to historical levels. One version of this involves on- and off-the-run treasury securities. Since on-the-run securities generally enjoy a higher demand, they tend to trade at a premium and have greater liquidity. So LTCM would buy off-the-run treasuries at the relatively lower value and short on-the-run securities. Their overall risk seemed mitigated since they had small net positions within any single market. However, following the Russian default in 1998, the 'flight to quality' caused a large spike in on-the-run treasury securities, causing sizable early losses to LTCM and all the copycat funds mimicking their strategy. Margin calls required the sale of long positions, but in the less liquid off-the-run market, these sales had a material impact on prices, exacerbating losses and causing more margin calls. This vicious cycle resulted in the failure of LTCM's heavily leveraged portfolio, ending in a bailout from other financial institutions.
The author describes the liar's poker game, which sounds fun, where players have to successively guess how many of a certain number shows up on a collection of dollar bills. The successive player can either call the previous player's bet or raise the number of predicted occurrences. It's kind of like the game 'bullshit' with playing cards.
The author also covers carry trade, wherein traders borrow lend-able assets in one market with low interest rates and lend them in another with higher interest rates. The strategy requires failure of interest rate parity on exchange rates to hold over the investment horizon, which is more likely in emerging markets than in others. Japan's monetary policy has historically made them a primary market in which investors applied this strategy.
He gets some into collateralized debt obligations, explaining the tranche structure and how cash flows through. He notes that many investors under-estimated the correlation between tranches when investing, resulting in a serious miscalculation of risk-adjusted cash flows and a mismatch between risk rating and actual risk.
The above is all part of a narrative wherein individuals attempt to treat finance and economics as a field similar to the hard sciences, where the subjects (people) follow predictable patterns that can be modeled. He challenges this assumption and states that mathematical predictability is not reliable in these fields, which is a reasonable position held by several schools of thought. He points to behavioral finance developments as alternatives, including the adaptive market hypothesis. In this model, as opposed to the EMH, market inefficiencies can exist and be bid away, but may fail to rematerialize systematically. In other words, markets adapt to inefficiencies and prevent them from reoccurring. It also paints investment markets as far more chaotic, with institutional investors trying to squeeze every last penny out of every possible inefficiency imaginable.
He covers high frequency trading and dark pools, glossing over the often faux liquidity HFT offers, and explaining that dark pools are basically just exchanges that can't be seen by the general public (and to a similar extent regulators).
The moral of his story is that quants were the cause of the crisis. Unfortunately, his own story made me feel that the quants were just as much victims of the crisis as anyone else. There's no step-by-step causal relationship developed to explain how they caused the crisis, just this vague idea that their incorrect models may have caused asset price bubbles, and that the irrationality of the masses (not captured in models) resulted in the bubble bursting. But the link between quant funds and housing prices is nonexistent, even if the link with housing derivatives is apparent. As with most books about the crisis, the author stops short of sources and focuses on symptoms. I would not recommend as a wealth of crisis knowledge, however I would recommend as a brief history of finance and financial markets.
Nevertheless, it tells a good story of how the Finance industry came to appreciate and make use of quantitative methods and how professionals arrived from Academia to the back office and eventually dominated the front office, many of them becoming true leaders in the industry managing billions of dollars each.
The book also offers a truly valuable reminder of how over leveraged trading strategies in combination with too much belief in models lead to disaster when the door gets too narrow and liquidity is gone, while also drawing nice parallels with the LTCM debacle in the late 90s as well as the Black Monday event of 1987.
if you want to understand what has been going on in the stock market over the last 30 years or so, this book will enlighten you in an easy to read manner.
Top reviews from other countries
Obendrein ist die journalistische Arbeit einfach nicht vorhanden. Vielleicht hat er ein paar Interviews geführt, aber der Author hat weder Ahnung von den quantitativen Modellen, noch davon wie man ein stimmiges Werk schreibt.
Der rote Faden fehlt komplett, weil von Person und Fond gesprungen wird sowie ständig die Zeit wild wechselt.
Das Buch taugt vielleicht etwas als Roman, aber selbst hierfür fehlt es an tiefe.
Dann doch lieber den Film "Margin Call". Spart zeit und Geld.
Reading the book I appreciated a lot the contents but I guess that the storytelling is full of repetition and so it is not lean.
If you are fresh to the subject I also suggest to start reading M.Lewis "FLASH BOYS" to get the high level overview of the market.