Tuesday, October 19, 2010


Book Review : The Quants
Author : Scott Patterson
Released : Feb, 2010
My Rating : 3 out of 5 stars

The complete title of the book is "The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It".

The financial collapse of 2008, has generated a lot of information on many facets of Wall Street via books, news articles and TV documentaries.  This book focuses on the secretive world of "Quants", or hedge funds primarily using quantitative analysis as their investment strategy.

The people who run these funds are not in the tradition of Warren Buffet, rather they are Math wizards. They depend on their statistical analysis skills and a deep understanding of probability theory to manage huge sums of money. Their models are built on massive number crunching, rather than fundamental economic analysis.

How different it is than traditional investing philosophy ? How did these funds come to manage such huge sums of money ? Who are these people ? How did they do it ?

The book tells us, that it all started with Ed Thorpe. He literally wrote the book on winning in blackjack, "Beat the dealer". He then extended those ideas about using probability, computer modeling and statistical analysis to beat the stock market - the grandest of all casinos.

Calling Wall Street a casino, is not just a cliché. Many of these quants are very good poker players. Peter Muller has won many poker tournaments. They are obsessed with gaining a complete control over risk, not in just managing it. Understanding probabilities and positioning for various outcomes is what they excel at. In that sense, there is a lot of common mathematical ground on which strategies for both poker and trading can be built on.

This is a fascinating story to say the least. Part history, part rough biographies, and part commentary - the book presents a lot of information in a very reader-friendly style. In spite of the heavy sounding title, this book makes for a very light entertaining read - the target audience is general public like you and me.

The author, Scott Patterson is a journalist, and that style is obvious. Very readable, but often time feels very superficial. There is a lot of research done on the historical aspects, no doubt, and it's very informative. On the other hand if you are interested in finance/investing, you will most likely not encounter anything new on that aspect. I also found the order of presentation a bit distracting. It's almost chronological, but shifts back and forth between different people and the transitions are not smooth.

I can definitely recommend this book to everyone. But it left me wanting for more, and only half satisfied. Is the author blaming the quants for the financial collapse ? Of course they played a part in it and the over-reliance on models is one of the main culprits. But how much blame goes to quants ? What about the over leverage in the entire system ? And outright fraud at all levels starting from borrowers to mortgage originators and to all the steps in securitization. Not to mention the bad regulation (repeal of Glass-Steagall) and failure of Federal Reserve. This context is not mentioned at all.

If you keep that in mind, I think you would enjoy the book.

1 comment:

  1. http://www.ederman.com

    Now, the older quants are sitting in their couches, applying quant to philosophy.


    Will we be complaining the demise of philosophy
    soon ?




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