The Quants

"The Quants explains how maths, combined with a lot of leverage and a bit of modelling error led to a lot of disasters. It’s about the mathematicians and, literally, rocket scientists who came up with a series of concepts as to how to use mathematics to try to game the market. The fun thing about mathematics is that you can identify these really small, really tiny edges that you wouldn’t find otherwise. But if you have a 0.015% edge, you can’t really make a lot of money unless you really ramp up the leverage, so most of these guys traded with a lot of leverage. But the laws of mathematics are all the same – no matter which firm you’re at – so you ended up with lots of people doing, if not identical trades, certainly very similar trades. Then you have a series of wobbles. The first one was LTCM and the Asian contagion. But really it hit in the summer of 2007, when the first errors took place with the Bear Stearns hedge fund. You have a huge correlated move with all the quant shops. That was really problematic, and it only got worse over the next couple of years. That really exacerbated a lot of the moves. It’s a very entertaining book. There’s a lot of really interesting personalities in it. I have a math background, but it’s written for really pretty much anybody. You only need to know two plus two is four and you’ll enjoy it. Same thing with The Myth of the Rational Market – it’s good wonky fun. Yes, there are hundreds of variables, and yet people are making these massive, multi-billion dollar bets based on these models. It’s like aiming your rocket for Mars. If you’re only off by an inch or two when you’re launching that rocket, project that error out hundreds of millions of miles and you’ll miss Mars by hundreds of thousands of miles. It’s the same thing, when a model is off a little bit, and you extrapolate it out throughout the entire economy, and at the same time put billions of dollars at risk with it, you end up with a real crisis situation."