Scott Patterson's 'The Quants' Shows Where Those Before Us Went Wrong

by: Wall Street Oasis

Wondering how it came to the point where one needed a PhD from MIT in order to “truly understand” finance? Look no further. As the subtitle of “The Quants” explains, this is the story of how Buffett’s maligned “geeks bearing formulas” rose to infamy with their even more infamous models. Telling this story through several of the world’s most famous quants, from originators like Ed Thorp to academics like Myron Scholes and hotshot traders like Boaz Weinstein, it is excellently told with the right balance of entertainment and education.

The original quant was Ed Thorp, who developed a card-counting strategy for cracking blackjack in the 1960s, resulting in a bestseller called “Beat the Dealer.” That tome was the inspiration for many of the quants and high foreheads who began applying quantitative theories and analysis to finance. The book has an overview of how the system worked, and although it’s a bit out of date now, it was more than enough to get Thorp and his acolytes on the Vegas casinos’ blacklists.

From there, 90% of the rest of the book’s action centers on five characters (Peter Muller of Morgan Stanley, Ken Griffin of Citadel, Jim Simons of Renaissance Technologies, Boaz Weinstein of Deutsche Bank, and Cliff Asness of AQR) and their search for what the author calls “The Truth,” that elusive reality about financial markets that, if discovered, will make the discoverer rich beyond all telling.

Their stories are all entwined, as they all hung out with the same people, played the same marathon poker sessions into the early hours of morning, raked in enormous amounts of cash, and all were lambasted by the same guy (Nassim Taleb, of the Black Swan fame). The book describes how each one built his own mini-empire in quantdom, and then nearly (in some cases, actually) lost it all in the great collapse.

What was particularly interesting to me was how each one responded to having their ideas and knowledge destroyed by reality: Peter Muller, ever the hippie, started writing music; Ken Griffin sometimes took it out on his employees; Cliff Asness punched many computer monitors; Boaz doubled down on his bets; Jim Simons smirked and remained silent as his Medallion Fund inexplicably continued to make money while the world blew up. In this sense, the book is also very much a revealing character study of these individuals as much as it is a finance course/history lesson.

The writing is good but tries too hard to be dramatic at times; many paragraphs end with words to the effect of “BUT THEY WERE ALL WRONG MWAHAHAHAHAHA!!!!!” Nevertheless, Scott Patterson has tried to present both sides of the argument pretty objectively (that is, those in Taleb’s camp who believe that it’s impossible to model human beings vs. those who think that it can be useful to at least try). I also would have liked to see a little more technical analysis of the trades; with the exception of Thorp’s card-counting strategy and some high-level overview of the trading at each major fund, this isn’t the most number-oriented book in the world despite the title.

But I highly recommend it, not only because a lot of us will aspire to work for these firms someday, but also as a reminder that the real world isn’t always like the classroom (recent grads, take note). As we grow into our careers and start making our own impact on the world of finance/quantdom, we need to see where those before us went wrong. And in that sense, this book is a must-read.