The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It Paperback – January 25, 2011

The Catastrophe of CertaintyIn his fascinating book entitled "On Being Certain - Believing You Are Right Even When You're Not," neuroscientist Dr. Robert A. Burton concludes the work with this poignant phrase: "We do not need and cannot afford the catastrophes born out of a belief in certainty."(pp.223-224).Well, the Wall Street Journal's Scott Patterson chronicles the catastrophe that Dr. Burton's conclusion alludes to in this riveting volume entitled, THE QUANTS - How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It. Patterson states his case bluntly: "In other words, there is no single truth in the chaotic world of finance, where panics, manias, and chaotic crowd behavior can overwhelm all expectations of rationality. Models designed on the premise that the market is predictable and rational are doomed to fail. When hundreds of billions of highly leveraged dollars are riding on those models, catastrophe is looming." (P. 294).Human history appears to be replete with disasters wherein one group seems `certain' they have captured the `truth.' The ongoing U.S. and global economic crisis is no different. Listen to Patterson:The Truth was a universal secret about the way the market forked 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. The quants built giant machines - turbocharged computers linked to financial markets around the globe- to search for the Truth, and to deploy it in their quest to make untold fortunes. (p.8)."It was about money, of course, but it was also about proof. Each added dollar was another tiny step toward proving they had fulfilled their academic promise and uncovered the Truth (p.8)To the quants, beta is bad, alpha is good. Alpha is the Truth. If you have it, you can be rich beyond your wildest dreams." (p.8).What happened? Patterson's perspective on this historical epoch is essential reading for those interested in economics, culture and human behavior. It is also a treatise about man and machine. He writes, "Always trust the machine" was the mantra." (P.128). It's also about our human appetite for order and predictability, as well as our propensity to become victims of the illusory: "The model created an illusion of order where none existed." (P.196). "To quants, unprecedented is perhaps the dirtiest word in the English language. Their models are by necessity backward-looking, based on decades of data about how markets operate in all kinds of conditions. When something is unprecedented, it falls outside the parameters of the models. In other words, the models don't work anymore." (Pp. 271-272).Patterson does an absolutely spectacular job profiling the key players, organizations and belief systems that fueled the growth in hedge funds from $39 billion in assets in 1990 to $490 billion in 2000, and $2 trillion in 2007. How? How could such a rate of growth be sustained? Patterson's take: "the model was a jury-rigged formula based on the irrationally exuberant, self-reinforcing, and ultimately false wisdom of the crowd that assigned make-believe prices to an incredibly complex product. For a while it worked, and everyone was using it. But when the slightest bit of volatility hit in early 2007, the whole edifice fell apart. The prices didn't make sense anymore. Since nearly every CDO manager and trader used the same formula to price the fizzing bundles yet another instance of crowding that results from popular quant methodologies-they all imploded at once." (P.195).I can't wait for the next book by Scott Patterson. THE QUANTS - How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It is distinctly a five star work of art. Essential reading. You'll love it. Spellbinding!

I read this book after thoroughly enjoying Scott Patterson's follow on book called Dark Pools which I read during the game stop and Reddit trade mania of early 2021. I'd recommend that book over this one for anyone looking for a deeper understand of how financial markets work and how they have radically changed over the past three decades. This was a nice follow on to that book as well as The Man Who Solved The Market by Gregory Zuckerman which dives deep into the life of legendary quant Jim Simons.We meet several legends in The Quants as well including Ken Griffin, Cliff Assess and Peter Mueller. The book is best when providing a narrative history of the rise of quantatative finance and the rejection of the prevailing Efficient Markets Hypothesis which I was taught in college. It also does a nice job comparing and contrasting these Wall Street icons and their hedge funds with traditional legendary investors such as Warren Buffett, Peter Lynch and Bill Gross. Ed Thorp makes a large appearance here as well and his influence cannot be understated on the multitudes of quants that followed.Towards the end of the book, Patterson flies through the 2007 and 2008 market meltdown and teases some of the correction in 2009 and 2010 but this part felt a bit rushed to me and felt like a superficial treatment of the perils, dangers, corrections and lessons that were made during this time. While the Hollywood ending might have been the comeuppance of the quantatative, that's not exactly what happened and a deeper exploration of this period is warranted.All in all, it was a good introduction to who quants are and how they arose, so I would recommend it for readers seeking material covering this.

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).