book review: the quants

July 6th, 2010 • posts i've written

In The Quants, staff reporter for the WSJ Scott Patterson follows the housing bubble collapse of 2008 and the lives of the brilliant-but-overly-confident hedge fund managers that contributed to the global economic meltdown.

Instead of painting the architects of such financial instruments as CDOs (collateralized debt obligations) as malevolent plotters, Patterson demonstrates, through their personal history, a group of mathematicians and physicists who were hell bent on trying to prove that they could create algorithms to accurately describe reality and repeatedly manipulate the fabric of the global market. And when they thought they had succeeded, raking in billions of dollars in profits during the early 2000s, they became assured of their dominion. Until of course, their quantified worlds fell apart around them.

The book is an essential read if you’re at all curious how the modern market works and why we find ourselves potentially facing a double dip in housing. It’s even more important as a cautionary tale for people like myself, who get a wee bit too obsessed with modeling reality through complex mathematics.

“We look at the present through a rear view mirror. We march backwards into the future.”
– Marshall McLuhan

The Quants, fascinated by poker and blackjack, devised models based on decades of historical market prices along with probability theories such as Brownian Motion, to predict future price movements. They imagined themselves sitting alone at a blackjack table, in the corner of the market, taking advantage of microscopic inefficiencies. However, the mechanized trading systems they engineered became the backbone of the entire global money grid, and when their historical models couldn’t cope with unprecedented events (and price movements that were more than incremental adjustments), they froze liquidity and crippled markets around the world.

Here’s the author on a recent episode of The Daily Show:

Related posts:

1. let’s write a book together
2. what’s my book about again?
3. Illusory superiority

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