"The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It", by Scott Patterson (2010)

"The Quants" describes the rise of the generation of quantitative traders that have come to dominate the hedge fund world over the past couple of decades, focussing in particular on a handful of the most successful managers.

It's a reasonably interesting read, but Patterson (a reporter for The Wall Street Journal) doesn't really have the technical chops to describe in any effective way what these so-called "quants" do. He's limited to superficial, fawning descriptions, describing their methods as "a dizzying, indecipherable-to-mere-mortals cocktail of differential calculus, quantum physics, and advanced geometry". This sort of writing conjures up grandiose images of superhuman geniuses which is at odds with reality: a more accurate description for most quantitative trading would be "a straightforward combination of statistics and high-power computing resources, together with preferential access to trading locations".

On the few occasions when he does venture into technical explanations, Patterson stumbles quite badly. For example, on page 53 he describes a 27-standard-deviation event as having "a probability of 10 to the 160th power". Any reasonably numerate person knows that is a very large number! He means 10 the negative 160th power -- a very small number -- corresponding to a very low probability.

Less trivially, on page 60 we read:

the volatility smile disobeyed the orderly world of "no arbitrage" laid out by Black-Scholes and modern portfolio theory, since it implied that trades could make a lot of money by selling these out-of-the-money puts.

Ahem, not exactly: the whole point of the volatility smile is that it doesn't violate the no-arbitrage condition and is hence free to be "chosen" by the market.

And again on page 81: "A stock with a beta of 1 has the same volatility as the rest of the market". This would only be true if the stock was perfectly correlated with the market (in other words, if it was the market): in general the stock's volatility would be larger than that of the market.

It's not a big deal, but someone in the editing process really should have picked up on errors like these.

The book does a better job of describing the main players and describing with fairly broad brush strokes how they fared in the lead-up to the GFC.

Overall, it's not a bad read, but doesn't answer any deep questions.

Personally, I'm hanging out for the day when some of the insiders open up and describe how their quantitative strategies really work (in particular, a monograph detailing the strategies used by Renaissance Technologies over the past couple of decades would be a fascinating read). But I won't be holding my breath...