Book Review: “The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It” by Scott Patterson

This is the story of the Quants, the PhD Mathematicians who turned the financial market into a gambling casino. They made an obscene amount of money but ended up wrecking the market they helped to create. The players are: Peter Muller (Morgan Stanley), Ken Griffin (Citadel), Cliff Asness (AQR Capital Management), Boaz Weinstein (Deutsche Bank), Jim Simons (Renaissance Technologies), Aaron Brown, Paul Wilmott (foretell the meltdown), Benoit Mandelbrot (warned of the danger), and finally Ed Thorp, who started it all with the books “Beat the Dealers” and “Beat the Market” books.

It’s hard to tell with certainty what really caused the meltdown. The author seemed to point the finger at Allen Greenspan’s low-interest policy that started the housing bubble and his lack of oversight of investment bankers and hedge funds industry. If this were true, one should argue that Greenspan’s long tenure at the helm may be to blame for his insufficient understanding of the risk takings going on under his nose.

I learned a lot on how the Quants make money by hedge one bet against another bet in search of easy money or “sure” thing or the “truths.” There are the frequency trading to arbitrage values, and there are the hedging bets – all done with a huge amount of leverage and precision. Of course, those trades broke down when the market turned illiquid, which caused the melt down. In principle, all the algorithms should all work but when everything is linked from one another. A small change can cause a tsunami of ripple effects. Now they know.

The stories of the rich Quants’ spending their new-found wealth on such luxuries as $80M paintings, and luxurious homes, vacation homes, fancy cars, really excited my resentment and many tax payers who ended up paying for their mess. It’s not different than the Internet bubble that brought on the rise of greedy people and their excesses. The destructive ending was the same except they were bailed out by the government instead of the reduced wealth of the over-exuberant investors.

This is a reasonable good book that tells the stories of these Quants people but more importantly, it revealed the mentality and the motivations of these people. They thought they were doing goods to rid the market of inefficiencies and making lots of money along the way. Whether or not they realized the danger of the leverages from their bets is hard to know. But it’s like a drug addiction, you may know it’s bad for you and the society; it’s hard to break away from it. Ultimately, it’s the failing of the human nature and greed that did them in, dragging the society and world to the brink of a financial collapse. How the government can craft a good policy to prevent a similar collapse from happening in the future remains to be seen.