The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It

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Overview

In March 2006, the world’s richest men sipped champagne in an opulent New York hotel. They were preparing to compete in a poker tournament with ­million-dollar stakes. At the card table that night was Peter Muller, who managed a fabulously successful hedge fund called PDT. With him was Ken Griffin, who was the tough-as-nails head of Citadel Investment Group. There, too, were Cliff Asness, the sharp-tongued, mercurial founder of the hedge fund AQR Capital Management, and Boaz Weinstein, chess “life master” and ...
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The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It

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Overview

In March 2006, the world’s richest men sipped champagne in an opulent New York hotel. They were preparing to compete in a poker tournament with ­million-dollar stakes. At the card table that night was Peter Muller, who managed a fabulously successful hedge fund called PDT. With him was Ken Griffin, who was the tough-as-nails head of Citadel Investment Group. There, too, were Cliff Asness, the sharp-tongued, mercurial founder of the hedge fund AQR Capital Management, and Boaz Weinstein, chess “life master” and king of the credit-default swap.  
           
Muller, Griffin, Asness, and Weinstein were among the best and brightest of a new breed, the quants. Over the past twenty years, this species of math whiz had usurped the testosterone-fueled, kill-or-be-killed risk takers who’d long been the alpha males of the world’s largest casino. The quants believed that a cocktail of differential calculus, quantum physics, and advanced geometry held the key to reaping riches from the financial markets. And they helped create a digitized money-trading machine that could shift ­billions around the globe with the click of a mouse. Few realized that night, though, that in creating this extraordinary system, men like Muller, Griffin, Asness, and Weinstein had sown the seeds for history’s greatest financial disaster.
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Editorial Reviews

Publishers Weekly - Library Journal
In a fast-moving narrative, Wall Street Journal reporter Patterson explores the coterie of mathematicians behind the Wall Street crash of 2008. The story's stars are "an unusual breed of investors" called quants, who "used brain-twisting math and super-powered computers to pluck billions in fleeting dollars out of the market." Following the first quant, Beat the Market author Ed Thorp, from his graduate school days in 1955, and introducing others like Peter Muller and Ken Griffin as they established funds at major investment firms, Patterson spins a fascinating story of riches amassed for a few and, inevitably, lost for many: a collapsing hedge fund, "imploding under the weight of toxic subprime assets," took down the system "like a massive avalanche started by a single loose boulder." Though his narrative is interesting and easy to follow, Patterson's explanations of investment terms are not for novices; a glossary would have helped. As he puts the excesses and failures of Wall Street into perspective, however, Patterson also offers evidence that Wall Street hasn't learned its lesson: as of spring 2009, "several banks reported stronger earnings numbers... in part due to clever accounting tricks... and other potentially dangerous quant gadgets being forged in the dark smithies of Wall Street."
Copyright © Reed Business Information, a division of Reed Elsevier Inc. All rights reserved.
From the Publisher
“Scott Patterson has the ability to see things you and I don’t notice. In The Quants he does an admirable job of debunking the myths of black box traders and provides a very entertaining narrative in the process.”
Nassim Nicholas Taleb, New York Times bestselling author of Fooled by Randomness and The Black Swan

“Fascinating and deeply disturbing…Patterson gives faces and personalities to the quants, making their saga accessible and intriguing…[he’s] onto a big story that begs follow-up.”
—New York Times

“Valuable…makes [the quants’] secretive world comprehensible…the story radiates with hubris, high stakes and expensive toys.”
—Bloomberg.com
 
“A riveting account…there are many dramatic moments and a good dose of schadenfreude in Scott Patterson’s THE QUANTS.”
—Financial Times

“Read this book if you want to understand how the collapse of the global financial system was at its core a failure of modern financial theory and its most ardent disciples. Patterson is able to gracefully explain the complex ideas underpinning our financial system through an extraordinarily engaging and insightful story.”
 —Mark Zandi, Chief Economist of Moody’s Economy.com and author of Financial Shock

"Enlightening and enjoyable...Patterson masterfully recounts how brilliant mathematicians and technologists ignored the human element...If you're serious about understanding the financial meltdown, you need to read this book."
—David Vise, Pulitzer Prize Winner, author of The Google Story, and Senior Advisor, New Mountain Capital

"A  compelling tale of greed and conceit, The Quants tells the inside story of the Wall Street rocket scientists who could couldn’t resist playing with numbers and nearly blew themselves up.”
—Michael J. Panzner, author of Financial Armageddon and When Giants Fail

"The Quants will keep hedge fund managers on the edge of their Aeron chairs, while the rest of us read in horror about their greed and their impact on the wider economy. A gripping tale right until the last page...but I fear this is perhaps not yet the end of the story."
—Paul Wilmott, Oxford Ph.D., founding partner of Caissa Capital, and author of Paul Wilmott Introduces Quantitative Finance

“A character-rich tale of how quirky geniuses cut their teeth on gambling, then moved on to the biggest casino of all, Wall Street. From blackjack to black swans, The Quants tells how we got where we are today.”
—William Poundstone, author of Fortune’s Formula


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Product Details

  • ISBN-13: 9780739385067
  • Publisher: Random House Audio Publishing Group
  • Publication date: 2/2/2010
  • Format: CD
  • Product dimensions: 4.92 (w) x 5.94 (h) x 1.17 (d)

Meet the Author

Scott Patterson is a staff reporter at The Wall Street Journal, covering the latest technological advances on Wall Street. This is his first book.

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Read an Excerpt

1: All in One

Peter Muller stepped into the posh Versailles Room of the century old St. Regis Hotel in midtown Manhattan and took in the glittering scene in a glance.

It wasn’t the trio of cut-glass chandeliers hung from a gilt-laden ceiling that caught his attention, nor the pair of antique floor-to-ceiling mirrors to his left, nor the guests’ svelte Armani suits and gemstudded dresses. Something else in the air made him smile: the smell of money. And the sweet perfume of something he loved even more: pure, unbridled testosterone-fueled competition. It was intoxicating, and it was all around him, from the rich fizz of a fresh bottle of champagne popping open to the knowing nods and winks of his friends as he moved into a room that was a virtual murderer’s row of topflight bankers and hedge fund managers, the richest in the world. His people.

It was March 8, 2006, and the Wall Street Poker Night Tournament was about to begin. More than a hundred well- heeled players milled about the room, elite traders and buttoned-down dealmakers by day, gambling enthusiasts by night. The small, private affair was a gathering of a select group of wealthy and brilliant individuals who had, through sheer brainpower and a healthy dose of daring, become the new tycoons of Wall Street. This high-finance haut monde—perhaps Muller most of all—was so secretive that few people outside the room had ever heard their names. And yet, behind the scenes, their decisions controlled the ebb and flow of billions of dollars coursing through the global financial system every day.

Mixed in with the crowd were professional poker players such as T. J. Cloutier, winner of sixty major tournaments, and Clonie Gowen, a blond Texan bombshell with the face of a fashion model and the body of a Playboy pinup. More important to the gathering crowd, Gowen was one of the most successful female poker players in the country.

Muller, tan, fit, and at forty-two looking a decade younger than his age, a wiry Pat Boone in his prime, radiated the relaxed cool of a man accustomed to victory. He waved across the room to Jim Simons, billionaire math genius and founder of the most successful hedge fund on the planet, Renaissance Technologies. Simons, a balding, whitebearded wizard of quantitative investing, winked back as he continued chatting with the circle of admirers hovering around him.

The previous year, Simons had pocketed $1.5 billion in hedge fund fees, at the time the biggest one-year paycheck ever earned by a hedge fund manager. His elite team of traders, hidden away in a small enclave on Long Island, marshaled the most mind-bending advances in science and mathematics, from quantum physics to artificial intelligence to voice recognition technology, to wring billions in profits from the market. Simons was the rare investor who could make Muller feel jaw-clenchingly jealous.

The two had known each other since the early 1990s, when Muller briefly considered joining Renaissance before starting his own quantitative hedge fund inside Morgan Stanley, the giant New York investment bank. Muller’s elite trading group, which he called Process Driven Trading, was so secretive that even most employees at Morgan weren’t aware of its existence. Yet over the previous decade the group, composed of only about fifty people, had racked up a track record that could go toe-to-toe with the best investment outfits on Wall Street, cranking out $6 billion in gains for Morgan.

Muller and Simons were giants among an unusual breed of investors known as “quants.” They used brain-twisting math and superpowered computers to pluck billions in fleeting dollars out of the market. By the early 2000s, such tech-savvy investors had come to dominate Wall Street, helped by theoretical breakthroughs in the application of mathematics to financial markets, advances that had earned their discoverers several shelves of Nobel Prizes. The quants applied those same breakthroughs to the highly practical, massively profitable practice of calculating predictable patterns in how the market moved and worked.

These computer-driven investors couldn’t care less about a company’s “fundamentals,” amorphous qualities such as the morale of its employees or the cut of its chief executive’s jib. That was for the dinosaurs of Wall Street, the Warren Buffetts and Peter Lynches of the world, investors who focused on factors such as what a company actually made and whether it made it well. Quants were agnostic on such matters, devoting themselves instead to predicting whether a company’s stock would move up or down based on a dizzying array of numerical variables such as how cheap it was relative to the rest of the market, how quickly the stock had risen or declined, or a combination of the two—and much more.

That night at the St. Regis was a golden hour for the quants, a predators’ ball for the pocket-protector set. They were celebrating their dominance of Wall Street, just as junk bond kings such as Michael Milken had ruled the financial world in the 1980s or swashbuckling, trade-from-the-hip hedge fund managers such as George Soros had conquered the Street in the 1990s.

Muller flicked a lock of sandy brown hair from his eyes and snatched a glass of wine from a passing tray, looking for his friends. A few nonquants, fundamental investors of the old guard, rubbed elbows with the quant crowd that night. David Einhorn, the boy-faced manager of Greenlight Capital (so named when his wife gave him the green light to launch a fund in the 1990s), could be seen chatting on a cell phone by a tall, narrow window overlooking the corner of 55th Street and Fifth Avenue. Just thirty-seven years old, Einhorn was quickly gaining a reputation as one of the sharpest fundamental investors in the business, putting up returns of 20 percent or more year after year. Einhorn was also an ace poker player who would place eighteenth in the World Series of Poker in Las Vegas the following year, winning $659,730.

The next billionaire Muller spotted was Ken Griffin, the blueeyed, notoriously ruthless manager of Chicago’s Citadel Investment Group, one of the largest and most successful hedge funds in the business. Grave dancer of the hedge funds, Citadel was known for sweeping in on distressed companies and gobbling up the remains of the bloodied carcasses. But the core engines of his fund were computer driven mathematical models that guided its every move. Griffin, who sported a no-nonsense buzz cut of jet-black hair, was the sort of man who triggered a dark sense of foreboding even in close associates: Wouldn’t want to mess with Ken in a dark alley. Does he ever smile? The guy wants to be king of everything he touches.

“Petey boy.”

Muller felt a jolt in his back. It was his old friend and poker pal Cliff Asness, manager of AQR Capital Management, among the first pure quant hedge funds. Asness, like Muller, Griffin, and Simons, was a pioneer among the quants, having started out at Goldman Sachs in the early 1990s.

“Decided to grace us tonight?” he said.

Asness knew Muller wouldn’t miss this quant poker coronation for the world. Muller was obsessed with poker, had been for years. He’d recently roped Asness into a private high-stakes poker game played with several other traders and hedge fund hotshots in ritzy Manhattan hotel rooms. The game had a $10,000 buy-in, couch cushion change to topflight traders such as Asness and Muller.

The quants ran the private poker game, but more traditional investment titans joined in. Carl Icahn, the billionaire financier who’d gotten his start on Wall Street with $4,ooo in poker winnings, was a regular. So was Marc Lasry, manager of Avenue Capital Group, the $12 billion hedge fund that would hire former first daughter Chelsea Clinton later that year. Lasry was known for being a cool investor whose icy demeanor belied his let-it-roll mentality. He was said to have once wagered $100,000 on a hand without even looking at his cards. And won.

The real point of Asness’s needle was that he never knew when the globetrotting Muller would be in town. One week he’d be trekking in Bhutan or white-water rafting in Bolivia, the next heli-skiing in the Grand Tetons or singing folk songs in a funky cabaret in Greenwich Village. Muller had even been spotted belting out Bob Dylan tunes in New York’s subway system, his keyboard case sprinkled with coins from charitable commuters with no idea the seemingly down-on-his luck songster was worth hundreds of millions and flew around in a private jet.

Asness, a stocky, balding man with a meaty face and impish blue eyes, wore khaki pants and a white tee peeking out from his open collar. He winked, stroking the orange-gray stubble of his trimmed beard. Though he lacked Muller’s savoir faire, Asness was far wealthier, manager of his own hedge fund, and a rising power in the investment world. His firm, AQR, short for Applied Quantitative Research, was managing $25 billion and growing fast.

The year before, Asness had been the subject of a lengthy and glowing profile in the New York Times Magazine. He was a scourge of bad practices in the money management industry, such as ridiculously high fees at mutual funds. And he had the intellectual chops to back up his attacks. Known as one of the smartest investors in the world, Asness had worked hard for his success. He’d been a standout student at the University of Chicago’s prestigious economics department in the early 1990s, then a star at Goldman Sachs in the mid-1990s before branching out on his own in 1998 to launch AQR with $1 billion and change, a near record at the time. His ego had grown along with his wallet, and so, too, had his temper. While outsiders knew Asness for his razor-sharp mind tempered by a wry, self-effacing sense of humor, inside AQR he was known for flying into computer-smashing rampages and shooting off ego-crushing emails to his cowed employees at all hours of the day or night. His poker buddies loved Asness’s cutting wit and encyclopedic memory, but they’d also seen his darker side, his volatile temper and sudden rages at a losing hand.

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Table of Contents

The Players

1 All In 1

2 The Godfather: Ed Thorp 13

3 Beat the Market 27

4 The Volatility Smile 47

5 Four of a Kind 64

6 The Wolf 102

7 The Money Grid 118

8 Living the Dream 151

9 "I Keep My Fingers Crossed for the Future" 183

10 The August Factor 209

11 The Doomsday Clock 242

12 A Flaw 262

13 The Devil's Work 289

14 Dark Pools 301

Notes 313

Glossary 323

Acknowledgments 327

Index 329

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Customer Reviews

Average Rating 3.5
( 139 )
Rating Distribution

5 Star

(42)

4 Star

(38)

3 Star

(34)

2 Star

(12)

1 Star

(13)

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See All Sort by: Showing 1 – 20 of 142 Customer Reviews
  • Posted February 23, 2010

    I Also Recommend:

    INTERESTING BUT NOT THAT INTERESTING!!!!!

    In so many words, there are so many other books that you could be reading about this sort of stuff. When I read this book, my first thought was that you could be reading something else that really had some meat to it. I am not a professional quant but I do have some training in such affairs. The first thing that I thought when reading this is that I preferred the other book on quant mechanics and discrete physics applications to this book. It is called "The Manual of Quants" by John Henry Morel. It is way out in left field but it really packs a punch. It is almost otherworldly, like "Zen and the Art of Motorcycle Maintenance," but it has a flavor that really inspires, incites and cultivates true investigation of quantitative analysis from a holistic and intelligent perspective instead of from a purely exploitive wealth or hoarding perspective. It teaches us how to better investigate quantum physics as quants and not as animals or ignorant work slaves of the financial arena. We need to learn how to think outside of the box if we are going to change the world around us for the better and instead of collapsing financial markets we need to learn how to build them from the ground up based on true stochastic models, not sophomoric research hydraulics and investigative techniques. I highly recommend Morel's "The Manual of Quants" if you are going to ever make a name for yourself as a quant!! Switch over the other side and save your career like all the others: "THE MANUAL OF QUANTS"!!!!!

    5 out of 9 people found this review helpful.

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  • Posted March 5, 2010

    Read for Yourself

    I read Patterson's book awhile ago and enjoyed the combination of its pace and illuminating details. I do not work on Wall Street so the context of this foreign land with its exquisite creatures resembled something almost fictional. Unfortunately this strange world GAMBLES with our retirements. After reading reviews here and elsewhere I have found an interesting reaction. Those with a vested interest (or simply want a cheap kindle version) have bashed the book with knee jerk that if nothing else shows it has struck a cord with those in the know.

    Squelch is an obvious industry insider trying to limit the truth in the book

    4 out of 5 people found this review helpful.

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  • Posted March 12, 2011

    more from this reviewer

    Complements the "The Big Short" by Michael Lewis

    Read a review of the "The Big Short" which ended with the question of whether "The Quants" was better, or complementary. I think it's complementary. Whether one calls it math, blind luck, strategy, or tactics, it's not too different. In this case, the traders relied on math to filter, then deliver "crucial" information to their attention, or the attention of the computer doing the trading unattended. "The Big Short" also mentions the ratings agencies, while "The Quants" does not. Probably because it follows a different theme. Seems like ratings agencies should be considered, because many trades were based upon ratings. From the "The Quants", I was exposed to more of the different types of trades, and some of the economic theory in which they live. "The Quants" focus on the role of the math whizzes and the effects of their trading on Wall Street. "The Big Short" follows the stories of a handful of traders as well, but with less history or economic theory or ripple effect. I liked the dialog in the "The Big Short" better. In the long run, I'm happy to have read both.

    2 out of 2 people found this review helpful.

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  • Anonymous

    Posted March 3, 2010

    Quite an accomplishment

    While the cast of characters is hard to follow at times, overall this is an excellent analysis of the "quants" and their dubious contributions to world financial markets. The explanations and defininitions of the mechanisms used by the "quants" and their role in our financial crisis should be required reading to any investor who doesn't spend eight hours a day working in the real financial world.

    2 out of 2 people found this review helpful.

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  • Posted February 16, 2010

    Great read....

    Very insightful and informative. Lots of info that makes you appreciate the near disaster we saw in 2008!

    2 out of 4 people found this review helpful.

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  • Posted May 5, 2010

    A great overview of the influx of mathematical talent to Wall Street

    An extremely entertaining account the rise of math geniuses into the world of finance, and how they believed their mathematical models and theories were working to stabilise the world economy while in fact they were fueling the fire of the credit meltdown. It is a little difficult to follow due to the narrative format and number of different companies/people involved in the story, but the financial jargon isn't excessive and it includes some simply worded examples for the concepts that any layperson can follow. it is extremely relevant, and I'd recommend it to anyone who wants to understand more about how the modern economy is structured and the financial instruments behind the current recession.

    1 out of 2 people found this review helpful.

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  • Posted March 20, 2010

    An outstanding book

    I started in my quuest to understand how as an innocent investor, my net worth had crumbled with Charles Gasparini's book (the first one out) which really focused on the risk taking "genes" inherent in many of the Wall Street Players. They were often international level poker players and took on enormous risks and horrendous leverage.

    I then read Sec. Henry Paulson's book which was a little like being dropped into a Rugby scrum without knowing the rules - he did often define terms, but gave you no idea of the range of values. He is a defender of the "free market" (the market is all knowing and will correct itself unaided). In 2005, before he accepted the Secreatary of Treatury position, Goldman Sachs led the credit default swap popularization. He was a CEO, but like so many of them, not truly knowledgable about what his company was doing. His book shows how close we came to a depression, but is somewhat insensitive and self-serving in my opinion.

    Scott's book focuses on the mathematics which mathematicians, statisticians and physicists used to try to find the "Truth". What they failed to comprehend was that their idealized equations are not well connected to reality. Their equations failed to handle the "rare" event in the tail of bell shaped curves, which is exactly what happened. I have seen this for years in my scientific careers.

    This book does an excellent job of explaining what happened. It follows the key characters within the companies, explains how Lehman did itself in, not Paulson as some suggest, and describes his internal battle to save the finanical system which had frozen up, despited deeply held beliefs that this was not how government should act. I still don't understand, however, having AIG receive 100 cents on the dollar. I still think that should have taken some of their lumps for their stupidity rather than have the taxpayer salvage them to the tune of billions of dollars. In a true Free Market society, the losers fail, not be rescued by the taxpayer while the taxpayer's net worth crumbles.

    1 out of 1 people found this review helpful.

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  • Anonymous

    Posted December 6, 2013

    Awesome

    Couldn't put it down!

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  • Posted April 30, 2012

    more from this reviewer

    Highly Recommended

    Highly Recommended

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  • Posted August 11, 2011

    A grest read

    Though some of the words are foreign to nonconomics persons like myself, this book still dors a pretty good job of explaining the eco meltdown.

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  • Posted August 7, 2011

    Highly Recommended! Very relevant to today's debt crises

    Very well written account of the subprime mortgage crisis that led us to the situation we are in today.

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  • Anonymous

    Posted September 27, 2010

    Excellent book

    I really enjoyed this one. Some fascinating insights into the personalities that drove the quant crisis. I speak from the point of view of a person who is an expert on Wall Street but a harsh critic of typical books about it.

    0 out of 1 people found this review helpful.

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  • Posted May 15, 2010

    I Also Recommend:

    What did you get from The Quants?

    If you want to learn the drama of the "Great Recession", there are bunches of books you can read. I believe most of the fans of "The Quants" are particularly interested in Mathematics and finding out how it could help nearly destroy the entire financial system.

    From digging into this book, what I got are:

    Outstanding Quants are excellent porker players and most of them are good at counting the cards at Black Jack Tables. The first time I went into the casino was back 1988 in Paradise Island, Bahamas when I was in early twenties. If you had a little bit sense of math, you could easily figure out that the overall probability of 10 points being dealt is more than 30% no matter if the dealers keep shuffling.

    Most of quantitative models are based on EMH. True, no matter how complex are the models, the simple concept is that traders believe prices of all of the securities will eventually reflect the impact of all information. The key is if you can immediately quantify the outcome of a piece of valid information amongst all rumors. If you have fond of modeling, you may pick a stock to quantify all information and rumors into a model, then predict the trend.

    Before the crisis, it had been considered that all risks in the market were well managed and controlled through sophisticated hedging strategies and solutions, even Greenspan agreed. People kept thinking that: "Oh, I hedge my position, someone else will take the risks, I am fully covered." But they forgot who someone else is, he is not God with unlimited power. He could leave the table without delivering the promise.

    As we understand, market is random, except a handful of black swans, most of the stocks will be up and down within a range. Buy Low/Sell High + Short Sell High/Buy Back Low should be the key factors in a model for speculators.

    Back 1988, one day in Paradise Island Casino & Resort, the predecessor of Atlantis, General Manager, an Italian, educated me: "Pat, you know as a legal business, casino doesn't cheat with tricks. We win over the gamblers because of time." What he meant is Casino has relatively unlimited cash individual gamblers can't match. In theory, Casino keeps running perpetually as long as it is not shut down. Probability will ensure it winning.

    So, as an individual or small institutional trader, don't try to beat the giant players. Building your model to follow them"

    0 out of 2 people found this review helpful.

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  • Anonymous

    Posted April 12, 2010

    Excellent Book!!

    One of the best books I've read. The author does a tremendous job of detailing events that most of us would never have realized occurred and how close some of the biggest names in quant investing almost took each other down! This is the first book since Lowenstein's 'When Genius Failed' that I literally couldn't put down. Great read...would highly recommend!!

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  • Anonymous

    Posted April 12, 2010

    Eye opening!

    I have been an investor for many years and have long known that there is an elite world of finance that I am not privy to. I thought it to be the world of insider trading. Where CEO's and investment bankers share information with those of there inner cirle. Where those in the know are always a step ahead. "The Quants" opened my eyes to an even more elite world funded by those innner circles, but altogether different. Where math nerds, card sharps, and cumputer geeks reign supreme.

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  • Posted March 20, 2010

    A decent contemporary read.

    If you want to learn how to beat the Quants at their own game, then this book is a good place to start.

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  • Anonymous

    Posted February 3, 2010

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    Posted December 26, 2010

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    Posted September 11, 2011

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    Posted November 10, 2012

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