Product Description

“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.
  

Product Details

• Amazon Sales Rank: #6599 in Books
• Published on: 2010-02-02
• Released on: 2010-02-02
• Original language: English
• Number of items: 1
• Binding: Hardcover
• 352 pages

Features

• ISBN13: 9780307453372
• Condition: New
• Notes: BUY WITH CONFIDENCE, Over one million books sold! 98% Positive feedback. Compare our books, prices and service to the competition. 100% Satisfaction Guaranteed

From Publishers Weekly
In a fast-moving narrative, Wall Street Journal reporter Patterson explores the coterie of mathematicians behind the Wall Street crash of 2008. The story's stars are "an unusual breed of investors" called quants, who "used brain-twisting math and super-powered computers to pluck billions in fleeting dollars out of the market." Following the first quant, Beat the Market author Ed Thorp, from his graduate school days in 1955, and introducing others like Peter Muller and Ken Griffin as they established funds at major investment firms, Patterson spins a fascinating story of riches amassed for a few and, inevitably, lost for many: a collapsing hedge fund, "imploding under the weight of toxic subprime assets," took down the system "like a massive avalanche started by a single loose boulder." Though his narrative is interesting and easy to follow, Patterson's explanations of investment terms are not for novices; a glossary would have helped. As he puts the excesses and failures of Wall Street into perspective, however, Patterson also offers evidence that Wall Street hasn't learned its lesson: as of spring 2009, "several banks reported stronger earnings numbers... in part due to clever accounting tricks... and other potentially dangerous quant gadgets being forged in the dark smithies of Wall Street."
Copyright © Reed Business Information, a division of Reed Elsevier Inc. All rights reserved.

From Booklist
*Starred Review* Journalist Patterson proves Mark Twain’s point that “truth is stranger than fiction.” Patterson’s recounting of the events leading up to and including the global financial meltdown in 2007 and 2008 features the Quants, a new breed of investor, a corps of elite math geniuses who exchanged the hunches of risk-taking traders for advanced mathematical tools, including complicated algorithms and supercomputers. These new titans of Wall Street set off a chain of events for a financial catastrophe beginning in August 2007, which nearly destroyed the world’s financial markets. This is primarily the story of four main “characters”—Morgan Stanley’s Peter Muller, Citadel hedge fund’s Ken Griffin, Cliff Asness of AQR hedge fund, and Boaz Weinstein of Deutsche Bank. These and other number-crunching wizards amassed multibillion-dollar war chests and then the numbers turned against them. Their ascendancy to the heights and then extraordinary fall to near extinction is a remarkable story, as is the possibility that they all will rise from the ashes. This is a must-read, excellent book. --Mary Whaley

Review
“Scott Patterson has the ability to see things you and I don’t notice. In The Quants he does an admirable job of debunking the myths of black box traders and provides a very entertaining narrative in the process.”
--Nassim Nicholas Taleb, New York Times bestselling author of Fooled by Randomness and The Black Swan

“Read this book if you want to understand how the collapse of the global financial system was at its core a failure of modern financial theory and its most ardent disciples. Patterson is able to gracefully explain the complex ideas underpinning our financial system through an extraordinarily engaging and insightful story.”
 --Mark Zandi, Chief Economist of Moody’s Economy.com and author of Financial Shock

"Enlightening and enjoyable...Patterson masterfully recounts how brilliant mathematicians and technologists ignored the human element...If you're serious about understanding the financial meltdown, you need to read this book."
--David Vise, Pulitzer Prize Winner, author of The Google Story, and Senior Advisor, New Mountain Capital

"A  compelling tale of greed and conceit, The Quants tells the inside story of the Wall Street rocket scientists who could couldn’t resist playing with numbers and nearly blew themselves up.”
--Michael J. Panzner, author of Financial Armageddon and When Giants Fail

"The Quants will keep hedge fund managers on the edge of their Aeron chairs, while the rest of us read in horror about their greed and their impact on the wider economy. A gripping tale right until the last page...but I fear this is perhaps not yet the end of the story."
--Paul Wilmott, Oxford Ph.D., founding partner of Caissa Capital, and author of Paul Wilmott Introduces Quantitative Finance

“A character-rich tale of how quirky geniuses cut their teeth on gambling, then moved on to the biggest casino of all, Wall Street. From blackjack to black swans, The Quants tells how we got where we are today.”
--William Poundstone, author of Fortune’s Formula

Customer Reviews

Whiz-Bang Journalist Misinforms Public with Sensationalism and Confused Analysis
Scott Patterson's _The Quants_ was thoroughly terrible. Patterson manages to make a dizzying array (to borrow a term he overuses) of errors, packaged in a mass of hyperbolae and confused statements.

It had a few good qualities, which I'll start with. It was pretty entertaining, especially the first half, and it was a quick and easy read. It also had some interesting bits that don't appear in other books (that I'm aware of): the "second forty hours" at Renaissance and the description of AQR deciding to go back into the markets on the Friday just after the quant liquidation in August 2007. Finally, I applaud the message that risk management policies based on the normal distribution can be deeply pernicious. But the problems with this book were monumental.

The first problem with Patterson's book is that it's wrong at its core. Quant traders weren't guilty of causing the credit crisis. Some of them were victimized by it (when Lehman went bust, it took with it a bunch of money belonging to some very good, honest, and hardworking quant traders that were Lehman's prime brokerage clients). It's foolish to claim that market neutral trading, CTAs, and high frequency traders were somehow responsible for investment banks' over-leveraged, toxic balance sheets. The responsibility for this falls squarely on the shoulders of banks' managers, and perhaps also on the shoulders of free-market disciples who believe, despite all the evidence throughout history to the contrary, that regulation of human behavior is bad. The crime in this is that it dramatically changes the focus from the real source of the problem that nearly buckled our economic system--namely unchecked greed, incompetent or impotent risk managers, screwed up incentive structures, and misguided regulation--to a group of traders that people are naturally inclined to hate anyway. If Patterson's disingenuous take on the credit crisis is widely adopted, it will make for a very convenient scapegoat enabling greedy, ego-hungry Goldman Sachs execs once again to make the very same kinds of bets that (at least nearly) brought them down to begin with. Did these execs use statistics to justify their position? Sure. But to make it sound like quants are somehow responsible for the stupidity or greed of their bosses who didn't (want to?) understand the weaknesses of a model is moronic.

Another fundamental problem with this book was the arbitrariness of Patterson's use of the label "quant." Whenever it was convenient (when it sounded evil), he labeled or insinuated the activity as being quant. But math is used pretty much everywhere in finance, and it always has been. Patterson:
- Treats the computation of a price-to-book ratio (P/B) as "value investing" but taking the difference in two interest rates (X minus Y) as a "quant carry trade". Why is subtraction "quant" and division "value"? Patterson also ignores the fact that the bulk of carry trading is done by discretionary traders, such as those in the global macro space.
- Confuses financial engineers, derivatives experts employed by the sell-side investment banks to create products like Principal Guaranteed Notes, Collateralized Debt Obligations, and compute VaR with buy-side quant trading outfits that are simply speculating their own, or their clients', capital in the markets alongside everyone else.
- Calls the belief that investors are rational a "quant theory," which is stupid. It's a basic tenet of economics and not a premise of quant trading.
- Treats the efficient market hypothesis as central to quants. By definition, quant traders believe the market is at least somewhat inefficient.
- Refers to capital structure arbitrage and distressed debt trading, respectively, as a though they are quant strategies. They're not. Cap structure arb is at the intersection of legal and accounting expertise. Deciding to buy a bunch of toxic assets from a company to which you already have lots of exposure (E*Trade) is not a quant trade either.
- Equates the move by banks to take huge risk off their balance sheets through tricky accounting practices with quants.
- Somehow treats Jerome Kerveil's very plain vanilla long equity futures trade as a "complex derivatives trade," which (for the author) puts it under the heading of quant. This was a fully discretionary trade that moved markets down by 8-9% as it was unwound.
Saving the worst for last...Patterson writes: "The quants were killing Bear Stearns." This is so foolish that it should make anyone with half a brain question his integrity. Because two funds with quant trading activities withdrew their funds' capital from a brokerage house rumored to be on the brink of failing, they are somehow quants killing a bank? Are the quants who trusted Lehman (and had their money evaporate as a result) called martyrs for the cause of our financial system because they kept their capital there too long? Is it a quant model that is responsible for the manager of a fund deciding it was a matter of common sense and fiduciary responsibility to move his cash to a safer haven? What kind of nonsense is Patterson trying to peddle here? This kind of arbitrary labeling is helpful for his rhetoric, but it's also garbage. In reality, quants are no better or worse citizens of humanity than George Soros (who was responsible for breaking the Bank of England in 1992 and maybe for bringing Asian economies to the brink of collapse in 1997) or Warren Buffett.

My second problem with this book is that it is poorly written. It is full of confused statements and errors. Patterson:
- calls diversification "quant magic" (p. 180)... what the hell?
- mistakenly refers to buying credit default swaps when in fact the transaction described is a sale, carrying this mental midgetry throughout the rest of the example and drawing wrong conclusions from it (pages 189-191).
- claims that "virtually the entire quant community...embraced the derivatives explosion wholeheartedly," (p. 192) which is pretty much the opposite of correct. The derivatives explosion also resulted in the widespread selling of volatility by banks, which itself was no small pain in the neck for quants (and other trading-oriented alpha-seekers).
- claims that the August 2007 quant liquidation was "making a hash of (mom-and-pop investors') 401(k)s and mutual funds." (p. 230) The quants that liquidated in August 2007 were market neutral. This means they held roughly equal quantities of long and short positions, and that they liquidated roughly equal quantities of long and short positions. The S&P was basically flat through this crisis, meaning that no one's 401(k) was being hashed.

The style of the writing reminded me of a cross between the National Enquirer and a Batman comic. Every one of the following phrases appears in this book, many more than once, and some countless dozens of times: "nerd king," "math whiz," "math wizard," "value king," "whiz-bang," "crack team," "it was nuts," and "whiz kid." Patterson also continuously used overwrought, mixed and confused metaphors, such as: "churning wheels of the Money Grid," and later, "tentacles of the Money Grid." On p. 197, he claims that the carry trade was a "frictionless digital push-button cash machine based on math and computers--a veritable quant fantasyland of riches." This horrible abuse of the English language is also hyperbolic nonsense. On p. 270, he likens investors in 2008 to "frightened children in a haunted house," a trivializing and wholly inappropriate description. On p. 273, a nonsense sentence appears: "...its hedge funds held about $140 billion in gross assets on $15 billion in capital, or the stuff it actually owned." He climaxed on p. 307, with this gem: "Lo's view of the market was more like a drum-pounding heavy metal concert of dueling forces that compete for power in a Darwinian death dance." That, I think, sums it up. I'd say I was disappointed that the press has adopted Patterson's deeply flawed views wholesale, but in reality, I guess I didn't expect any better.

A mixed bag
I heard an NPR interview pertaining to this book and immediately bought a copy. Many of the personalities woven into Patterson's tale are very intriguing, to say the least.

This book neatly retraces the influences of several quantitative traders ("quants", got it?). The author provides a history spanning the early work of Ed Thorp ("The Godfather") up to the current generation of quants who currently run the high-frequency trading strategies on Wall Street.

All in all, the book is a good read... but it also could have been assembled in a more informative way. The author set out a rather difficult task for himself: on the one hand, he has to tell the anecdotes in a way that will reach a wide audience; on the other hand, he has to provide a thorough enough treatment of topics that could easily be found in an advanced textbook. Patterson's approach goes right down the middle, so that sometimes it is condescendingly basic, while at other times unintelligibly riddled with market lingo. Hence most readers will not be able to read it at a consistent pace.

I suspect that the main frustration for most readers will be that extremely important bits are incompletely explained at the outset. For example, the distribution curve on page 30 has no axis labels... either you know what the author is talking about or you don't. Various terminology is not explained well at all; for example, the author's description of warrants will likely send you straight to wikipedia for clarification:

""Warrants are basically long term contracts, much like a call option, that investors can convert into common stock."

Basically? Call option? Common stock?! How about a more through lexicon at the back of the book for everyone who isn't a daytrader?! The small glossary that is provided won't be helpful to most readers. You'll definitely want to pair this book with "Trading for Dummies" if you aren't already up to the Cramer level of lingo. As an armchair daytrader, I still found myself re-reading certain key passages many times before they clicked.

Another minor annoyance is that effusive terms like 'genius' and 'brilliant' and 'whiz' etc. are used so freely that they completely lose their impact. Okay, the quants did well in statistics in some well-known Colleges; we got it! But real geniuses (like Mandelbrot) open the door to entirely new theory; quants program those ideas into their computers. There is a big difference, and the book's overall hypothesis is a lot less surprising if you understand that.

Nevertheless, the stories and anecdotes are very enjoyable, and the book does thread together quite well as a whole. Patterson does ultimately form an alarming hypothesis that will have you trailing your stops by chapter 14! I recommend it highly, with a few provisos.

Naive and sophomoric
This book is among several that have been published in the last two years that attempts, without success, to lay the blame for the current financial crisis on the practice of financial modeling. These books are full of hyperbolae and exhibit an incredible naiveté on the role of mathematics in finance and in financial trading. Further, the authors lack the mathematical insight that is required to explain some of the ideas involved in financial modeling, and they frequently display an excess of veneration for the mathematicians that are hired to do modeling. It is not that the mathematical techniques used in financial modeling are difficult, some of them are and some are not. The issue is rather that the authors of these books cannot discuss them in a way that is understandable to a reader who is not familiar with them. And too often one can stand in awe of something that one cannot understand. The mathematicians themselves of course do not usually help in promoting understanding of their results.

A lot of this book therefore is just plain silly, and the writing incredibly sophomoric when discussing some of the mathematics used in financial modeling. As an example, the author speaks of the "Great Hedge Fund Bubble", characterizing it as a "true bubble" without defining precisely and quantitatively what a "true" bubble really is. He also refers to the use of quantum physics to "wring billions in profits from the market." No explanation is given as to how quantum theory is used in financial modeling, and its use would be surprising to those readers familiar with it. There has been discussion on "quantum finance" in recent years, but this work was not referenced in this book. Artificial intelligence is also said to have been used, but the author does not bother to delineate for the curious reader what ideas from this area were deployed. The author only gives a cursory treatment of automated trading, disappointing readers who, like this reviewer, are strong advocates of it.

The historical anecdotes in the book are somewhat entertaining, as are the brief biographies of some of the managers and employees of a few of the major financial institutions on Wall Street. These serve to make the book a little bit more palatable but they do not assist at all in giving the reader insight into how financial modeling "nearly destroyed" Wall Street. The personalities and idiosyncrasies of the people he discusses in the book may titillate some readers, but the space devoted to discussing them is a complete distraction from the author's main thesis. No doubt many of them were colorful people, and the type of people one would like to work with, but it is how they used algorithms and mathematical finance that is the most important, not how well they played poker.

Readers cannot expect of course that hedge funds will reveal what algorithms, trading practices, and mathematical constructions they are using, so the author's opinions and speculations in this regard are no better than anyone else's. Therefore it definitely remains an open question whether the mathematicians, traders, and managers of these hedge funds "controlled the ebb and flow of billions of dollars coursing through the global financial system every day" as the author states. It definitely remains an open question as to the efficacy of the mathematical techniques they used for generating profits or indeed if many where used at all. It definitely remains an open question as to whether financial modeling "conquered" or "nearly destroyed" Wall Street. From the information that the author has given in the book, one could just as easily assert that the profits where generated by a thousand edible frog farms in Brazil, or something equally as nefarious.