DAVIN O'DWYERreviews The Quants: How a Small Band of Maths Wizards Took Over Wall Street and Nearly Destroyed ItBy Scott Patterson Random House Business Books 337 pp, £12.99
IT IS fitting that poker plays such a large part in Scott Patterson’s account of the rise and fall of the mathematical wizards who rose to eminence on Wall Street in the years before the financial meltdown – what better analogy for the unchecked risk-taking and greed of Wall Street than the game that relies on skill, yes, but also huge amounts of blind luck.
An understanding of numbers and probability plays a part in poker, and so too does a fearless fascination with money, qualities that the mathematician hedge fund managers – the “quants” of the title – possessed in spades. But Wall Street has vastly more numbers to analyse than a deck of cards, and vastly more money to offer the winners. The losers, as it turned out, were the rest of us.
Patterson's book charts the rise of the quantitative analysts who transformed money management and investment, particularly over the past decade. The archetypes of Wall Street greed in the public imagination remain those fictional figures of 1980s excess, Gordon Gekko and The Bonfire of the Vanities' Sherman McCoy. The quants profiled by Patterson were a different breed, with backgrounds in mathematics, physics, cryptoanalysis, voice recognition – they weren't relying on their gut instinct, they were relying on hard science. Their aim was to seek the "Truth", mathematical models that could predict the behaviour of markets, and they sought to find it through complicated computer analysis and modelling. It was this modelling, Patterson contends, that played a role in the financial crisis unfolding since 2007.
This is, of course, just the latest book detailing the messy collapse of the markets, joining the likes of Michael Lewis's The Big Short, Simon Johnson and James Kwak's 13 Bankers, and Too Big To Failby Andrew Ross Sorkin.
Telling a story about the invisible hand of the market is an inherently tricky proposition, as any narrative requires visible characters for a reader to engage with – Patterson tackles this by telling the story of quants, beginning with Ed Thorp, who revolutionised investing in the 1960s with his rigorous models. Also profiled are major quants – such as Peter Muller, Jim Simons, Cliff Asness and Boaz Weinstein, all successful hedge fund managers. He details how the interconnected web of modern global finance suddenly began to fray, and how the previously all-conquering quants, ultimately reliant on the “rationality” of the market, were ill-equipped when its actual irrationality began to test their models beyond breaking point.
In bringing these characters to life, Patterson adopts a narration that is oddly omniscient – the endnotes “some incidental details were created to add verisimilitude”, an admission that accounts for lines such as “Muller flicked a lock of sandy brown hair from his eyes and snatched a glass of wine from a passing tray, looking for friends”. This is financial reporting in the style of Dan Brown or John Grisham and, for all his skill, he is no great prose stylist, often overshadowed by laboured scene-setting and characterisation.
While The Quantsspends more time celebrating the quants' genius than illuminating their mistakes or greed, it shows how their data-driven hubris led to a different and expensive sort of "Truth": the invisible hand of the market just can't be seen.
Davin O’Dwyer is a freelance journalist
