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

Lofty Mathematical principles applied to finances and real-life can make for exciting reading. First example: Ariel Rubinstein had been toiling through an article on how to apply mathematics to games; and at length the economist found himself, as the sharpness of his focus waned, seeking respite from the tedium in Edgar Allan Poe's short story "The Purloined Letter." But the economist's work, it seemed, wouldn't let him rest. For in the middle of the detective story, Poe launched into an analysis of mathematics and game theory! Rubinstein read in Poe: "I knew one about eight years of age, whose success at guessing in the game of `even and odd' attracted universal admiration. This game is simple, and is played with marbles. One player holds in his hand a number of these toys, and demands of another whether that number is even or odd. If the guess is right, the guesser wins one; if wrong, he loses one. "The boy to whom I allude won all the marbles of the school. Of course he had some principle of guessing; and this lay in mere observation and admeasurement of the astuteness of his opponents. For example, an arrant simpleton is his opponent, and, holding up his closed hand, asks, `are they even or odd?' Our schoolboy replies, `odd,' and loses; but upon the second trial he wins, for he then says to himself, `the simpleton had them even upon the first trial, and his amount of cunning is just sufficient to make him have them odd upon the second; I will therefore guess odd;' -- he guesses odd, and wins. "Now, with a simpleton a degree above the first, he would have reasoned thus: `This fellow finds that in the first instance I guessed odd, and, in the second, he will propose to himself, upon the first impulse, a simple variation from even to odd, as did the first simpleton; but then a second thought will suggest that this is too simple a variation, and finally he will decide upon putting it even as before. I will therefore guess even;' -- he guesses even, and wins. "Now this mode of reasoning in the schoolboy, whom his fellows termed `lucky,' -- what, in its last analysis, is it?' `It is merely,' I said, `an identification of the reasoner's intellect with that of his opponent.'" Later he found that the mathematics within game theory prevailed. There was no statistically significant difference between how often each player won (SN: 7-08). Second Example is in the fast-paced story of "The Quants," Wall Street Journal reporter Patterson explores the role of mathematicians behind the financial crash of 2008. The tale follows investors who are called the Quants forasmuch as they use complicated abstract mathematics and computers to gain millions of dollars through the applying the results to the market. This true-life plot is fascinating and simple to understand, however some financial terminology can be a bit difficult to comprehend, yet the story of applied mathematical high-jinks and excessive prosperity along with the fast rise and upcoming fa

Interesting book about the history of the rise of quants on wall street. Detail descriptions of the men who pioneered quantative finance and those who rose to fame in the 90's and 00's. Very good book that discusses a lot of the strategies used by different quants but does not contain too many technical aspects. Very interesting short biographies of various quants are also mixed in throughout the book.

Scott Patterson's "The Quant" is an excellent narrative of Wall St. mathematical trading methods. It gives the prologue to the methods, and how they morphed into real world attempts to "beat the market." They presume to strike it rich, but just fed upon the age old problem of leverage. Many of the gimmicks described as investments used by the Quants are nothing but ways to borrow lots of money on the trade. And it works, for the survivors. The failures are long in the dust bin of history. Then August, 2007, yes, 2007, hits, and this facts of financial life hit the Quants broadsides. The description of this month began of the Great Recession itself makes this book well worth the money. You didn't see this in the press, the daily news, or even the belated commentaries even now. But you find it here...How the Crash began on an up day on Wall St. If you don't know, you should read the "Quants." I actually know something about the financial and stat models discussed in the books, and the fallacy of the Quants' misshapen concept of what is an efficient market and what isn't. I always figured they were missing the point and the proper data was not there to be used. (No, I didn't work on Wall St. Actually I worked debunking the "Quants" finance professors who served as so-called expert witnesses.) This book has good descriptions, and evolution, of those models and methods. The idea that efficient markets presumes regularity of the economic world is much too limited a perspective on what an efficient market is. The world turns, things change, i.e. oil prices in the '70's and 2007 and 2008, What was a good price for 'economic things' no longer are tomorrow's good prices. Beneath these had developed a structure of nearly 100% indebtedness, whether it the house on the corner of 1100 Elm St. or the "Quant" on Wall St. Like the little pigs who built of straw and sticks when the wolf at the door huffed and puffed the house caved in. So when the economy trembled, and yesterday's prices were no longer the efficient price of tomorrow, economic value changed. Tomorrow's efficient price became different from yesterday's. Quant's would see this as a bounce to cash in, and like so many, didn't realize this was a whole new price framework. The Quant's stats saw tomorrow as just more of yesterday; but it no longer wasn't. "The Quants" does an excellent job of showing how the house of straw and sticks that the "Quants" built blew down. The book can be read from lots of angles I'm sure. The conspiracy of Wall St. no doubt is one; another, a real life who done it; "Vanity, vanity, all is vanity," a third angle, etc. Mainly, the book restates a couple of old adages, "A fool and his money are soon parted," and "Neither a lender or borrower be." The Quants violated both, as did many others in the US and world wide, and are still paying the piper, in many cases literally still paying off the debt rung up. I also had a great grandfather who thought

As a history of quantitative trading, this book is a lot of fun, and despite what some of the reviewers might say, the author appears to understand his own mathematical limitations, and goes out of his way to explain the concepts he does introduce (and to respond to another review, if you don't know what a call option is, you probably won't pick up this book in the first place). I was amused that one of the "fathers" of the quant revolution (according to this book) is Eugene Fama, since the success of the better hedge funds is a slap in the face of the Efficient Market Hypothesis. It is also interesting that while the book's story ends sometime in 2009, most of the protagonists (Ken Griffin, Peter Muller, Jim Simons, not sure about Asness and Weinstein) are doing very well indeed, with Citadel making continuing noises about taking over the world. The success of quantitative trading is another symptom of continuing industrial revolution, where the (intellectual) workers are controlling the means of production (which consist of a $500 PC and a $20/month internet connection). As always, power intoxicates, and the same exuberance which led to the Shelby Cobra has led to the multi-layered CDO -- neither is very safe, and both have brought profits to the people making them. However, the real problems lie elsewhere -- political pressures have caused the government (of which the Fed is a part) to print money to paper over systemic problems in the US economy, and exacerbating the already severe "more money than brains" problem, which have hurt a lot of suckers (which, in this case, include many, many pension fund managers, who, unfortunately, play with other people's money), and this will continue (the DotCom boom/bust, the housing boom/bust, the structured debt boom/bust) until people understand that you cannot have something for nothing -- for now things are only getting worse with the government's printing presses working 24/7 (and yes, I am an adherent of the Austrian School, and strongly recommend "Meltdown" and any one of Rothbard's books).

The author is a staff reporter for The Wall Street Journal, and it's clear that he has done a good deal of research for this book, which describes the history and the (sometimes colorful) characters behind the growth of quantitative methods in hedge funds and throughout Wall Street. The book begins and ends with the Wall Street Poker Night Tournament at the St. Regis Hotel in Manhattan--specifically, the tournaments of 2006 and 2009, where many quants would seek to strut their IQs. (Have you ever noticed that Wall Street quants seem to love poker, while fundamentally-oriented investors like Warren Buffett seem to prefer bridge? One possible reason is that compared to bridge, poker is much more easily characterized by math--specifically, math that computers and sharp people can master.) A lot happened between 2006 and 2009, of course, but before the author spends much time discussing all of the market turmoil of the last few years (and the role quantitative investing had), he spends perhaps half the book discussing the relevant background of quant methods, which dates back to the 1960s, 1950s, or 100 years ago, depending on how you look at things. Digesting this history, the reader will likely conclude that big events (in numerous disciplines) seldom come out of nowhere--they develop over a long time, and once a catalyst occurs, they can present themselves with full force. And so it is with quantitative investing. So it is entirely appropriate that author Patterson devote the time necessary to present this important background. Well before the trading turmoil of 2007 - 09, there was the one-day market crash of 1987, which was caused in part by a disastrous overuse of "portfolio insurance." Patterson describes how many of the academics who promoted portfolio insurance didn't realize how transactions in derivative markets, such as stock index futures, could essentially flow into the cash markets--where most investors see them. This general problem would grow greatly in the 2007 - 09 experience, so it is important to review the 1987 episode. It doesn't take the reader much insight to generalize that one of the fatal flaws of the quants was that while math can be useful to help researchers understand some of the complexities of the economic world, economic reality is not a purely deterministic endeavor--and, especially when people act in unusual ways (typically during times of extreme stress), seemingly regular market patterns aren't quite so regular. Indeed, some quants, such as Benoit Mandelbrot (discussed in the book) saw the limits to some of the quants' simplifying assumptions. That's another key point: Simplifying assumptions are just that--assumptions. People, whether they be Joe Six-pack or the head of the Fed, reserve the right to change their behavior. The fact that they don't do so frequently is what makes math models seem to work, and the fact that sometimes people do change behavior (perhaps from that suggested by raw logi