The economic meltdown of 2008 is widely attributed to three issues: the sub-prime mortgage bubble, weaker government regulation of the markets, and the rise of computer generated trading that was controlled by mathematical wizards. On this last point, it seems like in the last few decades there have been plenty of Nobel Prizes in economics awarded to mathematicians who came up with new formulas for understanding the marketplace. And it seemed like all of these winners made a fortune associating themselves with a hedge fund.

“The Quants” by Scott Patterson takes a look at this world. Patterson argues that these brilliant math minds created systems that built massive fortunes for Wall Street firms and leaders, but the systems themselves contained the seeds of their own destruction. He follows a handful of “quants”, those people responsible for figuring out the highly complicated algorithms that track trading patterns and then apply strategies to create quick profits from those patterns. The subtitle of the book is, “How a new breed of math whizzes conquered Wall Street and nearly destroyed it.” That pretty much sums up what the book is all about.

Unfortunately, I don’t think he makes a strong enough argument. His points are good, but at the end of the book I didn’t feel like his arguments were foolproof. I agree with most everything the author asserts, so if I’m finding minor objections, I can only imagine that others are finding major flaws in this book. As I read the book I kept imagining my old economics professor arguing against Patterson and some of his assumptions!

Which is too bad. I tend to think his basic point is correct: mathematical formulas are important but are only one tool to be used in understanding markets. Ultimately, markets are controlled by human behavior, and I’m not convinced that a mathematical formula can predict human behavior. Further, economics is built on the assumption that we make rational decisions. Which is clearly not always the case. Economic theory can adjust for this, of course, and the best economists always create some degree of irrationality into their theories. But mathematical formulas do not accomplish this so well. And that’s when the quants get into trouble.

So I agree with Patterson’s points. And appreciate the work he did on this book. It’s just not foolproof. But it’s well worth reading, and for those of you non-math and non-economic types, it’s not as technical as I thought it might be. It’s a relatively simple book to read.

In some ways, this concludes my look at the economic meltdown from the three perspectives I mention in the first paragraph. The Big Short looked at the sub-prime markets, 13 Bankers looked at government regulation, and now The Quants finishes the equation by looking at the math whizzes and their computers. Taken together, I feel I have a much better understanding of what happened. Individually they are all good books, though not complete. But given the size of the issue, it’s not surprising that it takes more than one book to explain it all!