Book Zeros in on Wall Street's "Quants"

February 25, 2010

A new book about the recent financial crisis points to quantitative geniuses, "quants", a swashbuckling breed of mathematicians and computer scientists, as the culprits that nearly brought down Wall Street.

The Quants: How A New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It, by Scott Patterson, warns of geeks bearing formulas and complicated mathematical models which were used as guidelines to trade huge quantities of securities. As the housing market crumbled, the models failed, turning into doomsday formulas.

Patterson identifies what he calls "the minds behind the meltdown". They include Peter Muller, who studied theoretical mathematics at Princeton University and managed the hedge fund PDT; Ken Griffin, from Harvard University, who headed Citadel Investment Group; Cliff Asness, founder of the hedge fund AQR; and Boaz Weinstein.

According to Patterson, these men believed that a mix of differential calculus, quantum physics, and advanced geometry held the key to riches from the financial markets. In addition, they helped create a digitized money-trading machine that could shift billions around the globe with the click of a mouse.

"The result," Patterson wrote, "was a catastrophic domino effect. The rapid selling scrambled the models that quants used to buy and sell stocks, forcing them to unload their own holdings...The selling had taken on a life of its own, leading to billions in losses. The meltdown also revealed dangerous links in the financial system few had previously realized—that losses in the U.S. housing market could trigger losses in huge stock portfolios that had nothing to do with housing."

Patterson's books also includes chapters about mathematician James Simons, founder of one of the most successful hedge funds; Aaron Brown, who used his mathematical skills to take on Wall Street's old guard; and gadflies and dissenters such as Paul Wilmott, Nassim Taleb, and Benoit Mandelbrot.

Source: The Wall Street Journal