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

3.92  ·  Rating details ·  1,009 ratings  ·  60 reviews
Inside markets, innovation, and risk Why 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 th ...more
Hardcover, 276 pages
Published April 1st 2007 by Wiley (first published January 1st 2007)
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Ross T
Jul 25, 2012 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
Jan 18, 2009 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
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
Nov 29, 2014 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
Nov 09, 2017 rated it it was amazing
This book will pop your eyes and drop your jaw. This is a report from inside the front lines emanating from a veteran financial trader who ran with the pack Back in The Day, who observed the carnage from a front row seat in 1989, 1997-99 and 2007 before all hell broke loose the next year.
Bookstaber is a very smart man, well-versed in mathematics and derivatives; however, this book translates the complex financial engineering into plain English. Having read other tales of excess and debauchery o
Apr 13, 2009 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
Jul 05, 2009 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
May 12, 2011 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 a p
Jul 28, 2012 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
Zbyszek Sokolowski
Feb 02, 2013 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
Apr 04, 2010 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.
Apr 28, 2009 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.
Aug 20, 2018 rated it really liked it
Why did I wait 10 years to read this book? It is a joy to read. Richard Bookstaber has had a long career in the financial markets. Today he is the Chief Risk Officer at the pension fund University of California Board of Regents and a senior advisor at the US Treasury’s Financial Stability Oversight Council. When he wrote this book he was a hedge fund portfolio manager and prior to that he was in charge of risk management at both Morgan Stanley and Salomon that later turned into Citigroup. The re ...more
Feb 07, 2021 rated it it was amazing
Shelves: finance, trading
One of the better financial and trading books that I have read in a while - Bookstaber provides an excellent book that is a bit biography, financial history and also theoretical exposition. Written by an experienced market participant, there is something for everyone here.

A Demon of Our Own Design framed roughly around Bookstaber's own career - he uses his experiences trading around various financial panics (Black Monday, LCTM, the dotcom bubble, etc) to provide insight. Generally after providin
Ian Robertson
Feb 13, 2013 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
Jun 06, 2017 rated it really liked it is another great book focusing mainly on LTCM blow out, Russian default and mainly from the background story of Citigroup failure: Weil, Prince, etc..although towards the end of the book, author did mention all of the so called natural self protection mechanism, and the rules of the nature and all...slowly guide us to the direction that hedging, investment, arbitrages are no safe bet...HFT was mentioned in one short paragraph..also mentioned hedge funds are not making profit coincide wi ...more
Rob Mills
Sep 07, 2017 rated it really liked it
Bookstabber has been on the ground floor (and or partially responsible) for all of the terrific market crashes we've seen in our time. He writes about them and tells great first hand stories of things like Charlie Munger castigating Salomon mgmt at a BoD meeting or Dimon aggressively demanding a zeroing out of Russia exposure (ahead of the default!).
The author does a great job with his analogies and tells wonderful historic anecdotes that he then ties into modern day finance.
He makes some effo
Grace Cao
Nov 14, 2020 rated it it was amazing
Five-star content, four-star writing.

The question posed by this book is: why can’t the financial markets seem to get their act right? Why, in spite of reduced risk in the underlying economy, in spite of the march of innovation and the contributions of financial engineering, do we not enjoy reductions in financial risk that we find in other areas of our lives? Why are markers actually becoming more crisis-prone?

One answer is the effects of innovation. The positive effects of innovation comes at a
Aug 01, 2020 rated it really liked it
Shelves: business
Another insider take into Salomon, LTCM, 90s' Wall St. Fun stories. Book ends with concluding that "normal accidents" are unavoidable in complex systems that are also tightly coupled. To break the chain of recurring financial crises we have to forgo our desire to invent new securities and everyone's favorite - reduce leverage. Slowing the speed of transaction (a la bank holidays of the good old bank-run days) is also recommended - anything that reduces the "liquidity" of investments and the leve ...more
Feb 26, 2019 rated it liked it
So much I didn't know about economics. The systems approach to his explanations of both complexity and liquidity are something an ex-engineer could appreciate. Also makes me realize how little hope there is for regular players (read: people with full time jobs doing things other than finance) to reliably hope to achieve better than average in the market. I'm much more happy now making average returns on the markets! ...more
Lawrence FitzGerald
Nov 22, 2018 rated it liked it
Shelves: economics, 2000-s
A quick read with some useful insights.

The supply and demand for liquidity in markets is a useful insight.

Complexity is a necessary condition for chaos.

I don't think either originates with Bookstaber, but I carried it away none-the-less.
Robin Michael
Apr 09, 2020 rated it it was amazing
as relevant now as in the GFC
identified and reasoned, contextual examples from history of finance
demystifying the BS
demonstrating the limits of statistical predictions, and a warning against over complicating market structure and backward looking regulation
Jan 26, 2018 rated it it was amazing  ·  review of another edition
Easy to read, hard to put down.
Guy Posts
May 02, 2010 rated it it was amazing
This review has been hidden because it contains spoilers. To view it, click here.
Nov 09, 2017 rated it really liked it
Had A deamon of our own design been published 2-3 years after 2007, it would just be another book on our troubled financial system. However, the fact that it was released on the critical date of 2007 on the eve of the largest Financial crisis since the great recession, makes this book stand out from it's piers.

Although short on solutions to the issues we currently face in building a better Financial system (a glaring issue worthy of striping it of a single star in what would otherwise be a brill
May 11, 2010 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
Oct 05, 2008 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
Jan 22, 2009 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 should I), and 2. That trying to regul ...more
Philipp Muellauer
Jan 23, 2017 rated it liked it
Shelves: finance
So so. Starts out strong with some interesting anecdotes about the personalities of high finance in the 80s and 90s and provides a perspective on what was going on inside iconic trading firms and investment banks at the time. His story of Three Mile Island really drives the point home that excessive complexity eventually results in disaster. That said, Bookstaber starts to waffle and goes off on tangents from that point on. The ideas he's trying to convey in the latter half of the book are not s ...more
Jun 28, 2008 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. ...more
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Richard Bookstaber is the author of A Demon Of Our Own Design, a book highlighting the fragility of the financial system that occurs from tight coupling and complexity. The book is noted for its foreshadowing of the financial crisis of 2007–08.

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