The Quants a Fun Read for Big Dorks like me


Scott Patterson has done what many people would think is impossible: He wrote a 300+ page book about leading Ph.D holding mathematicians who specialize in quantitative and computational finance, and he made it fascinating.  In fact, it was such a fun read for me, I probably read the entire 309-page book in two sittings.  And besides being a very fun read, it was an important read as well. 

As best I can tell, Patterson did not mean to imply at any level that the quantitative hedge fund managers deeply involved in the financial crisis of 2008 were the cause of anything that happened.  I believe his ultimate point is simply that even the most braniac Ph.D’s in the world were largely unable to avoid the carnage that the financial collapse created.  In that sense, “the quants” were victims of what happened – not perpetrators.  But Patterson’s book does an effective job describing the insane excesses that began to exist more than a decade before the crisis.  And he certainly goes to great lengths to criticize the highly controversial (and misunderstoof) “efficient markets hypothesis” of Eugene Fama.  To Patterson, and many critics of the EMH, the financial world believes that markets always perfectly price in various circumstances, and no consideration of human behavior is necessary to evaluate financial assets.  It is an inane straw man, but it is easy shooting for the EMH critics based on what happened in 2008.  Of course, for those looking to evaluate long-held investment theories like the Efficient Markets Hypothesis and the Capital Asset Pricing Model (CAPM) and even Modern Portfolio Theory (MPT), the 2008 crisis provides important context in which to discuss them.  All three theories, I would suggest, have fundamental truths to them that are undeniable, but all have become in tremendous need of better articulation and modification.  However, this book does not provide an exhaustive critique of the major theories in investment finance.  If anything, it should make sensible readers just say, “Geez, these guys used a lot of leverage, and it sure seems like really bad things happen when that much borrowed money is on the line.”  What a Too much debt = bad.

Some of the smartest men in the world are not immune to the diseases that excessive leverage can create.  The Quants is a great reinforcement of Taleb’s familiar “black swan” thesis, and it has all the drama of a Hollywood movie.  I don’t know if I have five friends this side of New York who would like it as much as I did, but it is a good book, and it gets into a side of the financial crisis most books have not touched.  Importantly, it also replays near the end of the book one of the most despicable aftermaths of the financial crisis: Alan Greenspan’s October 2008 testimony to Congress where he stood before the country and made the painful admission that “capitalism failed”, and that “markets are not self-correcting as I thought.”  Patterson did not have to provide readers commentary of this perverse cowardice from his own pen, as he simply quoted Cliff Asness (one of “the quants”) lambasting him for it.  It is an infuriating part of this saga, and one I will address further in my own book about the crisis.  Patterson’s contribution to the story is to illuminate the folly of believing that a computer program – regardless of the pedigree of the one who write it – can insulate one from investment loss in the mix of a deleveraging meltdown.  (He also, by the way, highlights one of the most fascinating weeks in market history – early August 2007 – when almost every good stock in the world got killed, and all kinds of crummy stocks rallied up; to this day I doubt 1-in-100 Americans understand how that could be, but this book explains it very, very well).  I profited from the book because the narrative was a delight; I learned from the book because one can never read enough on the silliness of excessive leverage.  If this sounds remotely interesting to you, you may just be as uncool as I am!

As a basic update to my book review project (my commitment to reading and reviewing every serious book on the financial crisis of 2008 is still very much alive), I intend to write reviews to Hunter Lewis’s Where Keynes Went Wrong, Paul Krugman’s The Return of Depression-Era Economics, and Michael Hudson’s The Monster later this week (all of which are read and ready).  I have another three books I believe I will finish within the week, and a long list I feel compelled to complete from there.  I admit I am a bit behind (in the reviews and the reading), but am excited to be caught up, and to complete my own writing on the crisis by the spring of 2011.