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The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It
“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 $30 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.
--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 $30 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.
337 pages, Hardcover
First published February 2, 2010
746 people are currently reading
9,053 people want to read
About the author
Scott Patterson
41books206followersI'm the author of a new book called Dark Pools, as well as a New York Times best-seller called The Quants. I'm a reporter for The Wall Street Journal, covering financial regulation from Washington, D.C. I've also written for the New York Times, Rolling Stone and Mother Earth News. I have a masters of arts degree from James Madison University and currently live in Alexandria, Virginia.
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Displaying 1 - 30 of 466 reviews
May 13, 2013
(Disclaimer: I worked in derivatives on Wall Street for several years, though this book is more focused on stat arb, not my area.)
This book reminded me of , not only in content matter but in style. This isn't a great thing, as I thought both books were hampered by some corny dramatics. In both cases the authors picked an inherently exciting topic; let the excitement tell itself and spend your energy telling us things we don't know rather than trying to inject more adrenaline into it. I'd rather the author kill every silly poker anecdote, every reference to the megalomania of Griffin and Asness, and instead talk some more about the basic principles of stat arb or convert arb, basic quant formulas and relative pricing approaches, I'm not expecting a textbook but when I read something I want it to walk away with as many new insights as possible.
The weirdest thing is the author's insistence on returning to the contrived theme of "The Truth," which far as I can tell simply refers to the ability to consistently beat the market, making it sound like Street quants were strange acolytes who thought of their work in reverent, near-religious terms. I've never met anyone who actually thinks like this; most quants or quantitative thinkers tended to think about their work with some scientific dispassion. Arguably that was actually the problem, because they were either too inflexible about violations of their assumptions (or failed to communicate the importance of flexibility to others), but I guess that didn't make as exciting of a story?
Style over substance, occasional insights clumsily wiped out by an unnecessary compulsion towards excitement.
This book reminded me of , not only in content matter but in style. This isn't a great thing, as I thought both books were hampered by some corny dramatics. In both cases the authors picked an inherently exciting topic; let the excitement tell itself and spend your energy telling us things we don't know rather than trying to inject more adrenaline into it. I'd rather the author kill every silly poker anecdote, every reference to the megalomania of Griffin and Asness, and instead talk some more about the basic principles of stat arb or convert arb, basic quant formulas and relative pricing approaches, I'm not expecting a textbook but when I read something I want it to walk away with as many new insights as possible.
The weirdest thing is the author's insistence on returning to the contrived theme of "The Truth," which far as I can tell simply refers to the ability to consistently beat the market, making it sound like Street quants were strange acolytes who thought of their work in reverent, near-religious terms. I've never met anyone who actually thinks like this; most quants or quantitative thinkers tended to think about their work with some scientific dispassion. Arguably that was actually the problem, because they were either too inflexible about violations of their assumptions (or failed to communicate the importance of flexibility to others), but I guess that didn't make as exciting of a story?
Style over substance, occasional insights clumsily wiped out by an unnecessary compulsion towards excitement.
March 11, 2011
The author of this book makes a big deal of the fact that the major players in his story treated stock price time series like Gaussian random variables. And they lost big time in 2008. Two of the minor players in the book, Nassim Taleb (author of ) and Benoit Mandelbrot (of fractal fame, and author of and ) had an entirely different concept. They treat stock prices as distributions with very large tails. (They did alright in 2008.) Well, duh!! Why didn't any of the "genius" quants understand this very basic concept? They all adopted a super-simplistic mathematical model that was in vogue, and got themselves and their companies into a heap of trouble. Were they geniuses? Well, in a sense they were, since they were able to get incredibly high-paying jobs. But on the other hand, they seem to have been mathematical lemmings.
December 29, 2011
Meh. The pervasive Poker Theory forces Patterson into a straightjacket as regards his casting decisions—colourful though these depicted characters prove to be—and he assigns the label Quant to those who do not seem to merit it and blame for the economic crisis of 2008 to these same Quants in what, in my humble opinion, is a mostly erroneous and misplaced determination of guilt. The background story itself is quite intriguing, as is the proliferation of mathematical modeling in financial markets, but the entire affair contained too much sizzle and too little steak.
November 24, 2021
A bit of a snooze, in spite of the author's pervasive use of "jaw-droppingly." Maybe the crash is too far in the past now to remain interesting. I did enjoy the phrase "massive hairballs of derivatives."
January 2, 2014
I don't think I've ever witnessed the reviews of a book which more pointedly reflect the personal biases/grievances/et al of the reviewers as this one does ... I worked a floor down from one of the main "characters" in this book from 2002-2007, so I know lots of these "types" in the real world and I don't think my experience has colored my perception of this as being an engaging & entertaining narrative. Some of these concepts could have been explained more easily - others, more thoroughly - but I felt the author's choice in most instances was appropriate within the parameters of providing narrative flow. Sure, the individual characterizations run the gamut from Tom Wolfe to Nicholas Nassim Taleb "lite" but, overall, I thought it was fairly balanced, pleasurable, informative, and quick read.
I'm glad I didn't bother reading any of these reviews ... sometimes I think people forget reviewing a book is supposed to be about the BOOK and not them!
I'm glad I didn't bother reading any of these reviews ... sometimes I think people forget reviewing a book is supposed to be about the BOOK and not them!
August 11, 2020
The first half is a page-turner, the second half reads like a drag.
It probably really depends on what you enjoy reading: I did like the background storytelling of Ed Thorp, Beat the Dealer, and the very early beginning of mathematics on Wall Street. I enjoyed reading about the mathematics of Brownian Motions, fractals, or about Mandelbrot and how they impacted the new financial modeling on top of statistics.
At some point though into the book, I am lost in the narrative. The author cramps in loose stories about quants that are relevant for the umbrella topic of quantitative trading, but not concise anymore with the overall story. Sometimes less is more. Towards the end, I am not even sure what the overall narrative was supposed to be. The end is abrupt and does not lead anywhere.
I will probably read the book again at some point. But for now, I am semi-disappointed.
It probably really depends on what you enjoy reading: I did like the background storytelling of Ed Thorp, Beat the Dealer, and the very early beginning of mathematics on Wall Street. I enjoyed reading about the mathematics of Brownian Motions, fractals, or about Mandelbrot and how they impacted the new financial modeling on top of statistics.
At some point though into the book, I am lost in the narrative. The author cramps in loose stories about quants that are relevant for the umbrella topic of quantitative trading, but not concise anymore with the overall story. Sometimes less is more. Towards the end, I am not even sure what the overall narrative was supposed to be. The end is abrupt and does not lead anywhere.
I will probably read the book again at some point. But for now, I am semi-disappointed.
February 19, 2019
Brilliant! This book is an absolute Five Star. It took me over three years after Big Short & Boomerang by Michael Lewis to rate a financial journalism book this high.
Most books which detailed the Great Recession of 2008 has basically restated the same thing, in almost the same refrain that its author knew that the world was running blindfolded towards a speeding train. In my view, this was, well, bullshit. Nobody but only a select few sensed what was happening and dared to out their money where their mouths were.
However, this is the brilliance of Patterson that he had dug out details hitherto unknown.
The book is pacy and even though you know how it will all end, you felt the thrill of the ride. again, Brillaint!!!
Most books which detailed the Great Recession of 2008 has basically restated the same thing, in almost the same refrain that its author knew that the world was running blindfolded towards a speeding train. In my view, this was, well, bullshit. Nobody but only a select few sensed what was happening and dared to out their money where their mouths were.
However, this is the brilliance of Patterson that he had dug out details hitherto unknown.
The book is pacy and even though you know how it will all end, you felt the thrill of the ride. again, Brillaint!!!
May 7, 2011
I'm a bit naive when it comes to the Wall Street world of statistical arbitrage and collateralized debt obligations, so I learned something new on every page of this book. I'm not sure I followed all of the different players and why exactly my mortgage is more expensive than my house, but this was definitely an interesting (and mostly accessible read) about how our economy ended up in the dumps and whet my appetite for more. Also, perhaps the stock market wasn't really a good idea in the first place and neither was computers, statistics, or poker. I think my rating would really be a 3.75, but I think from now on I'm against decimal points too. And milliseconds.
September 7, 2024
If you are really into finance, then this is great. If you are not, and get easily confused like I do, then it is not.
April 14, 2024
Scott introduces a deluge of details into what led the so called quantitative traders to their “doomsday� in 2008. By going over multiple high profile traders personal and business lives, we get a glimpse into why matters panned out the way they did. On occasion, Scott strays too far from the matter at hand or switches characters too quickly, leaving the reader with a feeling that they have to catch up to something.
January 10, 2012
As a book that reads as a narrative of the growth of mathematics in finance, as well as a who's who of the largest players in the industry, this book deserves 4 out of 5 stars. The book is easy to read and the author is very capable in making his point. The friendly narrative reads almost as a planned fiction with a well planned and executed story. It would probably be an enjoyable if read by someone that does not have a hard science background.
The reason for the low rating is two fold: The authors mistreatment of mathematics, and amazingly spiteful bias towards anything he calls a Quant.
To the first point, the author appears to be trying to artificially scare the reader about the mathematics used in finance. At one point, he lays out the second law of thermodynamics, so he appears to be aware that his audience is able to consume ideas from hard science. Then, the author will take simple mathematical concepts and introduce them in a manner that makes it appear that the concept is somewhere between witchcraft and hogwash. Saying that the financiers use the 'so called "correlation"', or using a drunkard as an analogy in the creation of a random walk is an obvious attempt to deride the tools, and not the practice.
To the second point, anyone that the author labels as a Quant is vilified, whereas anyone that did not have a hand in the fall of structured securities was labelled as a mathematician. Taleb and Mandelbrot are both mentioned several times as mathematicians, although only once is Taleb called a Quant. After I noticed the pattern, it was transparent that the author intended Quants to be bad, and mathematicians to be good.
The blame is squarely placed on traders that make use of mathematical models, missing the contribution of leverage to the financial crisis. The author does mention leverage a couple of times in the book, then proceeds to ignore its contribution and paint the mathematical models as the sole problem with today's markets.
The reason for the low rating is two fold: The authors mistreatment of mathematics, and amazingly spiteful bias towards anything he calls a Quant.
To the first point, the author appears to be trying to artificially scare the reader about the mathematics used in finance. At one point, he lays out the second law of thermodynamics, so he appears to be aware that his audience is able to consume ideas from hard science. Then, the author will take simple mathematical concepts and introduce them in a manner that makes it appear that the concept is somewhere between witchcraft and hogwash. Saying that the financiers use the 'so called "correlation"', or using a drunkard as an analogy in the creation of a random walk is an obvious attempt to deride the tools, and not the practice.
To the second point, anyone that the author labels as a Quant is vilified, whereas anyone that did not have a hand in the fall of structured securities was labelled as a mathematician. Taleb and Mandelbrot are both mentioned several times as mathematicians, although only once is Taleb called a Quant. After I noticed the pattern, it was transparent that the author intended Quants to be bad, and mathematicians to be good.
The blame is squarely placed on traders that make use of mathematical models, missing the contribution of leverage to the financial crisis. The author does mention leverage a couple of times in the book, then proceeds to ignore its contribution and paint the mathematical models as the sole problem with today's markets.
June 9, 2011
As someone that does not normally traffic in world of high finance or the jargon associated with it, I found this book to be fascinating and eye-opening. Patterson crafts a compelling narrative about the rise and fall of an extremely talented set of mathematicians and economists that came to dominate stock markets with quantitative modeling, sophisticated computer algorithms, and rapid fire computer based trading. Indeed, Patterson's grim conclusion suggests that perhaps the recent stock market collapse of 2007-2008 is not so much the end of "the quants," as he calls them, but rather only the signal of a new iteration of quants that may soon come to dominate Wall Street once again, and bring with them new potential for catastrophic failure of the markets. Without pomp or bombastic language, Patterson has crafted a subtle and thoughtful warning about and critique of the state of modern finance, which he deftly weaves into the narrative of those individuals that he chronicles throughout this book. I would highly recommend this book to anyone who finds soundbite media coverage of the economy lacking, and instead would like a more in-depth account of precisely what might have gone wrong in our economic systems over the past 5 years, or past 50 years if we really start to interrogate the genealogy of the present problems.
March 21, 2017
This book is an OK summary of the careers of a couple quants. Mostly things you'd get from reading extensive profiles of them, but with a couple vignettes I hadn't seen elsewhere.
What drove me batty was the author's motif of the search for The Truth.
Here's how he describes it:
>Regardless of which signature trade each man favored, they had something far more powerful in common: an epic quest for an elusive, ethereal quality the quants sometimes referred to in hushed, reverent tones as the Truth. The Truth was a universal secret about the way the market worked 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.
That sounds really cool, but I have literally never heard anyone who worked in quant finance talk like that. It reminds me very strongly of the movie Pi, though.
What quants *actually* do is identify repeating patterns in asset prices--which are usually not The Truth so much as consistent errors that other people make, or cases where people overpay for liquidity. More than any other subfield of finance, quants make money from identifying other people's mistakes. This is the exact opposite of a search for The Truth. It's a search for Lots Of Little Oopses.
What drove me batty was the author's motif of the search for The Truth.
Here's how he describes it:
>Regardless of which signature trade each man favored, they had something far more powerful in common: an epic quest for an elusive, ethereal quality the quants sometimes referred to in hushed, reverent tones as the Truth. The Truth was a universal secret about the way the market worked 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.
That sounds really cool, but I have literally never heard anyone who worked in quant finance talk like that. It reminds me very strongly of the movie Pi, though.
What quants *actually* do is identify repeating patterns in asset prices--which are usually not The Truth so much as consistent errors that other people make, or cases where people overpay for liquidity. More than any other subfield of finance, quants make money from identifying other people's mistakes. This is the exact opposite of a search for The Truth. It's a search for Lots Of Little Oopses.
March 1, 2019
A good historical account of the development of quantitative finance. The book doesn't go far in depth with the strategies but describes the players in the industry and their influence on the development. A good starting point for anyone who wants to understand the history of quants.
July 20, 2010
one of the most comprehensive book on the most recent financial collapse, written in an exciting way. And one does not have to be a ph.d to understand it.
May 23, 2024
Perhaps a five star rating is a bit too high. But ŷ doesn’t allow for a 4.5 star rating. Obviously, I really enjoyed this book.
This is the second book I’ve read from Scott Patterson. He has an easy writing style that I think resembles in the financial arena like a Michael Lewis. However, unlike Lewis, this seems to bear a greater resemblance to factual information.
It surprises me that I have taken this long to read this book, or find this book to read it. I am a bit of a financial nerd professionally, and have always been fascinated with looking for a glimpse of a system that mathematically can provide an investor an advantage. I can say with almost 30 years of experience as a professional financial planner, if these do exist it’s only for limited brief periods of time, and in small measures. Patterson goes very in-depth to explain how these quants devised ingenious mathematical strategies, and with the additional benefit of massive leverage, have an advantage for a brief time.
However, as everyone probably knows, and history has proven, there was a massive blow up. I personally don’t believe that the quantitative investing strategies were solely responsible for the meltdown in 2007 and 2008. There’s so many factors that have gone into that, I couldn’t fit it in one review.
Patterson does an outstanding job building the cast of characters: establishing who they were, how they began their careers, their backgrounds, their ups and downs, positive and negative characteristics, and uses a swath of three years to walk you through their adventures.
Another wonderful thing about the writing is that it opened the door to a treasure trove of other books that I would like to read, authors I would like to learn more about, and techniques that have been used in the past. Not that I’m looking for some perfect formula, as I said I don’t believe, nor does Patterson believe it exists.
Give this one a try if you have any interest in the technical side of how markets work, and how money is managed on a high-end level.
This is the second book I’ve read from Scott Patterson. He has an easy writing style that I think resembles in the financial arena like a Michael Lewis. However, unlike Lewis, this seems to bear a greater resemblance to factual information.
It surprises me that I have taken this long to read this book, or find this book to read it. I am a bit of a financial nerd professionally, and have always been fascinated with looking for a glimpse of a system that mathematically can provide an investor an advantage. I can say with almost 30 years of experience as a professional financial planner, if these do exist it’s only for limited brief periods of time, and in small measures. Patterson goes very in-depth to explain how these quants devised ingenious mathematical strategies, and with the additional benefit of massive leverage, have an advantage for a brief time.
However, as everyone probably knows, and history has proven, there was a massive blow up. I personally don’t believe that the quantitative investing strategies were solely responsible for the meltdown in 2007 and 2008. There’s so many factors that have gone into that, I couldn’t fit it in one review.
Patterson does an outstanding job building the cast of characters: establishing who they were, how they began their careers, their backgrounds, their ups and downs, positive and negative characteristics, and uses a swath of three years to walk you through their adventures.
Another wonderful thing about the writing is that it opened the door to a treasure trove of other books that I would like to read, authors I would like to learn more about, and techniques that have been used in the past. Not that I’m looking for some perfect formula, as I said I don’t believe, nor does Patterson believe it exists.
Give this one a try if you have any interest in the technical side of how markets work, and how money is managed on a high-end level.
August 8, 2021
A really interesting summary of the major players in the business that I ended up in and how they’re connected. Raises questions about the incentives at play in the modern financial industry and how we model and manage risks. A slice of trading life from a bygone time yet echos quite familiarly.
The dramatisation, the focus on personalities and anchoring themes that might not be central to how people in the business think about things didn’t bother me with my limited attention span at all. If I wanted to read Hull I would be reading Hull.
The dramatisation, the focus on personalities and anchoring themes that might not be central to how people in the business think about things didn’t bother me with my limited attention span at all. If I wanted to read Hull I would be reading Hull.
April 13, 2024
A tiny bit outdated but still a fairly interesting read - lots of history that ties into the fundamental topics in mathematical financial modelling (random walks, brownian motion, etc.) and how it relates to major economic events.
I was a fan of how Patterson dives into the personalities of some of the big players like Cliff Asness and Pete Muller. It's cool to see how competitive and obsessed one can get, and these guys are absolutely stimming for the markets lol
I liked the Simons book more, this one has similar vibes though!
I was a fan of how Patterson dives into the personalities of some of the big players like Cliff Asness and Pete Muller. It's cool to see how competitive and obsessed one can get, and these guys are absolutely stimming for the markets lol
I liked the Simons book more, this one has similar vibes though!
June 22, 2018
Beware of geeks bearing formulas.
Warren Buffett
You got to know when to hold 'em,
Know when to fold 'em,
Know when to walk away,
And know when to run.
Kenney Rogers, The Gambler
If I had to come up with a theme for this book, the Warren Buffett quote would be it. Quants refers to math whizzes with math, statistics and science backgrounds who founded and inhabited the world of quantitative finance, the use of statistical models to decide when to buy and sell investments, usually in high-frequency trading, and to assign risk (as in the Kenny Rogers quote) for the purpose of pricing increasingly complex financial products. Mr. Patterson appears to lay the primary blame for the 2007-2008 panic at the feet of the quants. While I concede that he made a strong case for their contribution to the situation, I am not convinced that they are the primary cause if.
Interestingly enough, the quant pioneers got their start learning how to manage risk in games of chance such as blackjack and roulette, like their predecessors who centuries earlier pioneered the science of probability and statistics for purposes of managing risk while gambling in games of dice. Having mastered the statistics of gaming, they moved on to the larger casino otherwise known as Wall Street. One key assumption in their statistics is the “drunkard’s walk� behavior of stock prices. In other words, the market is not completely efficient, and the quants� understanding of statistics and historical market data allow them to better recognize when a stock is low and to decide when to sell high before the price falls again. Of course, the quants� investing strategies involved more than just statistics and often looked like value investing. One example given in the book involved a company selling stocks that would not pay dividends the first year, and the price reflected that lack of dividends. However, there was a different legal definition for dividends in the UK such that the same stocks bought in the UK would pay dividends in the first year. One quant firm recognized this and bought these stocks in the UK at the discounted price, allowing them to get that dividend.
It appears that the biggest contribution by the quants to the market panic relates to their risk models and their development of complex financial instruments. Generally, they assumed a normal distribution for price swing behavior, but this distribution underestimates the frequency of large market swings such as corrections and panics. The normal distribution predicts that such price swings occur once every few thousand years, but they actually occur every few years. If their risk models were so underpredicting the frequency of these events, they were significantly underestimating the risk profiles used in financial decision making. With regards to complex financial instruments such as collateralized debt obligations and other mortgage backed securities, they assumed that bundling a group of mortgages into a single instrument would spread out the risk associated with a single borrower failing to pay, failing to consider dynamics that could cause multiple borrowers to fail to pay. In other words, underestimating risk again. Furthermore, some of their financial instruments helped to produce unrecognized interconnections within the global finance market such that weakness in one part of the market might cascade into another part. Another failure to recognize risk.
There were, however, other major market dynamics that were independent of the quants. For example, after the dot-com crash and the market weakness following the 9-11 terrorist attacks, the Federal Reserve lowered interest rates to very low values in an effort to protect the economy. This easy credit situation allowed firms to make increasingly risky bets using leverage, borrowed money, collateralized by their investments. When these bets payed off, the outcome was large profits. More cautious firms faced a different risk, that their customers would take their money to the less risk-averse firms in search of higher returns on investment, and often embraced the riskier modus operandi to stay competitive. As they say, what can’t go on, won’t, and the party ended, thanks to securities backed by sub-prime mortgages. As confidence in these now shaky investments fell, creditors demanded more collateral, a margin call, from firms holding them, forcing the debtor firms to raise more money by selling assets. Because no one would by the mortgage backed securities, these debtor firms had to sell other assets such as stocks, producing a glut on the market, lowering the price of these assets as well as the value of such assets on the books of these firms, prompting further margin calls, resulting in a vicious cycle of margin calls and reduced asset values, hence, the panic.
While the quants underestimated risk and increased market interconnectedness, they didn’t put a gun to the heads of these investment firms and force them to leverage up. In search of ever higher returns and profits, they chose to take ever greater risks. There is nothing wrong with making profits; businesses that don’t make money go bankrupt, but businesses that take unnecessarily excessive risks greatly increase the chances of going bankrupt, as well. The quants were a part of this tapestry of risk and greed, but only a part of it, not the whole tapestry.
Warren Buffett
You got to know when to hold 'em,
Know when to fold 'em,
Know when to walk away,
And know when to run.
Kenney Rogers, The Gambler
If I had to come up with a theme for this book, the Warren Buffett quote would be it. Quants refers to math whizzes with math, statistics and science backgrounds who founded and inhabited the world of quantitative finance, the use of statistical models to decide when to buy and sell investments, usually in high-frequency trading, and to assign risk (as in the Kenny Rogers quote) for the purpose of pricing increasingly complex financial products. Mr. Patterson appears to lay the primary blame for the 2007-2008 panic at the feet of the quants. While I concede that he made a strong case for their contribution to the situation, I am not convinced that they are the primary cause if.
Interestingly enough, the quant pioneers got their start learning how to manage risk in games of chance such as blackjack and roulette, like their predecessors who centuries earlier pioneered the science of probability and statistics for purposes of managing risk while gambling in games of dice. Having mastered the statistics of gaming, they moved on to the larger casino otherwise known as Wall Street. One key assumption in their statistics is the “drunkard’s walk� behavior of stock prices. In other words, the market is not completely efficient, and the quants� understanding of statistics and historical market data allow them to better recognize when a stock is low and to decide when to sell high before the price falls again. Of course, the quants� investing strategies involved more than just statistics and often looked like value investing. One example given in the book involved a company selling stocks that would not pay dividends the first year, and the price reflected that lack of dividends. However, there was a different legal definition for dividends in the UK such that the same stocks bought in the UK would pay dividends in the first year. One quant firm recognized this and bought these stocks in the UK at the discounted price, allowing them to get that dividend.
It appears that the biggest contribution by the quants to the market panic relates to their risk models and their development of complex financial instruments. Generally, they assumed a normal distribution for price swing behavior, but this distribution underestimates the frequency of large market swings such as corrections and panics. The normal distribution predicts that such price swings occur once every few thousand years, but they actually occur every few years. If their risk models were so underpredicting the frequency of these events, they were significantly underestimating the risk profiles used in financial decision making. With regards to complex financial instruments such as collateralized debt obligations and other mortgage backed securities, they assumed that bundling a group of mortgages into a single instrument would spread out the risk associated with a single borrower failing to pay, failing to consider dynamics that could cause multiple borrowers to fail to pay. In other words, underestimating risk again. Furthermore, some of their financial instruments helped to produce unrecognized interconnections within the global finance market such that weakness in one part of the market might cascade into another part. Another failure to recognize risk.
There were, however, other major market dynamics that were independent of the quants. For example, after the dot-com crash and the market weakness following the 9-11 terrorist attacks, the Federal Reserve lowered interest rates to very low values in an effort to protect the economy. This easy credit situation allowed firms to make increasingly risky bets using leverage, borrowed money, collateralized by their investments. When these bets payed off, the outcome was large profits. More cautious firms faced a different risk, that their customers would take their money to the less risk-averse firms in search of higher returns on investment, and often embraced the riskier modus operandi to stay competitive. As they say, what can’t go on, won’t, and the party ended, thanks to securities backed by sub-prime mortgages. As confidence in these now shaky investments fell, creditors demanded more collateral, a margin call, from firms holding them, forcing the debtor firms to raise more money by selling assets. Because no one would by the mortgage backed securities, these debtor firms had to sell other assets such as stocks, producing a glut on the market, lowering the price of these assets as well as the value of such assets on the books of these firms, prompting further margin calls, resulting in a vicious cycle of margin calls and reduced asset values, hence, the panic.
While the quants underestimated risk and increased market interconnectedness, they didn’t put a gun to the heads of these investment firms and force them to leverage up. In search of ever higher returns and profits, they chose to take ever greater risks. There is nothing wrong with making profits; businesses that don’t make money go bankrupt, but businesses that take unnecessarily excessive risks greatly increase the chances of going bankrupt, as well. The quants were a part of this tapestry of risk and greed, but only a part of it, not the whole tapestry.
March 9, 2020
The book is very fascinatingly written and it weaves the fund managers at the helm of 2008 financial crisis from the perspective of a high stakes poker game they enjoy and that’s how the book seems to derive a lot of the correlations. The work by Mandelbrot who predicted this years before and Nassem Nicolas Taleb who has been vocal about the excesses of the Quants, play a minor role too. I was unaware of the role Ed Thorpe of Beating the Dealer fame played to inspire the hedge fund revolution. However, although the author mentions the algorithms and the differences in approaches, it’s a far simplistic approach to explain the 2008 crisis. I do think this a good book to learn about the history leading up to the crisis and how quant funds like AQR, PDT, GSAS and others helped amplify it.
August 15, 2021
Conta a história de quatro magnatas de Wall Street, que fizeram fortuna com o uso de métodos quantitativos e modelos matemáticos. Há um foco especial no período que antecedeu a crise de 2007 e suas causas. Vale a leitura.
March 6, 2023
The first book I ever read on quant finance. Shaped my career path and is still included in my answer to interview questions about why I chose my first job.
May 6, 2024
Very nice overview of the HFT and quants world.
March 15, 2017
This book is pretty dense. I wouldn't recommend it to a casual reader. I am starting an algorithmic trading fund, so I liked this book because I am trying to get more focused information on the history of algorithmic trading on Wall St and with traditional investment firms.
If you're looking for entertaining stories about wall st and trading, this is not really the book for you.
It's a great backstory that walks you through the original algorithmic traders on wall st and how their quantitative analysis strategies evolved from trying to beat the dealer at blackjack or game the roulette wheel, to running the world's financial markets.
Not so much about high speed trading, this book talks a lot about the theory of using computer algorithms to trade and find an "edge" against human traders.
There's really interesting backstories behind the role that the quants played during "Black Monday" in the 80s, the collapse of LTCM in the late 90s, the 2007/2008 derivatives bubble.
I did not realize that most of the financial voodoo products like CDOs, credit default swaps, options trading, etc were mostly instruments created by quant traders.
Nassim Taleb, the author of The Black Swan makes an appearance a few times in this book.
If you google "wall street trading floor" you will see the pictures of barren wall st trading floors with a tiny fraction of traders compared to what you'll probably remember from the movies. This is thanks to "the quants".
Computer algorithmic trading systems have depreciated the traditional wall st trader.
We are now in an era where Artificial Intelligence is shifting the market once again...who knows how this will work out.
Overall, this was a great book with lots of solid information about the previous generations of hedge funds and trading methods used by the biggest funds in the world.
It gets boring sometimes, it probably could have been about 30% shorter.
If you're looking for entertaining stories about wall st and trading, this is not really the book for you.
It's a great backstory that walks you through the original algorithmic traders on wall st and how their quantitative analysis strategies evolved from trying to beat the dealer at blackjack or game the roulette wheel, to running the world's financial markets.
Not so much about high speed trading, this book talks a lot about the theory of using computer algorithms to trade and find an "edge" against human traders.
There's really interesting backstories behind the role that the quants played during "Black Monday" in the 80s, the collapse of LTCM in the late 90s, the 2007/2008 derivatives bubble.
I did not realize that most of the financial voodoo products like CDOs, credit default swaps, options trading, etc were mostly instruments created by quant traders.
Nassim Taleb, the author of The Black Swan makes an appearance a few times in this book.
If you google "wall street trading floor" you will see the pictures of barren wall st trading floors with a tiny fraction of traders compared to what you'll probably remember from the movies. This is thanks to "the quants".
Computer algorithmic trading systems have depreciated the traditional wall st trader.
We are now in an era where Artificial Intelligence is shifting the market once again...who knows how this will work out.
Overall, this was a great book with lots of solid information about the previous generations of hedge funds and trading methods used by the biggest funds in the world.
It gets boring sometimes, it probably could have been about 30% shorter.
November 1, 2012
This book describes some of the causes of the financial crisis at the most fundamental level. It's an oversimplification to state that the financial crisis was caused by the banks behaving badly. It's more satisfying to know the details and the human interaction and decision making that went into it. The hedge funds weren't the only cause of the financial crisis which was more due to the housing bubble, merging of big banks, and excessive leveraging. But the hedge funds were the guys who did much of the risky gambling that wiped out trillions of dollars of the nation's wealth. It's amusing to learn about the details of how their models broke down and how these supposed geniuses got caught with their pants down. Starting in late 2006 they were experiencing 25-sigma events every week. The sigma is defined relative to the standard deviation where 1-sigma is roughly 33% probability, and 2-sigma is 5% probability. A 25-sigma event is like 1 chance in 10 to the 20th power. It's funny that these people's models were so flawed as to witness these events happening that were predicted to be impossible. That's why they lost so much money. They were leveraging money in such a way that a slight loss would wipe them out due to margin calls. In reality, these 25-sigma events had more like an 80% probability given the fact that the adjustable rate mortgage payments were guaranteed to explode 2 years after they were sold. The characters in the book were real people and not all of them were very interesting, as you might imagine with math-nerds. But this book is interesting in that it shows how these people who thought they were so smart were still not able to think outside of the box and see how the system they were used to was about to be turned upside down.
April 29, 2012
Este libro explica un montón de cosas sobre la crisis de 2008, entrando tras un montón de puertas que yo creía que siempre habían estado cerradas. Es una lectura muy interesanet y muy bien llevada sobre cómo afectó el crack a los hedge funds, fondos de inversión sin reglas escritas sobre cómo invertir el dinero. Fondos de inversión discrecionales, podríamos llamarlos. En ellos, los más afamados traders se llevan cada año el 2% de lo que gestionan y el 20% de lo que ganan, operando en mercados guiados por alta matemática que busca pequeñas discrepancias en los mercados o bien tendencias que nadie más ha visto para obtener beneficios.
El libro comienza narrando las vidas de los principales managers de hedge funds, cómo se conocieron y formaron, cómo lanzarosn sus fondos, y cómo todos se pegaron la gran galleta en 2007, 2008, 2009 y subsiguientes.
El libro destroza la hipótesis de Fama de los mercados eficientes y cuenta un montón de cosas interesantes. Tiene algunos fallos de bulto, como cuando describe el carry trade (estás largo de yenes, no corto, cenutrio) y alguna otra, pero en general se lee muy bien.
El libro comienza narrando las vidas de los principales managers de hedge funds, cómo se conocieron y formaron, cómo lanzarosn sus fondos, y cómo todos se pegaron la gran galleta en 2007, 2008, 2009 y subsiguientes.
El libro destroza la hipótesis de Fama de los mercados eficientes y cuenta un montón de cosas interesantes. Tiene algunos fallos de bulto, como cuando describe el carry trade (estás largo de yenes, no corto, cenutrio) y alguna otra, pero en general se lee muy bien.
June 16, 2010
Jeebus this book was pretty bad. I felt compelled to read it because I know some large fraction of the characters involved, but I don't really recommend it for anyone.
For starters, a lot of the facts are not overly factual.
Next, if you already know about the quant kerfuffle, there is very very little you will learn from this book. And if you don't know about the quant kerfuffle, why on earth would you want to?
He takes random potshots at people (e.g. what does he have against Eugene Fama (efficient markets economist)?
I think the worst thing is that he conflates the quant crisis of 2007 with the general enormous disaster (in financial markets; in the real economy) of 2008, particularly when talking about Boaz, who had a stat arb business (2007) but was most active in credit markets (2008). There are connections but it's just not the case that the quant crisis of 2007 caused the 2008 problem in any meaningful sense (it is more true that there are some common causes of both, but that isn't his angle so much).
Booo.
For starters, a lot of the facts are not overly factual.
Next, if you already know about the quant kerfuffle, there is very very little you will learn from this book. And if you don't know about the quant kerfuffle, why on earth would you want to?
He takes random potshots at people (e.g. what does he have against Eugene Fama (efficient markets economist)?
I think the worst thing is that he conflates the quant crisis of 2007 with the general enormous disaster (in financial markets; in the real economy) of 2008, particularly when talking about Boaz, who had a stat arb business (2007) but was most active in credit markets (2008). There are connections but it's just not the case that the quant crisis of 2007 caused the 2008 problem in any meaningful sense (it is more true that there are some common causes of both, but that isn't his angle so much).
Booo.
September 26, 2012
I've read more than a few books on Wall Street's latest fiasco. Much like [[ASIN:0393338827 The Big Short: Inside the Doomsday Machine]], The Quants makes what would be a dry narrative more interesting by focusing on characters as much as arcane stock market theories. While I liked Lewis' book a bit more, the Quants more than holds its own. I enjoyed learning more about the history the sub prime mess.
At times, I had a hard time keeping track of the characters. Patterson is a gifted writer and I hope that he churns out more texts.
At times, I had a hard time keeping track of the characters. Patterson is a gifted writer and I hope that he churns out more texts.
March 3, 2016
Uma descrição dinâmica, e eu sou suspeito por gostar, já que é parte do meu dia a dia profissional. Mas as ideias mostradas no livro e o desespero perante as crises deixaram a leitura MUITO boa!
December 25, 2016
Very well written and highly entertaining. Must read. Great real-life characters.
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