The Gospel Coalition

Along with On the Brink and Too Big to Fail, The Quants is the third book on the list of bestsellers this year that has attempted to make sense of the recent economic downturn. I suspect it will not be the last. On the Brink told the story from Treasury Secretary Henry Paulson’s perspective while Too Big To Fail looked at it through a wide lens. Scott Patterson’s The Quants takes a different approach altogether, looking at the role played by the quants–the quantitative analysts.

When you read of hedge funds, ATQs, statistical arbitrage, credit default swaps and so many of the other terms that have very suddenly found their way into common parlance, you are speaking of the work of quants. Quantitative analysts are mathematicians or physicists or people from related disciplines who have found a role to play in the world of economics. The Times says, “Seduced by a vision of mathematical elegance underlying some of the messiest of human activities, they apply skills they once hoped to use to untangle string theory or the nervous system to making money.” Seeing the world markets as akin to the universe, a mystery to be solved, they set out to construct impossibly complex formulas and algorithms that can turn money into more money.

Yes, they can turn money into more money. But they can also turn credit into money and risk into money and pretty much everything else into money. The problem is that much of the wealth they were able to produce at the end of this process was created by borrowing billions and by increasing leverage to dangerous levels. Much of it was a very elaborate kind of fiction, a giant bubble just waiting to be deflated. Though many quants were convinced that the formulas were foolproof and that the flow of money could never dry up, the events of 2007 and 2008 proved them wrong. Suddenly the truth they thought they knew was reversed and recklessly-constructed edifices came crashing down. Hundreds of billions of dollars evaporated overnight and very nearly took world economies with them. And I am left asking, if money can vanish into thin air, did it really and truly exist in the first place? What exactly was it that these people were creating?

In this book the author writes often of the ultimate quest of the quants. The quants, more than anything else, want to discover the Truth. Truth, in their lexicon, describes the mathematical knowledge that would once and for all settle how the markets work. They want to solve the markets just as they’ve solved the Rubic’s Cube or the game of Blackjack. They pursue this Truth with abandon at times, pursuing it as one might devote oneself to a deity or, worse, a functional deity such as an addiction. Their Truth is their god.

It seems to me that at the heart of the work of the quants is the age-old combination of obsession and greed. In their world, making money is not a means to an end, but is an end in and of itself. They do not create anything beyond money and offer nothing beyond the fabrication of wealth. They are, essentially, gamblers. And throughout this book Patterson shows how many of these men turned first to gambling and only later to the ultimate poker game of Wall Street. Many of these quants are notorious gamblers still, finding the old thrill at the tables or at the trading desk.

As much as Too Big to Fail or On the Brink, The Quants shows just how close we were to a complete economic meltdown. And more than those other books, it shows how greed–unbridled greed combined with a worldview that treats life as if it is a kind of game–was at the heart of so much of it. A small handful of utterly brilliant individuals proved themselves hopelessly, utterly foolish. They gambled with their own money, they gambled with other people’s money, and they gambled with the world economy. In the end, only providence saved us from an epic disaster.

In The Quants Patterson neatly combines the biographical with the economic, tying together the stories of the quants themselves with the work they did and the economic turmoil they caused. It combines into an intriguing combination that makes the book a joy to read. Though the subject matter can at times be difficult and obscure, Patterson makes it accessible and enjoyable. I highly recommend this one.

Verdict: Read it if you are even the least bit intrigued by the subject matter.