The Quants

Books on the subprime meltdown of 2007-2008 usually revolve around common themes: that the Masters of the Universe on Wall Street were greedy, were too smart for their own good, and were ultimately clueless about how their decisions would affect the world economy. On that score, Scott Patterson's book, The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It, covers much of the same ground, with the exception that it offers a more personality-driven narrative of the financial crisis by focusing on four hedge fund managers who were in the eye of the storm in more ways than one.

Peter Mueller of Morgan Stanley's PDT hedge fund. Ken Griffin of the Citadel Investment Group. Cliff Asness of AQR Capital Management. Boaz Weinstein of Deutsche Bank's Saba hedge fund. In chronicling these four traders' rise to prominence on Wall Street, Patterson is also telling the story of the rise to prominence in high finance of quants -- traders with backgrounds in mathematics whose quantitative models of financial instruments would define an industry. As described in The Quants, these increasingly complex mathematical models would forever change the face of Wall Street, first by yielding unparalleled profits for those who got them right, and later for being so out of touch with the "Truth" they were supposed to describe that they would nearly bring the world to financial collapse.

Although the book focuses principally on four quants, it also serves as a good reader on the development of modern quantitative finance. Many of the luminaries and critics of the field are discussed in the book: Eugene Fama, Ed Thorp, Fisher Black, Myron Scholes, Benoit Mandelbrot and Nassim Nicholas Taleb, just to name a few. But of course none figure more prominently than Mueller, Griffin, Asness and Weinstain, whose professional trajectories arguably exemplify the standard against which quants once wished -- and may still wish -- to be measured.

For all their intelligence, the quants' sophisticated mathematics ultimately failed to capture the "Truth". At best, some quantitative models predicted that a financial crisis on the scale of what transpired in 2007-2008 was a twenty-five standard deviation event; in short, practically impossible -- yet it happened. That perhaps is the most sobering lesson from The Quants: that mathematical modeling is ultimately an imperfect abstraction of reality, where the impossible may just be a standard deviation within reach.