There are a whole lot of Scott Pattersons online, but the one we get tonight is a WSJ reporter and the author of The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It. And while there are a whole lot of articles about the book, I haven't found a brief summary/review (even the press release is somewhat dense). But here are some snippets from a review at Fredericksburg.com:
SCOTT Patterson's fantastic new book "The Quants" shows the extent to which flawed mathematical models caused the blowup on Wall Street and subsequent damage to the broader economy.
Patterson is a Wall Street Journal reporter whose book describes the massive growth of quantitative-focused hedge funds last decade. The funds were led by mathematical geniuses trained at the country's elite universities.
Patterson focuses on four "quants".... Each brought to his fund a mathematical approach that for a time proved wildly successful. Until it didn't.
The quants built their models on past market data. Much of the philosophy behind their models was based on the efficient-market theory...
Their fatal flaw was in looking at the market as an entirely rational entity rather than one occasionally swept away by human emotions...
The Financial Times (free registration) has this:
There are many dramatic moments and a good dose of schadenfreude in Scott Patterson’s The Quants.
Patterson, a Wall Street Journal reporter, provides a riveting account, as the subtitle promises, of the rise and fall of a group of traders, most of them masters of mathematics, poker and the universe.
They are some of the brightest minds in finance, dubbed "quants" because they specialise in quantitative, maths-based finance....
..At their peak, these traders were a force with which to be reckoned. Between them they controlled about $150bn ...collectively had assets of as much as $1,000bn. But many of them were then crushed in the market meltdown, having failed to factor in just how vulnerable their models were....
...To a novice in this high-powered world the faith in the models is almost touching. There were plenty of signs along the way that the models were anything but infallible. Equally intellectually endowed cassandras, such as Nassim Nicholas Taleb, warned that the models failed to account for sudden price swings that change everything, as had the mathematician Benoit Mandelbrot a generation earlier. No matter. It was as if the models had a life of their own, apart from the humans who programmed them....
The whizzes who studied market relationships so exhaustively failed to grasp some elementary truths....
And the NYTimes has this:
...Mr. Patterson gives faces and personalities to the quants, making their saga accessible and intriguing...{He} casts the quants’ pursuit of riches as "an epic quest for an elusive, ethereal quality the quants sometimes referred to in hushed, reverent tones as the Truth." According to the author, "The Truth was a universal secret about the way the market worked that could only be discovered through mathematics." When coupled with giant, turbocharged computing machines, it was the key to reaping enormous profits....
The virtually exclusive use of mathematical models, Mr. Patterson says, was what separated the younger cohorts of quants from their Wall Street forebears. ...
Therein was the quants’ flaw, according to Mr. Patterson. Pioneers like Mr. Thorp understood that while the math world and the financial world have much in common, they aren’t always in sync....
MR. PATTERSON’S compelling account is marred by some poor editing and sloppy fact-checking...
But Mr. Patterson is onto a big story that already begs follow-up. He warns that quants have recently begun tracking highly leveraged exchange-traded funds, applying similar math models they once used to trade stocks and bonds.
Perhaps even more worrisome, he says, is the advent of computerized stock exchanges called dark pools, which, unlike the publicly visible New York Stock Exchange, match buy and sell orders anonymously in cyberspace. Who knows? Mr. Patterson may soon be writing a sequel: "The Quants Strike Back."
The booksite links to several other reviews, and of course there are the customer reviews at Amazon and B&N (I see only four Amazon reviews complaining about the Kindle price). There's also an NPR interview with proto-Quant Ed Thorp and Patterson that's worth taking a look at.
This will probably be interesting.
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