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

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

The Catastrophe of Certainty

In his fascinating book entitled "On Being Certain - Believing You Are Right Even When You're Not," neuroscientist Dr. Robert A. Burton concludes the work with this poignant phrase: "We do not need and cannot afford the catastrophes born out of a belief in certainty."(pp.223-224).

Well, the Wall Street Journal's Scott Patterson chronicles the catastrophe that Dr. Burton's conclusion alludes to in this riveting volume entitled, THE QUANTS - How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It. Patterson states his case bluntly: "In other words, there is no single truth in the chaotic world of finance, where panics, manias, and chaotic crowd behavior can overwhelm all expectations of rationality. Models designed on the premise that the market is predictable and rational are doomed to fail. When hundreds of billions of highly leveraged dollars are riding on those models, catastrophe is looming." (P. 294).

Human history appears to be replete with disasters wherein one group seems `certain' they have captured the `truth.' The ongoing U.S. and global economic crisis is no different. Listen to Patterson:
The Truth was a universal secret about the way the market forked that could only be discovered through mathematics. Revealed through the study of obscure patterns in the market, the Truth was the key to unlocking billions in profits. The quants built giant machines - turbocharged computers linked to financial markets around the globe- to search for the Truth, and to deploy it in their quest to make untold fortunes. (p.8).

"It was about money, of course, but it was also about proof. Each added dollar was another tiny step toward proving they had fulfilled their academic promise and uncovered the Truth (p.8)

To the quants, beta is bad, alpha is good. Alpha is the Truth. If you have it, you can be rich beyond your wildest dreams." (p.8).

What happened? Patterson's perspective on this historical epoch is essential reading for those interested in economics, culture and human behavior. It is also a treatise about man and machine. He writes, "Always trust the machine" was the mantra." (P.128). It's also about our human appetite for order and predictability, as well as our propensity to become victims of the illusory: "The model created an illusion of order where none existed." (P.196). "To quants, unprecedented is perhaps the dirtiest word in the English language. Their models are by necessity backward-looking, based on decades of data about how markets operate in all kinds of conditions. When something is unprecedented, it falls outside the parameters of the models. In other words, the models don't work anymore." (Pp. 271-272).

Patterson does an absolutely spectacular job profiling the key players, organizations and belief systems that fueled the growth in hedge funds from billion in assets in 1990 to 0 billion in 2000, and trillion in 2007. How? How could such a rate of growth be sustained? Patterson's take: "the model was a jury-rigged formula based on the irrationally exuberant, self-reinforcing, and ultimately false wisdom of the crowd that assigned make-believe prices to an incredibly complex product. For a while it worked, and everyone was using it. But when the slightest bit of volatility hit in early 2007, the whole edifice fell apart. The prices didn't make sense anymore. Since nearly every CDO manager and trader used the same formula to price the fizzing bundles yet another instance of crowding that results from popular quant methodologies-they all imploded at once." (P.195).

I can't wait for the next book by Scott Patterson. THE QUANTS - How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It is distinctly a five star work of art. Essential reading. You'll love it. Spellbinding!

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

• ISBN13: 9780307453372
• Condition: New
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The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It Overview

“Beware of geeks bearing formulas.”
--Warren Buffett
 
In March of 2006, the world’s richest men sipped champagne in an opulent New York hotel.  They were preparing to compete in a poker tournament with million-dollar stakes, but those numbers meant nothing to them.  They were accustomed to risking billions.  
 
At the card table that night was Peter Muller, an eccentric, whip-smart whiz kid who’d studied theoretical mathematics at Princeton and now managed a fabulously successful hedge fund called PDT…when he wasn’t playing his keyboard for morning commuters on the New York subway.  With him was Ken Griffin, who as an undergraduate trading convertible bonds out of his Harvard dorm room had outsmarted the Wall Street pros and made money in one of the worst bear markets of all time.  Now he was the tough-as-nails head of Citadel Investment Group, one of the most powerful money machines on earth. There too were Cliff Asness, the sharp-tongued, mercurial founder of the hedge fund AQR, a man as famous for his computer-smashing rages as for his brilliance, and Boaz Weinstein, chess life-master and king of the credit default swap, who while juggling billion worth of positions for Deutsche Bank found time for frequent visits to Las Vegas with the famed MIT card-counting team.  
 
On that night in 2006, these four men and their cohorts were the new kings of Wall Street.  Muller, Griffin, Asness, and Weinstein were among the best and brightest of a  new breed, the quants.  Over the prior twenty years, this species of math whiz --technocrats who make billions not with gut calls or fundamental analysis but with formulas and high-speed computers-- had usurped the testosterone-fueled, kill-or-be-killed risk-takers who’d long been the alpha males the world’s largest casino.  The quants believed that a dizzying, indecipherable-to-mere-mortals cocktail of differential calculus, quantum physics, and advanced geometry held the key to reaping riches from the financial markets.  And they helped create a digitized money-trading machine that could shift billions around the globe with the click of a mouse.  
 
Few realized that night, though, that in creating this unprecedented machine, men like Muller, Griffin, Asness and Weinstein had sowed the seeds for history’s greatest financial disaster.  
 
Drawing on unprecedented access to these four number-crunching titans, The Quants tells the inside story of what they thought and felt in the days and weeks when they helplessly watched much of their net worth vaporize – and wondered just how their mind-bending formulas and genius-level IQ’s had led them so wrong, so fast.  Had their years of success been dumb luck, fool’s gold, a good run that could come to an end on any given day?  What if The Truth they sought -- the secret of the markets -- wasn’t knowable? Worse, what if there wasn’t any Truth?
 
In The Quants, Scott Patterson tells the story not just of these men, but of Jim Simons, the reclusive founder of the most successful hedge fund in history; Aaron Brown, the quant who used his math skills to humiliate Wall Street’s old guard at their trademark game of Liar’s Poker, and years later found himself with a front-row seat to the rapid emergence of mortgage-backed securities; and gadflies and dissenters such as Paul Wilmott, Nassim Taleb, and Benoit Mandelbrot.  
 
With the immediacy of today’s NASDAQ close and the timeless power of a Greek tragedy, The Quants is at once a masterpiece of explanatory journalism, a gripping tale of ambition and hubris…and an ominous warning about Wall Street’s future.
  

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