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The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It, by Scott Patterson
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Review
“Scott Patterson has the ability to see things you and I don’t notice. In The Quants he does an admirable job of debunking the myths of black box traders and provides a very entertaining narrative in the process.” --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.” --Bloomberg.com “A riveting account…there are many dramatic moments and a good dose of schadenfreude in Scott Patterson’s THE QUANTS.” --Financial Times “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
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About the Author
SCOTT PATTERSON is author of the New York Times bestselling book The Quants and Dark Pools and a staff reporter for The Wall Street Journal. His work has also appeared in the New York Times, Rolling Stone and Mother Earth News. He has a masters of arts degree from James Madison University. He lives in Alexandria, Virginia.
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Product details
Paperback: 352 pages
Publisher: Crown Business; Reprint edition (January 25, 2011)
Language: English
ISBN-10: 0307453383
ISBN-13: 978-0307453389
Product Dimensions:
5.2 x 0.7 x 8 inches
Shipping Weight: 9.1 ounces (View shipping rates and policies)
Average Customer Review:
4.0 out of 5 stars
224 customer reviews
Amazon Best Sellers Rank:
#118,250 in Books (See Top 100 in Books)
The enjoyable portions of the book were those detailing objective history in the finance field. The author summarizes the quant side of finance well, explaining both sides of the efficient market hypothesis debate, its implications, and the players involved.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.
The book nicely covers the origins of quantitative investing. But the second half is full of purple prose and overwrought drama. The connection between the quants and the 2008 financial crisis isn't shown convincingly. More important, the book lacks perspective on financial evolution. At least from the perspective of 2018, we can see the 2008 crisis as the inevitable over-reach of some useful financial innovations of the preceding two decades. Instead of blaming quantitative investing for instability, we can see it as just another chapter of financial innovation. The book almost concedes as much in mentioning that half of the six leading quants highlighted in the book actually achieved positive returns in 2008, and that quants are at least as entrenched in Wall Street in 2011 as they were in 2008. As the book suggests at the very end, quantitative investing is just another tool for financial engineers looking to make the financial markets more efficient (and thereby generate profits). It has strengths and weaknesses, and it will continue to adapt.
This was an interesting recount of the financial meltdown from the perspective of hedge fund actions. The history of the application of mathematical models is discussed. The author provided a possible reason for the model failure by comparing the utilization of similar mathematical models used in classical physics with fixed laws of behavior to the use of similar models in finance without fixed laws of behavior.
"The Quants" is a highly entertaining read that seems to have been written under the guise of non-fiction. Scott Patterson seeks to link the actions of those highly mysterious Wall Street types called "Quants" to the credit crisis of 2008, linking their riches and egos to the demise of the market, the problem is it's simply not true. The problem with the book is that it seems to want to place blame on the quants so much that it narrowly focuses on specific events and character flaws that would support the argument. Did quants play a part in the meltdown? Yes, but not all quants and not even the notable people highlighted in the book, there were many factors that led to the crisis. Quants practice a specific type of investment strategy, just like fundamental investors do, it isn't necessarily a big mechanism for group-think like the author would like you to believe. If the reader's underlying goal is to understand the events that culminated with the 2008 credit crisis, they will not find insight here. If the reader's underlying goal is to be highly entertained with a fast paced, well constructed story then they will be delighted with this book.
An interesting look inside and the some of the key individuals involved with hedge funds over the past 20-30 years. Very interesting examination of the foundation for their work.
This book gets old fast. The author repeats the same format for each of his profiled Quants; birth, school, first job, card playing, poker. He explodes with superlatives. This book seems like one of those extended Fortune, Business Week, Vanity Fare pieces without the photographs. Patterson repeats himself and focuses too much on the Ferraris, houses in the Hamptons and the poker matches. He confides where one successful Quant eats in Chicago. He pops in a bell curve chart thinking it will sate the reader's interest that he knows something about the Quants' search for the mathematical Truth. What he knows he tells well but gush and the lap dog nature of the story overwhelm the reader.
Straight forward read. Provides insight about the role of some leaders in the hedge fund world and the market crash of 2008.
Well done in compiling the history of quants and a closer look at some of the major players. It certainly quantifies the old sayings that you can fool all the people some of time and some of the people all the time but you can't fool all the people all of the time.
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