David's Reviews > The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It

The Quants by Scott Patterson
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's review
Mar 10, 2011

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bookshelves: economics, business, nonfiction, audiobook

The author of this book makes a big deal of the fact that the major players in his story treated stock price time series like Gaussian random variables. And they lost big time in 2008. Two of the minor players in the book, Nassim Taleb (author of The Black Swan: The Impact of the Highly Improbable) and Benoit Mandelbrot (of fractal fame, and author of The (Mis)Behavior of Markets and Fractals and Scaling In Finance) had an entirely different concept. They treat stock prices as distributions with very large tails. (They did alright in 2008.) Well, duh!! Why didn't any of the "genius" quants understand this very basic concept? They all adopted a super-simplistic mathematical model that was in vogue, and got themselves and their companies into a heap of trouble. Were they geniuses? Well, in a sense they were, since they were able to get incredibly high-paying jobs. But on the other hand, they seem to have been mathematical lemmings.
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Comments (showing 1-4 of 4) (4 new)

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message 1: by Matt (new) - added it

Matt I think your view of Taleb's beliefs is a bit naive, especially when when spoken in reference to the quants referred to in this book - which I have not yet read - but have a fairly rooted understanding in their risk-management models and practices.

Anyway, it's not to say Taleb and Mandelbrot "believe in fat tails" in the mathematical modeling sense, but that they believe the natural order of the market & economy is inherently unpredictable, and thus any probability derived from a distribution is not accurate to reality because we simple cannot assign correct probabilities to future events. Therefore, Taleb (not sure about Mandelbrot) bet against the quants who were reliant on and blinded by the Gaussian, aka the entire financial system.

message 2: by David (last edited Aug 27, 2014 04:44AM) (new) - rated it 3 stars

David Matt, I think I understand what you are saying. The market is unpredictable, so the ability to estimate risk is misguided. The "big tails" concept basically means that usually, a Gaussian distribution is OK, and that big, unpredictable events occur infrequently--but much more frequently than a Gaussian assumption predicts.

John Excellent informative dialogue here. Both of you should keep it going. I will probably read Quants but after digesting these reviews I expect it won’t measure up to Richard Bookstaber’s Demons if Our Own Design.

David Thanks, John. I look forward to seeing your take on the subject.
Thanks for mentioning Richard Bookstaber's book. I have placed a hold at the local library on a more recent book of his, The End of Theory: Financial Crises, the Failure of Economics, and the Sweep of Human Interaction

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