The guys at Minyanville, a group of very smart investors and hedge fund managers, did a Q&A and video with me. We talk about what’s wrong with some quant techniques, a little Black Monday, a little LTCM, fat tails, Ed Thorp (an example of what’s right)–and more.
I appeared on a Canadian business show with structured finance expert Janet Tavakoli on March 31. Janet and I don’t completely agree about the role of the quants in the meltdown — she fingers fraudulent behavior in the structuring of the billions of structured products (all those complex deals packed with subprime mortgages). I completely agree that there probably was a great deal of fraud — or something very close to it — although I also believe that the bad actors used the complexity of these products to mask their actions.
I also believe that the credit crisis was much bigger than toxic CDO (collateralized debt obligations). Banks were overlevered using overnight “repo” markets. Hedge funds were overlevered using faulty risk models. There was a popular delusion that the global economy was in a period of low volatility, which Ben Bernanke, in 2004, called the Great Moderation. Wall Street was collectively congratulating itself that, due to the great innovations of the quants, the entire system was more efficient.
As we all know, that was dead wrong.
I was on The Daily Show with Jon Stewart on March 4 talking about the book.
Ed Thorp and I were recently interviewed by Terry Gross on NPR’s Fresh Air:
The Quants arrived in bookstores today. Now begins the process of getting the word out. Monday, Fresh Air ran an interview with Ed Thorp and me. Ed is one of the main characters in the book, the scientist who invented a mathematical method to count cards in blackjack, which he wrote about in Beat the Dealer. He later went on to found the first quant hedge fund in 1969, which was eventually called Princeton Newport Partners. He also wrote about a new method to price stock warrants in a 1967 book called Beat the Market. I spoke with Ed at length as I wrote the book and his views about the market and quantitative strategies informed the perspective I took a great deal. Ed has grown extremely disappointed with how quants have misused math and models as an excuse, a sleight of hand, to make huge bets.
The Quants will be published on Feb. 2 by Crown Business. The book, told through the eyes of several leaders in quantitative finance, is a deep-dive look at the history of this field as well as the destruction it wrought during the last few years.
My hope for this site is that it becomes a forum for thoughts about the role of quantitative finance in the markets, its risks and how it can be improved. I am by no means against quantitative finance in general. That would be futile, if not just plain stupid…like being against the air. Quants are a vital cog in today’s financial markets and have many extraordinary qualities. Yet their track record, sadly, is littered with wreckage.