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A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation

3.88  ·  Rating Details  ·  687 Ratings  ·  41 Reviews
Inside markets, innovation, and riskWhy do markets keep crashing and why are financial crises greater than ever before? As the risk manager to some of the leading firms on Wall Street-from Morgan Stanley to Salomon and Citigroup-and a member of some of the world's largest hedge funds, from Moore Capital to Ziff Brothers and FrontPoint Partners, Rick Bookstaber has seen the ...more
Hardcover, 276 pages
Published April 1st 2007 by John Wiley & Sons (first published January 1st 2007)
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The Big Short by Michael LewisToo Big to Fail by Andrew Ross SorkinLiar's Poker by Michael LewisBoomerang by Michael LewisFault Lines by Raghuram G. Rajan
Understanding the Financial Crisis 2008
73rd out of 115 books — 185 voters
The Company of Strangers by Paul SeabrightIn FED We Trust by David WesselA Demon of Our Own Design by Richard BookstaberHere Comes Trouble by Michael MooreExtraordinary Popular Delusions and the Madness of Crowds by Charles Mackay
2008 recession books
3rd out of 65 books — 1 voter


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Community Reviews

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Ross T
Aug 03, 2012 Ross T rated it really liked it
Marvellous read. Bookstaber gives the reader an interesting and unorthodox theory of why financial crises occur, as well as an in-depth account of some of the scandals and failures that have been associated with financial innovation in the past few decades.

The most valuable chapter of the book is on the nature of accidents and their origins in complexity. The enabling cause of crises may be exogenous, such as through new information, but the fundamental cause is endogenous within the structure o
...more
John
Mar 19, 2016 John rated it really liked it
The author, a former hedge fund risk manager, describes how the nature of our financial system makes it prone to behaving unpredictably and pathologically in times of crises due to tight coupling and systematic complexity. He predicts that attempting to overlay profligate safety regulations onto these tightly coupled, complex markets may magnify, rather than reduce risk of future crashes.

The Deeply Connected Downward Spiral
The book delivers two major points about risk in modern financial systems
...more
Jeffrey
Jan 25, 2009 Jeffrey rated it really liked it
This is not an easy book to understand if you are not a trader or involved with financial engineering on an everyday basis. Upon first read however, I sensed that Bookstaber's overall argument is spot-on for the historic financial crisis of 2008. For example, he explained how a liquidity crisis could be precipitated, ironically, by a demand for liquidity itself.

Once we move away from many of the technical nomenclatures in Bookstaber's book, the underlying backbone of this book argues that the fi
...more
Jim
Apr 14, 2009 Jim rated it it was amazing
This book helps explain why the financial markets collapsed. Basically, when complex systems (like space shuttles, suspension bridges and nuclear power plants) fail, they fail catastrophically (meaning it happens fast and they stay broke). This physical principle seems as reasonable to the civil engineer as to the financial engineer.

It also helped me understand the mindset of the financial engineers (who prefer to call themselves quants) who use their particular cleverness with mathematical mod
...more
Steve
Here is where the inadequacies of the rating system comes into play. In terms of writing, I would give this book 2.5 stars. While the prose itself is acceptable (not great, but workmanlike), the book has serious problems with its structure. It is definitely NOT a book for a novice in this field. John Cassidy's HOW MARKETS FAIL or Michael Lewis' THE BIG SHORT (the latter I have *not* read) would be much better choices. Other choices would include Sorkin's TOO BIG TO FAIL (in my queue but not read ...more
Glenn
Jul 05, 2009 Glenn rated it really liked it
Bookstaber is has a Ph.D. in econ from MIT and years of risk management experience on Wall Street during the 80s and 90s to add delightful anecdotes to his risk-philosophizing. Less heady than Taleb and more detailed than most finance-style books, Bookstaber describes positions which earned billions and/or blew up. The writing is a little disorganized, and sometimes the direction is unclear. Many of the stories are familiar as they are the epic disasters which defined Wall Street in this era. Fi ...more
James
May 12, 2011 James rated it really liked it  ·  review of another edition
This book was written in 2007, just before the recent crisis,
the author doesn't predict it,
but the book has a lot of interesting ideas, individually well presented.

Some like the authors belief that the markets move because of a demand for liquidity,
I don't accept, I think fear & greed move the markets.

But I'm open to new ways of looking at things and there's a lot of good material in the book.

From the cover you'd think it was about the evils of hedge funds,
but the author thinks they are
...more
Zbyszek Sokolowski
May 23, 2013 Zbyszek Sokolowski rated it really liked it  ·  review of another edition
Shelves: financial
Book is good, it describes that not only small investors make very simple mistakes but also people even who have won noble prize in finances. Author shows also that any try to regulate market will eventually fail. And way is to make it simpler and less prone to break down it means that leverage of positions should be confined. Greed causes to introduce new financial instruments because they until they become more popular are source of easy money due to market ineffectiveness but this strategy en ...more
Ernst
Jul 28, 2012 Ernst rated it it was amazing
I read this book before the financial crisis hit its peak, and it was astounding. Even for a non-finance person like me, the explanation of the workings of the financial markets and structured products was easily understandable, and the predictions of the market reaction to over-leveraging due to structured products, combined with a lack of liquidity proved prescient.
If you want to learn about the workings of the financial markets and how structured products work, and how both can fail, this boo
...more
Joseph
Apr 04, 2010 Joseph rated it liked it
This book alternated between fascinating and boring page to page. I love his analogies and he had some great ideas and points but at times became overly technical and repetitive. Glad I read it for the commentary about financial regulation. He gave some great ideas about the need and dangers of more regulation of financial markets.
Jonathan
May 09, 2009 Jonathan rated it really liked it
Good account of the financial crises earlier this decade and some pretty interesting ideas on why modern finance is going to continue to be struck by these crises.
Ian Robertson
Feb 13, 2013 Ian Robertson rated it really liked it
With its publication predating by a year the financial meltdown of 2008, this well written book about “the perils of financial innovation” promises an insider’s view of what ailed the system; neither a postmortem nor a prediction, but rather a detailed diagnosis of the corpus financius. For the most part, Bookstaber, a former trader and head of risk management at several major Wall Street firms, delivers a very entertaining thirty year history of financial innovation and folly. Over time, risk i ...more
Guy Posts
May 02, 2010 Guy Posts rated it it was amazing
This review has been hidden because it contains spoilers. To view it, click here.
Peter
Sep 10, 2010 Peter rated it liked it
well written and very relevant. has particularly good description the blossoming and subsequent tailing off of statistical arbitrage -- with insight you won't find in some of the other recent, dime-a-dozen journalist books ("The Quants" springs to mind).

The author also makes a cogent argument for a simpler financial marketplace and against yet more layers of regulations. His point is that extra regulation merely adds more complexity, thereby increasing rather than decreasing the chances of a fu
...more
Phil Toop
Mar 27, 2016 Phil Toop rated it really liked it  ·  review of another edition
Shelves: finance
Whilst not as 'reader friendly' as some other books covering similar material, Richard Bookstaber does give some interesting perspectives on risk and 'unexpected' disasters. Overall I found it interesting and worth the read.
Jamon
Apr 10, 2009 Jamon rated it really liked it
Shelves: business
Caveat is that I grew up with the Author's older sons. This is a slow book at first, and has some nice wall street cliff claven-esque factoids. But I liked it...but I am a finance guy. I learned alot about how institutional banks work, trading. The author gives great analogies to understanding the fiancial crisises from the 1980's to 2007. Things that stuck out to me are: 1. It is easy to see why all banks do the same thing (hey if he is making a profit..so should I), and 2. That trying to regul ...more
Joel Files
Mar 21, 2016 Joel Files rated it it was amazing
Shelves: stock-market
Prescient.
Kent
Oct 26, 2008 Kent rated it liked it
A timely and worthwhile read for anyone interested in learning more about derivatives and hedge funds. The book is a bit uneven and would have benefit from tighter editing. While readers with a background in financial services may find some of the explanations to be overly simplistic, all readers will appreciate Bookstaber's anecdotes from his years on Wall Street - especially those spent at Salomon Brothers. Much like Michael Lewis' Liar's Poker, this is where the book is at it's entertaining ...more
Matt
Jun 30, 2008 Matt rated it really liked it
Recommends it for: those interested in finance
This is an interesting read for someone who wants the inside story of someone who has worked for proprietary trading desks of big firms and hedge funds and understands how hedging and derivatives and synthetic products have added to the risk and volatility of the market rather than reducing it. Probably not a lot of interest to someone who doesn't enjoy reading about investments.
Christopher Russell
Aug 13, 2014 Christopher Russell rated it liked it
Shelves: red-books
Hard to understand. I think I got to page 100, then stopped. I got the jist however: banking system and culture are wholly removed from the effects of their actions. They are not attempting to undermine the nation per se, but by virtue of the competitiveness and legitimate smarts possessed by these individuals, they end up expanding and contracting a volatile system.
Maciej Janiec
Jul 05, 2009 Maciej Janiec rated it really liked it
Książka, która na pewno zasługuje na drugie czytanie.

I wymaga go, z uwagi na wielość i złożoność poruszanych w niej tematów, m.in.:

- kryzys 1987 (str. 7)
- LTCM (str. 97)
- interaktywna złożoność oraz ścisłe powiązanie elementów (str. 143)
- bąbel internetowy (str. 177)
- arbitraż statystyczny (str. 185)
- związek zmienności i kryzysów z płynnością oraz lewarem
Randy Carlson
Feb 21, 2014 Randy Carlson rated it really liked it
Great book but you will have a hell of a time with this one if you have not taken a class in Advanced Finance with the Mathematics to go with it. Not that you will see a lot of equations, but the subtext is extremely technical. Inside Baseball to the max....
Andrew
Sep 18, 2009 Andrew rated it it was ok
Started this, but didn't finish it. It's basically the story of a guy who has been in the middle of a lot of wall street hijinx. Lots of name dropping, lots of detail, but you definitely have to be in the mood. I have other things to read.
Nathan Willard
Mar 03, 2009 Nathan Willard rated it it was amazing
If you are wondering how all this economic mess was hidden from view for so long, read this book. Seriously. This book lays out, clearly and succinctly, the culture that made deregulation a terrible, terrible idea.

Read this book.
Emily
Jun 20, 2010 Emily rated it really liked it
Great summary of major market crashes from the past century. The author doesn't come to many conclusions, but the summaries and thoughts on causes are very interesting. If you are curious about the market history, pick this one up.
Clare
Apr 12, 2016 Clare rated it it was amazing
This should be mandatory reading for every single person in risk management. Bookstaber saw first hand much of the chaos of 1987, and has extensive experience in derivatives and risk management on Wall Street. Brilliant.
Beth
May 09, 2012 Beth rated it it was ok
Disorganization and misguided diversions into quantum mechanics made this book much harder to get through and understand than it should have been given the interesting subject matter and reasonably clear writing.
Jeremy
Sep 01, 2008 Jeremy rated it really liked it
Interesting history from a participant in the hedge fund space. His commentary on the importance of liquidity in movement of security prices changed the way I think about the markets.
David
Feb 25, 2008 David rated it liked it
Didn't tell me as much as I was hoping about what's under the hood of all the fancy new financial vehicles. And this guy definitely does know, if he is who he says he is.
Alan
Jan 31, 2010 Alan rated it it was amazing  ·  review of another edition
Bookstaber get's to the heart of the underlying mechanics behind market crises and panics. Increadibly important book to have read given the last few years developments.
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