When Genius Failed: The Rise and Fall of Long-Term Capital Management

by Roger Lowenstein

which was the model for the investment bank in Tom Wolfe’s The Bonfire of the Vanities.

G. K. Chesterton wrote, life is “a trap for logicians” because it is almost reasonable but not quite; it is usually sensible but occasionally otherwise: It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait.5

As Fama put it, “Life always has a fat tail.”12

Although pricing a bond can largely be reduced to math, valuing a stock is far more subjective. Wall Street (and academe) had devised many a formula to forecast the market, but none, no matter how esoteric or rigorous, had worked. Over the short run, stocks are subject to the whim of often emotional traders. Over