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The Quants – How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It.

February 23, 2010 2 comments

The Quants

I pre-ordered this and received it the day of release. There were some negative comments on Amazon regarding this book that basically went along the lines of ‘the author is bashing quants (quantitative maths whizz) for the economic crisis’. It is clear the ‘reviewer’ did not actually read the book. For starters the author is a staff reporter for the WSJ. Not sure if that is a good thing or a bad thing. (For stories I’ll happily read the WSJ, but for objectivity I’ll stick to the FT.)

This book does NOT blame all quants for the crisis. Don’t judge a book by its cover; the title is probably more of a marketing ploy than anything. Patterson basically covers the alpha and the omega of a small breed of highly influential quants, the big swinging d!cks, the masters of the universe such as hedge fund bosses, head of prop traders and senior management of some major financial institutions on Wall Street.

The biographies and historical anecdotes of the major characters have to be taken with a pinch of salt, nevertheless the author did a good job with narration. Obviously anyone who is reading this book is smart enough to realise that the author is not reconstructing the ‘conversations’ verbatim.

The book begins with Ed Thorp (quant legend) who was the first guy that devised a mathematically ‘proven’ and field tested method to beat blackjack. Not satisfied with beating casinos at their own game Thorp decided to take his math skills to the biggest casino of all, Wall Street. He later ‘discovered’ a mathematical formula for buying and selling warrants. Thorp is perhaps best known for his two books, Beat the Dealer and Beat the Market, both of which are now classics.

Click here for podcast of an interview with Ed Thorp and Scott Patterson

The author then takes the reader through a journey in history to the present day titans of the financial markets such as Ken Griffin of Citidel and Cliff Asness of AQR, Peter Muller, Boaz Weinstein etc. These men each control billions and most of them wield PhDs in the quantitative field from the top academic institutions. They all share one thing in common: the search for THE truth/alpha. The truth/alpha roughly equates to knowing (or ‘predicting’) where the financial markets are heading and/or the world as a matter of fact.

According to them the truth/alpha can be measured a dollar at a time and for every dollar they accumulate, it represents one step closer to THE truth (if there was one). Possession of the truth or alpha promises ethereal riches.

However, the book does not go into detail on how financial modelling caused the crisis nor does it offer any concrete evidence as such. You just have to take the author’s word. Nevertheless the stories itself are worth it.

Try reading this with Fooled by Randomness and the Black Swan by Nassim Taleb. Which is what I did. Not only did these three books change my outlook on the financial markets and the economy in general, they had me re-examining my epistemological and philosophical paradigm of my knowledge (or the lack of it) on the said matter and in general.

Read an excerpt from the book (Chapter 2)

 

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