It’s Part VII! (Remember, if you’re having trouble keeping up, check here for a complete list of all posts in the series.) Today John S looks at the magical world of hedge funds.
The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It
by Scott Patterson 2010
“Quant” is a word that pops up over and over again in descriptions of the financial crisis, but it never really gets defined. It tends to be used on Wall Street the way “sabermetrician” gets used in baseball or “Nate Silver” is used in politics: It just means someone who uses math in a slightly unconventional way while doing his job.
Nevertheless, these “quants” were blamed for much of the financial crisis, as those industry “experts” who concocted elaborate formulas showing that housing prices would never fall and homeowners would never default. I turned to Patterson’s book to find out who, exactly, these “quants” were and why their formulas—unlike Nate Silver’s and Billy Beane’s—went so awry.
Patterson’s title bills the book as a story of these “new… math whizzes,” and the cover even contains a quote from Warren Buffett: “Beware of geeks bearing formulas.”* Unfortunately, Patterson’s book focuses primarily on the world of quantitative hedge funds. In other words, instead of focusing on those within the banks themselves and how these whizzes were used to justify massive trading strategies, Patterson’s book is about some of the most successful outsiders. Continue reading
Sometime during 2011, essentially on a whim, I decided that I wanted to read every book written on the subject of the financial crisis of 2007-08.
What would motivate someone to undertake such a project? Eh, who knows why people do the things they do? As far as I can remember, I had two main motives: one general and one specific.
Generally, I’ve always had a vague desire to pick one subject and just read everything I could about it. Whenever I read a work of nonfiction, no matter how good or thorough it is, I have this feeling that I’m only getting some of the story. I’m only seeing reality as filtered through the author. The stories told are the ones the author found interesting; the opinions featured are the ones of this writer’s sources; the quotes are the ones he happened to write down. Even the most evenhanded and objective writer retains some biases, if only due to the natural limitations on research and reporting. When I read nonfiction, I always feel keenly aware of this. As a result, a book that’s supposed to inform me often ends up highlighting what I still don’t know.
This problem doesn’t really have a solution—nobody can be a firsthand witness to everything—but reading the same story multiple times is at least a better approximation of reality than reading it just once. After all, the police don’t stop the investigation after interviewing one witness. Of course, there’s a reason most people don’t read this way: It is, by design, very, very repetitive. You’d end up reading slightly different versions of the same story over and over again, intentionally making a leisure activity less fun.
Nevertheless, the cumulative nagging of years of nonfiction motivated me to at least try this method once. No matter the subject, I felt like the experiment would at least give me a better sense of the systemic biases of nonfiction.
Which brings me to the specific reason of why this subject. Continue reading
What we read while getting ready for our huge Ramadan party…