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September 26 - October 11, 2025
After losing £20,000 on a vast Ponzi scheme known as the South Sea Bubble in 1720, Newton observed: “I can calculate the motion of heavenly bodies but not the madness of people.”
Thorp had calculated that when the ratio of tens left in the deck relative to other cards increased, the odds turned in his favor.
the law of large numbers. The rule states that as a sample of random events, such as coin flips—or hands in a game of blackjack—increases, the expected average also becomes more certain.
Doubling down, also known as martingale betting, has been a time-honored strategy practiced by gambling legends such as Casanova. But there’s an obvious flaw in the strategy: gambler’s ruin. Eventually the martingale gambler will run out of money. The odds of this happening, if the gambler keeps playing, are 100 percent.
the Black-Scholes formula was the assumption that stocks moved in a random walk.
On April 26, 1973, one month before the Black-Scholes paper appeared in print, the Chicago Board Options Exchange opened for business. And soon after, Texas Instruments introduced a handheld calculator that could price options using the Black-Scholes formula.
As Nassim Nicholas Taleb, a critic of quant models, later argued in several books, investors who believe the market moves according to a random walk are “fooled by randomness” (the title of one of his books).
Perhaps even more surprising were Fama and French’s findings about the market forces that did, in fact, drive stock returns. They found two factors that determined how well a stock performed during their sample period for 1963 to 1990: value and size.
Value is generally determined by comparing a company’s share price to its book value, a measure of a firm’s net worth (assets, such as the buildings and/or machines it owns, minus liabilities, or debts).
Fama and French’s prime discovery was that value stocks performed better than growth stocks over almost any time horizon going back to 1963.
Credit derivatives were, in a way, like insurance contracts for a loan, Tanemura explained to Weinstein at Deutsche’s New York headquarters, which sat in the shadow of the World Trade Center. Investors who buy the insurance on the loan pay a premium for the right to collect if the borrower goes belly up. The buyer and seller of the insurance basically swap their exposure to the risk that the bond will default.
An unexpected economic report or surprise move by the Fed would send the market into chaos. Better to override the models, they thought, or simply shut everything down. But they quickly concluded that the computers were more reliable than people. Every time they tried to outsmart the computer, it turned out to be a bad move. “Always trust the machine” was the mantra.
Just as it didn’t matter whether a company made widgets or tanks, or whether its leaders were visionaries or buffoons, the specifics of a country’s politics, leadership, or natural resources had only a tangential bearing on the view from a quant trader’s desk. A quantitative approach could be applied not only to a country’s stocks and bonds but also to its currencies, commodities, derivatives, whatever.
So much money was flooding into the field that it was becoming impossible to put up solid returns without taking on too much risk.
Private equity firms are akin to hedge funds in that they are largely unregulated and cater to wealthy investors and large institutions. They wield war chests of cash raised from deep-pocketed investors to take over stumbling companies, which they revamp, strip down, and sell back to the public for a tidy profit.
Nassim Nicholas Taleb, a New York University professor and hedge fund manager who’d just published a book, Fooled by Randomness, which claimed that nearly all successful investors were more lucky than skilled.
“If ten thousand people flip a coin, after ten flips the odds are there will be someone who has turned up heads every time. People will hail this man as a genius, with a natural ability to flip heads. Some idiots will actually give him money. This is exactly what happened to LTCM.
a few doubting Thomases in the wilderness,
He knew the correlations spat out by the Gaussian copula were a fantasy. But as long as the money was rolling in, no one wanted to hear it—not the correlation traders making fat bonuses, and definitely not the Wall Street CEOs making even fatter bonuses.
To this day, former Bear Stearns employees believe the firm was taken out in a ruthless mugging.
Asness had hurled a hard object at the wall, scoring a direct hit on a framed picture in Liew’s office, shattering the glass. Asness had already destroyed several computer screens as well as an office chair as AQR’s fortunes continued to sour.
In the first half of the year, he’d been coming into the office late, often around 10:00 a.m. instead of the predawn hours he used to keep, so he could spend time with his one-year-old son. He couldn’t help thinking that he was paying for letting his guard down.
you don’t get rid of them unless you’re about to go down for the dirt nap,”
As Warren Buffett wrote in Berkshire Hathaway’s annual report in late February 2009, Wall Street needs to tread lightly around quants and their models. “Beware of geeks bearing formulas,” Buffett warned. “People assume that if they use higher mathematics and computer models they’re doing the Lord’s work,” observed Buffett’s longtime partner, the cerebral Charlie Munger. “They’re usually doing the devil’s work.”
The book, edited by MIT finance professor Paul Cootner, was called The Random Character of Stock Market Prices, a classic collection of essays about market theory published in 1964.
At bottom, he learned, risk management is about avoiding the mistake of betting so much you can lose it all—the mistake made by nearly every bank and hedge fund that ran into trouble in 2007 and 2008.
the Kelly criterion, the risk management strategy Thorp used starting with his blackjack days in the 1960s.
“The available edge has been diminished,” Gross agreed, noting that Pimco, like Warren Buffett’s Berkshire Hathaway, used very little leverage. “And that led to increased leverage to maintain the same returns. It’s leverage, the overbetting, that leads to the big unwind.
Daniel Kahneman,
Normally, stocks are traded on public exchanges such as the Nasdaq and the NYSE in open view of anyone who chooses to look. Trades conducted through dark pools, as the name implies, are anonymous and hidden from view. The pools go by names such as SIGMA X, Liquidnet, POSIT, CrossFinder, and NYFIX Millennium HPX.
