February 11, 2018

The Quants (Scott Patterson)

Here's the vocabulary list for The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It.

ISBN 978-0-307-45337-2
Patterson, Scott. The Quants. Crown Business, 2010.

Representative Quotes

"The very real crash on Black Monday left very real scars on the psyches of the traders who witnessed it.... Meltdowns of such magnitude and ferocity were not supposed to happen in the world's most advanced and sophisticated financial marketplace. They especially weren't supposed to happen in a randomized, Brownian motion world in which the market obeyed neat statistical rules. A 27-standard-deviation event was tantamount to flipping a coin a hundred times and getting ninety-nine straight heads." (p. 54)

"Prices can gyrate wildly over short periods of time - wildly enough to cause massive, potentially crippling losses to investors who've made large, leveraged wagers." (p. 59)

"The value and momentum strategies they'd studied in academia could actually work for entire countries. It was a monumental leap. They would measure a country's stock market, divide by the sum of the book value of each company in that market, and get a price-to-book value for the entire country. If Japan had a price-to-book value of 1.0 and France had a price-to-book of 2.0, that meant Japan was cheap relative to France. The investing process from there was fairly easy: long Japan, short France.
"The applications of this insight were virtually endless. Just as it didn't matter whether a company made widgets or tanks, or whether its leaders were visionaries or buffoons, the specifics of a country's politics, leadership, or national resources had only a tangential bearing on the view from a quant trader's desk. A quantitative approach could be applied not only to a country's stocks and bonds but also to its currencies, commodities, derivatives, whatever. In short order, Asness' team designed models that looked for cheap-versus-expensive opportunities around the globe. Momentum strategies quickly followed." (pp. 134-5)

" 'We are seeing things that were 25-standard-deviation events, several days in a row....' According to quant models, the meltdown of August 2007 was so unlikely that it could never have happened in the history of the human race." (p. 239)

"Greed + Incompetence + A Belief in Market Efficiency = Disaster.... In their desire for mathematical order and elegant models, the economic establishment played down the inconveniently large role of bad behavior... and flat-out bursts of irrationality. The incredibly inaccurate efficient market theory was believed in totality by many of our financial leaders, and believed in part by almost all.... 'Surely, none of this could be happening in a rational, efficient world,' they seemed to be thinking. And the absolutely worst part of this belief set was that it led to a chronic underestimation of asset bubbles breaking." (pp. 290-1)

"In a September 2009 article titled 'How Did Economists Get It So Wrong' in the New York Times Magazine, Nobel Prize-winning economist Paul Krugman lambasted EMH [the efficient market hypothesis] and economists' chronic inability to grasp the possibility of massive swings in prices and circumstances that Mandelbrot had warned of decades earlier. Krugman blamed 'the profession's blindness to the very possibility of catastrophic failures in a market economy.... As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.' " (p. 291)

"Banks and hedge funds employ mathematicians with no financial market experience to build models that no one is testing scientifically for use in situations where they were not intended by traders who don't understand them. And people are surprised by the losses!" (p. 292)

"The Ph.D.'s might know their sines from their cosines, but they often had little idea how to distinguish the fundamental realities behind why the market behaved as it did. They got bogged down in the fine-grained details of their whiz-bang models. Worse, they believed their models were perfect reflections of how the market works. To them, their models WERE the Truth. Such blind faith... was extremely dangerous." (p. 292)

"To ensure that the quant-driven meltdown that began in August 2007 would never happen again, the two uber-quants developed a 'modeler's Hippocratic Oath:'
* I will remember that I didn't make the world, and it doesn't satisfy my equations.
* Though I will use models to boldly estimate value, I will not be overly impressed by mathematics.
* I will never sacrifice reality for elegance without explaining why I have done so.
* Nor will I give the people who use my model false comfort about its accuracy. Instead, I will make explicit its assumptions and oversights.
* I understand that my work may have enormous effects on society and the economy, many of them beyond my comprehension." (pp. 294-5)

"Markets are far less well-behaved than standard financial theory held. Out at the no-man's-land on the wings of the bell curve lurked a dark side of markets that haunted the quants like a bad dream, one many had seemingly banished into subconsciousness." (p. 296)

"A river of money had flowed into hedge funds in recent years, turning it from an industry with less than $100 billion under management in the early 1990's to a $2 trillion force of nature. But the actual amount of investing opportunities hadn't changed very much.... The edge had diminished, but hedge fund managers' and bankers' appetite for gigantic profits had only grown more voracious. That led to massive use of leverage - in other words, overbetting. The inevitable result: gambler's ruin on a global scale." (p. 299)

" 'The available edge has been diminished,' Gross agreed, nothing that Pimco, like Warren Buffett's Berkshire Hathaway, used very little leverage. "And that led to increased leverage to maintain the same returns. It's leverage, the overbetting, that leads to the big unwind. Stability leads to instability, and here we are. The supposed stability deceived people." (p. 300)

"As the financial panic of 2007 and 2008 had shown, liquidity is always there when you don't need it - and never there when you do." (p. 312)

SAT Vocabulary Words

Godfather: a man who is influential or pioneering in a movement or organization.
"Ed Thorp, godfather of the quants" (p. x)

Haut monde: fashionable society
"high-finance haut monde" (p. 2)

Cabaret: a nightclub or restaurant where entertainment is performed.
"singing folk songs in a funky cabaret" (p.5)

Savoir faire: the ability to act or speak appropriately in social situations.
"Though he lacked Muller's savoir faire, Asness was far wealthier" (p. 5)

Scourge: a person or thing that causes great trouble or suffering.
"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." (p. 5)

Wry: using or expressing dry, especially mocking, humor.
Self-effacing: not claiming attention for oneself; retiring and modest.
"wry, self-effacing sense of humor" (p. 5)

Noir: a genre of crime film or fiction characterized by cynicism, fatalism, and moral ambiguity.
"An old poster from a 1960s film noir by Jean-Luc Godard called Alphaville hung on the walls of PDT's office" (p. 9)

Catcall: a shrill whistle or shout of disapproval, typically one made at a public meeting or performance.
"Griffin rained catcalls on Muller" (p. 10)

Kitty: a fund of money for communal use, made up of contributions from a group of people.
"Citadel's kitty topped $20 billion." (p. 11)

Anabolic steroid: a synthetic steroid hormone that resembles testosterone in promoting the growth of muscle. Such hormones are used medicinally to treat some forms of weight loss and (illegally) by some athletes and others to enhance physical performance.
"trillions more in leverage that juiced their returns like anabolic steroids" (p. 12)

Puckish: playful, especially in a mischievous way.
"Many of the msot important breakthroughs in quant history derived from this obscure, puckish mathematician, one of the first to learn how to use pure math to make money - first at the blackjack tables of Las Vegas and then in the global casino known as Wall Street." (p. 15)

Swing shift: a work shift from mid-afternoon to around midnight.
"the swing shift at Doublas Aircraft" (p. 16)

Croupier: the person in charge of a gaming table, gathering in and paying out money or tokens.
"croupiers take bets after the ball is in motion" (p. 17)

Glad-handing: (especially of a politician) greet or welcome warmly or with the appearance of warmth.
"all smiles and glad-handing" (p. 24)

Absinthe: a potent green aniseed-flavored liqueur, originally made with the shrub wormwood.
"too much absinthe" (p. 30)

Touchstone: a standard or criterion by which something is judged or recognized.
"A quant touchstone, it soon became one of the most influential how-to books on investing ever written." (p. 32)

Stochastic: randomly determined; having a random probability distribution or pattern that may be analyzed statistically but may not be predicted precisely.
"Scholes and Robert Merton, an MIT professor whose ingenious use of stochastic calculus had further validated the Black-Scholes model, would win the Nobel Prize for their work on option pricing." (p. 40)

Heady: having a strong or exhilarating effect.
"Thorp and Regan were managing about $130 million, a heady increase from the $10,000 stake Thorp had received from Manny Kimmel" (p. 41)

Peripatetic: traveling from place to place, especially working or based in various places for relatively short periods.
"After Merrill, the peripatetic Tartaglia went to five other firms before landing at Morgan in 1984." (p. 42)

Agog: very eager or curious to hear or see something.
Pointed: (of a remark or look) expressing criticism in a direct and unambiguous way.
"Adams was agog. Griffin was smart and focused, and he asked penetrating and coherent questions about the market - questions that were so pointed they made Adams stop and search for a coherent answer." (p. 70)

Scotch: decisively put an end to.
"scotched the plan" (p. 76)

Grizzled: having or streaked with gray hair.
"grizzled traders" (p. 77)

Brogue: a strong outdoor shoe with ornamental perforated patterns in the leather.
"Boston brogue" (p. 77)

Chino: a cotton twill fabric, typically khaki-colored. Casual pants made from chino or a similar fabric.
"a loose-fitting blue cotton button-down shirt and tan chinos" (p. 77)

Flatly: in a firm and unequivocal manner; absolutely.
" 'The evidence shows that trying to pick stocks is a complete waste of time,' Fama said flatly." (p. 78)

Crackerjack: exceptionally good.
Crack: very good, especially at a specified activity or in a specified role.
"crackerjack quant combo" (p. 80)

é·mi·nence grise: a person who exercises power or influence in a certain sphere without holding an official position.
"Samuelson was becoming an é·mi·nence grise of the economic community" (p. 83)

Acolyte: a person assisting the celebrant in a religious service or procession.
"It's a paradox that continues to baffle [efficient market hypothesis] acolytes." (p. 84)

Warren: a network of interconnecting rabbit burrows. A densely populated or labyrinthine building or district.
Storied: celebrated in or associated with stories or legends.
"Weinstein would visit after hours and roam the warrrens of the storied bank" (p. 91)

Swap: an exchange of liabilities between two borrowers, either so that each acquires access to funds in a currency they need or so that a fixed interest rate is exchanged for a floating rate.
"In theory, hundreds of swaps, or more, could be written on a single bond."

Hotbed: an environment promoting the growth of something, especially something unwelcome.
"At the time, the quants were known as rocket scientists, since many came from research hotbeds such as Bell Labs, where cell phones were invented, or Los Alamos National Laboratory, birthplae of the atomic bomb. Wall Street's gut traders eventually proved to be no match for such explosive brainpower." (p. 103)

Schlep, schlepper: an inept or stupid person.
"poor schleps at the end of the line" (p. 104)

Nefarious: (typically of an action or activity) wicked or criminal.
"The suit also hinted at a nefarious swaps deal that he described as a 'massive scam' " (p. 116)

Philosopher's stone: a mythical substance supposed to change any metal into gold or silver and, according to some, to cure all diseases and prolong life indefinitely. Its discovery was the supreme object of alchemy.
"the holy grail, the philosopher's stone - the secret mythical Truth of the financial markets" (p. 117)

Unstinting: given or giving without restraint; unsparing.
"unstinting success" (p. 120)

Hamlet: a small settlement, generally one smaller than a village.
"hamlet of the queen" (p. 122)

Faux: not genuine; fake or false.
"faux village" (p. 122)

Apocryphal: (of a story or statement) of doubtful authenticity, although widely circulated as being true.
"One story - perhaps apocryphal" (p. 137)

Credenza: a sideboard or cupboard.
"water kept in an office credenza" (p. 137)

Auspicious: giving or being a sign of future success.
"a very auspicious, and lucky, start" (p. 138)

Beau: a boyfriend or male admirer.
"future beau of the supermodel Elle Macpherson" (p. 142)

Mentalist: a magician who performs feats that apparently demonstrate extraordinary mental powers, such as mind-reading.
"a magician and mentalist" (p. 144)

Gunslinger: a forceful and adventurous participant in a particular sphere.
Preternatural: beyond what is normal or natural.
"Hunter had a reputation as a gunslinger, doubling down on trades if they moved against him. He was preternaturally confident that he would make money on them in the long run, so why not?" (p. 155)

Mogul: an important or powerful person, especially in the motion picture or media industry.
"Hollywood mogul David Geffen" (p. 156)

Magnate: a wealthy and influential person, especially in business.
"publishing magnate S. I. Newhouse" (p. 156)

Filet mignon: a small tender piece of beef from the end of the tenderloin.
Tenderloin: the tenderest part of a loin of beef, pork, etc., taken from under the short ribs in the hindquarters.
"The dinner included lobster, filet mignon, and baked Alaska" (p. 158)

Tony: fashionable among wealthy or stylish people.
"tony, aging resort" (p. 165)

Hothouse: an environment that encourages the rapid growth or development of someone or something, especially in a stifling or intense way.
"a nerdy band of hothouse quants" (p. 176)

Regale: entertain or amuse (someone) with talk.
"regaling the table with tales of 'correlation' " (p. 179)

Byzantine: (of a system or situation) excessively complicated, typically involving a great deal of administrative detail.
"One of the problems with the Byzantine practice of carving up CDOs into all these slices was figuring out how to price them." (p. 180)

Fantasia: a thing that is composed of a mixture of different forms or styles.
"increasingly complex derivatives fantasia" (p. 191)

Veritable: used as an intensifier, often to qualify a metaphor.
"veritable quant fantasyland of riches" (p. 197)

Rout: a decisive defeat.
"The Chinese market began to collapse, falling 10 percent in a single day and triggering a global stock market rout that saw the Dow Jones Industrial Average drop more than 500 points." (p. 198)

Pantheon: a group of particularly respected, famous, or important people.
"highest pantheon of the investing universe" (p. 208)

Scion: a descendant of a notable family.
"due to give birth to the first scion of the Griffin dynasty" (p. 246)

Hard-scrabble: involving hard work and struggle.
"a product of Chicago's hard-scrabble south side" (p. 253)

Brook: tolerate or allow (something, typically dissent or opposition).
Wrought: (of metals) beaten out or shaped by hammering.
"Asness had surrounded himself with yes-men... and brooked no deviation from the carefully wrought models that had made him wildly rich." (p. 255)

Manic: frenetically busy; frantic.
" 'We've got to act fast so this financial tsunami doesn't wash us away,' Fuld said to his underlings, a manic tone in his voice." (p. 256)

Red-eye: an overnight or late-night flight on a commercial airline.
"red-eye back to New York" (p. 258)

Patina: a green or brown film on the surface of bronze or similar metals, produced by oxidation over a long period.
"A patina of sweat glistened on his egglike dome." (p. 263)

Beholden: owing thanks or having a duty to someone in return for help or a service.
"banks would be far more beholden to bank regulators and would be subject to more restrictive capital requirements" (p. 275)

Mendacity: untruthfulness
"anonymous mendacity on the Internet" (p. 284)

Prosaic: having the style or diction of prose; lacking poetic beauty. Commonplace; unromantic.
"The answer, at the end of the day, may be as prosaic as this: The people in charge are smarter than everyone else." (p. 287)

Hobnobbing: mix socially, especially with those of higher social status.
"Griffin was in Beverly Hills hobnobbing with former junk bond king Michael Milken at the Milken Institute Global Conference, where rich people gathered for the primary purpose of reminding one another how smart they are." (p. 301)

Clearinghouse: a bankers' establishment where checks and bills from member banks are exchanged, so that only the balances need be paid in cash.
"Progress had been made in setting up a clearinghouse for credit default swaps to keep better track of the slippery contracts." (p. 312)

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